Sunday 19 Aug 2018 | 20:25 | SYDNEY
Sunday 19 Aug 2018 | 20:25 | SYDNEY

From financial to political contagion


Mark Thirlwell

23 February 2011 11:22

Until the onset of the Asian financial crisis, the term 'contagion' typically referred to the spread of a disease: July 1997 changed all that. Once the currency crisis in Thailand went regional (Indonesia, Malaysia, South Korea) and then global (Russia, Brazil and the Long Term Capital Mangement (LTCM) company), we started to get used to the idea of thinking about contagion in terms of the international spread of financial market collapses. 

The GFC provided another powerful example of this process in action, as problems in the US housing market spread rapidly throughout, first, the US financial system and then the financial sectors of much of the developed world, even as the real economy fallout triggered abrupt falls in trade and industrial production across the world economy (although, see this). More recently still, sovereign debt problems across the periphery of the Eurozone have again prompted much talk about the dangers of financial contagion.

Mind you, although the term is now thrown around quite freely, economists continue to disagree over what it means, or even whether it actually exists. Some economists like to define contagion in quite narrow and specific terms, as an increase in cross-market linkages that occurs during a crisis. Others prefer a broader definition which captures international spillovers more generally, whereby a shock to one market or country spreads to others.

Along with seeking to define and measure contagion, researchers have looked at possible channels through which contagion or spillover effects might operate, including trade linkages, financial linkages, and the presence of common economic and financial fragilities. Interestingly, one study looking at past crises — the Latin American debt crisis, the Mexican Tequila crisis and the Asian financial crisis — found that there are strong 'neighbourhood' or regional effects. That is, geographic proximity seems to be an important factor (hence the Latin American debt crisis and the Asian financial crisis, I suppose).

As political unrest spreads across the Middle East and North Africa, I'd be interested to know if there is an equivalent political science literature that looks at contagion-style effects. At least at a superficial level, something like the neighbourhood effect seems to be playing an important role, and there are also some obvious common factors (the nature of the political regime, demographic youth bulges and high unemployment, the role of food prices) at work.

Presumably there are also some interesting things to be said about common transmission channels (the role of Al-Jazeera, perhaps'). Also, are there any other examples of political contagion' As a non-specialist, the Revolutions of 1989 in Eastern Europe would seem to be one possible example, and maybe the shift to democracy in southern Europe in the mid-1970s (Greece, Portugal, Spain) would make for another' 

Perhaps Interpreter readers can point me in the right direction.

Photo by Flickr user Foshydog