The world’s attention is riveted on the United States economy as the financial crisis in the global superpower promises a depression within that country and threatens economic growth everywhere else. But as crisis management in the U.S. comes into play with the government’s proposal for a huge bailout of troubled banks, it is interesting to look at how financial crises in less powerful countries have been managed. The details of the plan in the U.S. are still e merging, but it is clear that it will involve a very large draft on taxpayers, both present and future, and rely on resources from other countries, including developing Asia.

The likely reduction of capital flows into developing countries is generally perceived as bad news. But that is not necessarily true, since the earlier capital inflows were mostly not used for productive investment by the countries that received them. Instead, the external reserve build-up (which reflected attempts by developing countries to prevent their exchange rates from appreciating and to build a cushion against potential crises) proved quite costly for the developing world, in terms of interest rate differentials and unused resources. While some developing countries may indeed be adversely affected by the reduction in net capital inflows, for many other emerging markets this may be a blessing in disguise as it reduces upward pressure on exchange rates and creates more emphasis on domestic resource mobilisation.