The Asian Crisis in Context

The crises in Asia have served to highlight the dangers inherent in the current expansion of the international financial system. In the aftermath of the Mexican crisis, many economists pointed to its unique characteristics in arguing that it did not represent a systemic threat. That argument seems wrong today. Allowing the free flow of financial capital across national borders exposes countries to the inevitable risks of runs against their currencies, just as individual banks are threatened with runs domestically. Yet the international community does not appear willing to provide the magnitude of funds required to support an effective lender‐of‐last‐resort on a global basis. Developing countries need to manage the risks of capital market opening with an understanding that they will be forced to rely primarily on their own resources in the event of a crisis.