Crisis Prevention: Lessons from Mexico and East Asia

Sebastian Edwards

NBER Working Paper No. 7233
Issued in July 1999
NBER Program(s):   IFM

This paper provides a comparative analysis of the East Asian and Mexican crises, and draws lessons for the emerging economies. Although much of the discussion concentrates on East Asia and Mexico, I also draw on the history of some previous crisis episodes. I argue that in spite of the efforts to understand the anatomy of currency crises, there are still a large number of controversial and unresolved issues. More to the point, I argue that some of the lessons extracted from these crises are based on a misreading of the historical record. As a result, some of the policy implications that have emerged from this debate are, to say the least, questionable. In particular, I make two points: First, I argue that, in general, current account ratios have limited usefulness in determining a country's financial health. Although I fall short of taking the position that the current account is completely irrelevant, I do argue that a rigid interpretation of current account ratios may be highly misleading. Second, I argue that the rapidly growing popularity of controls on capital inflows as a device for reducing external vulnerability is rooted in a misreading of the recent history of external crises.

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Document Object Identifier (DOI): 10.3386/w7233

Published: Harwood, A., R.E. Litan, and M. Pomerleano (eds.) Financial Markets and Development: The Crisis in Emerging Markets. Washington, D.C.: World Bank, 1999.

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