Managing Capital Flows: Search for a Model - Technical Workshop

Purpose

The purpose of this workshop is to present the preliminary drafts of the survey of literature on capital flows, country studies and perspective papers. The participants in this workshop will include ten members of the core study group, the five invited international experts, technical staff of ASEAN+3's central banks and ministries of finance and other resource persons who will comment on the various draft reports. The researchers will incorporate comments and suggestions they will receive from their colleagues and other participants of the workshop in their final drafts.

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Background

Sustained economic growth can contribute significantly to poverty reduction. Indeed, countries that have enjoyed economic growth for long periods of time have witnessed marked declines in poverty incidence. But crisis could frustrate such development. Even though countries can recover quickly from the crisis, they may not return to the same growth path as before the crisis, thus delaying further the economic development process. Because a crisis can have long-term developmental implications, ADBI is keen in making a contribution to the understanding of the causes of a crisis and to the formulation of policy measures that DMCs could adopt to avoid a crisis.

It was ten years ago that emerging Asian economies were subjected to a crisis, with Thailand, Korea, Indonesia, and Malaysia being the most affected economies. It was a demonstration of how the volatility of private foreign capital flows can adversely affect a country's economy whose policies and institutions were weak in dealing with such flows. The crisis was preceded by surges in capital inflows of a largely short-term nature, creating double mismatches and jacking up asset prices, followed by a sudden stop and massive reversals of capital flows. With central banks of crisis-affected countries not being able to hold the line, currencies depreciated sharply, exposing the weaknesses of the banking system.

The recovery of crisis-hit countries' economies was indeed remarkable. The recovery was facilitated by the reforms put in place by these countries and by the favorable external environment. Thus, today, exchange rates are more flexible and the banking systems' exposure to double mismatches has been greatly reduced. Emerging Asian economies have been experiencing current account surpluses, attracting more foreign capital, and accumulating international reserves that have reached new heights. But all seem to be not well: these economies are currently facing new challenges, which, if not properly addressed, could lead them to another crisis.

Global payments imbalances could put emerging Asian economies at risk. These economies have received massive capital inflows while also recording current account surpluses. To moderate currency appreciation pressure, monetary authorities of emerging Asian economies have intervened in the foreign exchange markets. Even so, currencies of emerging Asian economies have tended to appreciate against the US dollar, threatening their competitiveness.

This situation, which has been going on for some time, is expected to continue in the near future. The questions that have been raised in the region are: what would be the best policy of an individual country to deal with the situation? And what regional cooperation initiatives can possibly be introduced to best utilize capital inflows while maintaining prudent macroeconomic stability?

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Objectives

The objective of this project is to develop a policy framework for managing capital flows that can be used as a basis for formulating

1. DMCs' national policy responses to surges in capital inflows consistent with the goals of macroeconomic and financial sector stability;
2. Asian regional cooperation initiatives in support of national efforts to manage capital flows; and
3. proposals for reforming the international financial architecture that can support DMCs' efforts to manage capital flows.

To achieve this objective, ADBI will provide Asian think tanks a forum for identifying and studying issues on capital flows and for debating on alternative measures for managing such flows. The Asian Policy Forum consisting of Asian think tanks is expected to come up with a policy framework for managing capital flows that they will propose to national, regional and global policy makers. Background papers and conference/workshop proceedings will be used as inputs to the development of such a framework.

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Outputs

The deliverables of this technical workshop are:

Final drafts of the survey of literature on capital flows; nine country studies (People's Republic of China, India, Indonesia, Republic of Korea, Malaysia, the Philippines, Singapore, Thailand and Viet Nam); and five perspective papers by invited international experts.

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Participants

Participation is by invitation only.Invited participants include mid-level and technical staff from ministries of finance and central banks in ASEAN+3 countries and India, researchers from ASEAN+3 think tanks and prominent scholars.

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Language

English

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Partners

Asian think tanks will be involved in the implementation of this project.They shall organize themselves into an Asian Policy Forum (APF). The core members of this forum are think tanks from ASEAN+3 countries and India.