The reason has to do with how financial crises – and booms – spread between local economies. Known as contagion, how this occurs is influenced by the way global economic networks are connected, and Professor Mardi Dungey from the Tasmanian School of Business & Economics is a world leader in her ability to track the spread.
“Contagion is seen as a terrible, destructive force,” she said. “We’ve done a lot of work on contagion, but it is remarkably difficult to predict future occurrences.”
In a recent study, Professor Dungey and colleagues from several Australian universities report the development of a statistical method for detecting contagion, and as part of the process, they’ve been able to identify the start and end points of a financial crisis.
They found, for instance, that the Global Financial Crisis (GFC) had already been set in motion even before the Lehman Brothers collapse – the international financial services company that has more widely been singled out as the major trigger.
“My main interest is in trying to understand how we can capture economic relationships that are consistent with the data, which will help us with important economic decision-making,” said Professor Dungey.
“At present, the things we set up to mitigate problems during normal periods tend to get overrun during times of financial stress.”
In 1997, well before the onset of the GFC, Asia had its own major financial crisis, and in recent background work prepared for the Asian Development Bank, Professor Dungey analyses how the network of financial relationships in the region has changed in the 20 years since.
“In a nutshell, what happened in 1997 was a loss of confidence. People were pouring money into the Asian markets, but then they realised there was a lack of regulation. And when financial pressure came, they started to withdraw their money all at once,” she says.
But the result wasn’t all bad. When the GFC hit a decade later, “Asia didn’t fare nearly as badly,” said Professor Dungey.
“They likely had more of a memory of what happened during their own crisis, and were better prepared. They were nowhere near as affected as the US and Europe.”
Professor Dungey’s analysis of the Asian financial crisis has also drawn attention to a difficult policy issue for developing economies: insisting that they be more stringently regulated and resilient curtails some of the flexibility required for growth.
“What you might be doing is condemning lesser-developed places to a slow rate of growth, just at the time when they need to be able to increase their growth to further develop,” she said.
Closer to home, Professor Dungey is now analysing the potential contagion effect that a financial crisis or shock in China could have on Australia – a largely unknown risk that could have major consequences.
“We don't have high-quality data going back a long way about China's financial markets, so we don't know how the shocks that affect it will feed back into the rest of the world,” she said.
“This is a big risk for Australia.”