Financial Crises and National Policy Issues: An Overview

Abstract

In recent years a new type of crisis has developed in Asia and Latin America, with four features that differentiate it from the old type. First, international capital markets have been the major source of shocks, both positive and negative, to emerging economies. Second, capital flows have largely taken place between private suppliers and demanders; fiscal deficits have played only a secondary role, and indeed in most cases public finance has been in balance or surplus (Korea and Thailand before 1997; Argentina and Mexico before the Tequila crisis in late 1994). Third, this type of financial crisis has been suffered by emerging economies that were deemed to be highly successful by international financial institutes, risk evaluation agencies and the financial press. Fourth, flows have been characterized by a lack of regulation and supervision on both the supply and the demand sides. Domestic financial systems in recipient markets have often been liberalized without the parallel development of a significant degree of prudential regulation and supervision, while the new sources of supply have grown, usually unregulated.