Latin America Confronting the Asian Crisis
32 Pages Posted: 2 Jan 1999
Date Written: December 1998
This paper evaluates the repercussions of the Asian crisis for Latin America and discusses policy options available to some of the major countries in the region. The paper starts by reviewing the contributions of several theoretical models to our understanding of crises. Next, it discusses the lessons that can be drawn from previous regional crises. Then, it evaluates the current situation of four of the largest Latin American countries and discusses policy options and prospects.
It is shown that the Latin American crisis of the early 1980s was very different in nature from both the Mexican crisis of 1994-95 and the recent Asian crisis. In the early 1980s, the crisis had a clear fiscal root in all the countries analyzed (except Chile) while Mexico?s and Asia?s troubles were unrelated to fiscal problems. In contrast, a private credit boom was present in the earlier episode only in Chile, while it clearly shows up in Mexico and most of the Asian countries that fell in crisis. Large current account deficits and substantial real exchange rate appreciation, however, have been a common feature in all the episodes analyzed.
Looking at the effects of the current crisis among the larger countries of Latin America, Brazil appears as the most vulnerable economy. Brazil needs to take further steps to reduce its twin deficits in the current account and the public budget, to flexibilize its exchange rate policy, and to implement additional structural reforms. Chile, though hit hard by a terms of trade shock, is structurally healthy. It faces, however, a major challenge from its heavy exposure to copper and to the Asian region. Weaker regional demand and the loss of competitiveness associated with the Asian crisis will deteriorate Argentina's external accounts and provoke a significant slowdown. Because of its heavy dependence on the Brazilian market, Argentina will face severe problems if Brazil falls into a crisis. Mexico benefits from its significant export diversification and its close integration to the U.S. economy but faces severe pressures from lower oil prices and, especially, from its weak banking sector. Capital controls, though popular, are no solution at times of crisis. A correction of the fundamental macroeconomic imbalances, on the other hand, is a necessary but not sufficient condition to prevent currency crises.
JEL Classification: F31, F33
Suggested Citation: Suggested Citation