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n last the two decades, Western scholars have pointed to East Asian achievements which seem to be a kind of economic 'miracle'. However, with the 1997 financial crisis, the conventional wisdom about economic dynamics in the region requires some rethinking. The Asian financial crisis is the first development‐related crisis caused by economic liberalisation and globalisation and reveals an institutional shortcoming of Asian capitalism. Developmental states in the region generally adopted mercantilist development policies and encouraged private businesses to over‐expand and over‐invest without considering the change of international market competition. Although political institutions effectively fostered economic development under state autonomy, their economic bureaucracies lacked the administrative capacities to regulate financial institutions and to exert financial allocations into productive industrial sectors. Most importantly, the developmental model has fundamentally undermined the risk management capability of bureaucracies dealing with financial turmoil. This paper argues that Asian countries should build a financial governance regime that can effectively control, regulate and manage capital formation mechanisms and, most importantly, lead domestic and foreign capital to competitive sectors rather than to speculative ones, particularly, when exposed to foreign capital.