What is noteworthy is that the spill-over effect of the US boom was  less visible during the 1990s than would have been expected based on past experience. Excepting for some success, however unstable, in Southeast Asia and China, growth was either moderate in the other industrial nations (barring the UK) or dismal, as in Japan and large parts of the developing world. The reasons are not hard to find. France, Germany and the UK were not major beneficiaries in terms of a net export boom. Whatever growth occurred there was based on an expansion of final domestic demand. Also, in these countries, the stimulating effect of financial flows on stock market values and the extent of involvement of households in the stock market were far less than in the US. Thus one of the principal ways in which a financial boom translates into a real boom, was far less effective in these countries.
 
But that is not all. In countries such as Japan and even in many developing countries like South Korea, which have predominantly bank-based rather than stock market-based financial systems, financial liberalization has proved debilitating. In these countries, the high growth of the 1970s and 1980s was fuelled by bank credit, which allowed firms to undertake huge investments in capacity and diversify into new areas where world trade was booming, in order to garner the export success that triggered growth. The consequent high levels of gearing of firms and high exposure of banks to risky assets could be 'managed' within a closed and regulated financial system, in which the state, through the central bank, played the role of guarantor of deposits and lender of last resort. Non-performing loans generated by failures in particular areas were implicitly seen as a social cost that had to be borne by the system in order to ensure economic success.
 
Such systems were rendered extremely vulnerable, however, once liberalization subjected banks to market rules. And when, in a post-liberalized financial world, vulnerability threatened the stability of individual banks, the easy access to liquidity, which was so crucial to financing the earlier boom, gave way to tight financial conditions that spelt bankruptcy for firms and worsened the conditions of the banks even further. At the beginning of 2002, the official estimate of non-performing loans of Japanese banks stood at Y43,000 billion, or 8 per cent of GDP. This, despite the fact that over nine years ending March 2001, Japanese banks had written off Y72,000 billion as bad loans. In the past this would not have been a problem, as it would have been met by infusion of government funds into the banking system in various ways. But under the new liberalized, market-based discipline, banks (i) are not getting additional money to finance new NPAs; (ii) are being required to pay back past loans provided by the government; and (iii) are faced with the prospect of a reduction in depositor guarantees, which could see the withdrawal of deposits from banks.
 
With banks unable to play their role as growth engines, the government has been forced to use the route of reduced interest rates to fuel growth. This has affected banks even further. With interest rates close to zero, lending is not just risky because of the recession, but downright unprofitable. As a result, despite government efforts to ease monetary conditions, credit is difficult to come by, adversely affecting investment and consumption.  The net effect is that financial liberalization has triggered a recession that consecutive rounds of reflationary spending by the state have not been able to counteract.
 
In other situations, as in South Korea and Thailand, financial liberalization had permitted the financial system to borrow cheap abroad and lend costly at home, to finance speculative investments in the stock market and in real estate. When international lenders realized that they were overexposed in risky areas, lending froze, contributing to the downward spiral that culminated in the 1997 crises in Southeast Asia. In the event, deflation has meant that, a recovery in some countries notwithstanding, the current account of the balance of payments in developing countries reflects a deflationary surplus in recent years (Chart 9).
Chart 9 >>
 
Thus, in countries which do not have the US advantage of being home to the reserve currency and have a financial system that is structurally different, the rise of finance has implied that that the underlying deflationary bias in the system induced by financial mobility has been worsened in more ways than one. If we add this tendency towards depression in parts of the world to the limited and countrywise concentrated spill-over of the US boom into world markets, it becomes clear that the de-synchronization of the economic cycle across countries during the 1990s is a fall-out of the rise to dominance of finance internationally.