Financial Vulnerability, Spillover Effects, and Contagion logo

There is already a large and growing literature about the financial crises in Asia. Some analyses have focused on the mismanagement of the structure of foreign debt, and on the mismanagement of macroeconomic policies. Others have focused on weaknesses ingrained in the domestic financial and banking sectors of the economies. This paper attempts to reconcile these alternative explanations of the crises in a simple framework, where the authors distinguish between the causes and the symptoms of ""financial vulnerability"". Following the introduction in Section 1, Section 2 provides an analytical framework of the roots of financial vulnerability in Asia. Section 3 provides some suggestive evidence supporting some of the propositions presented in the previous section, comparing crisis with non-crisis Asian countries. Section 4 distinguishes among several channels of spillover effects and contagion across countries. Section 5 discusses the effects that the Asian crises have had on Latin American countries, and Section 6 concludes by pointing out the new lessons that can be learned from the Asian experiences, while reminding us of the lessons of previous crises in Latin America. The experience of the Asian crisis highlights the importance of institutions in preventing the emergence of financial vulnerability, especially in the areas of financial and banking regulation, and corporate governance.

Publisher: World Bank

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