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Financial crises in "successful" emerging economies

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  • Brookings Institution Press

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Abstract

Preface This book is the result of a project developed by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC);, with support from the Ford Foundation. The text encompasses five articles analyzing emerging economies that were generally rated as successful by international financial institutions and the financial press during episodes characterized by a broad supply of external funds. We include the cases of Chile, Korea, and Mexico in the critical years of the 1990s and Chile in the deep crisis of the 1970s. All these economies were praised for their efficient public policies. They all experienced episodes of an abundant supply of financial capital, and they all suffered macroeconomic disequilibria as a result. We contrast these cases with the positive experiences of Chile during the Tequila crisis and of Taiwan during the Asian crisis. Three of the articles are country studies, undertaken from a comparative perspective. The paper by Manuel Agosin, professor at the University of Chile, draws parallels between Korea and Taiwan. These two countries achieved a similar performance from the mid-1960s through the early 1990s, but their paths then diverged. The study analyzes the national policies adopted in each case and the underlying motives. The article by Ricardo Ffrench-Davis and Heriberto Tapia, both economists at ECLAC, compares three positive financial shocks experienced in Chile: the liberalization of the capital account in the 1970s, which exploded in a massive crisis in 1982; a substantial policy shift in 1991-94, in the direction of a "prudential" macroeconomic management of the capital account, which kept Chile immune to the Tequila crisis in 1995; and the capital surge of 1995-97, which culminated in a rather severe adjustment in 1999. The third study is by Dr. Jaime Ros, Mexican economist and professor at Notre Dame University, who addresses the contrasting experiences of Mexico in 1991-94 and 1996-97. The paper examines the different domestic and external variables that explain the marked differences in the two episodes, and it evaluates the depth of the economic and social effects. The fourth article, by Dr. Stephany Griffith-Jones of the University of Sussex, analyzes the current architecture of the international financial system and its incapacity for preventing crises or moderating the disequilibria that generally lead to crises. The article analyzes several recent proposals, including those of the author herself. Finally, the paper by José Antonio Ocampo, Executive Secretary of ECLAC, and Ricardo Ffrench-Davis, which opens the book, examines why countries that were considered successful before the explosion of a crisis incurred a level of macroeconomic disequilibria that made them vulnerable to a financial run. We start by considering the nature of supply, focusing on investors who specialize in short-term, highly liquid operations. We then trace the evolution of the prices of financial assets, foreign exchange, and stock markets in the receiving countries, and we identify links with paths that culminate in unsustainable macroeconomic disequilibria. On the basis of this analysis, we expose five misconceptions that are commonly held among proponents of full liberalization of the capital account. Heriberto Tapia provided highly professional support in preparing the final manuscript, verifying the technical content, and ensuring agreement between the Spanish and English versions. Lenka Arriagada was exceptionally efficient in assisting with the presentation of the final manuscript. We thank ECLAC for providing a stimulating environment for policy-oriented research and the opportunity for independent analysis on a most relevant issue today. Our deepest thanks also go to the Ford Foundation for its support. Naturally, all the opinions presented here are the responsibility of the respective authors. Ricardo Ffrench-Davis, Editor Santiago, April 2001

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  • -, 2001. "Financial crises in "successful" emerging economies," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1699 edited by Brookings Institution Press.
  • Handle: RePEc:ecr:col014:1699
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    References listed on IDEAS

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    1. Ocampo, José Antonio, 1999. "Reforming the international financial architecture: consensus and divergence," Series Históricas 7459, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Stephany Griffith-Jones, 1998. "Global Capital Flows," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-26912-9, October.
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    1. Agosin, Manuel R. & Ffrench-Davis, Ricardo, 2002. "Trade, specialization and economic growth in Latin America," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34898, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Ricardo Ffrench-Davis & Leonardo Villar, 2006. "Real Macroeconomic Stability and the Capital Account in Chile and Colombia," Palgrave Macmillan Books, in: Ricardo Ffrench-Davis (ed.), Seeking Growth Under Financial Volatility, chapter 4, pages 96-138, Palgrave Macmillan.
    3. Roberto Frenkel & Martin Rapetti, 2010. "A Concise History of Exchange Rate Regimes in Latin America," UMASS Amherst Economics Working Papers 2010-01, University of Massachusetts Amherst, Department of Economics.
    4. Adriana Moreira Amado & Marco Flávio da Cunha Resende & Frederico G. Jayme Jr., 2007. "Growth Cycles In Latin America And Developed Countries," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 035, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Antonio David, 2005. "Do controls on capital inflows insulate domestic variables against external shocks?," Money Macro and Finance (MMF) Research Group Conference 2005 9, Money Macro and Finance Research Group.
    6. David, Antonio C., 2007. "Controls on capital inflows and external shocks," Policy Research Working Paper Series 4176, The World Bank.
    7. Alice Sindzingre, 2003. "Liberalisation, Multilateral Institutions and Public Policies : The Issue of Sovereignty In Sub-Saharan Africa," Mondes en développement, De Boeck Université, vol. 123(3), pages 23-56.
    8. Ricardo Ffrench-Davis, 2008. "From Financieristic To Real Macroeconomics: Seeking Development Convergence In Ees," Working Papers wp272, University of Chile, Department of Economics.
    9. Ffrench-Davis, Ricardo, 2006. "Macroeconomics for growth under financial globalization: four strategic issues for emerging economies," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1890.
    10. Carlos A. Ibarra, 2004. "Capital Flows, Exchange Rate Regime, and Macroeconomic Performance in Mexico," WIDER Working Paper Series RP2004-27, World Institute for Development Economic Research (UNU-WIDER).
    11. Ocampo, José Antonio, 2006. "Overcoming Latin America's growth frustrations: the macro and mesoeconomic links," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1891.
    12. Ocampo, José Antonio, 2003. "Capital-account and counter-cyclical prudential regulations in developing countries," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1796.
    13. Ricardo Ffrench-Davis, 2014. "Is Chile a Model for Economic Development?," Working Papers wp392, University of Chile, Department of Economics.
    14. Ffrench-Davis, Ricardo & Larraín, Guillermo, 2003. "How optimal are the extremes?: Latin American exchange rate policies during the Asian crisis," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1797.
    15. Williamson, John, 2003. "Proposals for curbing the boom-bust cycle in the supply of capital to emerging markets," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1791.
    16. Carolina Salcedo & Michele E. M Akoorie, 2013. "Foreign Direct Investment in Chile: Historical Process, changing political ideologies and the responses of MNEs," Revista Ad-Minister, Universidad EAFIT, June.
    17. Birdsall, Nancy & de la Torre, Augusto & Caicedo, Felipe Valencia, 2010. "The Washington consensus : assessing a damaged brand," Policy Research Working Paper Series 5316, The World Bank.
    18. Adriana Moreira Amado & Marco Flávio da Cunha Resende & Frederico G. Jayme Jr., 2006. "Economic growth cycles in Latin America and developing countries," Textos para Discussão Cedeplar-UFMG td297, Cedeplar, Universidade Federal de Minas Gerais.
    19. Zahler, Roberto, 2006. "Macroeconomic stability and investment allocation of domestic pension funds in emerging economies: the case of Chile," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1893.
    20. -, 2006. "Seeking growth under financial volatility," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1889 edited by Cepal.
    21. Franklin Huaita & Manuel Agosín Trumper, 2007. "Why Should Emerging-Market Countries (Still) Concern Themselves With Capital Inflows?," Working Papers wp268, University of Chile, Department of Economics.

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