The Asian financial crisis of the late 1990s illustrates a somewhat different type of risk associated with large cross-border flows of capital. During the 1990s, strong capital inflows helped support robust growth in many Asian economies. But Thailand’s devaluation in mid1997 triggered closer scrutiny of developments in the region.
Investors began to recognize that the financial systems of some Asian economies – because of institutional weaknesses, inadequate regulation, or other deficiencies – had not effectively channeled the surge of incoming funds into productive investments. As foreign investors lost confidence, capital flows into the region reversed sharply, and the credit-driven boom came to a precipitous end.