Adjustments after speculative attacks in Latin America and Asia: A tale of two regions

The paper analyzes the adjustment process in the aftermath of speculative attacks against the currencies of six countries - Argentina, Brazil, Mexico, Indonesia, Korea, and Thailand. Even though the Mexican and Argentine crises of 1995, and the Brazilian adjustment after October 1997, were certainly costly, the Asian crises of 1997 were deeper and the recovery of the real economy was slower. The paper relies on rank-correlation analysis, and economic indexing and growth decomposition techniques to evaluate the explanatory power of several hypotheses of why the recessions in Asia were more severe. The paper concludes that the large size of short- term external debt relative to GDP, the higher incidence of leverage and currency mismatches, the higher rates of investment, plus the regional character of the Asian crisis and the high export similarity across the Asian economies contributed to the deeper economic downturn. However, with rising regional trade and financial development, the aftermath of future speculative attacks in Latin America may look more like the recent East Asian tales of adjustment. The paper draws policy implications for reducing the costs of the macroeconomic adjustment after currency crises.