Deregulation and Volatility: Where the Three Economies Meet

Abstract

The last three chapters analysed the ways in which three different middle-income developing economies drove themselves to financial crises in the 1990s. It examined three very different sets of domestic policy design and implementation, which all resulted in a financial crisis. Mexico followed a full liberalisation policy and allowed financial inflows without any controls within its economy. Brazil and Korea followed domestic economic policies different to those of Mexico but also different to each other. In an effort to avoid a Mexican-type asset inflation, Brazil sterilised its financial inflows. This, together with the application of a very costly bank rescue scheme and a highly disputed privatisation programme, drove the economy into unsustainable levels of public debt. Unlike Brazil, Korea’s private sector considerably increased its exposure to external finance and, at a time of regional market panic, found itself with a high exposure in external debt and low levels of exchange reserves to defend its currency against speculative attacks.