NCPA - National Center for Policy Analysis

When Countries Really Mess Up

September 29, 1997

When companies take the wrong path, the effects of their bad decisions only affect a limited number of employees, shareholders and creditors. But when big governments make poor policy decisions, they can throw their entire national economies into chaos -- and even have a negative impact on their neighbors.

America's most expensive financial debacle in recent decades -- the S&L bailout -- wound up costing about 2 percent to 3 percent of gross domestic product; but on the scale of "Mistakes by Nations" that U.S. lesson was relatively inexpensive, analysts say.

Here are some recent national fiascoes and their impact on the errant country's GDP, reported by Morris Goldstein of the Institute for International Economics at the Federal Reserve Bank of Kansas City's annual Labor Day conference in Jackson Hole, Wyo.

  • Thailand's financial crisis this summer has already reduced its GDP by 10 percent.
  • The potential losses from Japan's banking crisis are estimated at 10 percent of GDP, as well.
  • At least 14 countries have lost 10 percent or more of their GDP as a result of banking crises -- led by Argentina's whopping 55 percent of GDP loss in the early 1980s.
  • In 1992 and 1993, European nations spent around $150 billion to $200 billion in a fruitless effort to defend their semi-fixed-rate currency system.

Other nations which have suffered financial crises are Chile, which lost an estimated 41 percent of GDP in the period 1981-83; Israel, 30 percent during 1977-83; the Ivory Coast, 25 percent in 1988-91; and Venezuela, 18 percent of GDP in 1994-95.

The finance ministers, central bankers and economists at the Jackson Hole meeting concluded that price stability is an important precondition for economic and financial stability. Thus the U.S. has avoided major financial accidents in the 1990s in large part because of sound monetary policy.

Source: Rob Norton, "The Big Costs of Policy Mistakes," Fortune, September 29, 1997.


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