International Herald Tribune
Repeating the mistakes of the Asian crisis
Monday, July 9, 2007

HONG KONG: On the 10th anniversary of the start of the Asian economic crisis, much has been written about what lessons the countries caught up in the crisis have not learned. It is time to look at what lessons the rest of the world has not learned, or where it has learned the wrong things.

To take the last point first, there has been comment in the West that the huge foreign surpluses Asia has been accumulating are an over-reaction to the crisis, resulting in slow economic growth and a build-up in liquidity that threatens new trouble ahead. These countries are also accused of having failed to understand the dangers of inappropriate or fixed exchange rates. Currencies that were too strong before 1997 are now said to be too weak, leading to an explosion of liquidity.

This is factually wrong. Asia's fixed or deliberately weak exchange rates and gargantuan current account surpluses are concentrated in Japan, China, Taiwan and Hong Kong - the four countries that saw a downturn but no disaster 10 years ago.

Of the countries really hit by the crisis, Thailand, South Korea and Indonesia now have fairly freely floating currencies, all of which have appreciated rapidly in the past three years. All have economies growing at 4-to-5 percent and, though they have current account surpluses, none is large relative to GDP. There may be scope for faster growth, particularly in investment, in ex-crisis countries without dangers of excess.

The fourth major victim of the crisis, Malaysia, does have an excessive current account surplus of more than 10 percent of GDP, but that is due more to being an oil exporter than to excessively cautious economic policy. Malaysia is also gradually liberalizing its capital flows and allowing its currency to appreciate.

Stock markets in these countries have been booming, but they remain relatively inexpensive. Growth rates in the region are far below pre-crisis levels, but this has much to do with changing demographics and competition for investment from China. On the other side of the ledger, India, with its deficits, it hubris and its hugely expensive stock market, looks like Southeast Asia before 1997.

If finger-pointing is needed, it should not be aimed at Japan, Taiwan, China and Hong Kong. All are guilty on the currency issue and all have bloated current account surpluses. But no one can accuse China of inadequate economic growth. Japan and Taiwan have been growing faster than the European Union, despite even worse demographics, and asset markets are still far from their early 1990s peaks.

Back in 1997, Asian countries got the blame for excessive borrowing and currency mismatches. But now it is Asia that is to blame for excessive lending to Western countries. Yet it is not that Asian countries necessarily want to buy dollars or pounds, despite the U.S. and U.K. deficits, even to keep their currencies cheap to spur exports. The international financial architecture virtually forces them to do so. The creditors have little say and are unlikely to get more anytime soon, given the determination of Europe to cling to IMF leadership.

Excessive household debt is even more a feature of the United States, Britain, Australia and other developed economies, just as excessive corporate debt was in Asian in 1997. Currency mismatches are harder to apportion, due to the lack of data, but they must exist on a massive scale. Prior to the Asian crisis many analysts, including IMF economists, were blindsided about the size of Asian short-term debt.

The poor reporting that contributed to the build-up to the Asian crisis was nothing compared to the information fog that surrounds today's lenders and borrowers in the hedge fund and private equity industries. Asian financial markets even then were models of transparency compared to today.

Even those of us who warned in the mid-1990s of the dangers of Asian excesses were taken aback by the speed and ferocity of the events of 1997. That makes it all the more worrying that the global financial heartlands look critically at how Asia has dealt with the aftermath, but carry on with just the kind of practices that caused Asia's downfall.