The Search for a Framework
ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai and Mario B. Lamberte
Sustained economic growth can contribute significantly to poverty reduction, as evidenced by marked declines in poverty incidence for economies that have enjoyed long periods of economic growth. But a financial crisis could disrupt growth and frustrate such development. While crisis-hit economies will recover from the crisis, they may not return to the pre-crisis growth path. Because a crisis can have long-term development implications, the Asian Development Bank Institute (ADBI) is keen to make a contribution to the understanding of the causes of a crisis and to the formulation of policy measures that ADB’s developing member countries could adopt to avoid a crisis. Many fast growing economies in Asia suffered from a financial crisis in 1997–98, which could be attributed largely to their inability to deal with large capital flow volatility. Although few deny the benefits of capital inflows for recipient economies, they often create problems especially if they are substantial and volatile. Massive capital inflows can create too much bank lending, excessive investment, and speculative activities, which can lead to goods price inflation, asset market bubbles, and potential vulnerabilities in bank, household, and corporate balance sheets. Moreover, sudden stops or reversals in capital inflows could lead to a currency crisis, the bursting of asset price bubbles, investment collapse, banking sector stress, and economic difficulties. Since the recovery from the Asian financial crisis, many economies in the region have experienced massive private capital inflows against the backdrop of current account surpluses over many consecutive years. Cognizant of the implications of...