Financial crisis in asia and capital account liberalization

The paper discusses the effects of financial crisis in Asia on the progress toward capital account liberalization. It notes that during the IMF Annual Meeting in Hongkong in 1997, a consensus has been reached to amend the IMF Articles of Agreement to include capital account liberalization among the objectives that Fund members should seek. However, since then, the outburst of financial crisis in Asia has cast some doubts about the desirability of capital account liberalization. The paper discusses the role that large capital flows played in the Asian crisis, and notes some distortions and policy mistakes that have contributed to increased vulnerabilities of the Asian countries to a sudden reversal of capital flows. The next section discusses three different forms of criticism of capital account liberalization: ideological, macroeconomic and microeconomic. Final part of the paper provides some guidance how to think about this difficult and controversial issue, and it concludes than instead of focusing on limiting the international flows of capital, policy makers should focus on creating the necessary preconditions and pursue such policies that would allow their countries to enjoy the benefits of liberal movement of capital, without undergoing a risk of destabilizing swings in capital flows.