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Journal of International Development J. Int. Dev. 13, 25±44 2001) DOI: 10.1002/jid.734 STIMULANTS TO CAPITAL INFLOWS INTO EMERGING MARKETS AND THE RECENT ROLE OF SPECULATORS DILIP K. DAS* Economic Analysis & Research Division, Asian Development Bank, Manila 1 STIMULANTS OF CAPITAL INFLOWS Until ®nancial crisis struck the ®ve Asian economies 1 in mid-1997, private capital ¯ow to emerging market economies had gone on rising in a monotonic manner. Concurrently three major regional currency crises took place during this period, namely, the European crisis of 1992±93, 2 the Latin American crisis of 1994±95 and the Asian crisis of 1997±98. Two of three crises jolted the emerging market economies, while speculative runs played a discernible role in all three. To be sure, the Asian ®nancial crisis is not the last one of its kind. In two of the three cases, large and steady capital in¯ows were partly responsible for instability in the currency and ®nancial markets, therefore, this paper begins with an examination of capital in¯ows into the emerging market economies. It focuses on the stimulants to capital in¯ows during the 1990s in Section 1. In Section 2, the paper focuses on the macroeconomic factors in the emerging market and industrial economies which shaped the ®nancial scenario of the late 1990s, particularly the events after July 1997. 3 Section 3 analyses the modus operandi of the speculators and the extent and intensity of the speculative attacks in the emerging markets. In Section 4 we focus on the economic and ®nancial vulnerabilities in the emerging market economies which led to speculative attacks during the 1990s, with a particular focus on the latest run of speculative attacks on some of the emerging markets in Asia. In Section 5, we examine whether some defensive measures can be taken by the central banking authorities against probable speculative runs. A summary of conclusions is provided in Section 6. Copyright # 2001 John Wiley & Sons, Ltd. *Correspondence to: Dilip K. Das, Asian Development Bank, Economic Analysis & Research Division, PO Box 789, 0950 Manila, Philippines. Tel: 632 632-4444. Fax: 632 636-2444. E-mail: [email protected] 1 In the latter half of 1997 ®nancial crisis struck Indonesia, Korea, Malaysia, the Philippines, and Thailand. Other Asian economies, including Hong Kong SAR and Singapore were also adversely affected by the crisis. 2 In the international ®nance literature they are also known as the ERM crises of 1992-93. It needs to be clari®ed that the ERM crises had little to do with capital ¯ows, although speculators had an active role in these crises. 3 Financial crisis in Thailand began on 2 July 1997.

Stimulants to capital inflows into emerging markets and the recent role of speculators

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Page 14: Stimulants to capital inflows into emerging markets and the recent role of speculators

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