Financial Crises in an Asian Transitional Economy: The Case of Mongolia

Minsky’s analysis of the endogenous evolution of a financial system from stability through euphoria to fragility has, as its often-explicit example, the United States and presupposes a highly developed financial system. By contrast, the Central Asian transition economies of the former Soviet Union (FSU), and its client states such as Mongolia, had no experience of capitalist development and, at the time transition began, lacked even the most basic capitalist financial institutions, such as commercial banks. Nevertheless, a Minskyan perspective is both possible and useful. In the first decade of transition, for both internal reasons and due to external pressure, Mongolia very quickly became an enthusiastic implementer of the shock therapy transition strategy. This was predicated on the supposed efficiency and welfare implications of unfettered markets. Even the strongest adherents to this approach now consider that, at best, the immediate application of these ideas to financial markets in transition economies was inappropriate and destabilising (see Williamson and Mahar, 1998). Mongolia’s first decade of transition provides a striking example of why this change in viewpoint was necessary.