The east Asian economic shock reminds both Asians and westerners that the tiger economies are subject to normal economic laws. Gerald Segal hopes we will now hear less about Asian valuesby Gerald Segal / October 20, 1997 / Leave a comment
Give two and a half cheers for Asia’s recent currency and stock market crises. Cheer not from schadenfreude, but to welcome swift retribution for hubris. We all gain from a booming east Asia, so we should welcome an economic evolution that, if the Asians are clever, will ensure sustained prosperity.
Although east Asians had plenty of warning about their economic problems, promoters of “the Asian miracle” were not listening. On 2nd July, Thailand had to give up the battle to defend its currency and ever since there has been a wave of devaluations and stock market crashes throughout southeast Asia. Stock markets are down from recent highs by at least 45 per cent in the Philippines, 40 per cent in Thailand, 30 per cent in Malaysia, 25 per cent in Indonesia and 20 per cent in Singapore. Currencies are down by 25 per cent in Thailand, by 15 per cent in Indonesia, the Philippines and Malaysia, and by 10 per cent in Singapore. Hong Kong’s peg to the US dollar has held, but its stock market has lost all its gains this year. All this at a time when European and American markets are near or at record highs. Why did this happen?
The culprits are not, as Malaysia’s Prime Minister Mahathir has said, racist western speculators. The proximate cause was the recent rise in the value of the dollar which raised the cost of borrowing for indebted Asians with fixed exchange rates. Thailand and Malaysia were borrowing too much for grandiose projects. Foreign institutions such as the IMF were reluctant to highlight problems for fear of seeming politically incorrect.
A deeper cause of the crises was the belief of many in the region that they had created a miracle based on Asian values. They refused to change policies, even when a booming Chinese economy was cutting into their markets and forcing the “tiger economies” into higher value production. Hubris ensured that many did not realise how much they depended on the right policies rather than on the right blood.
With a return to sound policies, this could be a short crisis with salutary effects. Floating exchange rates, financial reform, less grandiose spending, more openness to constructive foreign criticism and a move higher up the production ladder will all help. There is still plenty of rapid growth potential left before the southeast Asians slow down to Japan- and OECD-like…