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Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)

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  • Pablo Bustelo

    ()
    (Instituto Complutense de Estudios Internacionales)

  • Clara Garcia
  • Iliana Olivie

Abstract

This paper suggests that a new approach is needed in order to identify the causes of the East Asian financial crises and that this new approach might be fruitful in reassessing the analyses and theories of financial crises in emerging economies. The first part of the paper presents a new empirical analysis of the state of fundamentals in East Asia before the crises. It suggests that the relevant fundamentals were both non-conventional and "intermediate" (or not "bad" enough to trigger the crises by themselves). Fundamentals were also different from those preceding previous turmoils in the 1990s, such as the ERM crisis in 1992-1993 and the Mexican crisis in 1994-1995. The second part highlights that existing theoretical models of currency crises miss some important points. Even second generation models, which stress self-fulfilling expectations and which acknowledge that crises might appear against the backdrop of non-conventional and intermediate fundamentals, explain only the role of fundamentals in relation to private expectations. But they do not explain how can it be that a shift in private agents' expectations turns out into a financial crisis. The third part suggests that the current process of globalization exacerbates failures in international capital markets and impinges upon capital flows and the pace and order of financial liberalization in emerging economies, increasing therefore uncertainty and rendering large domestic vulnerabilities. It also highlights how financial globalization was related to the East Asian crises. The main conclusion is that intermediate non-conventional fundamentals, shifts in private agents' expectations and financial globalization were arguably the main factors of the East Asian crisis. Therefore, in order to prevent future financial crises, governments in emerging economies should try to exit crises zones through improving their fundamentals, to proceed carefully with financial liberalization, to implement some kind of capital controls and to urge for the establishment of a new global financial architecture.

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Bibliographic Info

Paper provided by Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales in its series Working Papers with number 002.

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Length: 104 pages
Date of creation: Nov 1999
Date of revision:
Handle: RePEc:wop:coinwp:002

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Postal: Universidad Complutense. Somosaguas. 28223 Madrid - Spain
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References

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Cited by:
  1. Carlos Parodi Trece, 2011. "Las crisis financieras: un marco conceptual," Chapters of Books, in: Carlos Parodi Trece (ed.), La primera crisis financiera internacional del siglo XXI, edition 1, volume 1, chapter 1, pages 15-76 Departamento de Economía, Universidad del Pacífico.
  2. Feridun, M., 2005. "East Asian Financial Crisis Revisited: An Econometric Analysis, 1981-2001," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(1), pages 53-68.
  3. Feridun, Mete, 2004. "Russian Financial Crisis of 1998: An Econometric Investigation," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(4), pages 113-122.
  4. Nuria Malet & Clara Garcia, 2005. "Exchange Market Pressure, Monetary Policy, and Economic Growth: Argentina in 1993 - 2004," Working Papers wp99, Political Economy Research Institute, University of Massachusetts at Amherst.
  5. Sajid Anwar & Desh Gupta, 2006. "Financial Restructuring and Economic Growth in Thailand," Global Economic Review, Taylor & Francis Journals, vol. 35(1), pages 113-127.
  6. Ignacio Lozano & Ligia Alba Melo B. & Jorge Enrique Ramos F., 2012. "Flujos de capital y política fiscal en las economías emergentes de América Latina," BORRADORES DE ECONOMIA 009439, BANCO DE LA REPÚBLICA.
  7. San-Martín-Albizuri, Nerea & Rodríguez-Castellanos, Arturo, 2012. "Globalisation And The Unpredictability Of Crisis Episodes: An Empirical Analysis Of Country Risk Indexes / La Imprevisibilidad De Los Episodios De Crisis: Un Análisis Sobre Los Índices De Riesgo Pa�," Investigaciones Europeas de Dirección y Economía de la Empresa (IEDEE), Academia Europea de Dirección y Economía de la Empresa (AEDEM), vol. 18(2), pages 148-155.

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