The Asian financial crisis goes from bad to worse. No one will be surprised by this except for the group of analysts and commentators who, towards the end of 1997, looked at the figures for direct trade between the western world and southeast and east Asia and concluded that the region's troubles would hardly touch the European or American economies.
So small, they argued, were the volumes of direct imports and exports between either the EU or the US and the affected areas, that the whole business could safely be regarded as marginal, even beneficial, and the impact on western growth minuscule. Stock markets seized the good news and roared on upwards.
Unfortunately, as events are now proving, this rosy conclusion overlooked some vital considerations.
First, many of these experts, who like to remind the rest of us three times a day about globalisation, forgot their own lessons. Bilateral trade flows with troubled areas are a useless guide. Everybody trades with everybody, as Patrick Minford has pointed out, so that all our trade is damaged when a large part of the world economy starts shrinking.
Second, Asia had turned itself into the region with the world's highest volume of savings and the biggest export supply of longer-term investment, much of it channelled into the western economies. That tap has now been turned off. Some of the investment is even going home again.
Third, the west has invested heavily in Asia, partly, it is true, in order to ship lower-cost goods back to Europe and the US, but also to supply what used to be booming Asian demand. Asian order books have shrivelled.
Fourth, Russia, to the amazement of some analysts, turned out to be next door to Asia. Weakened by collapsing oil revenues, mediaeval politics and bad economic policies foisted on it by western economists, Russia rapidly contracted the Asian flu and will take years to recover.
Fifth, the Japanese bad loans bubble, suppressed for years, reached bursting point precisely at the moment when the Japanese banks found themselves exposed to the new horrors of southeast Asian and Korean collapse. (The Chinese economy is also reaching the bubble-bursting point, although this drama is yet to play out.)
Sixth, the whole Panglossian analysis overlooked the psychological impact of the crisis on the west. For almost two decades now, Asia has been the glow on the horizon-the El Dorado vista in the minds of western investors as they plunged into ever expanding markets. Risky, yes, but like China and the East Indies in the 16th and 17th centuries for the Portuguese and the Dutch, or India in the 18th and 19th centuries for the British, this was the thought which warmed a thousand adventurous hearts and kept spirits up when markets nearer at hand were dull or down. Now the glow has gone.
This is quite a large list to overlook. It serves as a further warning about the dangers of fashion in financial comment. At least we now hear less of this view and most of the herd are now facing the opposite way, with extreme pessimism replacing cavalier optimism. But then market sentiment always overshoots, so we should not be too harsh. What will be will be.
But there is a different group of opinion-makers, a sub-sect of the Pangloss tendency, which does deserve contempt rather than pity or patient explanation. This might be called the Schadenfreude school of opinion on Asian affairs. These were the commentators who argued not only that the Asian turmoil did not matter but that it was a thoroughly good thing, a deserved come-uppance for Asian values, Asian miracles and all that went with them. Dead tigers were good tigers. The west could get along nicely without Asian dictators, treacherous Orientals, murderously cheap Asian imports and insufferable lectures about the shortcomings of western liberalism from the likes of Lee Kwan Yew.
This is to parody some of the stream of articles which poured forth on this theme. But it does seem extraordinary that so many well-informed commentators could have shut their minds so tightly to both history and the recent past.
We could not have guessed from the denunciation of Asian values that Europe has been drinking at the well of these values and wisdoms for centuries, and that it has been precisely Europe's ability to learn from other cultures, especially the Asian ones, that has given it its own inner strength in the face of hideous setbacks.
Or would we have guessed that, in the last three or four decades, many Asian societies have raised themselves from nothing to standards of living, working and learning (yes, even now) which surpass the west, with an ?lan and at a speed unmatched in human history?
Surely, there would be a few lessons to learn, in all humility, from this colossal event, even if only to follow the example of our western forbears (as well as Asia's wisest leaders, who had no qualms about learning from the west with skilled selectivity).
But no, the Schadenfreude brigade would have none of it. Asia was morally bankrupt, a source of no instruction, a sea of cronyism and corrupt institutions. The Asian miracle-which they knew, beyond argument, had only ever been an ephemeral affair (indeed, Paul Krugman questioned whether it ever existed)-was now finished, over, an irritant removed.
