Asia Gropes for Japan's Bootstraps

The Asian economic crisis is rocking the world, again.

"There has not been a situation with such potential danger since the 1930s," maintain economists at the Bank Credit Analyst (BCA), a financial publication and consulting firm based in Montreal.

In the United States, the trouble on the other side of the globe has hit stock prices. Lost exports to Asia have slowed output, hurt corporate earnings.

"The US stock market was priced for a perfect world," notes BCA economist Martin Barnes. "This doesn't mean the market couldn't have run into trouble without Asia. But the Asian crisis brought everything forward and intensified it."

The Asian crisis has weakened commodity prices. That has hurt Russia, dependent on exports of oil and gas, as well as Latin America, Canada, and Australia.

The withered demand for farm goods shows up in the US. The price of hogs in Omaha was chopped 35 percent from a year ago and steer prices fell almost 10 percent. Wool prices unraveled even more.

Crisis countries - Thailand, South Korea, Indonesia - are suffering what some are calling a depression, not a recession.

The declines in their output are "without precedent since the 1930s," notes David Hale, an economist with Zurich Kemper Investments Inc., Chicago.

This year, he writes, demand for goods and services by their own people will fall 25 percent in Indonesia, 15 percent in Korea, and 12 percent in Thailand. That will be offset somewhat by higher exports. But the scene remains grim.

Overreaction

"It has gotten out of hand," Mr. Barnes says. He speaks of "financial panic," a "classic downward spiral."

Frightened investors have yanked money out of the countries, which depresses foreign-exchange rates, destabilizes already shaky banks, and clobbers ordinary consumers. Businesses find it hard to finance their sales.

Mr. Hale doesn't expect a meaningful recovery in the region until "2000 at the earliest."

Bank Credit Analyst sees the crisis as "a serious global episode, not a one-time shock.... This is not a typical business cycle downturn that can be corrected with some minor monetary and policy reflation."

What caused the crisis?

The business and investment community became overconfident in the "economic miracle" of Asia, according to Barnes. Investors saw a long period of rapid growth, a high savings rate, and hard-working peoples.

They poured money into the region and spawned overbuilding and excessive liquidity in the banking system. By the mid-1990s, investment spending accounted for 40 percent of economic output.

Crony capitalism and a lack of transparency in the financial systems added to the problem. Investors could not see the buildup of problem loans.

With greater openness, weakness would have surfaced before it became a crisis, Barnes says.

China's devaluation of its currency by 50 percent in 1994 and a gradual decline in the Japanese yen raised trade competition in the region and further undermined the smaller economies.

Devaluation of the Thai baht in July 1997 set off a chain reaction of devaluations in the region.

What will revive Asia?

Economists and businessmen hope Japan will become a locomotive, reviving its economy enough to buy more goods produced by other countries in the region.

When the bubble in Japanese stock and real estate prices collapsed, starting in 1987, it damaged the confidence of consumers. The Japanese aren't buying enough to boost their own economy, much less those of their neighbors.

"The government has to find a way to boost confidence," Barnes says. "It is very difficult."

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