Delanceyplace.com 7/29/09 - The Asian Financial Crisis

In today's excerpt - the 1997 Asian financial crisis, which a number of economists view as the direct antecedent to our current financial crisis:

"In the 1990s, Asia was 'hot': observers were smitten with the Asian 'miracle'. Exactly why was puzzling."The Asian economics grew rapidly in the 1990s. Much of this growth was unsustainable. Analysts were impressed by the high savings rates. Political instability and the lack of a social welfare system forced people to squirrel away money (especially in Swiss bank accounts). Analysts focused sagaciously on the growth prospects and high returns for investors. Asian labour costs were low and there were no employment laws. Abundant natural resources were free to be exploited without environmental safeguards. Unexploited domestic markets excited foreign businesses.

"There were, of course, 'problems'. The sudden increase in the rate of growth and demand set off rapid price rises. The office space in Mumbai's Narriman Point business district was among the most expensive in the world, a matter of national pride. Productivity was pitiful. The phones and plumbing did not work. The traffic was horrendous.

"Some experts even claimed to know the rules of the game. ... [One such local 'expert' explained] 'There are distinct phases in investment madness in emerging markets. Phase one is growth. You get a lot of foreign investment. It is mainly relocation of production facilities. Cheap [local] people to do dirty jobs for nothing. You dig up, cut down everything you can. The locals deregulate everything because the World Bank tells them it will attract foreign investment. Government-owned businesses are sold cheaply to the favoured sons and their foreign cronies. Government controls are relaxed as the foreigners tell the locals that it will create jobs and wealth.' ...

" 'In phase two, living standards improve for the fortunate. For the bulk of people nothing changes, of course. A middle class develops chasing McDonald's and Wal-Mart consumer heaven. Property prices and shares go crazy. More and more money comes in. Local banks lend recklessly. Foreign banks lend recklessly to local banks. The foreign banks think the local banks won't fail because of government support. Investors dive in. They talk about 'growth' and 'portfolio diversification'. People are excited. Prices spiral up as the tidal wave of money pours in.

" 'Phase three. Costs rise to levels that make the economies uncompetitive. They are not cheap any more. Alas, the capitalist caravan must move on. Everything is over priced. Politicians talk bravely about the 'need to move up the value chain'. They launch ambitious initiatives - the world's tallest building, the world's longest building, a new port in a country which has no sea access, bridges over rivers between two cities that do not exist, entire new cities! Locals bristle at any criticism. Everybody tries to shake off the opprobrium of being an emerging market nation. Talk of new paradigms becomes popular - 'the Asian century', 'Asian values'.

" 'Prices don't make any rational sense. You only buy because you think you can sell it tomorrow to someone else at a higher price. You are caught in an endless spiral of higher and higher prices. Fear and greed rule financial markets. You are afraid that you might miss out. Your greed is endless. Foreigners develop a peculiar hubris. They are bulletproof. Fundamentals of value are irrelevant in this world. ... Then, of course, kaput. It all collapses'. This was in 1995. In 1997, Asia's run as the hottest new 'new thing' ended abruptly.

"Other seers dispensed more worldly investment wisdom. 'If you arrive at a country and discover limousines waiting to transfer foreign investors and their investment bankers to five star hotels, then generally speaking it is time to sell.' "

Satyajit Das, Traders, Guns and Money, Financial Times/Prentice Hall, Copyright 2006 by Satyajit Das, pp. 3-4