LONDON -- "People have panicked out and the headless chickens are ruling the roost," said an investment adviser here after the Hong Kong stock market fell 10 percent on Thursday and other markets around the world dropped in sympathy. Hong Kong recovered 7 percent on Friday, to end with share prices down 25 percent this month, but the phrase "global meltdown" hangs heavy in the air.
Optimists still hope that the turmoil on the exchanges is a little local problem in Southeast Asia. Pessimists think it heralds the end of the long '90s boom. And some fear that this crisis will reveal the whole "global market" to be a lethal device that makes strong economies hostage to weak ones. We will learn the answer in the next few months, but how bad could it get?
There are three possibilities, in ascending order of pain: 1. the damage will stop with the current list of victims in Asia;
2. the panic in the markets will spread around the world, leading to a global crash as bad as that of October 1987;
3. we hit the jackpot, and the crash in the stock market leads to a prolonged depression in the "real" economy worldwide -- "the 1929 scenario."
What is really being tested here is whether the global free market, a phenomenon that has only emerged in the past decade, can really deliver on its promise of prosperity for all. It's an especially important question for all the Third World countries whose economies have started growing very fast in this period.
Changing the world
About 3 billion people, half the world's population, live in countries whose economies have grown at over 6 percent in the past few years. That is more than twice as fast as the average "mature" industrial economy grows, and if it continues for just one generation it will change the world. If it stops, then the grim old calculations about a world divided between a rich minority and a deprived and desperate majority will come back to haunt us.
So which is it to be? The least bad outcome is still pretty bad for the Asian "tiger" economies. Some of them face an ordeal as harsh as Mexico's experience since the emergency devaluation of the peso in December 1994 -- and there are those who would say they deserve it just as much as Mexico did.
Barton Biggs of Morgan Stanley recently summed up the case for the prosecution. "The 'Asian way,' it turns out, has less to do with education, hard work and family values and more to do with pegging your currency, borrowing a lot of money in dollars, plowing it helter-skelter into relatively unproductive capital investment and real-estate projects of dubious merit owned by the elite, corrupting your politicians by involving them in the stock market bubble, and assuming everyone is going to live happily ever after."
What brought the roof down was the relentless rise of the U.S. dollar against the Japanese yen. Asian "tigers" whose currencies were pegged to the dollar (four at the start of this year, though only the Hong Kong dollar remains) were dragged up with it, making their exports more expensive in the industrialized world.
As their exports fell, their economies and stock markets faltered, and it became clear that they would eventually have to devalue their currencies. The speculators gathered, seeking to take advantage of the inevitable, and one by one the dominoes tumbled: the Thai baht, the Indonesian rupiah, the Philippines peso, the Malaysian ringgit, and now the Hong Kong dollar.
Malaysian Prime Minister Mahathir Mohammed, it must be noted, rejects this analysis. First, he blamed the "racial prejudices" of Western speculators who didn't want to see Asians prosper. Then, he tried to fiddle the trading rules on the Malaysian stock exchange, and most recently he has been blaming the Jews: "We are Muslims, and the Jews are not happy to see the Muslims progress. The Jews robbed the Palestinians of everything, but in Malaysia they could not do so, hence they do this, depress the ringgit."
The degree of damage suffered by the Asian economies probably depends on how fast they moved to get their houses in order. The countries that carried out prompt devaluations -- the Philippines, Indonesia, and most recently Taiwan -- may recover quite fast. Thailand, which is still plagued by spectacular corruption and political instability, may suffer the full Mexican experience. And Malaysia, theoretically the least vulnerable, is taking a major beating because of Mr. Mahathir's uncontrollable mouth.
Now it is Hong Kong's turn, and both its options are bad. Either it does not devalue (Beijing's appointed ruler Tung Chee-hwa says the link with the U.S. dollar is "sacrosanct"), in which case it tumbles into recession since all its major competitors in the region have devalued by about 30 percent. Or else it does devalue, and destroys the international confidence that made it so attractive to foreign capital in the past. Either way, the vastly over-inflated property market probably collapses.
So far, so bad, but this is the least bad outcome: much pain in Southeast and East Asia for the next couple of years, but no major damage elsewhere. What about the danger that the collapse in the stock markets of developing Asia could trigger a meltdown in the capital markets of the wider world?
There is no logical reason why this should happen. Hong Kong accounts for only about 1 percent of the value of the world's stock markets, and all the rest of developing Asia's markets for even less. But markets respond psychologically, not logically.
So, a second option is also possible: At any time in the next few weeks, a new panic in the Asian markets could cause a collapse in those of the developed world. But even that need not necessarily cause shrinkage in the real economy: "Black Monday" in 1987 wiped hundreds of billions off the exchanges, but it had virtually no effect on employment or economic growth.
Which leaves the unhappy possibility that a global crash now may have results like 1929, not 1987. Many argue that this cannot happen in today's sophisticated capital markets, but the world's economies, not just its stock markets, are far more tightly linked than they were even a decade ago.
We simply don't know what their collective behavior will be in this situation. A 1930s-style depression seems highly unlikely, but we may be in for a wild ride as we discover how the global market really behaves in a crisis.
Gwynne Dyer is a London-based journalist.
Pub Date: 10/28/97