Only a few months on we can see how absurd this view is. Hopelessly underestimating the power and influence of the Asian economies, and the degree to which they were-and are-inextricably intertwined with the welfare of the entire globe, they have hopelessly underestimated the size of the problem. It has been a shoddy episode and not at all in the tradition of Europe's open-minded stance or, in particular, of Britain's uniquely enlightened record in understanding and empathising with Asian events.
As Edward Luce reminded us in July's Prospect, the IMF, only a few months before the rolling Asian collapse began, was expecting super-high growth rates from these economies-which were run, it thought, in an exemplary way, barring one or two minor causes for unease.
No matter: that was yesterday. Whatever it thought before, privately or in public, the IMF now agrees with the Asia-bashers that Asia was sick all along. IMF rescue remedies have been based squarely on this assumption.
The other side of the debate-that the problem may lie, at least partly, in the world capital market itself-is much less simple. It has attracted one or two influential voices in support, including some ruminations from Alan Greenspan and some robust remarks from Paul Volcker, but there things seem to be stuck.
The problem is that to query whether markets are working properly is taken as querying the free market system itself. Behind this lies the cavalier persistence of classical liberal economists who have too often assumed perfect market knowledge, have failed to study the broader context in which markets operate and, as a result, have injected a dangerous quality of unreality into all analysis of market behaviour.
None the less, some interesting views are circulating about the reform of global capital markets. Luce aired a selection of them in his Prospect article. But the arguments are complex and some may be founded on an impossibility-putting the genie of electronically-driven global capitalism back in the bottle.
Unfortunately, the Asia-bashing side of the argument was easier to grasp. Events are now showing that it was wrong in most respects, even if right in a few. The IMF remedies have not really worked, except in boosting some Asian export sectors which make matters for the west even worse; the contagion continues to spread.
Japanese reform is at a snail's pace and will take many years to work through (as was always evident), while China, which seemed like a bastion of stability at the outset of the crisis, is now reeling under the strains of vanishing export markets. Export growth was the great Chinese hope. It was this which was going to lubricate reform in the state enterprise sector.
Another Chinese devaluation will not help but it may be unavoidable. This would leave the Hong Kong dollar on a knife-edge. Already the efforts of the Hong Kong authorities to defend the dollar peg have led them into highly controversial-and uncharacteristically interventionist-policy moves.
Meanwhile, starvation has reached the countryside in Indonesia. In Malaysia stocks of medical supplies are gone. In Thailand bankruptcies continue amid a sea of un-repayable debt. Korean politics still look shaky; even Singapore has lost its bounce. At the time of writing the infection appears to have spread to almost all emerging markets, whether in east Asia, central Asia, southern Africa, Latin America or eastern Europe. Russia is sliding into a black hole and even Norway seems to have caught the bug, weakened by collapsing oil and natural gas prices.
The rising political and social tensions behind all this are not going to be resolved by more lectures or by IMF remedies, however correct they may be in theory. Nor will the impact on the rest of the globe disappear by ignoring it. Asia wounded and down turns out to be just as powerful in its influence on all our lives as Asia ascendant ever was.
While we can all agree on the virtue of longer-term improvements and reforms (tighter bank monitoring in emergent countries, better international co-ordination of bank regul-ation and so on), the time for debate is past and the need for fire fighting has arrived. The Asian crisis is going to be much worse for the west than almost all the predictions and is going to last much longer. We have yet to reach any point near the bottom, particularly if the Chinese currency falls and brings down the Hong Kong dollar with it.
Economic events and market upheavals do not occur in a vacuum. Nor are they confined to neat geographical zones or regions. They are interwoven with and are part of the whole amazing process of discovery, innovation and risk-taking which global capitalism has now become. If this grinds to a halt there is no alternative on which to fall back, unless the Burmese or North Korean "models" are considered as alternatives.
So the world's leaders had better work swiftly to repair the hurricane damage before the next phase of the storm strikes, as it looks like doing, at any moment.
