The Management of Capital Flows and Financial Vulnerability in Asia

It has been more than a decade since a virulent financial crisis has devastated several East and South East Asian economies with excellent track records in economic development and macroeconomic stability. The crisis was generally considered the outcome of a combination of misguided capital account and exchange rate policies coupled with overreaction of foreign lenders and investors to temporary shortfalls in international liquidity, rather than vulnerabilities emanating from structural payment imbalances and excessive external indebtedness. There is now almost a collective determination across the region never to allow a repeat of the crisis. There is also an increased awareness that vulnerability to financial contagion and shocks depends in large part on how capital inflows are managed, and that governments may have limited options in addressing the sudden stops and reversals that often mark short term capital flows