WORLD AFFAIRS '97: THE ASIAN CONTAGION
PERHAPS YOU HAD TO BE AT THE epicenter to understand the force of the earthquake. In Bangkok last August, a young American, the manager of the Thailand office of a major U.S. bank, sat in his high-rise office in the city's center. Lining its walls was a row of clocks displaying the time around the globe: Tokyo, London, New York. He eyed the two that read KO SAMUI and PHUKET--tempting beach resorts an easy flight away from the urban horror Bangkok had become. Outside it was about 100 degrees, and Thailand's financial markets were melting down.
There was an unmistakably shellshocked quality about him, suggesting that, years from now, he might hear the name of a failed Thai bank and scramble under his desk for cover. Sure, he had been in Tokyo in the early 1990s, when Japan's bubble economy began to collapse. But he'd ridden through that and had come to Thailand young, confident and competent. Southeast Asia was a place to make both your money and your name. No one, the young man said, had seen the debacle coming--certainly not in Thailand, with its growth rates and go-go attitude, nor anyone living anywhere else.
Could it really be that bad? he was asked. This was, after all, the East Asian miracle. The Thai market meltdown was only a bump in the road, a healthy correction that would make everything right again. His firm's own regional economist in Singapore had said just the day before that the disruption signaled only a slowdown in a handful of small Southeast Asian economies. Nothing more. He waved off the question. ""Yeah, well, maybe. I talk to him every day, he's a smart guy and all.'' Pause.
""But look out the window,'' he said finally. There, in one direction only, stood at least seven enormous skyscrapers, either fully constructed or not yet completed, that would never be inhabited. Alone they represented more than $100 million lost, and at least several Thai banks vaporized. And there were many more where they came from. ""You have to understand,'' the banker implored, ""this is a meltdown that I never in my life expected to experience. This is a disaster.''
THE WEEK BEFORE, IN A HOTEL COFFEE SHOP IN HONG Kong, an economist named Ken Courtis from Deutsche Bank in Tokyo was musing aloud about ""Mrs. O'Leary's cow.'' In Hong Kong then there was talk of an imminent collapse in the local currency, the Hong Kong dollar, partly driven by the concurrent fall of currencies throughout Southeast Asia. On a scrap of paper, Courtis wrote the names of 11 emerging-market economies, not all in East Asia. It included Argentina, the Czech Republic, Slovakia. What if, Courtis mused, they all go the way of Thailand? Runs on their currencies, bank failures, financial crises, recessions. Mrs. O'Leary's cow, legend has it, knocked over the lantern that lit up the barn that eventually set off the great Chicago fire. That was in 1871, and the whole place burned down. ""Could Thailand,'' the economist wondered, ""be Mrs. O'Leary's cow?''
THIS FALL, SOUTH KOREA IMPLODED, REQUIRING THE BIGGEST IMF bailout in history--a $57 billion transfusion; more may be needed. The turmoil was so deeply felt that the South Koreans, in a startling repudiation of their ruling elite, on Dec. 19 elected longtime dissident Kim Dae Jung as their president. Elsewhere this autumn, emerging markets throughout the globe were sent reeling. Even healthy European stock markets buckled momentarily. And Japan, the world's second largest economy, stood on the cusp of a financial disaster for the ages. The yen has plummeted 15 percent against the dollar in 1997; the Nikkei stock index has lost nearly 20 percent of its value. A Japanese banking house and a major securities firm have gone bankrupt. One of Japan's most senior politicians, Kiichi Miyazawa, who is now in charge of putting together an economic rescue package for the ruling Liberal Democratic Party, was asked in early December what urgent steps the country could take to arrest a mounting sense of economic crisis. None really, he replied in an answer that was the verbal equivalent of a little boy's standing ankle deep in gasoline, flicking matches into the wind. Japan, he said, ""will muddle through.''
