Recent events in East Asia have highlighted the risks of financial structures in a financially integrated world. This paper documents that the buildup of vulnerabilities in East Asia was mainly the result of weaknesses in domestic financial intermediation, poor corporate governance, and deficient government policies, including poor macro-economic policy responses to large capital inflows. Weak due diligence by external creditors, in part fueled by ample global liquidity, also played a role in building up vulnerabilities, but global factors were more important in triggering the crises than in causing them. In spite of these policies and weaknesses, we argue,. | December 3 1998 Volatility and Contagion in a Financially-Integrated World Lessons from East Asia s Recent Experience By Pedro Alba Amar Bhattacharya Stijn Claessens Swati Ghosh and Leonardo Hernandez World Bank and Central Bank of Chile Recent events in East Asia have highlighted the risks of financial structures in a financially integrated world. This paper documents that the buildup of vulnerabilities in East Asia was mainly the result of weaknesses in domestic financial intermediation poor corporate governance and deficient government policies including poor macro-economic policy responses to large capital inflows. Weak due diligence by external creditors in part fueled by ample global liquidity also played a role in building up vulnerabilities but global factors were more important in triggering the crises than in causing them. In spite of these policies and weaknesses we argue however that for most East Asian countries a large financial crisis was not inevitable but was mainly triggered by spillovers from nearby countries. Differences between countries both in degree of vulnerability and depth of crisis support this conclusion. The paper concludes with some lessons for other countries. Paper presented at the PAFTAD 24 conference Asia Pacific Financial Liberalization and Reform May 20-22 1998 Chiangmai Thailand hosted by School of Development Economics NIDA in collaboration with PAFTAD International Steering Committee. This paper has really been a group effort. We would like to thank Jos Jansen and Peter Montiel for very useful contributions Sergio Schmukler for his insights Michael Dooley the discussant Akira Kohsaka and seminars participants for comments and the PAFTAD steering committee for guidance. This paper draws on and extends the analysis in the joint-World Bank-ADB study Managing Global Financial Integration In Asia Emerging Lessons and Prospective Challenges March 10-12 1998 for comments. The opinions expressed do not necessarily reflect those of .
