The role of external factors, the volatility analysis and the impact of the Asian crisis on various types of flows in selected Asian countries (Indonesia, Korea, Malaysia, Philippines, Thailand)

The Asian crisis of 1997 was preceded by a period of massive capital inflows to Asian countries. When the crisis hit, these inflows became a massive capital outflow. This reversal, in terms of domestic economic output, cost these countries tremendously. Using the financial account and its components from the balance of payments, this study examines several characteristics of capital flows in five crisis countries: Indonesia, Korea, Malaysia, the Philippines, and Thailand. We also look at the experience of four other Asian countries, namely China, India, Pakistan and Singapore.; We argue that whether the factors driving inflows are external or internal matters. In numerous studies, external factors are associated with unsustainable flows. The second chapter uses principal components analysis to quantify the role of external factors in the five crisis countries. Principal components analysis estimates the importance of external factors by generating a new data series that captures the common variance across the original series with the assumption that external factors have roughly similar effects on all the recipient countries. The empirical findings indicate that external factors are as important as domestic factors in determining capital flows to these five countries.; The empirical findings in the third chapter suggest that the volatility measurement based on the standard deviation around the trend gives a better prediction of the volatility ranking. The volatility ranking we found during the period of normal flows is other sectors, bank flows, portfolio investment and direct investment. A trend towards increased volatility and higher average levels of various flows during the 1990's suggested the potential danger if a crisis hit, and the severity of the actual crisis demonstrated this. The source of the largest outflows was the banking sector. Unexpectedly, the outflow of portfolio investment was negligible. With respect to residents' outflows, there is some evidence that these outflows aggravated the crisis, especially in Thailand. These findings suggest that the composition of capital flows does matter and should be a cause of concern for policymakers.