Engine for Dynamism and Stability
Edited by Masahiro Kawai, Jong-Wha Lee, Peter A. Petri and Giovanni Capanelli
Chapter 8: From Crisis to Crisis: Changing Capital Flows and Foreign Exchange Reserves in Asia
Yiping Huang Asian economies have undergone profound transformation since the 1997/98 financial crisis1 most notably in the areas of exchange rate flexibility, current account balances, foreign exchange reserves, debt structure and regional financial cooperation. Interestingly, however, Asia’s economic challenges ten years after the crisis covered a similar set of issues, although from diametrically opposite positions. ● ● ● ● ● In 1997, Asia faced capital flight. In 2007, the key concern was too much capital inflow. In 1997, Asian economies were under heavy pressure to devalue currencies. In 2007, most regional currencies were probably undervalued. In 1997, Asian economies suffered from an overinvestment problem. In 2007, the share of investment in GDP in Asia – outside of the People’s Republic of China (PRC), India and Viet Nam – was on average still 10 percentage points below its peak. In 1997, many Asian countries ran large current account deficits. In 2007, with the exceptions of India, Republic of Korea (Korea) and Viet Nam, Asian economies enjoyed massive surpluses. In 1997, Asian central banks did not have enough foreign reserves to stabilize financial markets. In 2007, combined reserves of $3 trillion put pressure on currencies and a burden on central banks to maintain investment returns and sterilize domestic liquidity. Although specific policy measures probably varied, changes were made mainly in response to the 1997/98 financial crisis covered several core common areas. These generally included: (i) relatively conservative exchange rate policy; (ii) large external account surpluses; (iii) rapid accumulation of foreign reserves; (iv) a cautious approach to capital account liberalization;...
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