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

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  • Jan A. Kregel
Abstract
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 c
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  • Jan A. Kregel, 1998. "East Asia Is Not Mexico: The Difference between Balance of Payments Crises and Debt Deflations," Economics Working Paper Archive wp_235, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_235
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    1. Mr. John M Montgomery, 1997. "The Indonesian Financial System: Its Contribution to Economic Performance, and Key Policy Issues," IMF Working Papers 1997/045, International Monetary Fund.
    2. Claudia Echeverria & Mr. Salim M. Darbar & Mr. R. B. Johnston, 1997. "Sequencing Capital Account Liberalization: Lessons From the Experiences in Chile, Indonesia, Korea, and Thailand," IMF Working Papers 1997/157, International Monetary Fund.
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    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. M Cruz, 2003. "A Minskyian Crisis: An Application to the 1994-95 Mexican Experience," Economics Discussion Paper Series 0325, Economics, The University of Manchester.
    3. Devin Thomas Rafferty, 2017. "“In Case of Emergency, Break-Open Glass†: The IMF’s “New†Institutional View, Financial Instability, and Financing Development Processes," Review of Radical Political Economics, Union for Radical Political Economics, vol. 49(4), pages 543-550, December.
    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 E. 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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