TWN Global Economy Series no. 16 Financial Policy and Management of Capital Flows: The Case of Malaysia By Martin Khor Publisher: TWN (ISBN: 978-983-2729-82-2) Year: 2009   No. of pages: 104

ABOUT THE BOOK

This paper looks at how financial policy in Malaysia has evolved over the years with regard to management of capital flows into and out of the country, the exchange rate and related macroeconomic policies.

To deal with the financial crisis which struck East Asia in 1997-99, the Malaysian government had adopted an innovative set of policies that included selective capital controls, exchange rate stabilization and counter-cyclical macroeconomic policy measures. This unorthodox strategy proved to be a success, as attested to by Malaysia’s relatively rapid recovery from the crisis. 

Since then, the Malaysian capital account regime has been progressively liberalized. The country has largely shifted from a policy of regulating capital flows to one of managing their effects on the domestic economy through such measures as monetary policy operations, buildup of foreign exchange reserves and surveillance and risk management in the financial sector. 

However, as this paper cautions, the resulting increased capital mobility has rendered the economy vulnerable to sudden, damaging swings in the direction and magnitude of financial flows – a very real threat especially in the current period of global financial turmoil. In light of these risks, the author calls for a rethink of financial policy liberalization in Malaysia with a view to better shielding the economy from the effects of dangerously volatile capital flows.

ABOUT THE AUTHOR

MARTIN KHOR, formerly Director of the Third World Network, is Executive Director of the South Centre, an intergovernmental body with 50 member states from the developing world. He was educated as an economist in the University of Cambridge (United Kingdom) and Universiti Sains Malaysia. He is the author of several books and papers on issues relating to trade and development, environment and sustainable development. 

Contents

1.   INTRODUCTION                                                                    

2.   THE 1997-99 CRISIS AND POLICY RESPONSE                  

a.   The financial and economic crisis                                                  

b.   The Malaysian counter-crisis strategy                                              

c.   Lessons from the Malaysian policy response                                

3.   EVOLUTION OF THE CAPITAL ACCOUNT REGIME SINCE 1998                      

a.   Introduction                                                                               

b.   The exchange rate regime                                                               

c.   Liberalization of foreign exchange rules and foreign investment     

4.   RECENT DEVELOPMENTS RELATING TO CAPITAL FLOWS     

a.   General                                                                                     

b.   Flows of direct investment                                                          

c.   External loans and external debt                                                  

d.   Volatility in portfolio flows                                                          

e.   “Other investments”: Outflows of banking deposits abroad            

5.   OVERVIEW OF THE EVOLUTION OF CAPITAL FLOWS

6.   MANAGEMENT OF CAPITAL FLOWS AND THE EXCHANGE RATE        

a.   Managing the effects of capital flows                                            

b.   Capital outflows as a means to lower the pressure of inflows          

c.   Managing the exchange rate and interest rates in a liberalized environment      

d.   Increasing buildup of foreign exchange reserves                             

e.   Strengthening the surveillance and risk management system            

7.   VULNERABILITY TO EXTERNAL SHOCKS                      

a.   Vulnerability to global financial turmoil                                           

b.   Effects of capital flows on asset prices                                          

c.   Balancing the benefits and risks of capital liberalization                     

d.   Capacity to keep regulatory pace with new financial instruments   

8.   SUMMARY AND RECOMMENDATIONS                           

ANNEX 1:       Changes in Malaysia’s Foreign Exchange Regulations      

ANNEX 2:       Equity Regulations Relating to Foreign Direct Investment

ANNEX 3:       Regulations on Foreign Purchase of Real Estate             

BIBLIOGRAPHY                                                                         

PRICE
US$12.00 for First World countries
US$10.00 for Third World countries
RM11.00 for Malaysia
Prices are inclusive of postage costs by airmail.

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