This paper contends that the current difficulties are linked to prior financial excesses and regulatory shortcomings which led to a buildup

of vulnerabilities in financial and asset markets. The extent to whichthe Asian countries can decouple their growth from this ongoing turmoil depends on their prevailing domestic economic conditions and their policy response to possible shocks from the crisis.

In this respect, fragilities and imbalances exist in many major Asian economies, not least in the form of credit, asset and investment bubbles which were allowed to expand in recent years as foreign capital poured in. Nonetheless, in general, the author maintains, countries in the region do have the policymaking capacity to deal with any adverse trade and financial impacts of the crisis. Beyond the macroeconomic policy response to the present conditions, however, lies an urgent need for regulatory measures which will reduce the systemic instability generated by financial markets and capital flows in the first place.

About the Author

Dr Yilmaz Akyuz is a former Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD) in Geneva.

Contents

1. INTRODUCTION
     
2. THE ROLE OF FINANCE IN THE RECENT GLOBAL EXPANSION
     
3. EXPANSION AND CRISIS IN THE UNITED STATES
   a. The subprime boom and bust
   b. The policy response and prospects
     
4. CAPITAL FLOWS AND VULNERABILITY IN ASIA
   a. Lessons from the 1997 crisis
   b. Capital flows
   c. Credit, asset and investment bubbles
   d. Current account balances, exchange rates and reserves
   e. Capital account measures
      
5. EXTERNAL SHOCKS AND POLICY OPTIONS IN ASIA
   a. Growth prospects: projections and beyond
   b. Financial contagion and shocks
   c. Trade linkages and growth in Asia
   d. Policy challenges
      
6. CONCLUSIONS
     
   REFERENCES

June 17, 2008.