Stress Test for Reforms: Transition and East Asian 'Contagion'

Posted: 24 Aug 1999

See all articles by Steven Fries

Steven Fries

European Bank for Reconstruction and Development (EBRD)

Martin Raiser

European Bank for Reconstruction and Development

Nicholas Stern

Stern Review on the Economics of Climate Change

Abstract

Contagion from East Asia imposed a severe "stress test" on the market-oriented reforms of transition economies. We find that the portfolio reallocations of investors differentiated sharply among these economies at the height of the East Asian turmoil, appearing clearly in the relative movements in interest rates and share prices. Those countries that appeared more vulnerable to contagion had large public or private sector imbalances and low reserve cover of short-term debt. The analysis, however, goes beyond macroeconomic and financial imbalances to link these weak fundamentals to inadequate structural and institutional reforms. We find that flaws in public finances together with weak enterprises and financial institutions were key underlying factors in the vulnerability to East Asian contagion. They were also key causes of the Russian crisis, which initiated a new round of contagion driven primarily by high exposures to Russian trade.

JEL Classification: E44, E62, F32, F36, P31, P33

Suggested Citation

Fries, Steven M. and Raiser, Martin and Stern, Nicholas, Stress Test for Reforms: Transition and East Asian 'Contagion'. Economics of Transition, Vol. 7, No. 2, 1999. Available at SSRN: https://ssrn.com/abstract=169516

Steven M. Fries (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom
+44 20 7338 7004 (Phone)
+44 20 7338 6110 (Fax)

Martin Raiser

European Bank for Reconstruction and Development ( email )

One Exchange Square
London EC2A 2JN
United Kingdom
+44 20 7338 7231 (Phone)
+44 20 7338 6110 (Fax)

Nicholas Stern

Stern Review on the Economics of Climate Change

HM Treasury
1 Horse Guards Road
London SW1A 2HQ
United Kingdom

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