IN THE WAKE OF THE EAST ASIAN CRISIS : ANALYSIS OF CAPITAL INFLOWS

Abstract

The financial/economic crisis of 1997-98 that hit the four East Asian NIEs and Indonesia, Malaysia and Thailand (ASEAN-3) had caused a slump in capital inflows and also adversely affected the growth of exports from these economies.

Economy level regressions are tried to see whether there are statistically strong relationships between GDP growth and export growth, and export growth and the ratio of foreign direct investment (FDI) to gross fixed capital formation (GFCF). Hong Kong and Singapore stand out for strong relationships while Korea and Taiwan do not exhibit them.

Multiple regressions of economic growth are tried for pooled data for the NIEs and the ASEAN-3 with economy dummies and export growth and FDI/GFCF as independent variables. In the case of the NIEs, economic growth critically depends on export growth and FDI/GFCF, especially so in Hong Kong and Singapore where the economy dummies have no significant coefficients. In respect of the ASEAN-3, the critical independent variable turns out to be FDI/GFCF.

FDI inflows are a must for ASEAN-3 recovery and the recovery of the NIEs. ASEAN-3 recovery boosts export growth of the NIEs and helps their growth even more.