Stiglitz on East Asian crisis tenth anniversary

Stiglitz notes that most East Asian economies have built up a formidable war chest of foreign exchange reserves, so are better equipped today to deal with any big outflows of capital. But he believes two lessson of the crisis have still not be absorbed.

Indeed, the two most important lessons of the crisis have not been absorbed. The first is that capital market liberalisation — opening up developing countries’ financial markets to surges in short-term “hot” money — is dangerous. It was not an accident that the only two major developing countries to be spared a crisis were India and China. Both had resisted capital market liberalisation. Yet today, both are under pressure to liberalise.


The second lesson is that in a highly integrated world, there is a need for a credible international financial institution to design the rules of the road in ways that enhance global stability and promote economic growth in developing countries. With the IMF so dominated by the US (it is the only country with a veto) and Europe (which, by custom, appoints its head), the Fund was long seen as representing the interests of international creditors. Its failures in the 1997 crisis further undermined its credibility, and its failure to do anything about the massive global financial imbalances that represent the main threat to global financial stability today, have underscored its limitations.