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 central problems can be identified – the fatal combination of large and volatile international capital flows, interacting with fragile domestic financial sectors. This chapter will focus on the first of these issues, international capital flows.

International flows are now centre-stage in the international economic policy debate, certainly a higher profile than capital flows usually have. Traditionally, the focus has been on their real sector counterparts – the savings/investment balance and the current account surpluses and deficits. Both theory and practical policy-making often assume that these are the ‘movers’ of the action, with capital flows largely a passive, accommodating residual. But the Asian crisis suggests that the action may be in the capital flows themselves. The capital flows were certainly excessive in the sense that they were greater than could be absorbed (that is, the capital flows were substantially larger than the current account deficits: see Figure 2.1). The capital inflows into Indonesia, Malaysia, the Philippines and Thailand in the five years 1990–94 were twice as large as the current account deficits (Calvo & Goldstein 1996: 125). Capital inflows into Thailand in 1996, for example, were equal to 13 per cent of GDP. The ‘excess’ flows increased the foreign exchange reserves of the recipient country, in effect, being recycled back to the capital-exporting countries.