When Asian markets began to tremblelate last year, Latin America nations, veterans of numerous boom and bust cycles, bracedfor the worst. And sure enough, capital flows to the region, as to all emerging markets,were temporarily paralyzed. Exports to Asia, as expected, dropped dramatically. Somecountries were affected indirectly by a drop in raw material prices.

But the good news is that for LatinAmerica, the worst has passed. Trends in bond spreads are favorable again. Intra-regionaltrade is steady. Growth, although slowed, has not been interrupted. Most analysts agreethat the region's growth this year will exceed 3%, and ECLAC estimates that it willreach 3.2%. If one excludes Brazil, the country most affected by the crisis, growth shouldbe 4.6%, down form last year but better than the average for the decade.

So, how to account for theregion's quick rebound? Simply put, Latin America has learned form past experience.Strict monetary and fiscal policies are now firmly in place. This time around, authoritiesacted swiftly and decisively, keeping inflation low and below last year's levels. Infact, for the second year in a row inflation is running at the lowest level in a halfcentury.

Two negatives have emerged from theAsian crisis, however: the enormous imperfection in international capital markets and thegreat, and growing, vulnerability of Latin American economies to external shocks. Thecrisis has shown us the need to create international institutions capable of managingsophisticated, but unstable, financial markets in which waves of excessive expansion arefollowed by financial panics. There exists no international institution that helps avoidthe development of unsustainable financial booms ? not even the IMF, which has onlylimited ability to manage the crises which follow. Risk-assessment firms, which shouldplay a role on this score, tend to accentuate rather than absorb these trends, byupgrading countries during the booms and swiftly downgrading them during the downswings.

This, then, would be an opportunemoment to rethink the international financial order. It is not, on the other hand, anappropriate time to consider additional liberalization of the market, as in the currentdiscussion regarding a change in the IMF statute to include capital account convertibilityin its mandate. Moreover, given past experiences, attention should be focused onadministering bonanzas, not crises, since in many ways such crises are the result of boomsbadly managed. We do not possess appropriate tools to manage unsustainable bonanzas ?or, even better, to prevent them developing at all. It is this lack o fan appropriateinternational regulatory framework which justifies countries taking matters into their ownhands by imposing special measures to control unsustainable capital inflows, such as thereserve requirements on external capital inflows successfully applied in Chile andColombia.

The current Asian crisis alsohighlights the extreme vulnerability of Latin economies to external factors. The excessiveattention paid to managing crises ignores the obvious fact that authorities have morefreedom of movement in times of bonanza than in times of crisis. A boom characterized byexcessive expansion of public and private spending inevitably generates an adjustment,whose severity will be in direct proportion to the preceding spending spree. So it followsthat an unsustainable increase in public spending, based on exceptional but short-livedtax revenues and unusual access to external credit, will inevitably result in a severefiscal adjustment later on. Excessive indebtedness by the private sector, as a result ofunderestimating the risks involved, will lead to a severe contraction of credit and, inmost cases, a deterioration of bank portfolio which, in turn, can cause serious falls inGNP, if sufficiently severe. An overvalued currency based on short-lived capital inflowsor exceptional export prices can lead to strong pressure on exchange or interest rates,once the temporary phenomena disappear.

The main challenge in dealing withthis kind of external vulnerability is to create instruments capable of administeringbonanzas, with the sterilization of hot money as the first priority. Experience so farshows that fiscal goals should be fixed as a function of the structural, not the currentfiscal deficit, as in OECD countries. Furthermore, many countries may wish tocounterbalance trends in short term private spending, either totally or partially, bycurtailing public spending. This would also allow public debt to compensate for risingprivate debt.

On the monetary and exchange fronts,reserve requirements applied to foreign capital inflows do double duty by also moderatingthe exchange and monetary pressures which build up during periods of bonanza. Withincertain limits, sterilizing the monetary effects of increased reserves has also proven auseful tool for many countries. The Argentine system, which punishes short term assetswith higher reserve requirements, can also help. Reducing, during boom years, theproportion of real estate value which can be used as collateral to debts in anotherpossibility. As has often been said, strong and prudent regulation of a financial systemis one of the keys to keeping intermediaries from taking unmanageable risks.

Boom management, then, rather crisismanagement, is the clear agenda that the Asian crisis has brought to the forefront ofattention of the authorities. It is to crisis prevention during boom periods that thefocus of international debates should concentrate.