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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

KRUGMAN SEES THE LIGHT

A top economist calls Asia's woes "solvable"


PAUL KRUGMAN WAS RIGHT. The respected professor of economics at the Massachusetts Institute of Technology three years ago began warning that Asia's breakneck growth rates were unsustainable -- in fact were partly illusory -- because they derived in large measure from unproductive investment of money borrowed from abroad. Latin America's "tequila crisis" of 1994 could happen in Asia, he predicted. No one listened, preferring to believe the Asian miracle was a phenomenon immune to the economic laws that governed elsewhere. People are listening now. While in Hong Kong two weeks ago to address a meeting of the World Economic Development Congress, he spoke with Asiaweek's Andrea Hamilton:

How serious is the situation in Asia?

The fact is, the markets have not punished Asia nearly as severely as they did Latin America. Thailand has a lot wrong with it, but so did Mexico. Here, most governments are responding quickly. They cut back on big projects and put in moderate austerity programs. The Thai banking system is actually in worse shape than Mexico's was. But it is fundamentally a technical problem, and it is solvable. The region's strong growth potential is still there -- as long as people get on with fixing the crisis, instead of fixing blame.

Are there more steps the Thais should be taking?

They should have rushed into a wholesale clean-up of the banking mess, and explained how they were doing it. The fact is, the Thais did not go from being geniuses to being idiots overnight.

What prospects do you see elsewhere in the region?

China will be the big story. It has bigger growth potential than just about anywhere. And it has millions of under-employed peasants -- its great resource. As for problems in their banking systems, I don't see that they have announced anything specific to clean them up. On the other hand, they are not stupid, so I expect they will take some pre-emptive measures.

What will happen in Asia if the U.S. stock market undergoes the long-anticipated major correction?

It won't necessarily be a disaster. A U.S. slump would send dollars looking for other places to invest, first of all into interest-bearing assets. You could, of course, paint a nightmare scenario: the economy interacts with the political sphere, causing the markets to slump too quickly for the Federal Reserve to respond. The economy slides, the balanced budget goes down the tubes, there is general political disarray, and [protectionist trade policies] return. I do feel the U.S. is suffering from irrational exuberance -- an irrational economic view based on fuzzy thinking that is based on no evidence.

Along the lines of the delusion Asia was suffering from -- that the rules don't apply?

There are clear parallels to Japan in 1990. Japan has managed to replicate the 1930s, with persistent depressed demand, despite extremely low interest rates. But the Japanese don't focus on that. Instead, the political debate revolves around policy reform. What they really need right now is domestic demand, but they don't seem to be managing to stimulate it. The Bank of Japan should be flooding the system with liquidity. That is not a long-term solution, but as [British economist John Maynard] Keynes said, "in the long run we are all dead."

Do you have a general prescription for Japan now?

I can't see where the recovery is going to come from. The yen is not that weak. Exports were rising, but they have managed to abort that. Personally, I have put some of my own money into Southeast Asia. I think two years from now things will look much better.


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