International Crisis Management: The IMF’s Medicine for Asia and Russia

Abstract

Crisis management is a crucial task in the world economy in which national and regional crises can have major international spillover effects. A major crisis in Mexico or Brazil typically will affect the whole region — here Latin America; this holds both because of the spillover effects via regional trade and because of financial market contagion effects that often are linked to devaluation expectations and negative herd effects (financial market panic). A major crisis in Asian NICs will affect all countries with a similar export profile and regional export orientation so that the spillover of the Asian crisis towards Latin America does not come as a surprise. If major resource exporting countries in Asia and Latin America face adverse effects this will influence Russia as well as other countries whose major export revenues are from selling oil and gas in world markets. The Asian crisis caused a rush into quality bonds so that capital inflows to NICs, Eastern Europe and Russia strongly fell in 1997/98. Consequently interest rates increased sharply and growth slowed down in Asia and Russia. Massive devaluations occured in both Asia and Russia (in 1997 also in the Czech Republic), where the consequence of the Asian Crisis more strongly affected the US than the EU.