26 Pages

Introduction: Issues and findings


The Asian economic crisis of 1997-98 was an unfortunate outcome of confluence of ‘weak’ domestic financial systems in Asia and volatile international capital movements brought about by the globalization of financial markets (Dean 1998, Goldstein 1998, Montes 1998, Radelett and Sachs 1998). Given the technological advances in information and communications of the late twentieth century, globalization of financial markets was perhaps inevitable although its rapid progress since the 1980s was abetted by a widely accepted notion that free capital movements were better than less-than-free capital movements (Caprio 1998, Eichengreen 1998).1 As it turns out, this notion – which is based on a simple extension to financial markets of the dictum that free trade in goods increases economic efficiency and thus improves economic welfare – requires many qualifiers to be valid. The Asian economies that suffered dearly from the crisis of 1997-98 were victims of this naive notion about free capital movement. We now know better: if a country is to benefit from free international capital movement it must have, inter alia, a sound and strong financial system that can deter panic capital movement and withstand systemic shocks from such a movement, if it is to occur.