Economic Crises: Evidence and Insights from East Asia THE EAST ASIAN crisis is only the latest in a series of spectacular economic catastrophes in developing countries. In the past twenty years at least ten countries have suffered from the simultaneous onset of currency crises and banking crises. This has led to full-blown economic crises, in many cases with GDP contractions of 5 to 12 percent in the first year and negative or only slightly positive growth for several years after. Many other countries have experienced contractions of similar magnitude following currency or banking crises. Financial crises are not strictly exogenous; in many cases the slowdown itself, or the very factors that led to it, have helped to cause a financial crisis. But there is no doubt that the standard features of financial crises, including overshooting exchange rates, withdrawal of foreign capital, failure to roll over short-term debts, internal credit crunches, and the process of disintermediation have also been important. Crises are also becoming increasingly frequent, at least relative to the post-World War II period. There has been, in Gerard Caprio's memorable phrase, a "boom in bust[s]."' Caprio and Daniela Klinge-We wish to thank Andrew Berg, Amar Bhattacharya, William Easterly, Eve Gerber, Will Martin, Lant Pritchett, John Williamson, participants of seminars at Harvard University and the Centre for Economic Policy Research, and the Brookings Panel, especially our discussants, Barry Bosworth and Steven Radelet, for helpful comments. Jessica Seddon, Dennis Tao, and Maya Tudor provided excellent research assistance. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors; they do not necessarily represent the views of the World Bank, its executive directors, or the countries they represent. 1. Caprio (1997, p. 81). 1 Brookings Papers on Economic Activity, 2:1998 biel identify banking crises-defined as episodes when the entire banking system has zero or negative net worth-in sixty-nine countries since the late 1970s. The U.S. savings and loan (S&L) debacle would probably not be in the top fifty international banking crises since the early 1980s, although the cost of resolving it was 3.2 percent of GDP, several times more, in real terms, than that of resolving the U.S. banking crisis in the 1930s.2 With a less stringent definition, Carl-Johan Lindgren, Gillian Garcia, and Matthew Saal estimate that three-quarters of the member countries of the International Monetary Fund (IMF) experienced "significant bank sector problems" at some time between 1980 and 1995.3 Currency crises have been similarly pervasive. Jeffrey Frankel and Andrew Rose define a currency crisis as a year in which the currency depreciates by more than 25 percent, where this depreciation is at least 10 percentage points higher than depreciation in the previous year. By this definition, at least eighty-seven countries have suffered currency crises since 1975, and currency crises have also become more common recently...
