Asian leaders' political strength was founded on sound economic stewardship. The summer financial crisis threatens to undermine hard-fought reputations as policy bungles tip the region towards recession. For now, a united front holds with none of the finger-pointing between national governments so common in Europe. Common interest has seen repeated calls for co-operation to beat back the now almost mythical Western speculator intent on damage. Asian nationalism has been invoked with simmering colonial resentment behind the invective. Mainland red-chip firms are quietly playing the card as calls for intervention to arrest the stock market rout grow. But how much of this could have been avoided? For a while Asia looked to have conquered the business cycle. Now, politicians would have us believe that an economic downturn is being grossly exaggerated by foreign speculators. Unlike Japan, Korea and Taiwan, Southeast Asia opened its capital markets and banking systems to foreign influence early on. Playing catch-up and needing huge capital inputs fast, they rapidly developed. Such growth rates could never have been financed by domestic savings. In short, they played the game by the rules of international capital. By breaching the discipline they are getting just desserts, runs the unemotional retort of foreign investors. If you didn't want our money, why let us in typifies reaction to Malaysian xenophobia. Economic slowdown was inevitable. The 1995 collapse of semi-conductor prices was the trigger. Inflexible exchange rates and loose fiscal policy, typified by grand projects, made it worse. Protected banking systems allowed awful lending decisions to go unchecked. When the risk premium demanded by investors rose, governments decided it was all a bad dream. Thailand grimly supported the baht, spending its foreign exchange reserves in the process. The imposition of capital controls means investors are unlikely to return for years. When they do they will charge far more. Malaysia's reaction has almost defied belief, considering its exposure to foreign capital withdrawal is far less. National hubris meant that policy prescriptions by the International Monetary Fund were ignored. And yet Southeast Asian politicians have long experience in battling international investors. Bank Negara was a formidable speculator in global foreign exchange markets during the early 1990s. Officials should know the dynamics of currency speculation, what triggers panic and how to react. Instead they have played their hands with spectacular ineptness. The Philippines offers a telling insight. At the height of the currency selling in early August the government launched a US$1 billion note with payment linked to the peso spot rate and three-month treasury-bill rates. Returns rose with a strengthening peso and higher interest rates. Who would buy the note? Generously inclined foreign investors confident the government would survive the crisis with a stronger currency. Not quite. In fact it offered the perfect hedge for speculators shorting the peso in hope of a plunge. In effect the Philippines sold call options on its own currency, allowing hedge funds to off-set risk more cheaply than any of them could possibly have imagined. When you are waging war it does not take a great strategist to figure that giving the enemy a cache of ammunition is inappropriate. Similarly, threatening to close markets, prop up prices and arrest speculators creates a one-way bet. Unchecked, the exodus of money threatens to break already exposed banking systems. The policy response of Asian leaders has undermined claims of superior economic management. Autocratic rule has been justified in the name of economic efficiency. Could a little more accountability have prevented many of the mistakes that threaten to undo such hard work by so many?
