NCPA - National Center for Policy Analysis

Currency Crises Haven't Affected The Developed World

February 9, 1999

Some economists believe that rich, stable, developed countries -- such as the U.S. and those in Euroland -- are more or less insulated from upheavals recently witnessed in a number of developing countries. Although there has been some impact on U.S. trade due to the devaluations of some Asian nations, the much-feared Asian flu failed to lay us low. Moreover, Brazil's recent troubles have been met on Wall Street by little more than a shrug.

One reason may be the size of developed economies.

  • Brazil is the world's eighth-largest economy -- but it accounts for just 2.4 percent of global output.
  • The three biggest economies -- the U.S., Japan and the new Euroland -- together account for 66 percent of world production.
  • Another difference is that rich, stable countries satisfy their own investment needs -- while countries like Thailand usually must borrow from wealthy countries if they want new dams or factories.
  • If U.S. financial markets threaten to go into upheaval, we have tools such as our highly credible Federal Reserve to calm things down -- but developing countries lack such effective amenities.

U.S. exports to the seven countries hit by currency crises in the past 18 months account for just 1 percent of gross domestic product. At the same time, U.S. multinationals get 4 percent of their profits from operations in those seven countries.

So while multinationals such as Coca-Cola, Procter & Gamble and Gillette reported disappointing earnings last year, the rest of the U.S. economy barely noticed.

Source: Justin Fox, "Forecast for the U.S. Economy: Still Mostly Sunny," Fortune, February 15, 1999.

 

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