12 The Management of Capital Flows and Financial Vulnerability in Asia1

Abstract

AbstractThe author deals with the management of capital flows and financial vulnerability in Asia by focusing on the crisis and developing countries. There is a growing consensus that vulnerability of emerging markets to financial contagion and shocks depends in large part on how capital inflows are managed, since options are limited during sudden stops and reversals. Vulnerabilities associated with surges in capital flows lie in four areas: (i) currency and maturity mismatches in private balance sheets, especially of financial institutions; (ii) credit, asset and investment bubbles; (iii) unsustainable currency appreciations and external deficits; and (iv) reliance on help and policy advice from the International Monetary Fund (IMF) rather than self‐insurance against sudden stops and reversals of capital flows. Crisis prevention should thus aim at preventing fragility in private balance sheets and external payments, checking financial and investment bubbles, and building adequate self‐insurance against reversal of capital inflows.