Why Do Some Countries Recover More Readily from Financial Crises? (original) (raw)
2008, The MIT Press eBooks
Several emerging market economies around the globe were overtaken in the late nineties by severe financial crises and subsequent recessions stretching into the new millennium. Surprisingly, a handful of them recovered more rapidly than others. What factors contributed to their quick turnaround? This paper argues that pre-crisis macroeconomic fundamentals are a crucial part of the recovery process. In particular, the strength of the pre-crisis export sector plays a significant role in renewing investor confidence and pushing post-crisis recovery. Comparing two crisis-afflicted economies of Argentina in post-2001 and Thailand in post-1997, we find that the pre-crisis difference in export sector strength between Argentina and Thailand provides significant explanation for the post-crisis difference in the interest rate and exchange rate movements between the two countries. Our model simulations suggest that Argentina's recovery path would have been stronger if it had Thailand's export sector potential in its pre-crisis years. By contrast, a strong fiscal status and high saving rate resembling Thai levels would not have helped Argentine recovery to the same extent.
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