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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

ASIAWEEK 1997
Twelve Months of Turning Points

The End of an Era
The real question is whether Asian economies are ready to start anew

By Jonathan Sprague


Go to story about what the year's best investments were

MAY THE ASIAN ECONOMIC Miracle -- 1950 to 1997 -- rest in peace. But it hopefully won't be forgotten altogether. After all, the same characteristics that helped fuel three decades of heady growth, Asian thrift and hard work, are likely to be just as critical in the future. And something else -- enough humility to see that flawed methods of the past need fixing. In retrospect, what surprises about the Great Crash of '97 is not that the crisis erupted when it did but how deeply and completely it spread. Nothing could be a more clear signal that the time for change has arrived.

The warning signs were writ both large and small. A savvy investor might have started shorting the baht in March after 20 of 56 finalists in the popular Miss Thailand beauty contest competed without sponsorship sashes -- cash-strapped property companies had reduced promotion budgets. And well before then, more than a few voices warned that current account deficits in Thailand and bad loans in South Korea were ticking time bombs.

Even last year, signs of weaknesss abounded. Soft exports, falling stock prices, slowing economies and rising calls for Asia to wake up characterized the region's economies. The difference this year has been that localized symptoms laid bare severe macroeconomic illness. In January, the medium-sized Thai property firm Somprasong Land defaulted on $80 million worth of convertible Eurobonds. From that relative matchstick roared a consuming conflagration. It first focused attention on how overbuilt the Bangkok property market was, how overextended property developers and finance houses were, and how much private foreign debt was actually due to be paid in 1997. Around the same time, Hanbo Steel, flagship of South Korea's 14th-largest chaebol, failed after bingeing on over-expansion. Next door, Tokyo bailed out troubled Nippon Credit Bank in April but the same month let Nissan Life become the first Japanese life insurer to fail since World War II. These were the early rumblings of turmoil.

The crisis emerged slowly at first. Speculators began hammering the baht in February -- before the beauty queens sashayed sashless down the catwalk. The Bank of Thailand at first beat them back, but the attacks kept coming. On July 2, after spending tens of billions of dollars, mostly on forward currency contracts, Bangkok admitted defeat and floated the baht. The currency lost 20% of its value to the U.S. dollar in less than a week. The Malaysian ringgit, Indonesian rupiah and Philippine peso soon followed downward.

Why had what started as merely a bad exchange rate dream turned into a full-blown nightmare? Many Southeast Asian economies had pegged their currencies at least loosely to the U.S. dollar. But the links started to look unreasonable once it became clear that high current-account shortfalls, inflation and asset bubbles left many economies out of sync with America's economic fundamentals. That gave speculators incentive to keep up the pressure. Further, Asian financial institutions and companies had borrowed massively overseas to take advantage of relatively low rates. As local currencies fell, foreign obligations swelled. The borrowers bought dollars, seeking to hedge against further devaluation, but the move only fulfilled the worst fears. Meanwhile, too much of the borrowed money had been misdirected -- into unsaleable property or uneconomic factories, for instance -- by cronyism, corruption and plain bad business. The initial government policy response to all this (almost everywhere but in Malaysia) was to raise interest rates as a way to protect local currencies. But tight credit only aggravated the burgeoning slump and pushed debt-ridden companies to the edge.

More than bad economics fueled the crisis. Indecision by Bangkok politicians, many with links to bad financial institutions, hurt investor confidence. Malaysia's initial tendency to blame speculators fed the ringgit's tumble. Korean confidence held until the Kia Group went down in July. Even then, the problem was less the group's bankruptcy than the way its chairman refused to resign for months while banks and politicians dithered. The failure of venerable brokerage Yamaichi Securities in November -- under the weight of $24 billion in liabilities, much of it hidden -- provided a rare window into Japan's opaque accounting practices and corruption.

