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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

MAKING SENSE OF A CRISIS

Thailand really represents one link in a chain

By Assif Shameen


What exactly turned the Asian economic miracle into a mirage?

It was never a miracle; there is no mirage. True, for more than a decade Asian economies grew rapidly. Not everyone benefited equally, but the boom was nevertheless wide. In less than a generation, Asians saw their lives transformed. One year they lived in a sleepy fishing village. Five years later the village wasn't sleepy and the main industry was likely to be textiles or even semiconductors. It wasn't so much miraculous as a natural flow of capital to regions with cheap land, inexpensive labor and governments willing to build the infrastructure needed to produce goods and get them to market.

The formula succeeded again and again. But gradually, inevitably, costs rose, and time exposed weaknesses. The biggest may have been a misuse of capital. Corruption, greed and government interference directed capital to uses that were unproductive or downright wasteful -- things like property development and securities speculation. Asian currencies pegged to the U.S. dollar became overvalued as the underlying support for the currencies -- capital investment -- was wasted. At the same time, increased affluence boosted demand for imported consumer goods. In time, imports exceeded exports and current-account deficits -- money leaving an economy to pay for imports, overseas investment and travel versus what is coming in from things like export sales and direct investment -- grew.

Why are the currencies of so many Southeast Asian nations affected?

Many Asian currencies loosely or tightly pegged to the dollar came to be overvalued in comparison with the fundamentals of their economies. That means such indicators as budget deficits, current- account shortfalls and wage inflation in some cases reached dangerous levels. The misalignment was hidden for many years as the dollar fell steeply against the Japanese yen, German mark and other European currencies. But in the last two years, the dollar has rallied and exposed some weaknesses. Earlier this year, currency traders began attacking the Asian currencies they thought were most vulnerable -- Thailand was the first choice.

What did Thailand do to deserve that?

In April, a Thai property company called Somprasong threatened default on a foreign loan. This called attention to the rapidly deteriorating Thai property market -- and possible problems for companies that needed to repay foreign loans. Also, Thailand had one of the worst current-account deficits in the region and paid for it with short-term borrowings, which traders thought would eventually lead to trouble. Thailand did its best to ward off the speculators. The government kept short-term interest rates high, which made it expensive for speculators to borrow baht that they could then sell in currency markets. But because of Thailand's weak fundamentals and economic management, the efforts were doomed.

Why did the crisis spread beyond Thailand? Were the problems elsewhere just as bad?

The devaluation of the baht alerted currency traders and locals across Asia. In some cases, it led to panic selling by companies who wanted to protect themselves because they had large amounts of dollar-denominated debt. That meant they were going to have to repay their loans in dollars even if all their income was in local currencies. So buying dollars was a hedge against future devaluation. But hedging also turned into a self-fulfilling prophecy. With companies looking to hedge their risk from devaluation, and traders simply sensing that momentum and economic fundamentals were against Asian currencies, a selling frenzy ensued.

How did Asian borrowers pile up so much foreign debt?

Asia's impressive growth in recent years came partly from its ability to borrow cheaply from abroad. Companies in Thailand, for example, were able to borrow overseas at about half the rate they would need to pay at home; in Indonesia, the cost of borrowing from foreign sources was one-third the local rate. A significant portion of Japanese lending to Southeast Asia eventually ended up in the hands of property speculators.

What is likely to happen next?

The Southeast Asian currency crisis is far from over. In fact, even if speculators decided today to focus attention on, say, Eastern Europe, the effects would linger. A common defensive measure among central bankers has been to raise interest rates. But that tactic has costs. Obviously, high rates to discourage speculators also dissuade potential borrowers who want the money for more productive uses.

Why should Asian economies slow just because currencies have fallen? Wouldn't devaluation make Asian exports cheaper and spur growth?

Devaluation makes imported goods more expensive and is inflationary. Malaysia is deferring some large construction projects as a way to control spending. But such cuts depress economies. True, weaker currencies tend to make exports cheaper and more competitive, but it does not happen right away. Besides, Thailand, and especially Malaysia, export finished products that contain substantial amounts of imported components. In such cases, the higher costs of the imported components neutralize some of the export benefits from a devalued currency.

Malaysian Prime Minister Mahathir Mohamad has blamed George Soros for leading the attack against the region's currencies. But Soros says the real problem is bad government policy. Who deserves the blame?

Soros maintains he had no role in the fall of the Malaysian ringgit and has been only a small player overall. Indeed, as Asian currencies have plummeted to new lows, Soros and other hedge fund managers say they have been buyers. On the other hand, blaming politicians for all the problems isn't fair, either. While it's true that government policy has been increasingly ineffective in guiding capital to productive uses, it wasn't always that way. Strong direction from government played a positive role for much of the 1980s and early 1990s in Asia. It isn't surprising that these same governments have been slow to recognize shortcomings.


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