Will the Asian Contagion Infect Wall Street?
August 3, 1998
The economic crisis engulfing East Asia is starting to infect parts of the rest of the world. And according to CBN News reporter David Snyder, the United States is only beginning to feel the effects of the crisis.
David Snyder, reporter
Economists call it the "Asian contagion."
It's the spreading catastrophe that ravages national economies, consuming banking systems, toppling governments, and throwing millions out of work. And like some Hollywood monster that can't be stopped, the Asian economic crisis is relentlessly spreading around the world.
It all goes back to July 2, 1997, when Thailand's currency collapsed. From there, it spread, and by the fall, stock markets throughout the region collapsed. And as the markets collapsed, so did economies. The crisis brought an end to the long period of growth for the so-called "Asian tigers."
And the crisis exposed bad bank loans, faulty real estate speculation, and political corruption that had rotted the economic structures of countries like Thailand, Indonesia, Singapore, Malaysia, and South Korea.
"So while the rest of the economy was robust and sophisticated, the banking systems were very backwards, characterized by all kinds of bad lending practices and weak provincial supervision on the part of the government authorities," says Marcus Noland of the Institute for International Economics.
The economic mayhem toppled almost every government in the region, including the most stable democracy, Japan, which had already suffered through economic weakness since 1990. Now analysts say Japan, the world's second largest economy, is one of the keys to rebuilding the region.
"We've got a chance to turn that situation in Asia around before it gets any worse," said President Clinton. "America needs a strong, growing, stable economy in Asia."
But Japan has its own problems. Instead of getting better, its economy is getting worse. It's now officially in recession.
"Very likely the Japanese stock prices will weaken, which will attract a huge flow of foreign money into Japan, which Japan so desperately needs," says Merrill Lynch's Michael Rosenberg. "And that will begin to be the rebuilding process."
If new Prime Minister Keizo Obuchi can really implement dramatic reform measures, particularly to clean up bad debts and strengthen the yen, the land of the rising sun might herald a new dawn for the Asian tigers. But if things keep going wrong for Japan, it may hinder any recovery in Asia.
"As the Japanese economy slows down, there is a lot of concern among economists that this is going to have a second-round contagion effect throughout Asia, because Japan has been a very important source of liquidity -- of capital -- for the banking sectors," says Exton.
Another key nation is China. Despite continued economic growth, the Communist government might have to devalue its currency in order to compete with its neighbors.
"If China were to devalue its currency, that would send the rest of the region into turmoil, and there would be a wave of what we call competitive devaluations," says Noland. "There could essentially be a second round of the crisis."
Competitive devaluations would mean that different Asian countries would cut the prices of their exports, starting a price war of cheaper and cheaper products. As if the economic crisis weren't serious enough, there are also potentially dangerous military implications.
Indonesia, for instance, is so concerned with internal turmoil that the flow of oil through its waters has been jeopardized.
"As the attention of the army has been diverted to other matters, and as people have become more desperate, pirates have seized ships in the Indonesian Straits," says Noland. "They will seize a ship, repaint it at sea, and then sail it into some other harbor somewhere and offload the cargo."
While experts say America is just too economically stable to completely drown in the same whirlpool of financial turmoil that engulfed East Asia, the implications are mixed for American consumers.
A glut of imports has translated into lower prices, which in turn reduced the inflation pressures in America's booming economy. And those Asian investors who are still liquid look at the U.S. as a safe haven to protect their interests.
But certain sectors of the American economy have suffered. Timber companies, electronics manufacturers, airplane builders, and grain farmers have had to close American factories and lay off thousands of workers.
For some, however, the turmoil offers unique opportunities. To recover, analysts say the nations of East Asia must institute economic reforms and end corruption. That includes open markets for American investors to invest in countries previously closed to foreigners.
And the social chaos has opened up a different kind of opportunity for others. For Christian missionaries, the turmoil means more openness to hearing the gospel.
The tedious task of repairing the economies of Indonesia and other countries will take some time. While there are no easy solutions, many believe there is the potential for a financial phoenix to eventually rise from the ashes of what used to be known as the "tigers" of East Asia.
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