How can small and open economies manage capital inflows?

Asian economies have embraced the globalisation of production, trade and capital flows. One dimension of contemporary globalisation has been the rapid and massive stockpiling of foreign exchange reserves in Asia (Figure 1.1). By the end of 2008, the region held US$4.3 trillion of reserves or over three-fifths of global reserves. In view of the fact that half of Asia’s reserves have been attributable to Japan and China, most attention has inevitably been focused on these two Asian giants along with South Korea and India. However, often it is not recognised that two smaller economies, namely Singapore and Taiwan, hold over US$450 billion of reserves in aggregate (Figure 1.2). Indeed, on a per capita basis, these two economies are probably the world’s two largest reserve holders. ² Despite this, scant attention has been paid to the rationale for and impact of reserve accumulation in these two economies.