Capital Mobility in Developing Asia: How Does It Respond to the Financial Crises?

Abstract

This paper examines movements of capital flows in developing Asia, with an emphasis on their responses to the Asian and global financial crises. The determinants of capital flows are then further examined. Portfolio investment and bank loans (both inflows and outflows) are more prone to the financial crises than foreign direct investment. The determinant analysis shows that economic prospects of G3 countries are crucial in affecting movements of portfolio investment and bank loans. It is, therefore, not surprising that the recent global economic slowdown from the G3 markets resulted in the significant pullbacks of short-term capital. However, strong economic fundamentals, especially financial institutions, in the region help most of developing Asia to successfully redress and manage most of the adverse effects. The complementarity between capital flows and saving in the region is also found in the analysis, which may shed light on problems of efficient use of saving within the region. Shifting the composition of capital flows to longer-term capitals and further developing financial markets are two key policy inferences that can be drawn from the study.