Capital Market Liberalization, Economic Growth, and Instability

The world is just emerging from the worst financial and economic crisis since the great Depression. The World Bank estimated that in 1999 output of the 5 crisis countries of East Asia, two years after the onset, was still some 17 % below what it would have been had the growth trend of the ten years before the crisis continued. In 2000 matters were only slightly better.1 The fragile recoveries in Korea and Malaysia are being threatened by a global economic slowdown, originating in the U.S. Elsewhere, matters are even bleaker: Indonesia remains in depression, civil unrest affecting many of its far-flung islands. In Thailand, as the economy barely struggled to attain pre-crisis levels three years later, with between a quarter and 40 % of loans still non-performing, voters gave a resounding defeat to a government that had followed the prescriptions of the IMF perhaps better than any other. While exchange rates have stabilized in East Asia, other financial variables, like stock prices, have not fared so well, and unemployment remains far higher than before the crisis, and real wages far lower. Elsewhere, large parts of the world remain in a precarious economic position—with deep recession or depression facing several countries in Latin America, and output in many of the economies in transition still markedly below what it was a decade ago