Has Asia Recovered?

Two years ago, a nasty virus emerged in Bangkok. It spread rapidly through Asia and beyond, often claiming seemingly robust economies as victims. But no new cases have been reported in the past few months, and most of the original victims seem to be past the worst. Like anyone who has been very sick and starts to feel better, they feel relieved, even euphoric.

But are we celebrating too soon? Pundits who want to sound judicious are fond of warning against generalizing. Each country is different, they say, and no one story fits all of Asia.

This is, of course, silly. All of these economies imploded within a few months of one another, and the logic of catastrophe--a combined banking and currency crisis, as panicked investors tried both to convert long-term assets into cash and to convert baht or rupiah into dollars--was pretty much the same everywhere.

Governments had no good options. If they let their currencies plunge, inflation would soar, and companies that had borrowed in dollars would go bankrupt. If they tried to support their currencies by pushing up interest rates, the same firms would go bust from the combination of debt burden and recession. In practice, countries split the difference--and still paid a heavy price.

In hindsight it is easy to find reasons why the countries deserved their punishment. Like most cliches, the catchphrase crony capitalism has prospered because it gets at something real: excessively cozy relationships between government and business really did lead to a lot of bad investments.

Suppose the U.S., which is pulling in overseas money at the rate of about $300 billion annually, were to see that inflow suddenly become a trillion-dollar outflow--which, on a relative basis, is what happened to Asia's crisis-hit countries. How solid would our financial system look?

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 truth is that an observer without an ax to grind would probably conclude that none of the policies adopted either on or in defiance of advice given by the International Monetary Fund--which "suggested" that client countries tighten their belts and raise interest rates--made much difference either way. 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 President Bill Clinton might say, it depends on exactly what you mean by "full." If by recovery you mean not just a return to growth, but a recovery that resembles what people used to regard as the Asian norm, the answer is almost surely no.