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With financial liberalisation, this made domestic firms turn to cheaper foreign funds, and it also made foreign banks and financial institutions pour funds into the Asian economies to obtain larger interest earnings. Whenever there is a surge of financial inflows into an economy, then, no matter what it does, this economy gets into difficulties.

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Just think of the various possibilities. If it simply allows these funds to come in without any intervention and domestic expenditure does not increase, then the exchange rate appreciates, which has a contractionary effect on domestic output and employment, even as the external liabilities of the country go up.

If with larger inflow of funds, the current deficit expands because of larger domestic expenditure, then too there are problems. If the increase is in consumption expenditure, then effectively the country is borrowing short-term funds to indulge in a consumption splurge, typically of the rich; and when such funds are taken out, there is a foreign exchange crisis, which causes a squeeze, typically on the consumption of the poor, to generate resources for the outflow. It can of course simply hold reserves and prevent any appreciation of the exchange rate.


Thus any large inflow of short-term foreign funds is necessarily fraught with danger for the host economy. The Asian economies typically enlarged their investment rates when there was this surge in foreign financial inflows.

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Some of these inflows had arisen anyway because domestic firms were borrowing abroad to raise investment; additionally, other firms jacked up their investment with the easy availability of funds owing to these inflows, some of which found their way to local banks. When the crisis came, there was both a run on foreign exchange and a run on banks; and these two reinforced one another. The readers would benefit from this informative and insightful chapter.

The author begins the chapter with an analysis of interest rate deregulation and capital account liberalization started in the early s. His analysis leads to a conclusion that the opening of the capital account before establishment of prudential regulations was a major policy blunder for pre-crisis Thailand. The chapter would have provided the whole picture of Thailand's crisis and effects of the financial liberalization if it took in a discussion of the multilateral institutions' responses in the wake of the crisis and the weaknesses of banking and corporate sectors emerged during the storm.

In the chapter on Indonesia, the author examines the financial sector reforms initiated in the early s.

Financial Liberalization and the Economic Crisis in Asia: 1st Edition (Hardback) - Routledge

Factors contributing to Indonesia's banking crisis are well discussed and comprehensible. The appendix of the chapter also helps the readers to apprehend the chronological events of Indonesia's banking reforms over the period The next chapter focuses on Korea. The author examines how the country's financial liberalization, started in early s, changed the structure of financial markets and corporate sector's financing pattern.

A discussion is given to the link between the financial liberalization and the weaknesses in banking and corporate sectors. The chapter is well written and directly sheds light on the crisis.

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The policy recommendations on financial liberalization are well addressed. The liberalization, however, lacked a clear orientation and was not accompanied by a concurrent strengthening of prudential regulation. A fundamental reform was delayed because politicians and bureaucrats were not ready to bear the short-term costs.

Enforcing prudential regulation would have required the restructuring of many businesses and financial institutions. Phillip Wonhyuk Lim , p. Seoul: Korea Development Institute. They were involved mainly in discounting and trading commercial papers. Twelve new finance companies were added in the aftermath of two large-scale money market frauds in , and their number totaled 32 in But the worsening business environment in ensuing years forced their conversion into other types of NBFIs.

Financial Liberalization: How Well Has It Worked for Developing Countries?

Five of them were converted into securities companies and three into banks in , and the rest into MBCs in nine and fifteen. MBCs were created after the first oil shock to help domestic companies tap into foreign capital markets, but their remit covered domestic markets in commercial papers, securities and corporate bonds as well.

There existed six MBCs until the early s. With the subsequent conversion of 24 finance companies into MBCs, their number increased to 30 by Lee ed. All rights reserved. Development Overview. ALL Economy All. Financial Policy. Economic Conditions. Economic Administration. Economic System.

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