Asian Crisis

     The financial crisis that erupted in Asia in mid-1997 has led to sharp declines
in the currencies, stock markets, and other asset prices of a number of Asian
countries. It is hard to understand what these declines will actually do to the
world market. This decline is expected to halve the rate of world growth in 1998
from the four percent that was projected pre-crisis to an estimated outcome of
about 2 percent. The countries that are included in the East Asian crisis, known
as "Tiger" economies, are Hong Kong, Indonesia, South Korea, Malaysia,
the Philippines, Singapore, Taiwan and Thailand. For these countries to
participate effectively in the exchange of goods, services, and assets, an
international monetary system is needed to facilitate economic transactions. To
be effective in facilitating movement in goods, services, and assets, a monetary
system most importantly requires an efficient balance of payments adjustment
mechanism so that deficits and surpluses are not prolonged but are eliminated
with relative ease in a reasonably short time period. The Asian crisis of recent
falls into this category of inefficient balance of payments facilitated by
depreciation of its currency. By competitively depreciating its currencies, Asia
is exporting its deflation, its overcapacity and its lack of growth to the West,
particularly to the US. History The past ten or fifteen years have seen an
unprecedented expansion in the extent to which the countries of the world are
tied together, both by instant communication and by international trade,
institutions, and markets, including financial markets. On the whole, this
process of globalization has been an enormously positive development. It has
opened new markets, enhanced competition, spurred innovation, and provided new
opportunities for workers, farmers, and businesses around the world. For example
more than 40 percent of US exports today are absorbed by developing countries,
an extraordinary increase over past export patterns, and the jobs associated
with these exports are high-paying, good jobs. The increasing productivity of
our trading partners has helped keep inflation down and improve standards of
living in the United States. And outside the US, probably hundreds of millions
of people have been lifted out of poverty around the world by the economic
growth and trade over the past twenty or thirty years. Effects of the Global

Economy In this new global economy, countries are more tightly linked than ever
before to each other's fates. A decade ago, a collapse in the currency of a
small, distant country like Thailand would barely have rated a mention in the
typical American newspaper. Last year, however, that currency crash triggered a
crisis in other East Asian countries that has dominated news coverage in a way
that no other foreign financial crisis has ever done before in this country. The
reason for the change is that we now have more at stake than ever before in the
economic performance of these countries. Not only are they major customers for
our products; the rich countries and developing countries are also increasingly
linked by financial ties. In 1996, the developed countries including the US
invested more than 250 billion in emerging markets, and this is compared to
roughly 20 billion ten years earlier. Much of this money was from banks
(especially in Japan and Europe), although US mutual funds, pension funds, and
individual investors also participated. But whatever its source, the extent of
this investment means that economic turmoil in East Asia has a direct financial
impact on the developed world's capital markets, including our own. Indeed, a
brief plunge in US stocks last October was widely attributed to turmoil in the

Hong Kong stock market that was, in turn, linked to the crisis set off by

Thailand's currency crash. What were the causes? Throughout the East Asian
crisis many different ideas have been proposed to what the cause or causes were.

Attempts to identify the fundamental causes of a financial crisis always suffer
from the problem of distinguishing insight from hindsight. Many financial
journalists today have said the the crisis was the inevitable counsquence of:
"overvalued exchange rates, large current account deficits, short-term
capital inflows, opaque financial systems, or one of several other supposedly
fatal flaws in East Asian capitalism." It seems fair to say that a year ago
nobody suspected that a calamity like what we have seen was possible, although
all of the characteristics that are now described as the fatal flaws of the East

Asian economies were reasonably widely understood even then, at least by