The Latin American and Asian Financial Crises: Contagion of Causes and Costs

Latin America’s macroeconomy has been strongly affected by changes in capital flows over the last three decades. During the 1970s, a large supply of funds was made available to the region; then, during the 1980s, there was a severe and widespread shortage of financing, and the region became a net exporter of funds. Between 1991 and 1994, it became a net recipient of large capital flows again, only to experience another sharp reduction of some of the main inflows in late 1994 and early 1995, and a renewed access in 1996–97. Since 1998–99, Latin America (LACs) experienced a new shortage of external financing. A crisis centered in Asian countries was now the origin of this new recessive macroeconomic adjustment in the region. When closing this typescript, in early 2005, a new significant recovery of economic activity was at work. In 2004, LACs exhibited the larger GDP growth since the previous peak year 1997. Interestingly, in this occasion, recovery was not led by inflows but by a sharp improvement in export volumes and prices. On all these swings, the changes that were first expansive and then contractionary, began on the international markets and had a strong impact on the national economies. In the times of the Latin American debt crisis of the 1980s and the Tequila crisis of 1994–95, the successful emerging economies of Asia — with the exception of the Philippines — appeared to be immune to the instability associated with capital surges.