By MID-DECEMBER, THERE WERE STILL PLENTY OF PEOPLE WHO believed in a Kevlar America. The Asian implosion, they said, mainly meant lower import prices for American Christmas shoppers and, therefore, lower inflation and lower interest rates. Their confidence translated into higher stock prices. Sure, on Oct. 27, the Dow Jones industrial average plunged 554 points on fears that the so-called Asian contagion might actually affect the bulletproof American economy. And there have been other bumps since then; the Dow closed at 7756 on Dec. 19, down 200 points in two days, partly on worries about Japan. But for most of this year, even as the news in Asia got dramatically worse, the American equity market managed to hold its own.
The confidence, it's true, was not irrational. The American economy is extraordinarily healthy. Decades from now, this will rightly be viewed as a golden age. What in 1996 author James Grant called ""Wall Street's vision of heaven on earth'' has, if anything, only gotten better in 1997. U.S. unemployment is at a 25-year low; inflation is practically nonexistent, productivity is surging and growth remains strong.
And for all that--make no mistake--the rest of the world can only say a quiet prayer of thanks. Not since the end of World War II has the world's economic well-being been so linked to the health of the United States. America absorbs 15 percent of the world's exports, and that number is about to go up--perhaps rapidly. Virtually every country in East Asia has seen its currency plunge against the dollar during the past six months. That means made-in-Asia products are going to be much cheaper in the U.S. market relative to American goods. The top executive at one of Tokyo's largest companies may well have been speaking for the entire region when, asked what he wanted for Christmas, he replied: ""A strong U.S. economy.''
After 1997's stunning East Asian economic collapse, there is indeed no other game in town. Europe, after years of stagnation, now at least has an economic pulse rate, but it isn't growing swiftly enough to drag Asia out of its looming depression. South America also has been wounded by East Asia's serial blowouts. It is not much of an exaggeration now to say that there are two things that stand between the world and a vicious, deflationary bust: the International Monetary Fund, acting as the lender of last resort, and the United States of America, acting as the buyer of last resort.
With those two pillars in place, it is reasonable to assume that the world may manage to avoid the worst-case scenario: a Japan-led financial crisis that crushes the U.S. markets and, eventually, its economy. But that possibility was--and to some extent still is--very real. This summer, the ignorance-is-bliss crowd in the United States made two fundamental mistakes: it did not realize how bad things were in East Asia (including Korea) and how integrated into other East Asian economies Japan had become (Thailand is practically a wholly owned subsidiary of Japan Inc.). So Wall Street analysts kept talking about the crisis in ""Southeast Asia,'' and how little countries like Malaysia were, when viewed from the perspective of the mighty United States, really just flyspecks on the world's economic map. In fact, the Southeast Asian collapse only put more pressure on a deeply troubled financial system--Japan's--which in turn had a dramatically negative effect on business confidence in Tokyo.
That's why, for the first time since the summer, Tokyo recently provided some hope that it may, ultimately, come to grips with what's at stake. On Dec. 17 Prime Minister Ryutaro Hashimoto announced a much larger than expected tax cut, after it had been made abundantly clear that Japan's economy was lapsing into a free fall. ""We will never let the world fall into recession because of Japan's actions,'' Hashimoto vowed. At the same time, the government seemed to concede that, as in America's savings and loan debacle, lots of public money would have to be devoted to the financial sector in order to soothe global fears that Japan could yet follow South Korea into oblivion. (Fortuitously, Seoul on the same day announced that it would give up all controls on its currency, a move that led foreign investors to believe the worst there may finally be over.)
But all that still does not mean this story is over for the United States. Its position as the buyer of last resort as well as the world's largest exporter has enormous implications in the current environment--implications that, earlier this month, became clearer both to average investors and to professionals. On Dec. 17, 3M, a bellwether manufacturer, announced that its earnings would be lower than expected. Seems those pesky Southeast Asian flyspecks had swallowed a bunch of them up. Remarkably, Wall Street was shocked.
