Crisis and Contagion in East Asia: Nine Lessons

55 Pages Posted: 20 Apr 2016

See all articles by Sergio L. Schmukler

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Richard Newfarmer

World Bank

Masahiro Kawai

Asian Development Bank Institute

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2001


Currency and banking crises such as those originating in Mexico (1994), Thailand (1997), and the Russian Federation (1998) tend to be associated and often take place together across countries. The East Asian experience was a fruitful laboratory for examining key questions. For example: How did contagion occur so extensively, and why was it so devastating? Did policy responses to crises and contagion minimize their impact on the real economy? What type of international financial architecture is needed to prevent and manage crises and contagion?

Kawai, Newfarmer, and Schmukler investigate the origins of the East Asian crisis and its contagion, examine the channels of contagion, and discuss policy recommendations. They make detailed recommendations in the context of nine general lessons learned from the East Asian crisis.

Preventing crises and contagion - Avoid large current account deficits financed through short-term private capital inflows.

- Aggressively regulate and supervise financial systems to ensure that banks and nonbank financial institutions manage risks prudently.

- Put in place incentives for sound corporate finance to prevent high leverage ratios and overreliance on foreign borrowing.

Managing crises and contagion - In the context of sound policies, mobilize timely external liquidity of sufficient magnitude to restore market confidence.

- At times of crisis, "bail in" private foreign creditors. When official resources are too limited for the magnitude of the crisis or contagion, and when private creditors are not amenable to coordination, some involuntary private involvement may be needed too.

- Keep in mind that there is no one-size-fits-all monetary and fiscal stance for responding to crises and contagion.

Resolving the systemic consequences of crises and contagion - Move swiftly to establish domestic and international mechanisms for dealing with the assets and liabilities of nonviable banks and corporations.

- Cushion the effects of crisis on low-income groups through social policies to ameliorate the inevitable social tensions associated with adjustment.

Developing an effective regional financial architecture - Improve mechanisms for preventing, managing, and resolving crises and contagion at the regional level in ways consistent with improvements in the global financial architecture.

An earlier version of this paper - a joint product of the Office of the Regional Vice President, East Asia and Pacific Region, and Macroeconomics and Growth, Development Research Group - was presented at the seminar on ASEAN Macroeconomic Outlook and Economic Recovery, organized by the ASEAN Secretariat and held in Manila in February 1999.

Suggested Citation

Schmukler, Sergio and Newfarmer, Richard and Kawai, Masahiro, Crisis and Contagion in East Asia: Nine Lessons (June 1, 2001). World Bank Policy Research Working Paper No. 2610. Available at SSRN:

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
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202-458-4167 (Phone)
202-522-3518 (Fax)


Richard Newfarmer

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Masahiro Kawai

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki Chiyoda-ku
Tokyo, 100-6008

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