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The Crisis and Policy Response

National Economic Recovery Plan
Chapter 1

Contents





Conclusion

There is an average of one major currency crisis in the world every 19 months. This decade alone witnessed three distinct regional waves of currency crises: (a) Europe in 1992-3, (b) Latin America in 1994-5, and (c) Asia, which started in 1997. Unlike the era of the early 1960s under the Bretton Woods system of fixed exchange rates when international capital flow was severely controlled, the large sums of money that now move across borders and provide more countries with international finance, also drive currency crisis.

Even with the best economic management, small open economies remain vulnerable. A small open economy is vulnerable to sudden changes in sentiment that could swing from ëirrational exuberanceí to ëirrational pessimismí.

When there is instability of beliefs, there could still be the run on currencies even if countries had sound financial systems and good policies. If, however, the countries are linked with weak financial sectors, high levels of corporate debt, and lack of transparency, they become even more vulnerable to attacks. While it is not within the power of any one country to prevent the occurrence of future attacks on currency, the adoption of good policies would certainly make countries less vulnerable and the effects suffered less severe.

In the later chapters, this Recovery Plan will present policy measures to strengthen the ringgit and the financial system, as well as improve the level of transparency and corporate governance. These measures are intended to ward off the occurrence of future attacks, or at least minimise the severity of the adverse effects should such attacks occur.






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