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Summary

The issues concerning non-foreign direct investment (non-FDI) capital flows, i.e., portfolios (both equity and debt securities) and other investments, including bank loans, in developing Asia are not new and, indeed, received considerable attention during the Asian financial crisis. The reversal of capital inflows, which went hand-in-hand with a massive depreciation in exchange rates and a significant contraction in economic growth, resulting in doubts regarding the determinants and benefits of cross-border non-FDI capital flows (e.g. Kose et al. 2006; Wei 2006). Figure 5.1 shows that these inflows to developing Asian countries began in the latter half of the 1980s and accelerated with the onset of the 1990s. The contribution of other investment, especially bank loans, and portfolio investment in total capital inflows increased noticeably during this period. The share of bank loans jumped to 12 per cent in 1995 from less than 1 per cent in 1990, while that of portfolio investment increased from 1.5 per cent to 16 per cent during the same period. However, the Asian financial crisis interrupted non- FDI capital inflows into developing Asian countries. Portfolio inflows and other investments declined substantially during 1998–2002 and the latter actually registered a negative value during this period. Note that during the Asian crisis, capital outflows remained relatively flat. The squeezed market size resulting from the financial crisis resulted in a slowdown in capital outflows.

Issues related to non-FDI capital flows received attention once again when the current global financial crisis caused pullbacks in capital inflows across the region. After the Asian crisis, non-FDI capital inflows escalated once again from 2002 until the subprime mortgage crisis of late 2008 (see Figure 5.1). The crisis resulted in the dramatic decline of non-FDI capital inflows throughout the region. The decline in capital inflows during this period was even more dramatic than that experienced during the Asian financial crisis. As mentioned in Chapter 2, capital inflows declined from US$1,038 billion in 2007 to US$61 billion in 2008, while during the Asian financial crisis the decline of capital inflows was around US$387 billion in the period 1997–98. Portfolio and other investment inflows contributed substantially to such a slump.

Summary

Orthodox thinking on capital account convertibility during the Bretton Woods era maintained that capital account opening should be expedited cautiously and only after substantial progress has been made in restoring macroeconomic stability, liberalizing the trade account and establishing a strong regulatory framework to foster a robust domestic financial system. Any abrupt opening of capital accounts at an early stage in the reform process without achieving these pre-conditions was thought to constitute a recipe for exchange rate overvaluation, financial fragility and eventual economic collapse (Edwards 1984; Corbo and de Melo 1987; Michaely et al. 1991; McKinnon 1993).

There was, however, a clear shift in policy emphasis in favour of a greater volume of capital account openings from about the late 1980s, with the International Monetary Fund (IMF) and the US Treasury adopting such an emphasis as a basic tenet of their policy advocacy concerning developing countries (Bhagwati 1998; Rodrik 2011). This new policy shift was reflected in a major decision by the IMF to pursue capital account opening as one of its operational objectives. A milestone in capital liberalization arrived with the achievement of Article VIII of the IMF in the early 1990s. Private capital inflows to the developing Asian countries began in the latter half of the 1980s and gathered momentum in the early 1990s (see Figure 1.1). The contribution of non-foreign direct investment (non-FDI) inflows, especially bank loans, in other investment inflows increased noticeably during this period (see Figure 1.2).

The push towards opening capital accounts, however, was subject to serious reconsideration following the onset of the Asian financial crisis (1997–98). The fact that the countries which succumbed to the crisis had for some years benefited from substantial flows of foreign capital, especially non-FDI in terms of bank loans, has raised questions about the role of capital inflows in creating the conditions that generated the crisis, or at least favoured its dissemination.

Summary

This chapter looks at trends and patterns in capital flows within emerging Asian countries1 in the midst of the Asian financial crisis and on through the subsequent period. There have been three distinct waves of private capital inflows into developing Asian countries over the past two decades. The first began in the latter half of the 1980s and gathered momentum in the early 1990s, before abruptly ending with the Asian financial trauma of 1997. The second wave ran through 2002 to 2007. However, the global financial crisis pronounced in late 2008 precipitated a deceleration in cross-border capital flows in developing Asia. The third wave commenced from 2009 until recent years, when such flows swiftly rebounded and started to bounce back. Thus, the first sub-section of this chapter discusses the first wave of capital inflows and how they were in response to the Asian crisis. Section 2.2 considers the second wave of capital inflows, especially their distinctive after the Asian financial crisis. Section 2.3 reviews how the current global financial malaise has affected trends and patterns in capital flows and whether the effects have been different from those during the Asian financial crisis. Section 2.4 turns to characterizing the third wave of capital flows. The final section uncovers our conclusions.

