The Balance Sheet Approach to Financial Crises in Emerging Markets

This paper contrasts the conventional balance sheet approach to the analysis of economic
disturbances in emerging markets with the alternative balance sheet approach that applies and
extends Minsky’s Financial Instability Hypothesis to (open) emerging market economies.
Earlier balance sheet studies are found to be flawed because of a failure to disaggregate
firms’ balance sheets. Examination of such balance sheets in Thailand, Malaysia, Indonesia,
Singapore, and Hong Kong suggests that firms in the three crisis countries did share common
causes of financial fragility, but that the level of financial development and the particular
domestic economic and political situation also affected their situation.