Capital Flows and the International Financial System

It has become easier, with the passage of time, to forget what an extraordinary event the Asian financial crisis was. Before the crisis, the countries of east Asia had grown faster, for longer, than any other countries in recorded history. They had transformed their economies and the standard of living of their people in the course of a single generation. In 1960, some of the east Asian countries had standards of living similar to those in Africa; by the mid 1990s, the contrast between economic conditions in the two regions was very stark indeed. The miracle of east Asian economic growth was something to be admired, studied, and emulated. Two years after the onset of the crisis, however, the east Asian economies are viewed in a rather different light. Admiring analysis of the 'Asian model' – complete with suggestions that Asian-style capitalism might be more robust, and ultimately more successful, than the Anglo-American version – has given way to disparaging discussion of 'crony capitalism', 'connected lending' and bankrupt financial systems in Asia, and to a sense of triumphalism about Anglo-American capitalism. The atmospherics have evolved almost as quickly as the financial crisis itself. But the success, or otherwise, of the Asian economic model is not the only thing at stake in the aftermath of the Asian crisis. There are also wider issues about the stability of the international financial system. The transfer of capital from the industrial world to the developing world – intermediated through the international financial system – should be of benefit to all. Capital flows, and the technology that goes with them, should be a powerful force for enriching the developing world. Moreover, the higher returns available to savers in the industrial countries from investing in the developing world should ease the demographic transitions in the industrial countries as their populations age. The problem, brought to the fore by the string of financial crises in the 1990s, is that the threat of sudden, unpredictable reversals of capital flows to developing countries may be a force for instability on a scale that could swamp these longer-term benefits. The papers in the volume were commissioned by the Reserve Bank to improve our understanding of capital flows and the international financial system. They aim to contribute to our understanding of the causes of financial crises and the best ways to reduce their frequency and severity, to analyse ways in which …