This article offers an analysis of contemporary economic development in Malaysia, focusing especially on the causes and consequences of the 1997 Asian Financial Crisis. Malaysia offers an excellent case study in international development due to its role as an export-dependent developing country with a high degree of integration in the global economy. In attempting to determine why Malaysia was enveloped by a financial crisis in July of 1997, a two-level political economy approach is used to separate international policy influences from domestic influences. My findings suggest that a combination of ill-advised, full capital account liberalization (Washington Consensus / international influence) combined with imprudent handling of massive short-term capital inflows (domestic) in the late 1980s and 1990s led to a currency devaluation that resulted in a financial crisis and, consequently, a crisis of Malaysia’s real economy. This study identifies three specific policy choices made by the Malaysian government as instrumental in creating crisis-prone conditions: a fixed exchange rate, an open capital account, and monetary policy autonomy. Among foreign and domestic investors, this policy regime created a false sense of confidence in the stability of Malaysia’s economy. Since the crisis, Malaysian policymakers have come to recognize that a developing country’s vulnerability in the sometimes-volatile global economy cannot be completely eliminated. Under its current leadership, Malaysia has wisely sought to lessen its vulnerability through confidence-building measures in the banking and corporate sectors, diversification of the domestic economy through a focus on commodity and service expansion, and the implementation of more prudent macroeconomic policies. This line of research is valuable as it highlights the evident virtues and dangers of a developing country’s economic integration into the global economy.



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