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Or to sell it, which is what finally happened in mid-1997. When the crash began in Thailand, investors throughout the region rushed for the exits. Investors were spooked by various common flaws in countries that had once seemed attractive: corruption, short-sighted borrowers, imprudent banks. "When it was an Asian crisis," says David Hale, chief global economist of the Zurich Group, "people could say it was caused by borderline criminals and incompetents." But as Russia imploded and Brazil teetered, it became clear that Asia's woes would eventually be felt by the whole world. The Asian crisis became a global crisis, as trigger-shy investors stopped lending and investing anywhere, including in the West. "What we have is a crisis of global capital markets," says Jeffrey Sachs, director of Harvard University's Institute for International Development. "It is a full-fledged financial panic as we have not seen in decades." Agrees Kenneth Courtis, chief economist and strategist of Deutsche Bank Group Asia Pacific in Tokyo: "I think we are inches away from slipping into a crisis like the 1920s."
Gulp! In less trenchant terms, the IMF has said the world economy will see no snapback in 1999 and possibly "a deeper, wider and more prolonged downturn" afterward. That has swung the debate from rebuilding the financial hardware to a more pressing need to stave off a worldwide depression. Fed Chairman Greenspan has responded with two cuts in U.S. interest rates. At the time of the first, he also set forth his view on the dangers that deflation--marked by a worldwide decline in prices in the face of depressed demand and oversupply of many products--now poses. "We are clearly facing a set of forces that should be dampening demand going forward to an unknown extent," he said. "This is a time for monetary policy to be especially alert."
With Japan in its worst recession since the war, the U.S. and Europe are the only regions gobbling up the exports that the rest of the world hopes will pull them out of their misery. But Wall Street has stumbled, wiping out billions of dollars in paper wealth since mid-summer, and many companies have seen their earnings drop. A serious slowdown in the American economy could tip the entire world into a deflationary spiral. That, in turn, could fuel protectionism, which would surely make things worse. "The No. 1 question we face," says Deutsche Bank's Courtis, "is how to increase growth in the world economy."
The good news is that some of Asia seems ready for a renewal of fortunes. It's now widely agreed that the IMF programs in Asia--though they ultimately provided some stability--were often brutal to the point of incompetence. Indonesia, Thailand and South Korea were all told to raise interest rates and cut government spending at a time when their economies were in free-fall. Before the IMF could alter its strategy, enormous damage had been done. Even the World Bank, its sister institution, has publicly criticized that course, and some IMF honchos have grown contrite. "The Asia crisis has been a painful learning process for everyone concerned," pronounced Hubert Neiss, director of the fund's Asia-Pacific Department, at the Singapore summit last week, "and that includes the IMF."
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October 26, 1998
LIGHT AT THE END OF THE TUNNEL?
There's still plenty of pain to come, but hope is on the rise that the region's troubles may be waning. Japan's bank-overhaul plan and the Fed's interest-rate cuts bolster the new optimism
INTERVIEW
Eisuke Sakakibara, Japan's "Mr. Yen," emphasizes the need for cooperation
OUTLOOK
TIME's Asian Board of Economists evaluates the chances for recovery in the region
GOOD START
Thailand has better reviews than returns
THE RIGHT MEDICINE
Korea accepts a bitter pill
VIEWPOINT
David Roche sees trouble, but no depression
POLL
Are the region's troubles waning or is the worst yet to come?
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