Fresh cracks show Asia has failed to learn lessons
While region is more resilient now, its leaders should swap hubris for action to avert problems
It's time to set our clocks back in Asia. Not to 1997, as many are recommending, but to 1994. Memories of the former year remain raw. Currencies had gone into freefall and current-account deficits exploded. Central bankers and International Monetary Fund officials scurried to contain the chaos. It's true that another 1997-like crisis is highly unlikely. Today, exchange rates are more flexible, foreign-currency debt is lower, banks are healthier, countries are sitting on trillions of dollars of reserves, and economies are far more transparent. The differences between 1997 and today trump the similarities.
The same can't be said of 1994, the year the United States Federal Reserve last reminded the world that its monetary policy is decided in Washington, not Bangkok, Jakarta or Seoul. Then-Fed chairman Alan Greenspan doubled benchmark interest rates over 12 months, causing hundreds of billions of dollars in bond-market losses and helping set the Asian financial crisis in motion.
Asia's real problem was hubris. All that hot money coursing in its direction in the 1990s made rapid growth too easy. Policymakers were too busy signing foreign-direct investment deals, attending ribbon-cutting ceremonies for factories and flashy skyscrapers, and congratulating themselves for surging stocks to do their real jobs.
A different kind of smugness has afflicted Asia in recent years. After the 2008 global crash, regional governments started believing their own press. They were convinced they had decoupled from the West. Bankers were abandoning New York and London for Hong Kong and Singapore. Asian debt had become a safe haven from turmoil in Europe. And, as China's 1.3 billion people grew richer, the good times would keep rolling on.
Asia has indeed come a long way since 1997. But rapid growth and its unquestioned success in surviving the global meltdown has revived a hubris that policymakers need to own and analyse. The price of this cockiness is mounting as currencies in Indonesia, Thailand and elsewhere suddenly seem toxic to investors. India is in chaos at a time when China's growth trajectory is more uncertain than it has been in 15 years.
Examples of complacency are all too easy to find. In Indonesia, President Dr Susilo Bambang Yudhoyono seems to have forgotten that political stability only goes so far if corruption and inefficiency remain rampant. In Thailand, Prime Minister Yingluck Shinawatra has been too busy tweaking the constitution to notice a potentially disastrous bubble in household debt.
In the Philippines, President Benigno Aquino forgot that 7.8 per cent growth only matters if you create lots of jobs. In Malaysia, Prime Minister Najib Razak has been too focused on trying to shore up his political position to tend to a current account swinging towards deficit.
Then there is India, which has been acting as though its rise to superpower status was inevitable. Reforms have stalled, while unaffordable government handouts have proliferated. And with an election due in nine months, no one expects that the required hard decisions will be taken.
Things are far from hopeless for Asia. Among the reasons 2013 is not 1997 is Japan. Then, Japan's shaky banking system held about US$100 billion worth of loans to the five Asian economies hardest hit in 1997. When Japanese bankers pulled the plug, the crisis reached a fever pitch. Today, the government is shoring up the economy and the central bank stands ready to add new liquidity as the Fed's tapering begins.
Chinese leaders are also likely to pull out all the stops to keep growth above 7 per cent. Yet as markets crack anew, Asia should remember the years it squandered between 1994 and 1997. There are all too many similarities to the last few years, a period during which Asia should have been reducing vulnerabilities - not basking in its headlines.