Letís give two and half cheers for Asiaís recent currency and stock market crises. Cheer not from Schadenfreude, but because the warning tocsin rings out a message of what happens when hubris clouds judgement. We all stand to gain from a booming East Asian economy, so we should welcome a process that, if the Asians are clever, will ensure sustained prosperity.
Although East Asians had plenty of warning about their economic problems, touters of "the Asian miracle" were not listening. It was only on 2 July that Thailand had to give up its 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% in the Philippines, 40% in Thailand, 30% in Malaysia, 25% in Indonesia and 20% in Singapore. Currencies are down by 25% in Thailand, by 15% in Indonesia, the Philippines and Malaysia, and by 10% in Singapore. Hong Kongís 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 answer is not, as Malaysiaís Prime Minister Mahathir has said, due to racist Western speculators. The most proximate cause was the recent rise in the value of the US dollar which raised the cost of borrowing to indebted Asians with fixed exchange rates. The mostly poorly developed financial systems in the region meant there was little adaptability to change. Thailand and Malaysia in particular were borrowing too much for grandiose projects. Foreign institutions such as the IMF were reluctant to be politically incorrect and shout loudly about problems they knew to be brewing.
A deeper cause of the crises was the hubris of many in the region who believed they had achieved recent success through a miracle based on Asian values. As a consequence they refused to believe they had to change policies, especially as 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 good policies rather than on good blood.
With a return to good 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 turbo-charged growth potential left before the Southeast Asians slow to down to Japan- and OECD-like levels of 2-3% growth.
The reason for two and a half rather than three cheers is that some Asians resist the message of the markets. When Mahathirís solution to the crisis is to "shoot the speculators" one knows 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 damages the confidence of foreign investors and soon leads to an even greater loss of confidence than need be. Thailand lost $23b 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 necessary as a sign of confidence in the new rulers in Beijing, but by keeping the peg when their competitors have all gained an advantage through devaluation, means there will eventually be an economic price to pay in Hong Kong. To the extent that Hong Kong is so closely integrated with China, its suffering may help humble the even bigger Chinese economy.
Such gloomy scenarios are not the most likely--hence the need for more cheering. Far more likely is a sense, 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 Japanís ability to organise an essentially regional support package for Thailand through the IMF. That so many Asians are coming to understand that they have to work hard to change policies, and not trust in ethnicity, is a sign that East Asia can continue to be the primary engine for growth in the global economy.
But the fact that the Asian engine will be less turbo-charged is no bad thing for Europeans and Americans. Protectionist sentiment in the developed economies receeds when Asians are seen to be economic animals "just like us". Now that the American economy has outgrown its Japanese counterpart for the past six years, one hears 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 should also cheer those who wish to replicate the impressive achievement of growth. Chile has demonstrated that good policies can achieve similar sustained results. Is Poland about to do the same? Other developing economies, especially in Latin America, will remember both the perils of hubris (that also damaged the likes of Brazil and Argentina in earlier decades) and the possibilities if reforms are undertaken and openness is sustained.
One of the most daunting but encouraging implications is that East Asians are learning that closed and corrupt governments tend to be lousy economic managers, especially in times of crisis. Thailandís dithering before accepting the logic of the markets in July had a great deal to do with corruption among elite officials and plutocrats. Malaysiaís abysmal denial of responsibility and racist accusations against foreigners goes 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 more developed economies, and if East Asians keep travelling that road of development, they too will have a date with a democratic destiny.