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 levels of between 2 per cent and 3 per cent growth.
The reason for two and a half rather than three cheers is that some Asians resist the message of the markets. When Mahathir's solution is to "shoot the speculators" you know he has not yet learned that those who live by the open global market economy can die by the open global market economy. Cack-handed bureaucratic measures to restrain currency or equity trading damage the confidence of foreign investors, and lead to an even greater loss of confidence than need be. Thailand lost $23 billion in a futile defence of its currency and the result is an even deeper foreign debt problem.
Hong Kong has a different problem. Its dollar peg is seen as a necessary sign of confidence in the new rulers in Beijing, but keeping the peg when Hong Kong's competitors have all gained an advantage through devaluation means there will eventually be an economic price to pay. Hong Kong is so closely integrated with China that its suffering may humble the giant Chinese economy.
Such gloomy scenarios are not the most likely. Far more likely is an acceptance, already evident in Japan, South Korea, Singapore and even to some extent in Taiwan and the Philippines, that the message from the market should be heeded. Hence Japan's ability to organise an essentially regional support package for Thailand through the IMF.
But the fact that the Asian engine will cool down is no bad thing for Europeans and Americans. Protectionist sentiment recedes when Asians are seen to be economic animals "just like us." Now that the US economy has outgrown the Japanese for the past six years, we hear far less about the need to impose drastic trade sanctions that might damage the global economy.
The fallibility of Asian economies and the demolition of the myth of Asian values as an explanation of economic success, should also cheer those who wish to replicate the impressive achievement of growth. Chile has demonstrated that good policies can achieve similar results. Is Poland about to do the same? Other developing economies will remember both the perils of hubris and the opportunities available if openness is sustained.
One of the most encouraging implications is that east Asians are learning that closed and corrupt governments tend to be bad economic managers, especially in times of crisis. Thailand's dithering before accepting the logic of the markets in July had a great deal to do with corruption among elite officials. Malaysia's denial of responsibility and racist accusations against foreigners go unchecked in an autocratic system. In the long run, east Asians will learn that more democratic accountability will produce more prosperity. This iron logic of the global economy is especially true for the most developed economies, and if east Asians keep travelling that road of development, they too will have a date with a democratic destiny.
