Asian Crisis

The financial crisis that erupted in Asia in mid-1997 has led
to sharp declines in the currencies, stock markets, and other
asset prices of a number of Asian countries. It is hard to
understand what these declines will actually do to the world
market. This decline is expected to halve the rate of world
growth in 1998 from the four percent that was projected
pre-crisis to an estimated outcome of about 2 percent. The
countries that are included in the East Asian crisis, known as
"Tiger" economies, are Hong Kong, Indonesia, South Korea,
Malaysia, the Philippines, Singapore, Taiwan and Thailand. For
these countries to participate effectively in the exchange of
goods, services, and assets, an international monetary system
is needed to facilitate economic transactions. To be effective
in facilitating movement in goods, services, and assets, a
monetary system most importantly requires an efficient balance
of payments adjustment mechanism so that deficits and
surpluses are not prolonged but are eliminated with relative
ease in a reasonably short time period. The Asian crisis of
recent falls into this category of inefficient balance of
payments facilitated by depreciation of its currency. By
competitively depreciating its currencies, Asia is exporting
its deflation, its overcapacity and its lack of growth to the
West, particularly to the US. History The past ten or fifteen
years have seen an unprecedented expansion in the extent to
which the countries of the world are tied together, both by
instant communication and by international trade,
institutions, and markets, including financial markets. On the
whole, this process of globalization has been an enormously
positive development. It has opened new markets, enhanced
competition, spurred innovation, and provided new
opportunities for workers, farmers, and businesses around the
world. For example more than 40 percent of US exports today
are absorbed by developing countries, an extraordinary
increase over past export patterns, and the jobs associated
with these exports are high-paying, good jobs. The increasing
productivity of our trading partners has helped keep inflation
down and improve standards of living in the United States. And
outside the US, probably hundreds of millions of people have
been lifted out of poverty around the world by the economic
growth and trade over the past twenty or thirty years. Effects
of the Global Economy In this new global economy, countries
are more tightly linked than ever before to each other\'s
fates. A decade ago, a collapse in the currency of a small,
distant country like Thailand would barely have rated a
mention in the typical American newspaper. Last year, however,
that currency crash triggered a crisis in other East Asian
countries that has dominated news coverage in a way that no
other foreign financial crisis has ever done before in this
country. The reason for the change is that we now have more at
stake than ever before in the economic performance of these
countries. Not only are they major customers for our products;
the rich countries and developing countries are also
increasingly linked by financial ties. In 1996, the developed
countries including the US invested more than 250 billion in
emerging markets, and this is compared to roughly 20 billion
ten years earlier. Much of this money was from banks
(especially in Japan and Europe), although US mutual funds,
pension funds, and individual investors also participated. But
whatever its source, the extent of this investment means that
economic turmoil in East Asia has a direct financial impact on
the developed world\'s capital markets, including our own.
Indeed, a brief plunge in US stocks last October was widely
attributed to turmoil in the Hong Kong stock market that was,
in turn, linked to the crisis set off by Thailand\'s currency
crash. What were the causes? Throughout the East Asian crisis
many different ideas have been proposed to what the cause or
causes were. Attempts to identify the fundamental causes of a
financial crisis always suffer from the problem of
distinguishing insight from hindsight. Many financial
journalists today have said the the crisis was the inevitable
counsquence of: "overvalued exchange rates, large current
account deficits, short-term capital inflows, opaque financial
systems, or one of several other supposedly fatal flaws in
East Asian capitalism." It seems fair to say that a year ago
nobody suspected that a calamity like what