Capital Access Index 1999: Deconstructing Global Financial Architecture: Global Capital Access and Policy Backlash
May 01, 1999
Glenn Yago, Lalita Ramesh, Dan Brumbaugh and James R. Barth

Contagion hysteria has infected most intelligent discussions about global financial policies since the Asian crisis struck in the summer of 1997. But is fear of contagion a sociological, psychological, and political phenomenon or an economic one?

Careful economic analysis emerging from the crisis confirms the interdependence of national economies but not of some kind of pathological and irrational "contagion." Common structural problems in those economies most exposed to crisis persist.

To characterize the global financial crisis as "contagion" is to pathologize and institutionalize bad economic policies and financial practices. For example, using the language of contagion paints Argentina and Chile with the brush of Brazil.

Michael Bordo and Anna Schwartz lead us to a more differentiated conclusion about the propagation of structural crises: "Pure contagion would occur only in circumstances in which other emerging countries were free of the problems facing the first emerging country. We know of no evidence of pure contagion. Transmission is another story. Shocks to one country will spill over to other countries through trade and the capital accounts. When investors withdraw their capital from countries with the same problems as were present in the first such country, this is a demonstration effect, not contagion."