Global and Domestic Factors of Financial Crisis in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)

ICEI Working Paper No. 16

106 Pages Posted: 13 Jan 2000

See all articles by Pablo Bustelo

Pablo Bustelo

Complutense University of Madrid

Clara Garcia

Complutense University of Madrid

Iliana Olivié

Complutense University of Madrid

Date Written: November 1999

Abstract

This paper suggests that a new approach is needed in order to identify the causes of the East Asian financial crises and that this new approach might be fruitful in reassessing the analyses and theories of financial crises in emerging economies.

The first part of the paper presents a new empirical analysis of the state of fundamentals in East Asia before the crises. It suggests that the relevant fundamentals were both non-conventional and "intermediate" (or not "bad" enough to trigger the crises by themselves). Fundamentals were also different from those preceding previous turmoils in the 1990s, such as the ERM crisis in 1992-1993 and the Mexican crisis in 1994-1995.

The second part highlights that existing theoretical models of currency crises miss some important points. Even second generation models, which stress self-fulfilling expectations and which acknowledge that crises might appear against the backdrop of non-conventional and intermediate fundamentals, explain only the role of fundamentals in relation to private expectations. But they do not explain how can it be that a shift in private agents' expectations turns out into a financial crisis.

The third part suggests that the current process of globalization exacerbates failures in international capital markets and impinges upon capital flows and the pace and order of financial liberalization in emerging economies, increasing therefore uncertainty and rendering large domestic vulnerabilities. It also highlights how financial globalization was related to the East Asian crises.

The main conclusion is that intermediate non-conventional fundamentals, shifts in private agents' expectations and financial globalization were arguably the main factors of the East Asian crisis. Therefore, in order to prevent future financial crises, governments in emerging economies should try to exit crises zones through improving their fundamentals, to proceed carefully with financial liberalization, to implement some kind of capital controls and to urge for the establishment of a new global financial architecture.

JEL Classification: F30, F32, F33, F43, G15

Suggested Citation

Bustelo Gómez, Pablo and Garcia, Clara and Olivié Aldasoro, Iliana, Global and Domestic Factors of Financial Crisis in Emerging Economies: Lessons from the East Asian Episodes (1997-1999) (November 1999). ICEI Working Paper No. 16. Available at SSRN: https://ssrn.com/abstract=201150 or http://dx.doi.org/10.2139/ssrn.201150

Pablo Bustelo Gómez (Contact Author)

Complutense University of Madrid ( email )

Applied Economics 1 Campus de Somosaguas
Madrid 28223
Spain
+23 91 394 2472 (Phone)
+34 91 394 2499 (Fax)

Clara Garcia

Complutense University of Madrid ( email )

Carretera de Humera s/n
Madrid 28223, Madrid 28223
Spain

Iliana Olivié Aldasoro

Complutense University of Madrid ( email )

Carretera de Humera s/n
Madrid 28223, Madrid 28223
Spain

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