Integration in the Global Economy
- New Horizons in Money and Finance series
Edited by Suthiphand Chirathivat, Emil-Maria Claassen and Jürgen Schroeder
10. Rethinking capital controls: the case of Malaysia Masahiro Kawai1 and Shinji Takagi2 10.1 INTRODUCTION The 1990s saw a proliferation of capital account crises in emerging market economies. Such crises were characterized by sudden reversals of capital inflows that forced abrupt current account adjustments and major macroeconomic disruptions. It is now well understood that one of the most important factors behind those recent emerging market crises were some stock imbalances, such as high levels of public sector debt (Argentina, Brazil and Turkey) and currency or maturity mismatches in the structure of highly leveraged private sector liabilities (Argentina, Indonesia, Korea and Thailand). Unlike conventional current account crises, flow imbalances played a comparatively small role. However, the precise propagation mechanisms running from those stock imbalances to currency crises differed across countries. Also, the nature of those stock imbalances themselves has complicated the problem of tackling the crises once they broke out. In the last decade, a number of emerging economies – including those in East Asia – pursued financial market deregulation, capital account liberalization (both for inflows and outflows), and financial sector opening. Deregulation and liberalization have, no doubt, brought economic benefits in the form of greater financial resource mobilization to domestic investment and economic growth. At the same time, this has created new sources of vulnerabilities in the balance sheets of commercial banks, corporations and the public sector. The implication is that emerging economies wishing to integrate themselves with the international financial market must manage the process of such integration in a prudent...
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