South-Western College Publishing - Economics  
Vital Signs Improving?
Subject Recession
Topic International Finance
Key Words Default, Devaluation, Recession, Economic Growth
News Story

About 18 months ago, Korea almost defaulted on its foreign debts; stock markets in Hong Kong, Korea, Indonesia and Thailand sank precipitously. What started as an Asian financial crisis spread, and was partly responsible for Russia's defaulting on some of its debt. Economic turmoil then spread to Latin America, with Brazil's devaluation shaking world financial markets. The global economic crisis threatened to plunge the whole world into recession. Although few are willing to declare the crisis over, there is a widespread feeling that some semblance of normalcy has returned to international financial markets and the risk of worldwide recession has been reduced.

If we were to check the vital signs of the worlds' economies, we would find many things to be concerned about. The primary force keeping the world's economies afloat seems to be the continued expansion in the United States. The U.S. expansion has lasted for over 8 years and many policymakers feel that a slowdown is overdue. Japan's economy is in recession and shows no signs of recovering. Europe's economic performance has been lackluster with growth well under 2 percent. Others worry that the U.S. stock market bubble could burst, Brazil's finances could stumble, there could be significant political troubles in Russia, and the Kosovo situation could get out of hand.

What is the evidence that the world economies are moving toward recovery? For example, the Hong Kong stock market hit an 18-month high in early April, South Korea announced that it would repay its loans to the International Monetary Fund early, and Brazil's currency has climbed 30 percent against the U.S. dollar. This is not to say that the stricken countries have solved their problems; rather, they appear to be moving in the right direction.

(Updated June 1, 1999)

Questions
1. What happens when a country defaults on its bond repayments?
2. Define currency devaluation.
3. Describe how economic problems in one country get transmitted to other countries.
4. How does economic expansion in the U.S. support countries like Japan and Brazil?
Source Paul Blustein, "World Economy Passes From Crisis to Caution", The Washington Post, April 17, 1999.

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