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Contents Introduction

This paper examines the role of international capital mobility in making countries susceptible to financial crises and the use of capital controls as a crisis management tool, in the light of the Malaysian experience through the recent financial crisis. It is argued that further liberalization of capital account transaction and aggressive promotion of portfolio inflows in a context of growing macroeconomic imbalances and loosening financial prudence made Malaysia vulnerable to the currency crisis in mid-1997. As against the dire predictions by many observers, capital controls imposed in October 1998 have assisted crisis management along Keynesian lines. Whether the controls have played a 'special role' in delivering a way of a superior recovery outcome in Malaysia compared to the IMF-program countries will continue to remain a point of contention. But there is little doubt that the this pragmatic policy choice was instrumental in achieving recovery while minimising economic disruptions and related social costs. However, other countries should be cautious in deriving policy lessons from Malaysia because a number of factors specific to Malaysia seem to have significantly conditioned the outcome of the capital-control based recovery package.