Through it all, politicians found it hard to act decisively. After much hemming and hawing, Bangkok accepted a $17 billion International Monetary Fund bailout in August. But political turmoil prevented much from being done until a new prime minister, Chuan Leekpai, assumed power in November. Indonesia took the initiative in October to seek a rescue package that now totals almost $40 billion. However, analysts have been disappointed by Jakarta's relative inaction since. Seoul kept denying the inevitable. The government at first insisted no outside help was necessary. Then it said a smallish $20 billion loan would be enough. Just a few weeks later, it upped the ante to $57 billion, the largest such bailout ever. Neither is that likely to be enough. Korea itself has asked for additional aid from the U.S. and Japan.

Was there anything else going on in 1997? Indeed there was, but much has been overshadowed by the turmoil. Hong Kong boomed in the first half of the year. A two-year-old property slump reversed, and the stock market soared ahead of the historic handover from Britain to China on July 1. Investors euphorically looking to the future snapped up red chips, Hong Kong-based companies backed by mainland Chinese parents. Names like China Everbright and Shanghai Industrial replaced esteemed blue chips like Swire and Hongkong Telecom at the top of punters' buy lists. But after peaking in August, stocks tumbled as the Special Administrative Region's monetary authorities jacked up interest rates to protect the Hong Kong dollar against speculators. In short order, stocks lost pre-handover gains and more, and the property market shriveled.

Some of the year's developments will outlast the regional crisis and could both hinder and help a turnaround. China seemed more serious than it has ever been about tackling massive problems of its state-owned enterprises and the related bad loans of banks traditionally tasked with propping them up. That Beijing is addressing the problem -- economic czar Zhu Rongji has been assigned the unenviable task of finding a solution -- is positive even if solutions, when they come, are likely to be more than painful. On a multilateral level, nations signed World Trade Organization accords to liberalize telecommunications in February, information technology in March and financial services in December. The first two agreements were heralded as spurs to economic development. The latter, reflecting the dramatic economic strife in Asia, was hailed as a key to keeping the region financially above water. Asian signatories agreed in the end to far greater concessions than they had contemplated a few months earlier.

The Asian economic miracle that began in the 1950s in Japan, was pushed forward by the dragon economies of Korea, Taiwan, Hong Kong and Singapore in the 1970s, and was launched virtually into orbit by the tigers of Southeast Asia and China in the 1980s, may well have died this year. Of course, that hardly means the region will stop growing. It only means miraculous growth, and many of the policies that fed it, may be in the past. Nevertheless, the ingredients for a rebirth -- Asia's famous willingness to save and to sweat -- are strong as ever. Hopefully some of Asia's infamous willingness to lend money on the basis of relationships instead of economics, to invest for policy and pride instead of profits, and to ignore the signs of approaching bears will be squeezed out in the process. Then, politicians, bureaucrats and business leaders will look back on 1997 not as an end but as the beginning of a prosperous new era.

-- With reporting by Laxmi Nakarmi / Seoul and Julian Gearing / Bangkok


EXPECTING A SLUMP

In June, the Organization for Economic Cooperation and Development (OECD) said economic growth in many Asian economies would stabilize in 1997 and pick up in 1998. But then the bottom dropped out. This month, the OECD slashed its estimates and said Japan and Korea may be cut again.

1996 1997 1997 1997 1998
GDP

GROWTH

(actual)

(JUNE EST.) (DEC. EST.)
THAILAND 6.7% 6.0 6.3 1.0 -1.0
MALAYSIA 8.2 7.7 8.0 7.0 6.0
PHILIPPINES 5.5 6.0 6.0 5.0 3.5
SINGAPORE 7.0 6.5 6.8 6.5 6.0
HONG KONG 4.7 5.3 5.6 5.4 5.0
S. KOREA 7.1 5.3 6.5 6.2 5.5
JAPAN 3.6 2.3 2.9 0.5 1.7
 

Sources: OECD and Asiaweek research. December estimates based on mid-November data


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