Financial crises in "successful" emerging economies

Preface This book is the result of a project developed by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC);, with support from the Ford Foundation. The text encompasses five articles analyzing emerging economies that were generally rated as successful by international financial institutions and the financial press during episodes characterized by a broad supply of external funds. We include the cases of Chile, Korea, and Mexico in the critical years of the 1990s and Chile in the deep crisis of the 1970s. All these economies were praised for their efficient public policies. They all experienced episodes of an abundant supply of financial capital, and they all suffered macroeconomic disequilibria as a result. We contrast these cases with the positive experiences of Chile during the Tequila crisis and of Taiwan during the Asian crisis. Three of the articles are country studies, undertaken from a comparative perspective. The paper by Manuel Agosin, professor at the University of Chile, draws parallels between Korea and Taiwan. These two countries achieved a similar performance from the mid-1960s through the early 1990s, but their paths then diverged. The study analyzes the national policies adopted in each case and the underlying motives. The article by Ricardo Ffrench-Davis and Heriberto Tapia, both economists at ECLAC, compares three positive financial shocks experienced in Chile: the liberalization of the capital account in the 1970s, which exploded in a massive crisis in 1982; a substantial policy shift in 1991-94, in the direction of a "prudential" macroeconomic management of the capital account, which kept Chile immune to the Tequila crisis in 1995; and the capital surge of 1995-97, which culminated in a rather severe adjustment in 1999. The third study is by Dr. Jaime Ros, Mexican economist and professor at Notre Dame University, who addresses the contrasting experiences of Mexico in 1991-94 and 1996-97. The paper examines the different domestic and external variables that explain the marked differences in the two episodes, and it evaluates the depth of the economic and social effects. The fourth article, by Dr. Stephany Griffith-Jones of the University of Sussex, analyzes the current architecture of the international financial system and its incapacity for preventing crises or moderating the disequilibria that generally lead to crises. The article analyzes several recent proposals, including those of the author herself. Finally, the paper by José Antonio Ocampo, Executive Secretary of ECLAC, and Ricardo Ffrench-Davis, which opens the book, examines why countries that were considered successful before the explosion of a crisis incurred a level of macroeconomic disequilibria that made them vulnerable to a financial run. We start by considering the nature of supply, focusing on investors who specialize in short-term, highly liquid operations. We then trace the evolution of the prices of financial assets, foreign exchange, and stock markets in the receiving countries, and we identify links with paths that culminate in unsustainable macroeconomic disequilibria. On the basis of this analysis, we expose five misconceptions that are commonly held among proponents of full liberalization of the capital account. Heriberto Tapia provided highly professional support in preparing the final manuscript, verifying the technical content, and ensuring agreement between the Spanish and English versions. Lenka Arriagada was exceptionally efficient in assisting with the presentation of the final manuscript. We thank ECLAC for providing a stimulating environment for policy-oriented research and the opportunity for independent analysis on a most relevant issue today. Our deepest thanks also go to the Ford Foundation for its support. Naturally, all the opinions presented here are the responsibility of the respective authors. Ricardo Ffrench-Davis, Editor Santiago, April 2001