The Search for a Framework
ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai and Mario B. Lamberte
Chapter 13: Managing Capital Flows: The Case of the Philippines
Josef T. Yap INTRODUCTION 13.1 The global financial instability that was spawned by the 1997 East Asian financial crisis generated a broad consensus that the international financial architecture (IFA) had to be reformed. The proposed reforms had two wide-ranging objectives (Griffith-Jones and Ocampo, 2003): (i) to prevent currency and banking crises and better manage them when they occur; and (ii) to support adequate provision of net private and public flows to developing countries, particularly low-income ones. Much progress has been made in terms of reforming the IFA between 1997 and 2007. However, the progress has been uneven and asymmetric and in certain areas patchy (Griffith-Jones and Ocampo, 2003; Wang, 2004; Kawai, 2005; World Bank, 2005; and Kawai and Houser, 2007). For example, while the ASEAN+3 nations agreed to pool the region’s vast foreign currency reserves in May 2007, the urgency of architectural reform in the G-7 countries has receded considerably (Wang, 2004). As long as the structural problems on the supply side of international capital such as volatile capital movements and G-3 exchange rate gyrations persist, the East Asian countries will remain vulnerable to future crises. There are many indications of the inadequacies in the reform of the IFA. For example, in 2006, aggregate net resource flows into developing countries reached $566 billion, of which $316 billion comprised foreign direct investment (FDI) and $94 billion comprised portfolio equity or ‘hot money’. The latter was three times its peak level in 1997. The development is largely brought about by a situation...
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