International Economic Policy in the Wake of the Asian Crisis

The Asian crisis was the third financial crisis of the 1990s. Even more than its predecessors it raised questions about the international community’s approach to crisis prevention and crisis management. It led reservations to be voiced, and not only in Asia, about full and unfettered international capital mobility and about the policy priorities of the International Monetary Fund. This paper discusses the policy challenges posed by the Asian crisis. It starts in Section 1 by reconsidering the controversy over capital mobility. Even before the crisis struck, the IMF was on record as favoring the liberalization of capital flows and had proposed amending its Articles of Agreement to make the promotion of capital account liberalization a purpose of the Fund and to give it jurisdiction over restrictions on capital movements. In the wake of a crisis characterized by volatile financial flows and contagious currency crises, capital mobility is increasingly seen as a mixed blessing. There is a feeling, especially in Asia, that amending the Articles giving the Fund jurisdiction over capital account restrictions would be a bridge too far. The first part of the paper therefore seeks to reconcile the fundamental case for international capital mobility with Asia’s less-than-heartening recent experience. Section 2 draws lessons for country policy. It focuses on the implications for three issues at the heart of the Asian crisis: how to enhance the stability of banking systems, the connections between financial regulation and exchange rate policy, and the efficacy of capital controls. Section 3 turns to the IMF. Here too the questions are well known. Have Fund programs been too restrictive for countries whose problems reflect flaws in their domestic financial systems rather than excessively expansionary monetary and fiscal policies? Should the Fund modify its approach to the liberalization of capital flows? Should it limit itself to the traditional areas of monetary and fiscal policy, or does it need delve more deeply into financial regulation, competition policy, and corporate governance?