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Mid-1990s: Mexican crisis and Asian financial crisis

The political economic climate had changed dramatically by the mid-1990s, as the United States asserted itself as the world’s only superpower. The fall of Communism at the end of the 1980s and the beginning of the 1990s ended the decades-long Cold War and marked the triumph of democracy and free markets. In the United States, the Clinton administration, which came into office in 1993 and remained for two terms, focused less on security and more on economics than previous governments. Globalization became a major focus. Neoliberalism and its tenets were upheld, including in Latin America, and East Asian newly industrialized countries were viewed as shining examples of neoliberal policy reforms.

As a result, starting in the mid-1990s, financial crises worsened. With the continuing trend of liberalization, countries had opened themselves up to volatile capital flows. Mexico, which had suffered like other Latin American countries in the 1980s from the debt crisis and its accompanying slow growth, had been eager to regain its foothold in development through liberalization. What was not well understood at the time was that liberalization could create dangerous instability, and this is indeed what occurred as foreign capital flows reversed.

The newly industrializing economies in Asia had also followed the path of liberalization. At the time, it seemed to work miracles; economic growth was as high as 11 percent in the early 1990s in Singapore and Thailand. James Riedel (1988) wrote that:

the policy lessons that derive from the experiences of the East Asian countries are simple and clear-cut . . . that neo-classical principles are alive and well, and working particularly effectively in the East Asian countries. Once public goods are provided for and the most obvious distortions corrected, markets seem to do the job of allocating resources reasonably well.

As in Mexico, growth in the Asian countries did not last, and capital flows rapidly switched course and fled the Asian nations. The capital outflows caused both currency and banking crises, and threatened to spread to other countries.

Both crises threatened global financial stability. For this reason, the

International Monetary Fund (IMF) became the global lender of last resort, embarking on a controversial role that it would play on the world stage. At the time, its wisdom was accepted. The crisis-ridden countries were viewed as culpable for the crises, and neoliberal policies were not greatly questioned, even though crises had become both more substantial and more globalized. In what follows, we examine the historical context of these two crises and describe how events unfolded.

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