Given the problems described above in the East Asian financial crisis, it is clear that sudden outflow of capital can be very damaging. But what does this say about capital inflows? The ability to manage capital inflows is perhaps the more pertinent issue in current times. Large capital inflows can increase vulnerability to external shocks and shifts of market sentiment. In a way the capital inflows and outflows problems are two sides of the same coin.

Critics of globalization such as economist Joseph Stiglitz have cited the example of Thailand’s deregulation of capital inflows as an example of the dangers. Until the 1980s, Thailand used to have very restrictive policies surrounding real estate investment. However, under pressure from the IMF and the U.S. Treasury, the Thai government liberalized its investment policies, removing restrictions on bank lending for real estate. An over-capitalized domestic market—that is, one with too many investment dollars chasing too few real opportunities—resulted in a lot of very risky and sometimes poorly planned investment projects.

This led in the 1990s to a boom in office building construction, and many of these offices now sit empty. However, the Thai government still must repay the loans taken out for their construction, taking money from other developmental priorities such as building schools and roads.

A final awareness that grew out of this turmoil was that due to the new linkages in the world economy, with the assets of firms spread across many countries, a crisis of significant magnitude can affect not only poorer countries but more advanced economies as well. Many analysts were surprised that middle-income countries such as Russia and Brazil were affected by the events in East Asia. Indeed, some economists in the U.S. feared that a more serious downturn in Brazil could have had a domino effect upon the rest of Latin America, continuing up to Mexico, which would then inevitably have had substantial implications for the U.S. economy.

Although economists seldom achieve a consensus on major economic policy issues, many agree that one of the lessons learned by the East Asian crisis was that financial liberalization in developing countries should not get ahead of reforms in the banking and finance sectors. Many observers concluded that the supervision of East Asian banks, reserve requirements, and other traditional safeguards were not sufficient to manage the enormous capital inflows which began in the 1990s.

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