The Search for a Framework
ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai and Mario B. Lamberte
Chapter 14: Managing Capital Flows: The Case of Singapore
Hwee Kwan Chow INTRODUCTION 14.1 There has been much discussion on the state of the regional economies coinciding with the tenth anniversary of the Asian financial crisis. As has been widely noted, the Asian economies recovered quickly from the crisis and are now amongst the fastest growing in the world. Since Asia has not experienced further crises in the past decade, can one infer that the region is now less vulnerable to the destabilizing effects of unfettered international capital flows? After all, considerable efforts have been undertaken to build buffers and reduce vulnerabilities. Compared to the pre-crisis period, the Asian economies are now run more conservatively, have strengthened current accounts, and have significant buildups in foreign reserves. Meanwhile, the financial systems in the region have become more resilient, with the restructuring of balance sheets and the enhancement of surveillance. However, there has been a resurgence of private capital flows into Asia since 2003. This resurgence has largely been attributed to the search for high-yielding investments arising from low interest rates in developed countries.1 In view of the pro-cyclicality of such capital flows (Kaminsky et al. 2004), some question whether the region’s exposure to a capital flow reversal will lead to yet another financial crisis. It is clear that structural reforms and stronger economic fundamentals have increased Asia’s robustness towards such financial shocks. In contrast to the 1997–98 Asian crisis, the region has greater capacity to accommodate the capital outflows so that a liquidity crunch or balance of payments crisis...
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