Capital Account Regimes, Crisis, and Adjustment in Malaysia

This paper examines the role of international capital mobility in rendering countries susceptible to financial crises and the use of capital controls as a crisis management tool, in the light of the Malaysian experience through the Asian financial crisis. It is argued that significant liberalization of the capital account and aggressive promotion of portfolio inflows in a context of growing macroeconomic imbalances and loosening financial prudence made Malaysia vulnerable to a crisis. Against dire predictions by many observers, capital controls imposed in late 1998 assisted crisis management along Keynesian lines. However, other countries should be cautious in deriving policy lessons from the Malaysian experience because several factors specific to Malaysia seem to have significantly conditioned the outcome of the recovery package that was based on capital controls.