The Asian and Russian Economic Crises Smashed Latin America

The so-called "Asian Contagion" and the precipitous decline in the Russian ruble had poisonous repercussions for the economies of Latin America. The loss of confidence the international financial community felt in the Asian Tigers was indiscriminately extended to the region and huge capital outflows resulted. Interest rates soared and Latin American goods lost their competitiveness against even cheaper Asian goods.

Brazil in particular was hard hit, moving to a floating currency, abandoning its Real plan which was devised in 1994 to fight against inflation, and suffering a disastrous devaluation of the currency.

The main lessons learned from this horrific disaster were that an unsustainable current account balance can rapidly spin the economy out of control, that short-term capital is by its very nature prone to excess volatility, and that an inflexible exchange rate can compel a government to choose between a lingering financial death and immediate collapse.