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East Asia Is Not Mexico: The Difference between Balance of Payments Crises and Debt Deflations


  • J.A. Kregel

    (The Jerome Levy Economics Institute)


What was different about the collapse of the Asian emerging markets in 1997? The free fall of the Mexican peso and the collapse of the Mexican Bolsa produced a "Tequila effect" that spread through most of South America, but did not create a sell off in the global financial markets similar to that which occurred in 27 October 1997. Normally, sharp declines in prices in emerging equity markets produce a "flight to quality", in which international investors shift their funds back into developed country markets and local investors shift their funds back into developed country markets and local investors seek to protect their wealth by diversifying into developed country assets. Yet, the collapse in the Asian emerging markets, that started in Thailand, spread to the other second-tier Newly Industrialising Economies (NIEs), and eventually extended to the first-tier NIEs produced the largest absolute declines ever experiences in the major developed country equity markets. If equity markets can suffer from what Alan Greenspan has called "irrational exuberance", the Asian crisis suggests that they may also suffer from "irrational pessimism". Yet, there is much to indicate that in this case the financial markets in Japan, Europe and the US were quite rational in assessing the global implications of the financial crisis in Asia. The developing countries in Asia have come to play a crucial role in global growth. In the 1990s, they accounted for roughly half of global expansion. The immediate implication of the Asian crises is that the collapse of growth in the region would produce a global deflation. This would make it more difficult for developed economies, particularly Europe and Japan, to expand at rates necessary to generate sufficient investment to produce reductions in unemployment. Recovery in the developed world outside the US and the UK is thus at risk as a result of declining Asian growth. Indeed, if the US cannot continue its current expansion, there is a clear risk of a global depression similar to that of the 1930s.

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  • J.A. Kregel, 1998. "East Asia Is Not Mexico: The Difference between Balance of Payments Crises and Debt Deflations," Macroeconomics 9805020, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9805020 Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 24; figures: included

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    References listed on IDEAS

    1. Nieuwenhuis, Herman J. & Schoonbeek, Lambert, 1997. "Stability and the structure of continuous-time economic models," Economic Modelling, Elsevier, vol. 14(3), pages 311-340, July.
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    3. Bergstrom, A. R. & Nowman, K. B. & Wymer, C. R., 1992. "Gaussian estimation of a second order continuous time macroeconometric model of the UK," Economic Modelling, Elsevier, vol. 9(4), pages 313-351, October.
    4. Bergstrom, A. R. & Nowman, K. B. & Wandasiewicz, S., 1994. "Monetary and fiscal policy in a second-order continuous time macroeconometric model of the United Kingdom," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 731-761.
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    Cited by:

    1. Kirkpatrick, Colin & Tennant, David, 2002. "Responding to Financial Crisis: The Case of Jamaica," World Development, Elsevier, vol. 30(11), pages 1933-1950, November.
    2. Pablo Bustelo Gómez, 2004. "Capital Flows and Financial Crises: A Comparative Analysis of East Asia (1997-97) and Argentina (2001-02)," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 04-17, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
    3. M Cruz, 2003. "A Minskyian Crisis: An Application to the 1994-95 Mexican Experience," The School of Economics Discussion Paper Series 0325, Economics, The University of Manchester.
    4. Pablo Bustelo & Clara Garcia & Iliana Olivie, 1999. "Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)," Working Papers 002, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
    5. Pompeo Della Posta, 2002. "Modelli di crisi valutarie e misure di politica economica," Moneta e Credito, Economia civile, vol. 55(219), pages 237-262.
    6. Jomo K.S., 2001. "Growth After The Asian Crisis: What Remains Of The East Asian Model?," G-24 Discussion Papers 10, United Nations Conference on Trade and Development.
    7. Lynn Elaine Browne & Rebecca Hellerstein & Jane Sneddon Little, 1998. "Inflation, asset markets, and economic stabilization: lessons from Asia," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-32.
    8. Jomo Kwame Sundaram, 2008. "Obstacles To Implementing Lessons from the 1997-1998 East Asian Crises," Working Papers 66, United Nations, Department of Economics and Social Affairs.

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    • E - Macroeconomics and Monetary Economics

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