Toothless Tigers Struggling Asian Nations Became Victims Of Their Own Success

First came the meltdown. Now comes the backlash.

After a decade of energetic economic progress, Asia’s stock markets and currencies are collapsing and the region faces unexpected austerity and joblessness.

South Korea, once the world’s 11th-largest economy, is confronting the crash of its entire automobile industry, staggering layoffs and bankruptcies after being forced to submit to a bailout by the International Monetary Fund.

Unaccustomed stagnation, collapsed currencies and rising prices have hit Indonesia, Malaysia and the Philippines. China will have to decide whether it can afford to restructure its hobbled state-owned enterprises as its export revenues slow dramatically.

Japan, the world’s great creditor nation and second-largest economy, could help Asia pull itself out of its slump by opening its markets and stimulating its domestic economy. But that seems unlikely as a stagnant nation with a sclerotic political system enters a ninth year of recession, its banking system hobbled by bad loans, concealed debts and dishonest balance sheets.

Asia’s woes have sparked a growing debate between advocates of open markets and defenders of East Asia’s traditional “crony capitalism” that could spark vigorous new trade battles in Washington; stir new financial instability on Wall Street, Hong Kong, Tokyo and elsewhere; and revive anti-Western nationalism across Asia.

Some Asian political leaders are increasingly tempted to blame foreign bankers - and the United States - for the region’s woes. Some argue the trend of opening markets is unhealthy and should be reversed. Others, such as Malaysian Prime Minister Mahathir Mohammed, say global capital should be controlled - somehow - with new barriers and regulations.

In South Korea, however, president-elect Kim Dae Jung has warned his countrymen reform and recovery will be painful and has embraced efforts to curb corruption and reform the cozy relationships among banks, politicians, government regulators and industrialists.

The outcome of this debate could help determine whether the region’s troubles will deepen and spread. If Asian political and business leaders, especially in South Korea and Japan, allow weak banks and companies to restructure or die, their economies’ underlying strengths are likely to reassert themselves and the crisis of confidence may pass.

But if they continue to conceal their losses, resist reforms and blame outsiders, Asia’s slump could be deeper, longer and more contagious.

Just a year ago, the Asian crisis was a cloud on the horizon. Most Asian nations had experienced only the upside of the unprecedented interdependence of nations and global financial markets. Billions flowed into the region. Sparkling new factories took shape, and nations from Singapore to South Korea became the proud “tigers” of world economic growth.

The meltdown started on July 2. Faced with mounting pressure on its banking system and speculation against its currency, the baht, the central Bank of Thailand belatedly agreed to let the baht float freely against the dollar. Billions of dollars, mostly portfolio investments by foreign money managers and loans from foreign banks, rushed out of Thailand, leaving behind debts, doubts and demoralization.

The seeds of the debacle were planted in the early 1990s, after the collapse of Japan’s “bubble economy.”

By 1993, the Japanese domestic economy was in a deep funk. The rising yen, along with high relative interest rates, had made Japanese-made products too expensive to sell in America or elsewhere in Asia.

Seeking new markets and a refuge from the high yen and rising labor costs, Japanese industrialists did what American factory owners had done when faced with recession years before. They sent their jobs overseas.

While Toyota and Honda built new car plants in America, the majority of Japanese firms built new factories across Asia. In 1994, for example, Japan’s foreign direct investment in Asia totaled $74.7 billion.

European and American investors attracted by the region’s buoyant growth quickly emulated the Japanese model. Instead of building factories, however, they concentrated on the financial markets, buying stocks and making loans.

For most of the decade, the formula worked. Investment grew, economic output rose and the “tigers” - Malaysia, Singapore, South Korea, Taiwan and Thailand - followed by Indonesia and the Philippines, spawned a new middle class that began to buy the TV sets, cars and textiles their own workers were making.

The tigers, however, became victims of their own success. Wages climbed so high industry found it harder to compete in the global market, especially with China. Asia’s educational systems failed to turn out the skilled work force needed for higher-end manufacturing. So much money flooded into the young Asian markets that banks over-invested in factories, hotels and office buildings.

The easy money also invited corruption. In nations such as Thailand and Indonesia, banks seldom evaluated the risks of new loans; they simply gave money to friends and political cronies. If a deal went sour, there always seemed to be more new foreign investment to replace it.

Asia was overheating, and the only way for Asian banks and businesses to keep paying the bills was to export more. But there was a big problem: The market for exports was drying up.

Between 1995 and 1996, the growth in merchandise exports in Thailand dropped from 25 percent to 7 percent. In Malaysia, it fell from 26 percent to 4 percent.

Why? There were a variety of reasons. The rush of capital into these newly emerging markets caused their currencies to appreciate against the dollar. But instead of letting the Thai baht or the Indonesian ringgit rise in value, as the market dictated, governments tried to prevent their currencies from appreciating too quickly and boosting the prices of Malaysian disc drives and Thai textiles in the United States.

China and Japan posed a second problem. In 1994, China quietly devalued its currency by some 35 percent, making its goods that much cheaper to export.

In Japan, meanwhile, the weak yen made Japanese-produced goods once again cost-competitive in the American market.

Last spring, some Western money managers sensed trouble in Thailand as exports continued to fall. They began to sell their Thai stocks and withdraw their investments. The Thai market began to sag. In response, the Thai central bank pushed interest rates still higher and spent millions of dollars in hard currency to keep the baht pegged to the U.S. dollar.

It was too little, too late. In July, Thailand became the first nation to dump its unofficial “peg” to the U.S. dollar. The baht, which once had commanded 4 cents, was worth only 2.22 cents by Christmas, a nearly 50 percent drop. Banks and the stock market collapsed.

Other Asian nations, plagued by similar weakening exports, reckless lending and, to one extent or another, cronyism or corruption, soon caught the contagion. In swift succession, markets in Indonesia, Malaysia, the Philippines and most recently, South Korea all collapsed.