Expect more of this--probably much more. East Asia is now a crater. It probably will be for at least a year--and maybe more. Big American companies that do business there--think of Boeing, think of Caterpillar--have gone, in just six months' time, from projecting routinely brisk sales increases to extreme damage control. For exports to contribute to U.S. growth, other regions are going to have to take up the slack, yet none is in a position to do so.
Nor is that the only legacy from 1997's historic East Asia crisis. The coming year will see an onslaught of imports into the still vibrantly expanding American market. Do you think General Motors relishes the idea of competing with Toyota and Honda at 130 yen to the dollar? (Two years ago it was 79.) What about Caterpillar against Komatsu? Kodak and Fuji film? There are, as many economists say, real benefits to stiff import competition. Interest rates have already come down--with the Treasury's 30-year bond dipping below 6 percent--because inflationary expectations continue to diminish. Talk of a Federal Reserve rate increase in this environment is likely to vanish quickly. (Any bets that by next June--if not sooner--there'll be much talk about the need for a short-term-rate cut?)
If American managers can still keep their companies' earnings rising rapidly, then they truly deserve the seven- and eight-figure salaries their boards bestow on them. If they do it, stock prices will continue to set records, as optimists predict, and the Kevlar economy, fueled by lower rates, will roll on. God knows it's a pleasant story, heading into the holidays--and that scenario, as the Wall Street types like to say, ""is still out there.''
So too, alas, is the Great East Asian Bust. Only a Grinch would remind anyone of what James Grant wrote at the end of his recent book ""The Trouble With Prosperity'': ""Never before has a boom ended except in crisis.'' Financial watchwords ""for the millennium,'' he called them. Maybe even sooner than that. Happy New Year.
ILLUSTRATION
PHOTO (COLOR): Safe harbor? As the world's biggest exporter, America remains vulnerable to the ripple effects of Asia's fortunes
WORLD AFFAIRS '97
THE LIFE AND TIMES OF THE KEVLAR ECONOMY
If export markets dry up, U.S. investments in emerging markets continue to fall and currency devaluations make imports cheaper than domestic goods, can America really continue to ride through the crisis? Maybe IMF bailouts will stem disaster.
The IMF to the rescue
The International Monetary Fund, concerned about Asia's ability to recover, pledged aid to the region:
CREDIT FOR AILING ECONOMIES IN ASIA
Philippines: Extended a three-year credit of $652 million set to come due; additional credit of $435 million in July
Thailand: In August approved a standby credit of $3.9 billion over a 34-month period
Indonesia: Standby credit of $10 billion over a three-year period approved in November
S. Korea: Approved a $57 billion bailout for this collapsing economy--the biggest in history; more may be needed
America's link to the global economy
The U.S. exported more than $625 billion worth of goods worldwide last year. More than $187 billion went to Asian countries.
U.S. EXPORTS, IN BILLIONS OF U.S. DOLLARS, 1996
Canada $134 Western Europe 141 Eastern Europe 7 Mideast 20 Africa 11 Caribbean 9 South America 35 Central America 8 Mexico 57 Other Western Hemisphere 1 Australia and Oceania 14 Singapore 17 Thailand 7 Japan 68 Hong Kong 14 South Korea 27 China 12 Other Asia 43
Currencies and stock markets
The crisis began last summer, when Asian stock markets plunged and currencies were devalued
PERCENT CHANGE, JULY 4-DEC 19, 1997
CURRENCY
STOCK TO U.S.
MARKET DOLLAR
South Korea -49.0% -65.9%
Indonesia -48.6 -106.0
Thailand -41.0 -56.0
Philippines -32.7 -48.0
Hong Kong -29.8 -0.1
Japan -23.0 -14.0
United States -1.8 n.a.
Germany 3.6 -1.3
Britain 4.9 1.0
Mexico 6.5 -2.1
SOURCES: DEPARTMENT OF COMMERCE, INTERNATIONAL TRADE
ADMINISTRATION; BLOOMBERG; IMF.