Given that there were no good policy options, was the policy response mainly on the right track? There was frantic blame-shifting when everything in Asia seemed to be going wrong; now there is a race to claim credit when some things have started to go right. The International Monetary Fund points to Korea's recovery--and more generally to the fact that the sky didn't fall after all--as proof that its policy recommendations were right. Never mind that other IMF clients have done far worse, and that the economy of Malaysia--which refused IMF help, and horrified respectable opinion by imposing capital controls--also seems to be on the mend. Malaysia's Prime Minister Mahathir Mohamad, by contrast, claims full credit for any good news--even though neighboring economies also seem to have bottomed out.
The truth is that an observer without any ax to grind would probably conclude that none of the policies adopted either on or in defiance of the IMF's advice made much difference either way. Budget policies, interest rate policies, banking reform--whatever countries tried, just about all the capital that could flee, did. And when there was no more money to run, the natural recuperative powers of the economies finally began to prevail. At best, the money doctors who purported to offer cures provided a helpful bedside manner; at worst, they were like medieval physicians who prescribed bleeding as a remedy for all ills.
Will the patients stage a full recovery? As U.S. President Bill Clinton might say, it depends on exactly what you mean by "full." South Korea's industrial production is already above its pre-crisis level; but in the spring of 1997 anyone who had predicted zero growth in Korean industry over the next two years would have been regarded as a reckless doomsayer. So if by recovery you mean not just a return to growth, but one that brings the region's performance back to something like what people used to regard as the Asian norm, they have a long way to go--and there are a couple of good reasons to think that they won't get there.
First is what a Thai economist described to me as the "decapitation of the entrepreneurial class." Arguably, developing Asia had few true corporations in the Western sense. Institutions that looked, on paper, like modern corporations were really overgrown family firms, whose growth depended on the personal wealth of their owners and their ability to leverage that wealth through bank loans. While some progress has been made on repairing the region's devastated banks, it will be a long time before those banks are either able or willing to provide the kind of funding they used to--and in any case the entrepreneurs, their fortunes slashed by the crisis, cannot provide the necessary collateral. In time, alternatives can be found: economies can grow a new class of entrepreneurs, they can open the door to the expertise and capital of foreign companies, they can reform and modernize their financial systems (including developing workable and enforceable bankruptcy procedures). But for now, and probably for years to come, these economies are likely to remain weakened by their ordeal.
Second, even before the crisis there were indications that Asia was running into diminishing returns--that rapid growth was being sustained only by ever-more massive infusions of capital, much of it from abroad. (My notorious 1994 article in Foreign Affairs, "The Myth of Asia's Miracle," summarized that evidence.) Well, there isn't going to be nearly as much capital available in the future: foreign investors may have stopped fleeing, but they are not going to pour in funds the way they did a few years ago. So while there may be a year or two of growth at something like pre-1997 rates as Asian economies take up some of their slack, the post-crisis trend is probably going to be far below previous expectations.
Could the recovery be aborted, with an actual relapse? At least for the near future a cash squeeze like that of 1997-98 seems hard to envision. Short-term foreign debts have mostly been paid off, and massive trade surpluses--the product of devalued currencies and depressed economies--have allowed the crisis-hit countries to rebuild large reserves of foreign exchange. It would take several years of irresponsible borrowing to create the conditions for a repeat of 1997. As Mexico can attest, such things can be arranged, but the prospect does not seem imminent.
Unfortunately, there still could be a second act to the Asian crisis. That's because some of the players have not yet worked out their problems.
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The Asian Scorecard
The good news and bad news on the region's economies (click to open a pop-up window)
• Japan
• Singapore
• South Korea
• The Philippines
• Thailand
• Hong Kong
• Indonesia
• Malaysia
THIS WEEK'S TABLE OF CONTENTS
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