Just a few months ago, the 21st century still seemed certain to be the Asian Century -- an era in which Western dominance of the global economy would be surpassed by Asia's mighty industrial engine and burgeoning wealth.
Today, devastated by collapsed currencies and stock markets, their banking systems weakened and their people's confidence deeply shaken, the eve of the 21st century finds the nations of East Asia facing perhaps their greatest challenge of the post-World War II era.
It is a mammoth challenge for the rest of the world as well. With one-third of the planet's population and a similar share of its industrial capacity, the path East Asia follows in its drive to recover its economic health -- or in China's case, to maintain it -- will invariably alter the landscape of the global economy.
Some experts believe that the future of world capitalism itself is at stake.
The temptation to walk away from the tenets of international trade and cooperation, a major global triumph of the 1990s, could become overwhelming -- which would have dramatic implications for every country. Millions of jobs could be at risk; price deflation could ravage many companies, or inflation could resurge; the wide selection of goods now available worldwide could shrink; and the decade's bull stock markets could collapse.
For now, global financial authorities are trying to extinguish the most dangerous fire: the spreading doubts about Asia's banking system, which like all banking systems requires confidence above all else to survive.
When that situation is stabilized, East Asia's focus will turn again to the future. That is when the battle lines will be drawn.
Many Western analysts fear that Japan, South Korea, Malaysia and other states in the region will simply attempt to export their way back to wealth -- a flood-the-market strategy that could raise simmering protectionist sentiments around the world by threatening other nations' jobs.
The Japanese yen has already slumped to nearly 128 per U.S. dollar, the weakest level in five years, guaranteeing new pricing pressures on U.S. companies from ever-cheaper Japanese imports. For Thailand and Indonesia, their pricing advantage over U.S. competitors has ballooned by more than one-third as their currencies have plunged, while their ability to afford U.S. goods has declined by a like amount.
The United States, while resigned to the reality of this new currency disadvantage, has cautioned Japan, in particular, about merely focusing on exporting more.
The U.S. prescription for the region: Abandon the once-celebrated economic model of heavy government-directed investment, which encouraged cronyism and massive corporate borrowing for industrial and real estate projects that had poor profit prospects; open these economies, and let free markets rule via "Darwinian capitalism"; encourage domestic consumption.
If East Asia can change, it can prosper, many analysts insist. "This crisis is a result of delays about reform of finance and markets in the region, but the fundamental reality is that the key factors of global production have shifted to the Pacific countries," said Stephen J. Anderson, visiting professor at Temple University in Tokyo.
"These countries still have enormous potential," said Russell Jones, chief economist at Lehman Bros. Japan Inc.
"It's hard to imagine that once they get through this phase they won't be growing at much faster rates than the [West] can. But they can't operate outside the rules the rest of the world has to play by," he said.
The first sign of stress in East Asia was a marked slowdown in export growth, beginning in 1995. By 1996, Asian countries that once had financing surpluses with the rest of the world began to run deficits.
The recipe for disaster was written by Mexico in 1994: In a small economy, soaring debts coupled with slowing economic growth can send investors and creditors fleeing in fear -- which can then make a currency collapse inevitable.
Thailand surrendered July 2, allowing its currency, the baht, to plummet in value vs. the dollar and Japanese yen. That triggered devaluations throughout the region, in turn collapsing stock and real estate markets and fully exposing the high debt levels that many companies had incurred in the boom years.
The International Monetary Fund, in supplying emergency loans to Thailand and Indonesia to keep their banking systems from melting down, is demanding that the countries close down sick lending institutions and open their economies to greater foreign competition -- the idea being that only free-market forces can rid an economy of inefficiencies and promote new growth.
But will East Asian governments so willingly give up the control they have exerted over their economies since World War II?
At the Asia-Pacific Economic Cooperation summit last week, Mexican President Ernesto Zedillo told his Asian peers that they had little choice. Take the tough medicine that Mexico did in 1995, Zedillo said, and your economies will come back strong.
In the hours after the meeting, leader after leader went to the podium to say they were ready to follow Zedillo's advice. But that was the easy part. Every leader in APEC, including President Clinton, returned home to an audience that is increasingly skeptical of the claim that free trade and open markets lift all boats.
With elections looming in South Korea, Indonesia and the Philippines, governments risk the wrath of angry voters whose purchasing power has been slashed and whose job prospects are dwindling.
In part because of IMF conditions imposed on countries seeking aid, keeping East Asian markets open to foreign competition will become increasingly difficult -- even though many analysts agree that reforming the domestic sector of these economies is paramount for the region in the long run.
Clinton, at the APEC summit, offered a solution for restoring Asia's growth: Japan would spur its domestic economy and become the region's new "locomotive."
But Japan politely declined. "We are certainly not arrogant enough to think that we can take the role of the locomotive for Asia," Prime Minister Ryutaro Hashimoto was quoted as saying.
That leaves the United States, and Europe, as prime targets for a new wave of cheap Asian exports. While imports only account for about 12 percent of the U.S. gross domestic product, and imports from Asia are just one-third of that total, many economists worry that the outcry from U.S. companies and labor unions hurt by cheaper imports will exact a political toll in 1998.
What's more, many U.S. companies may be drawn to move more manufacturing to Asian countries, with the sharp decline in labor costs stemming from the currency devaluations.
Perhaps most worrisome is the potential for political and economic backlash should East Asia discover that there simply may not be a market for much of what it would like to sell, regardless of price.
"The U.S. cannot physically import what Asia needs to export," said Merrill Lynch economist Ronald Bevacqua.
"I think there is hardly a route out of this for many of these countries" that have excess capacity in low-end manufacturing and yet burgeoning populations in need of jobs, said a pessimistic Edward Leamer, economics professor at the University of California at Los Angeles.
"The euphoria of the 1990s is going to turn into [worker] depression and dissatisfaction with the economic system if it doesn't deliver," he said.
But that view implies that global capitalism may have reached its zenith -- an idea many economists reject.
The optimistic view is that, with East Asian reforms that encourage domestic consumption over pure export, more efficient markets and revitalized banking systems, there is no reason why the 21st century shouldn't be the Asian Century after all -- presenting both greater challenge and greater opportunity for the United States.
Pub Date: 12/01/97