Turkey’s troubles contagious due to bad policies in West - by Paul Krugman

Okay, who ordered that? With everything else going on, the last thing we needed was a new economic crisis in a country already racked by political turmoil. True, the direct global spillovers from Turkey, with its Los Angeles-sized economy, won’t be large. But we’re hearing that dreaded word “contagion” – the kind of contagion that once caused a crisis in Thailand to spread across Asia, more recently caused a crisis in Greece to spread across Europe, and now, everyone worries, might cause Turkey’s troubles to spread across the world’s emerging markets.

It is, in many ways, a familiar story. But that’s part of what makes it so disturbing: why do we keep having these crises? And here’s the thing: the intervals between crises seem to be getting shorter, and the fallout from each crisis seems to be worse than the last. What’s going on?

Before I get to Turkey, a brief history of global financial crises.

For a generation after the second World War, the world financial system was, by modern standards, remarkably crisis-free – probably because most countries placed restrictions on cross-border capital flows, so that international borrowing and lending were limited. 

In the late 1970s, however, deregulation and rising banker aggressiveness led to a surge of funds into Latin America, followed by what’s known in the trade as a “sudden stop” in 1982 – and a crisis that led to a decade of economic stagnation.

Latin America eventually returned to growth (although Mexico had a nasty relapse in 1994), but, in the 1990s, a bigger version of the same story unfolded in Asia: huge money inflows followed by a sudden stop and economic implosion. Some of the Asian economies bounced back quickly, but investment never fully recovered, and neither did growth.

Most recently, yet another version of the story has played out within Europe, with a rush of money into Greece, Spain and Portugal, followed by a sudden stop and immense economic pain.

As I said, although the outline of the story remains the same, the effects keep getting worse. Real output fell 4 per cent during Mexico’s crisis of 1981-83; it fell 14 per cent in Indonesia from 1997 to 1998; it has fallen more than 23 per cent in Greece.

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