First Wave of Capital Inflows (1990–97) and the Asian Financial Crisis

Private capital inflows to developing Asian countries began in the latter half of the 1980s and accelerated at the onset of the 1990s (see Figure 2.1). Huge capital inflows during this period could be attributed to capital liberalization policies introduced by many central banks in the region in 1990–94. A landmark in capital liberalization came with the launch of Article VIII of the International Monetary Fund (IMF) in the early 1990s. Capital control measures previously imposed were progressively relaxed or removed entirely. For example, in Thailand commercial bank net foreign liabilities increased from 20 per cent to 25 per cent; while the central bank allowed authorized dealers to lend foreign exchange currency to non-residents without any limit and lifted the limit of US$5 million per individual on commercial bank lending to non-residents.

Summary

EXECUTIVE SUMMARY

Summary

The economic, political, strategic and cultural dynamism in Southeast Asia has gained added relevance in recent years with the spectacular rise of giant economies in East and South Asia. This has drawn greater attention to the region and to the enhanced role it now plays in international relations and global economics.

The sustained effort made by Southeast Asian nations since 1967 towards a peaceful and gradual integration of their economies has had indubitable success, and perhaps as a consequence of this, most of these countries are undergoing deep political and social changes domestically and are constructing innovative solutions to meet new international challenges. Big Power tensions continue to be played out in the neighbourhood despite the tradition of neutrality exercised by the Association of Southeast Asian Nations (ASEAN).

The Trends in Southeast Asia series acts as a platform for serious analyses by selected authors who are experts in their fields. It is aimed at encouraging policy makers and scholars to contemplate the diversity and dynamism of this exciting region.

Summary

The swift and strong rebound of capital inflows in emerging Asian economies after the onset of the global financial crisis in 2008 has added new impetus to the debate on how to reap the gains to be enjoyed from capital inflows, while minimizing the possible economic costs. One of the unfavourable side effects of “too much” capital flows is (real) exchange rate appreciation — a loss of a country's competitiveness — that could adversely affect the tradable production and export sectors. Real exchange rate appreciation occurs regardless of the nature of the exchange rate regime implemented in a country. Under a flexible regime, real appreciation occurs through an upturn in the nominal exchange rate, while under a fixed exchange rate regime appreciation comes mainly through a rise in non-tradable prices. Under an intermediate regime, real currency appreciation occurs through a mixture of these two processes.

Stronger currency appreciation has become evident in emerging Asian economies (see Figure 6.1) along with a strong rebound in capital inflows (see Chapter 2). Exporters in many countries have asked for government intervention to mitigate the pressures arising from currency appreciation. Many central banks in the region, including China and Taiwan, have begun to tighten capital control policies, while the others monitor closely the movement of capital flows. In Korea, Taiwan and Thailand central banks have also intervened extensively in foreign exchange markets, while local currency bonds were issued to mop up the liquidity arising from foreign exchange market intervention.

These issues lead to empirical questions concerning the relationship between real exchange rates and capital flows in emerging Asian countries, particularly how far and how fast (real) exchange rates will be adjusted in response to capital flows. While there is strong evidence to believe that particular types of capital flows behave differently, whether the composition of capital flows matters in determining the movements of (real) exchange rates is also another question of interest. In particular, does the impact of foreign direct investment (FDI) on real exchange rates differ from other forms of capital flows, especially portfolio and bank loan investments?

Summary

There were three waves of private capital inflows to developing Asian countries over recent decades, as outlined in Chapter 2. The first began in the latter half of the 1980s, escalating in momentum through the early 1990s, before abruptly ending in 1997 with the onset of the Asian financial crisis. The extensive capital inflows experienced during this period could be attributed to the capital liberalization policy instigated by many regional central banks during 1990–94. In the second swell, capital inflows surged again from 2002 until the subprime mortgage crisis in late 2008, with this build up even faster than that witnessed during the early 1990s. However, the Asian financial crisis has changed the nature of local capital flows in different ways. Robust current account surpluses, for example, have been the major factor supporting foreign reserve accumulations after the Asian crisis. Net capital inflows have not been a major source of foreign exchange reserves. In addition to foreign direct investment (FDI), portfolio equity has become an important component of capital inflows, while other investment inflows have played a notably less crucial role. Capital outflows, both in terms of FDI and other forms of capital, have become increasingly important for the region. The surge of capital outflows has limited the role of financial accounts in supporting reserve accumulation. Furthermore, cross-border mergers and acquisitions have become important components of FDI. In particular, the economic recovery of developing Asia from the crisis period led to an upward trend in cross-border M&A (purchases). China; Hong Kong, China; and Singapore represent the key players in this activity.

