The Brazilian devaluation: national responses and international consequences

The Asian financial crisis in 1997 reached Latin America the following year. The Brazilian devaluation in January 1999 demonstrated the vulnerability of Latin America's largest economy to external shocks, but it was also a consequence of fiscal imbalance. This article explores the background to the devaluation and explains the circumstances under which it might lead to an improvement in economic performance. The article then examines the impact of the devaluation on Brazil's neighbours in MERCOSUL, particularly Argentina. It also considers the lessons of the Brazilian devaluation in the context of attempts to reform the global financial architecture and in the light of the volatility of capital flows to emerging markets. The main conclusion is that the impact of the devaluation will be felt most strongly in Brazil and that a successful outcome will require economic and political reforms over and above those already adopted by the Cardoso administration.