namely, in what sense does a crisis today inoculate a country against crisis tomorrow? does this inoculation occur through improved macroeconomic fundamentals, stronger financial sector performance, or some other factors? in an effort to answer such questions, i will focus on two issues. first, i will discuss some evidence assessing the impact of the recent crisis on the emerging asian and latin american countries. second, i will offer some working hypotheses that might explain the differential effects of the crisis on the two regions. before going further, let me underscore the following point. the asian economies have proven themselves to be very competitive in global markets and highly resilient. consistent with this observation, the major asian crisis countries appear to be well on their way to recovery, with the possible exception of indonesia, which remains plagued by political instabilities. but notwithstanding the underlying strength of the asian economies - or perhaps precisely because of their underlying strength - there is much to be learned in assessing why they fared poorly relative to their latin american counterparts during the recent round of crises. comparing the impact of the crisis the behavior of gdp provides a natural measure for assessing the severity of the recent crisis in the two regions ( exhibit 1 ). the asian crisis began in thailand during july 1997, when a run on the country ’ s currency - the baht - forced the government to float the exchange rate. not coincidentally, real gdp peaked in mid - 1997 and fell more than 10 % before reaching a trough during the second half of 1998. 1 after the devaluation of the baht, the crisis spread to malaysia, indonesia, and the philippines. each of these countries was eventually forced to allow its currency to float more freely against the dollar, and each country also experienced a sharp contraction of its gdp. in malaysia, output fell 10 % between the third quarter of 1997 and the third quarter of 1998. indonesia was even more severely afflicted, with gdp plunging more than 15 % during that time. the philippines was relatively less affected, however, as gdp declined just 3 % from peak to trough. korea, which was the last major asian country hit by the crisis, endured sharp declines in the value of its currency and its domestic financial markets during late 1997 and early 1998. korean gdp dropped about 8 % during this period. now turning to latin america, this region first felt the effects of the financial crisis during the fall of 1997. at that time, brazil - the center of the crisis

% of gdp in korea. these numbers far exceed the ratios of roughly 20 % of gdp that prevailed in mexico, argentina, and brazil, countries that also experienced considerably slower domestic loan growth in the years preceding the recent crisis. the systemic risks implied by weak regulation may be much more severe in countries with relatively large banking systems. this observation is not unique to developing countries. even japan, one of the world ’ s advanced industrial countries, has struggled with a bad - loan problem, partially because of massive bank lending in an environment of inadequate prudential supervision. moreover, countries where the banking system is large relative to gdp may be forced to endure more severe macroeconomic disruptions when a banking crisis actually occurs, since the costs of cleaning up the crisis are likely to be large compared with the size of the economy and firms are likely to be highly dependent on banks for the provision of credit. in light of these considerations, it is perhaps not surprising that asian financial institutions were hit harder by the crisis than latin american institutions. for example, thailand was forced to close dozens of finance companies, and deep financial problems in two of korea ’ s largest banks persuaded the authorities to temporarily nationalize those institutions. in addition, an enormous bad - loan problem in thailand and indonesia - and to some extent in the other asian crisis countries, including korea emerged after the crisis, thus creating uncertainty about the future economic performance and financial viability of these economies. in contrast, major latin american countries moved to strengthen their financial systems following the peso crisis in the mid - 1990s. as a result, banks in these countries appear to have sustained minimal new damage. argentina is a notable example : efforts to strengthen the financial position of the banks, coupled with improvements in prudential regulation, have allowed the banks to remain relatively healthy, despite the effects of the crisis and the country ’ s protracted recession. this discussion suggests that financial system vulnerabilities probably were more severe in asia than in latin america. such a conclusion, however, does not necessarily imply that asian financial institutions were fundamentally less efficient or effective, only that they were more vulnerable when the crisis hit. 3 suffice it to say that policymakers in latin america also are wrestling with sizable financial sector problems. a third hypothesis is that the crisis hit asia harder because investor sentiment shifted more abruptly than it did in latin america. in other words, one might be asked - did the crisis somehow reveal comparatively more information about the performance of the asian developing countries and