Three-and-a-half Cycles of ‘Mania, Panic, and [Asymmetric] Crash’: East Asia and Latin America Compared

This paper argues that, despite some significant differences, the 1982 debt crisis, the 1994 Mexican crisis, and the 1997 East Asian crisis share the common characteristic that ‘over-lending’ and ‘over-borrowing’ are basically endogenous market failures of over-liquid and under-regulated financial markets — along the lines described by Kindleberger’s Manias, Panics, and Crashes (although these crashes have tended to be ‘asymmetric’, as the largest international lenders have emerged relatively intact). The paper concludes with a discussion of Brazil’s increasing vulnerability to a sudden collapse of confidence and withdrawal of finance, which indicates the probability of another impending crisis. In the last 15 years, the world economy has witnessed three major financial crises: the 1982 (mainly Latin American) debt crisis; the 1994 Mexican crisis, and its repercussions throughout Latin America (commonly known as the ‘Tequila effect’); and the 1997 East Asian crisis. Furthermore, Brazil’s growing financial vulnerability signals the probability of another major crisis in the not too distant future (see Postscript, p. 273). This paper argues that the last three financial crises share many common characteristics.