Tim Worstall, often likes to talk about us lefties just don't get da markit, but for all this arrogance this post about liberalising capital market flows is somewhat lacking, he quotes a paper mentioned on Cafe Hayek about how liberalisation of capital markets brings foreign investment and encourages economic growth. Curious, because it's the complete opposite of what I've read about it.
Foreign investment in markets tends to follow a herd behavior moving in when prospects are good and creating a bubble then moving out with equal alacrity in a downturn exacerbating worsening the downturn. For a developing nation that could do with a steady flow of capital this kind of behavoir is deeply harmful. This was demonstrated very clearly in 1997 in the Asian crises. The stock markets of developing nations are especially vunerable to this because of their small size relative to those in the developed world, the largest, in India is 1/30th of the size of the US stockmarket.
The main effect of capital market liberalisation is to cause volatile money flows in and out of a country to no real good effect. There are policies to encourage growth in developing nations, and they do involve opening up the economy to the rest of the world, but this one should be way down the list of priorities.