Managing Foreign Capital Flows: The Experience of Korea, Thailand, Malaysia, and Indonesia
Between 1990 and 1994 developing countries in Asia posted $261 billion in net capital inflows, an amount equivalent to about half the total inflows to all developing countries. Although foreign direct investment accounts for the largest portion of net inflows to Asia, the share of portfolio investment has been steadily rising, from an average of 8 percent of net inflows between 1983 and 1989 to 24 percent between 1990 and 1994. Suggested reasons for the increase in portfolio investment have been a high demand for capital coupled with favorable growth prospects, deregulation and liberalization of capital accounts, domestic financial reform (which has facilitated foreign investment in domestic securities), lower interest rates, and international portfolio diversification. Capital inflows have been important in supporting high rates of investment, particularly in Indonesia, Malaysia, and Thailand, but short-term capital inflows also have threatened macroeconomic instability by inducing volatility of key financial variables such as the exchange rate. Threats to stability have, in turn, led countries to install direct control measures to dampen large swings in short-term capital inflows. In this working paper, Yung Chul Park, of Korea University and the Korea Institute of Finance, and Chi-Young Song, of the Korea Institute of Finance, analyze the experiences of Korea, Thailand, Malaysia, and Indonesia in managing these capital inflows. Park and Song found that for each of the four countries, following the surge in capital inflows, inflation rates rose (although they note that there is not necessarily a causal relationship between the two events) and real effective exchange rates declined (the result of a gradually rising share of investment to GDP and fiscal discipline). Moreover, there appeared to be no long-term rise in financial market volatility as compared to the period preceding the rise in capital inflows. The authors attribute this to policies of exchange rate sterilization, monetary stabilization, and fiscal restraint. In particular, exchange rates likely remained stable because each country adopted a similar interventionist policy to prevent rapid appreciation of the nominal rate.
|Date of creation:||14 Jul 1998|
|Date of revision:|
|Note:||Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 81; figures: included|
|Contact details of provider:|| Web page: http://188.8.131.52|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barry Eichengreen, James Tobin, and Charles Wyplosz., 1994.
"Two Cases for Sand in the Wheels of International Finance,"
Center for International and Development Economics Research (CIDER) Working Papers
C94-045, University of California at Berkeley.
- Eichengreen, Barry & Tobin, James & Wyplosz, Charles, 1995. "Two Cases for Sand in the Wheels of International Finance," Economic Journal, Royal Economic Society, vol. 105(428), pages 162-72, January.
- Reinhart, Carmen & Khan, Mohsin, 1995.
"Capital Flows in the APEC Region,"
8200, University Library of Munich, Germany.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993.
"Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors,"
IMF Staff Papers,
Palgrave Macmillan, vol. 40(1), pages 108-151, March.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
- Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America; The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
- Liliana Rojas-SuÃ¡rez & Donald J. Mathieson, 1993.
"Liberalization of the Capital Account; Experiences and Issues,"
IMF Occasional Papers
103, International Monetary Fund.
- Donald J. Mathieson & Liliana Rojas-SuÃ¡rez, 1992. "Liberalization of the Capital Account; Experiences and Issues," IMF Working Papers 92/46, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9807002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.