Lessons from the Asian Financial Crisis

At a recent conference held in D.C. to mark the 10th anniversary of the Asian Financial Crisis (AFC) - wow, has it been a decade already? - Denver University professor Ilene Grabel outlined what she called the most lasting and important effect of the AFC.

And that is, the center of gravity has shifted from an "unequivocal, fundamentalist opposition to any interference with the free flow of capital, to a kind of tepid, conditional support for some types of capital controls."

So is this shift good or bad?

According to Prof Grabel, while the shift had certainly moved policy discussions "in the right direction", such a "weak consensus" is not adequate in preventing another crisis.

But on the positive side, such capital controls will reduce the risk of investor flight, financial crises, as well as involvement with the International Monetary Fund (IMF). This, in Prof Grabel's view, had created space "for policy experimentation and policy and institutional diversity."

Turning to lessons gleaned from the AFC, the professor suggested that developing countries need to seriously rethink their participation in trade and investment agreements. She argued that such agreements "constrain their ability to protect themselves from and respond to financial crisis."

She added: "The costs of these agreements are clear, and the benefits are, at best, negligible insofar as there is no empirical evidence that they actually enhance trade or investment flows to the developing world."

Overall, Prof Grabel noted that the decade since the AFC had not been spent wisely in preventing its recurrence. She said the political will had not been mobilized and had even dissipated, and "without any substantial crisis-preventing reform" taking place.

"Instead of meaningful reform. we face today increasing efforts to lock in financial liberalism, leaving the world financial order perhaps even more precarious than a decade ago. One step forward, two steps back - I'm afraid to say that it's hard to make sense of the past ten years of international financial mismanagement in any other way."