Contagion and convalescence: Capital liberalization, capital controls, and the East Asian financial crisis. Case study: Thailand and Malaysia

Abstract

The East Asian Financial crisis highlighted the consequences of fast-tracked capital account liberalization in emerging market economies lacking the macroeconomic and regulatory infrastructures to manage such changes. The dichotomy between capital account liberalization and capital controls is illustrated in the divergent strategies utilized by Thailand and Malaysia in responding to the crisis. Thailand pursued IMF assistance. Malaysia implemented a reflationary strategy independent of the IMF and employed capital controls to shield the country from currency speculation and capital outflows. Malaysia not only recovered more quickly than Thailand, but also did not experience the same level of contraction. This thesis does not attempt to resolve debate regarding the risks of capital account liberalization or the merits of capital controls. Analysis of these controversial subjects is merely suggestive rather than resolutive. However, the thesis has drawn reasonable conclusions based on data, available scholarly work, and the author's own analyses of tested hypotheses.