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For years, East-Asian countries were held up as economic Icons. Their typical blend of high savings and Investment rates, autocratic political systems, export-oriented businesses, restricted domestic markets, government capital allocation, and controlled financial systems were hailed as the Ideal recipe for strong economic growth of developing counties (Shapiro, 1999). However, in July 1997, a currency turmoil erupted In Thailand. This currency crisis spread from there to Indonesia and Korea, then to Russia, then to Latin America. Few countries have not been touched by the global forces that this crisis--some accounts the worst since the 1980s debt crisis--have unleashed. Professor Paul Krugman who threw cold water on the popular enthusiasm on the Asian success story even before the crisis said, "I was 90 percent wrong about what was going to happen, but everyone else was 150 percent wrong. They only saw the miracle and one of the risk."
RECENT INTERNATIONAL FINANCIAL CRISES
The 1997 Asian crisis is the 4th international financial crisis. The first major blow to the international financial system took place in August 1982, when Mexico announced that it could not meet its regularly scheduled payments to international creditors. Shortly thereafter, Brazil and Argentina were in the same situation. By Spring 1983, about 25 developing countries could not make regularly scheduled payments and negotiated rescheduling with creditor banks. These countries accounted for two-thirds of the total debt owed by non-oil developing countries to private banks at the time.
The second crisis occurred in the fall of 1992, when a wave of speculative attacks hit the European Monetary System (EMS). Before the end of the year, five countries--Finland, the United Kingdom, Italy, Sweden, and Norway had floated their currencies. Despite attempts by a number of other countries to remain in the EMS by devaluing their currencies (Spain, Portugal, and Ireland), the old system was ultimately unsalvageable. The bands of the EMS were widened from +/- 2.25 percent to +/- 115 percent in August 1993. The third crisis came on December 20,1994 when the Mexican government announced its decision to devalue the peso against the dollar by 14 percent. This decision, however, touched off a panic situation to sell pesos, thereby compelling the Mexican government to float the peso. A rash of speculative attacks...