The Asian financial crisis had a profound impact on the global economy. Growth is expected to be slower; risks are higher; and the international flows of capital have been dislocated. Above all, it has set out forces of new conditionality surrounding the developmental state, constraining its ability in designing an independent strategy of industrialization and foreign trade. With the aid of an inter-temporal, multi-region CGE model, we regard the crisis to be the result of a fundamental incompatibility between an independent financial policy with unregulated capital markets. We model the increased financial fragility surrounding the unregulated, short-term speculative capital flows as a sudden and unexpected rise in the domestic risk premium. Employing the CGE apparatus, we further document how global financial markets preclude governments from having independent exchange and interest policies to promote industrialization; and demonstrate the serious threats that the international capital flows pose to economic stability and development