Capital inflows in developing Asia were interrupted again in 2008 because of the current global financial crisis. So far the decline in capital flows during this period has been more dramatic than that of the Asian financial crisis. However, strong economic fundamentals in the region, especially within financial institutions, have allowed these economies to successfully redress and manage the lion's share of adverse repercussions. One key similarity that can be drawn from both the Asian and global financial crises is that FDI (both inflows and outflows) tends to be more resilient to shocks than other forms of capital flows.

Summary

Capital liberalization have been implemented in most emerging Asian countries since the late 1980s. Restrictions have been gradually phased out during this period with the aim of enhancing a country's capacity to derive benefit from capital flows. However, the evidence related to the impact of such liberalization over the past two decades has led to doubts about the scale of the net gains of such policy in capitalreceiving countries. Particularly, it has been blamed as a key factor precipitating the boom and bust cycle experienced in many emerging countries, including the sudden reversal of capital inflows inherent in the Mexican crisis of the early 1990s and Asian financial crisis in the late 1990s.

In the early 2000s, capital inflows gathered momentum again in emerging countries worldwide, including Asia. Central banks in many countries re-introduced capital restrictions to guard against the build-up of inflows, while preserving their monetary autonomy and extensively intervening in foreign exchange markets. For example, in Thailand, the unremunerated reserve requirement on fixed income flows was introduced in September 2006 after unsuccessful measures to limit the build-up in non-resident holdings of baht accounts had been taken place in 2003. Chinese authorities restricted the borrowing of dollars by foreign bank branches in the People's Republic of China (PRC) in September 2006. Such a restriction was also introduced in Korea and India in April and August 2007, respectively.

Over the past two decades, a number of empirical studies have examined the effectiveness of capital account policies introduced in emerging countries, but the results are still mixed and vary according to the particular countries and periods sampled. Tamirisa (2004), for example, shows that capital account policies introduced in Malaysia during the Asian crisis could help the central bank to gain monetary autonomy. By contrast, Edison and Reinhart (2001) revealed evidence of the ineffectiveness of capital control policy in Thailand in 1997, whereas Coelho and Gallagher (2010) found that capital controls introduced in the 2000s were modestly successful in reducing the overall volume of inflows in Thailand.

Summary

INTRODUCTION

Islam has always been an important factor in Malaysia's politics. Even political parties whose members are mainly non-Muslims cannot run away from debating the role of Islam in public policy. Since its establishment in 1951, the Islamic Party of Malaysia (PAS) has dominated the discourse on political Islam, and many others have had to respond and compete with it. It would not be wrong to say that the deepening Islamization in Malaysia over the years is the result of political competition between PAS and the ruling coalition. However, a new development took place in 2015 when a group of senior PAS leaders left the party to form Parti Amanah Negara (Amanah). PAS suddenly found a competitor who is also staking a claim on the right to define and shape the discourse on political Islam in the country.

This essay looks into the break-up and its implications on the politics in the southern state of Johor, since this was the state where much of the groundwork to form Amanah took place. Following this introduction, a brief history behind the break-up is provided. Attention is then given to Johor, with a discussion on the role of activists in the state that led to the formation of Amanah, the party's current organization, and their likely electoral potential. The essay concludes with a discussion on how the emergence of Amanah may affect PAS in Johor.

FROM PAS TO AMANAH

To understand how Amanah came to be, a brief review of the evolution of Islamist thoughts in Malaysia is useful, as it has heavily influenced PAS’ own evolution. The history behind PAS’ establishment in 1951 is a contested one. Arguably, it was closely tied to the strategy of the United Malays National Organization (UMNO) which was founded six years earlier, especially to the latter's desire to widen its support base. UMNO at that time was worried that it was losing support from conservative Malay Muslims and wanted therefore to reposition itself as a champion of Islam. Thus, UMNO sponsored two Ulama Congress (Perjumpaan Alim Ulama Tanah Melayu), on 20–22 February 1950 and 23 August 1951. The purpose was to bring together conservative Muslim scholars to discuss, among others, steps that they could take to bring the country towards independence.

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Index

Contents

5 - Determinants of Non-Foreign Direct Investment Capital Flows

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Appendix

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1 - Introduction

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2 - Capital Mobility in Emerging Asian Countries

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Acknowledgements

Appendix 2 - A Chronology of Capital Account Policy in Thailand, 1990–2010

Frontmatter

Parti Amanah Negara in Johor: Birth, Challenges and Prospects

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List of Tables

Foreword

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4 - Determinants of Outward Foreign Direct Investment from Emerging Asia

Frontmatter

Appendix 1 - A Chronology of Capital Account Policy in Malaysia, 1992–2010

6 - Capital Flows and Real Exchange Rates in Emerging Asian Countries

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8 - Conclusions and Policy Inferences

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7 - Effectiveness of Capital Controls: Evidence from Malaysia and Thailand

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List of Figures

Parti Amanah Negara in Johor: Birth, Challenges and Prospects

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