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Capital Account Convertibilty & Some Issues
Capital Account Convertibilty & Some Issues
Until 1997, Asia attracted almost half of total capital
inflow to developing countries.
These economies maintained high interest rates
attractive to foreign investors.
Received a large inflow of hot money and experienced
a dramatic run-up in asset prices.
Thailand, Malaysia, Indonesia, the Philippines,
Singapore, and South Korea experienced high, 8-12%
GDP growth rates in the late 1980s and early 1990s.
This achievement was broadly acclaimed by economic
institutions including the IMF and World Bank, and was
known as part of the Asian economic miracle.
Asian Crisis (3)
Productivity did not increase !
In 1994, Western investors lost confidence in
securities in East Asia and began to pull money out,
creating a domino effect.
Large Current Account Deficits
Large External Borrowings
Russia, Brazil and US pulled-out investments from
Asia
Asian Crisis (4)
Role of IMF was controversial
Currencies weakened by 50% or more
Stock markets crashed by 75%
Interest Rates roofed up to 40% or even 500%
Depression
Unemployment
IMF Views
One of the objectives of IMF is to promote CAC !
Basic objective of IMF is to bailout economies in
crisis related to BoP
IMF urged India 3 times in 2005 to be liberal on
Capital Account
Contrary Views on objectives of IMF
Indian Approach
Partial CAC
Slow approach
Policy watch after every move
Current Account Improvements
Productivity Improvements
Democratic pressures positive