A Tale of Two Crises: The Search for the Enduring Reforms of the International Financial System

Abstract

The Asian economic crisis of 1997 spawned a vast analytical literature and a reconsideration of the international financial architecture. This article seeks a broader perspective on these issues by comparing the causes of the debt crisis of 1982 with those of the Asian crisis. These two crises are the most significant of the last fifty years. Their joint analysis reveals seven enduring lessons of international financial reform that need to be incorporated in any revisions to the international financial system. The debt crisis that erupted in August 1982 was the most damaging and far reaching financial crisis of the late 20th century. It spawned a voluminous literature. Of late we have had crises in Mexico in 1994, East Asia in 1997, Russia in 1998 and Brazil in early 1999. These more recent crises have served to supersede the debt crisis in the public imagination to the extent that that we hear nonsense such as the repeated descriptions of the Asian crisis as “the most severe crisis of the last fifty years”. This article seeks to re-examine the debt crisis in light of our more recent experiences of financial crises. “Those who cannot remember the past are condemned to repeat it.” and mistakes in the finance of developing countries cost the lives of thousands and sacrifice the futures of millions. The methodology of this article is to compare the causes of, and lessons from, the debt crisis with the causes of, and lessons from, the Asian crisis with reference, as appropriate, to the Mexican, Russian and Brazilian experiences. There are certain similarities among each of these four financial crises of the 1990s. The debt crisis of the 1980s was in many ways quite a different type of crisis. The goal of this article is to identify the lessons that have held good throughout the last thirty years of international financial history and across these two different types of crisis. These, it is postulated, will be the lessons most likely to be of relevance in these early years of the next century as we seek to improve the architecture of the international financial system.