Will America’s Pain be China’s Gain?

NEW YORK– In their efforts to pass a bailout plan for America’s financial system, Bush administration officials invoked the specter of the Great Depression of the 1930’s. But, for most Asians, economic Armageddon is far more recent.

The Asian financial crisis of a decade ago brought banks, corporations and governments to their knees. The bonfire was sparked by the collapse of the Thai baht in the summer of 1997. Contagion soon spread across East Asia, with the ripple effects of serial currency devaluations reaching as far as Russia and Brazil. The long-running “economic miracles” of South Korea and Hong Kong ended, as did surging growth in Indonesia and Thailand.

The central lesson taken from that crisis was to maintain large foreign-exchange reserves. This became a virtual article of faith among East Asian governments. Back in the 1990’s, Asia’s fast-growing economies maintained small reserves, despite booming exports and foreign investment. Once the tailspin began in 1997, governments’ lack of reserves hampered their ability to rescue failed banks, forcing them to appeal to international institutions for relief.

But the International Monetary Fund’s bailout came with strings attached, including demands for more of the rapid capital market liberalization that induced the crisis in the first place. Indeed, what the West calls the “Asian financial crisis” is known in Asia as the “IMF crisis.” The political humiliation and economic frustration of dealing with IMF imperatives confirmed the central importance of maintaining large reserves, as an issue not just of currency stability, but also economic sovereignty.