Commentary: Western Devils Aren't The Problem In East Asia

East Asia's leaders hardly knew what hit them. Early last year, the region's Tiger economies were cruising along as they had for a decade, the envy of the world. The end of the party was shockingly swift. In the past two months, currencies from the Malaysian ringgit to the Indonesian rupiah have been pummeled. Thailand, a World Bank darling just four years ago, is now at the mercy of the International Monetary Fund. In South Korea, the huge Kia Group and four other chaebol have collapsed under mountains of bad debt.

But even as the economic damage spreads across the region, Asian leaders still seem to be in denial, unable to admit that anything is fundamentally flawed in the old strategies that brought go-go growth. When Asian economies started sputtering last year, the slowdown was first blamed on cyclical blips in overseas export markets. When currencies came under attack, Asian central bankers pointed to speculators. Even today, Malaysian Prime Minister Mahathir Mohamad claims, absurdly, that Southeast Asia would be humming along fine were it not for a politically motivated Western "conspiracy."

ASLEEP AT THE SWITCH. Currency traders may be greedy and insensitive to the plight of a developing nation. But pinning the blame for East Asia's financial mess on George Soros is cheap political cover for the mistakes of its leaders. The hard truth is that speculators recognized that many East Asian economies were locked on a course that was unsustainable. Asian policymakers should have awakened to the danger signals long ago. Despite their nations' yawning current account deficits and heavy dependence on exports, many Asian countries refused to let their currencies adjust to the yen's 40% decline against the dollar since 1995. And despite persistently poor corporate earnings and an alarming rise in bad debts, leaders continued to let their banks subsidize ill-conceived, reckless investments in property developments and industrial complexes of powerful business interests and corrupt cronies.

Now, policymakers are in a serious bind. Banking systems, especially in Thailand and South Korea, don't have the funds to bail everyone out. And throughout the region, there is a glut of capacity in everything from automobiles to chemicals. The heat is only getting more intense as China continues to come on strong. Having already displaced many of its neighbors in garments, toys, and watches, China is a rising power in such sectors as consumer appliances, auto parts, and telecommunications equipment. While its neighbors' exports were flat, China's soared by 26% in the first half of 1996. And that happened despite capacity utilization averaging just 60%.

How can Asia's Tigers get out of this jam? Bailouts won't be a cure unless accompanied by a restructuring of the region's industrial and financial landscape, however painful. Thanks to the currency meltdown, the first stage of a shakeout is under way. Thailand has begun shelving plans for new chemical plants. In Malaysia and Indonesia, investors are halting steel and paper mills.

THINK BIG. A real cleanup will require mergers in everything from cars and telecoms to banks. And longer term, regionwide consolidation is needed. In Southeast Asia, few producers of chemicals, electronics, and aircraft, to name a few sectors, can compete outside their own protected markets. However, if they had access to all of Southeast Asia's 500 million consumers, companies efficient enough to compete globally should emerge. That's one concept behind the asean Free Trade Area pact to cut tariffs on most goods traded within the region to near zero by 2000. Several countries are backsliding to shelter their steel, chemical, and telecom industries. This free-trade agenda needs to stay on track.

But revamping industry will be wrenchingly difficult for East Asia's politicians. In the fledgling democracies of South Korea and Thailand, they must somehow face down powerful tycoons who fund their political empires. Elsewhere, autocrats who have based their legitimacy on perpetually high growth have to let go of white-elephant projects. For public consumption, leaders still will try to blame foreigners. But as they do, they also should start preparing their citizens for tougher times.