Sunday, March 23, 2008

Warnings Ignored then

From a review one of Krugman's earlier books;

Paul Krugman, an economist at the Massachusetts Institute of Technology, recalls in his excellent new book, ''The Return of Depression Economics,'' that Guillermo Calvo, a prominent economist then at the World Bank, kept telling people after the Mexican crisis that while Mexico had made mistakes, the important question was, ''Why was so large a punishment imposed for so small a crime?''

The answer is neither simple nor certain. Part of it surely lies in the way the world's financial system has evolved in recent decades, with big flows of capital moving into countries that are popular with investors and then moving back out again very rapidly. As Krugman notes, countries with controls on capital movements have tended to do better in the crisis environment than those without. That is a long way from conventional economic wisdom, and is one reason that reading Krugman as he glances over the economic history of the past several decades is both enjoyable and thought-provoking.

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