EXTERNAL SHOCKS, SAVINGS AND ECONOMIC GROWTH DURING THE CRISIS: A DYNAMIC PANEL STUDY OF ASAIN-6 COUNTRIES

Marwan A. THANOON (Universiti Putra Malaysia)
Ahmad Z. BAHARUMSHAH (Universiti Putra Malaysia)

The global economies in the 1990s were characterised by a string of new style of financial crises that plunged a number of rapidly growing and successful economies in the world into financial chaos and economic collapse. The challenge of reconciling international capital mobility with domestic economic stability and developmental priorities has now emerged as the most pressing and controversial topic in international economies and policymaking. At the heart of this new policy focus is a renewed emphasis on the conventional wisdom about the need to treat foreign direct investment (FDI) flows separately from other forms of capital flows (short run and long run debt) in designing national policies to monitor capital flows.

There are many things that went wrong for the countries caught up in the Asian crisis of 1997, but of the myriad causes two clear problems can be identified- the fatal combination of large and volatile international capital inflows, interacting with fragile domestic financial sectors. In particular, the financial crisis has created confusion about the role of foreign capital in the development of Asian economies. Since the crisis, there has been heated debate on how beneficial is foreign capital in promoting economic growth, given that it also created systemic risks that were a key to the Asian financial crisis. This paper contributes to the debate by assessing the role of foreign capital inflows and outflows in generating sustainable saving and growth prior and during the crisis. Although there has been a large number of studies have been conduct on foreign capital inflows, few have gone beyond qualitative assertions regarding FDI, long and short term debt, saving and growth. This study makes some attempt at rectifying this lacuna by quantifying the above issue using the dynamic panel techniques of Asian-6 countries over the 1965-2000 period.