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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?

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EASY COME, EASY GO

How Asia got mired in an economic mess


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WHAT CAUSED ASIA'S CRISIS? Overvalued currencies. Speculators. Hot money. Cronyism. Excessive investments in property and stocks. Financial liberalization without safeguards. Take your pick. Or choose all of them. Economists are still studying the evidence, but they are likely to cite a tapestry of reasons.

Flashback to 1985. Under the Plaza Accord, the G7 nations intervened to stop the dollar's surge against the yen and the mark. Tokyo also cut interest rates to help boost Japanese demand for imports and thus cut the trade deficit with the U.S. The yen strengthened, making East Asian exports more competitive (most currencies were virtually pegged to the dollar). Japanese businesses built production bases in Asia. The region boomed.

The world's banks and investors salivated. "Hot money" - funds in stocks and short-term instruments - poured in. The U.S. push for financial deregulation started getting results. Indonesia liberalized its banking system in 1988. Thailand allowed offshore banking in 1992. But regulation remained rudimentary, and cronyism and monopolies continued to distort many economies.

China devalued the renminbi in 1994, which meant it could undercut exports from East Asia. The dollar strengthened the next year. Current-account balances deteriorated as spending on imports outpaced receipts from exports. Japan's bubble economy had burst, but its interest rates were kept super low. So Japanese banks lent to Asian companies for high returns. Western lenders joined the party.

Easy money funded showcase infrastructure projects and property speculation. Thai finance companies borrowed low-interest U.S. dollars to relend in high-interest baht. Well-connected Indonesian corporates just needed to ask to get foreign-denominated loans. Korean conglomerates frittered borrowed money on grandiose expansion. No one bothered to hedge.

By the end of 1996, currency speculators smelled blood. The skirmishes ended with the Thais giving up on July 2, 1997. Other Asian currencies succumbed soon after. Hot money fled. Some politicians were paralyzed into inaction. Others reneged on promises to push reforms. Today, one year later, currencies remain under pressure and foreign investors are still staying away.


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