Ecuador, Indonesia, Russia, and South Korea, as well as many other countries, have all been hit by typhoon-force financial storms during the past three years—an indication that national financial crises are increasing in frequency and severity. Many other countries could be at risk for similar economic disasters unless they act now.

Oddly, one cause of these crises lies in the economic-reform programs undertaken by the affected countries. From our work in 20 crisis-hit nations, it appears that governments often embark on liberalization without taking into account market fundamentals (such as exchange rate regimes, corporate governance, and risk-management policies) and then run into trouble.¹

During a financial crisis, there is always a real temptation to yield to chaos. Currency values plummet; banks declare bankruptcy; capital flees the country; politicians have a field day looking for villains, real or imaginary; and many groups within the government clamor to take charge. To minimize these effects, governments must swiftly and effectively seize control of the situation.

Although each crisis varies with the economic, political, and cultural legacy of the country where it breaks out, some lessons apply to all. Within the first 100 days, it is crucial to establish clear leadership, to...