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Stress test for reforms: Transition and East Asian ‘contagion’

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  • Steven Fries
  • Martin Raiser
  • Nicholas Stern

Abstract

Contagion from East Asia imposed a severe 'stress test' on the market‐orientedreforms of transition economies. We find that the portfolio reallocations of investors differentiated sharply among these economies at the height of the East Asian turmoil, appearing clearly in the relative movements in interest rates and share prices. Those countries that appeared more vulnerable to contagion had large public or private sector imbalances and low reserve cover of short‐term debt. The analysis, however, goes beyond macroeconomic and financial imbalances to link these weak fundamentals to inadequate structural and institutional reforms. We find that flaws in public finances together with weak enterprises and financial institutions were key underlying factors in the vulnerability to East Asian contagion. They were also key causes of the Russian crisis, which initiated a new round of contagion driven primarily by high exposures to Russian trade.

Suggested Citation

  • Steven Fries & Martin Raiser & Nicholas Stern, 1999. "Stress test for reforms: Transition and East Asian ‘contagion’," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 535-567, July.
  • Handle: RePEc:bla:etrans:v:7:y:1999:i:2:p:535-567
    DOI: 10.1111/1468-0351.00024
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    File URL: https://doi.org/10.1111/1468-0351.00024
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    Cited by:

    1. Jokipii, Terhi & Lucey, Brian, 2007. "Contagion and interdependence: Measuring CEE banking sector co-movements," Economic Systems, Elsevier, vol. 31(1), pages 71-96, March.
    2. Cevik, Emrah I. & Dibooglu, Sel & Kenc, Turalay, 2016. "Financial stress and economic activity in some emerging Asian economies," Research in International Business and Finance, Elsevier, vol. 36(C), pages 127-139.
    3. Csaba, László, 2000. "A kis országok világgazdasági alkalmazkodása
      [The adaptation of small countries to the world economy]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 662-679.
    4. Joanna Siwinska-Gorzelak, 2000. "Currency Crises and Fiscal Imbalances. The Transition Countries Perspective," CASE Network Studies and Analyses 0219, CASE-Center for Social and Economic Research.

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