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Financial crisis in Malaysia: did FDI flows contribute to vulnerability?

  • Anita Giselle Doraisami

    (International Monetary Fund, Singapore)

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    To date there has been greater awareness that the sudden interruption and reversal of capital flows can cause financial crisis. However for the most part it is thought that the volatility of capital flows applies predominantly to short-term flows and not longer-term capital flows such as FDI. The Malaysian experience of financial crisis challenges the conventional wisdom and has profound implications for other developing countries seeking to attract FDI flows as a source of long-term stable financing. Malaysia succumbed to crisis in spite of the fact that FDI flows accounted for the bulk of financial flows on average. This paper argues that FDI flows in Malaysia contributed to vulnerability to crisis by causing chronic current account deficits and was associated with a slowdown in export growth prior to the crisis. This suggests that when assessing a country's vulnerability to financial crisis, emphasis should not only be placed on the reversibility of flows but also on the macroeconomic impact of these flows. Copyright © 2007 John Wiley & Sons, Ltd.

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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

    Volume (Year): 19 (2007)
    Issue (Month): 7 ()
    Pages: 949-962

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    Handle: RePEc:wly:jintdv:v:19:y:2007:i:7:p:949-962
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    1. Enzo Grilli, 2002. "The Asian Crisis: Trade Causes and Consequences," The World Economy, Wiley Blackwell, vol. 25(2), pages 177-207, 02.
    2. Ajit Singh, 2003. "Capital Account Liberalization, Free Long-Term Capital Flows, Financial Crises and Economic Development," Eastern Economic Journal, Eastern Economic Association, vol. 29(2), pages 191-216, Spring.
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    6. Antonio Spilimbergo & Rupa Duttagupta, 2000. "What Happened to Asian Exports During the Crisis?," IMF Working Papers 00/200, International Monetary Fund.
    7. Michael P. Dooley & Eduardo Fernandez-Arias & Kenneth M. Kletzer, 1994. "Recent Private Capital Inflows to Developing Countries: Is the Debt Crisis History?," NBER Working Papers 4792, National Bureau of Economic Research, Inc.
    8. Tilak Abeysinghe, 2000. "Electronics and growth cycles in Singapore," Applied Economics, Taylor & Francis Journals, vol. 32(13), pages 1657-1663.
    9. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion," IMF Working Papers 99/88, International Monetary Fund.
    10. Jomo, K S, 1998. "Malaysian Debacle: Whose Fault?," Cambridge Journal of Economics, Oxford University Press, vol. 22(6), pages 707-22, November.
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