Investor's Business Daily, June 29th, 2007
The Global Economy: Ten years ago, Asia's Miracle became Asia's Meltdown, a financial debacle so crushing that many feared the region wouldn't recover. But it did, by freeing its markets. It remains a beacon for the world.
July 2, 1997 remains a day that most people who follow markets remember vividly. Thailand's baht collapsed overnight, halving the savings of hard-working Thais; a frightening chain reaction followed.
First, it was Malaysia that went down, then the Philippines, followed by Singapore, Korea, Sri Lanka and Pakistan. Then, like a huge cliff weakened by an earthquake, Indonesia gave way in the biggest crash of all.
Riots and turmoil engulfed much of the region, even toppling Indonesia's 33-year dictatorship, and starvation and poverty were reported for the first time in decades.
Malaysians experienced their first water cannons and riot police since the 1960s. Asian kids returned home in tears from American universities, their parents' currency no longer able to afford American tuition.
The Oriental Hotel in Bangkok, the world's fanciest hotel, offered $75 weekend specials. McDonald's came up with a local rice burger because Indonesians could no longer afford Big Macs. Singaporeans talking on cell phones in glistening subways spoke darkly about the future.
Perhaps the worst thing about the region's demise was the damage done to the idea of free markets. Until then, Asia had been a shining example to the developing world of how to escape Third World poverty.
Milton Friedman, in his 1980s television series, "Free To Choose," showed how Asia freed itself from the begging bowl by embracing markets. To do so, it bucked the worst of odds -- the legacy of colonialism, a brutal Japanese occupation, World War II and Vietnam-era turmoil during the Cold War. Despite all that, it prospered.
In just one generation, the Pacific Rim showed that poverty was no life sentence for those who embraced markets, and that capitalism, not communism, was the wave of the future. The openings by communist China and Vietnam to the rest of the world were in large part driven by an effort to replicate the success of their Asian neighbors.
Conventional thinkers blamed capitalism for the currency trouble. But the ensuing 10 years showed that big government intervention, and the IMF bailouts that followed, were where the problem really started.
More to the point, the meddling of Asian strongmen in their countries' economies was what eventually proved to be the real cause of the region's trouble -- not the capitalism they had permitted into their economies.
Back then, it was not uncommon to have "state-directed development" and other such "guidance," from Seoul to Jakarta. Massive government spending and distrust of markets were behind many of the interventions that led to the currency collapses -- not the trading and investment activity of those who were acting in their own interest.
That understanding eventually hit Asia's nonideological strongmen, and today Asia is a very different place. None of the countries in the region has a perfect democracy, but all have shown significant progress in empowering their own people and opening up to others.
Korea has ended the power of the Chaebol oligarchs. Japan has cleaned up its bank crisis. Malaysia has dropped its capital controls, and the Thai baht has nearly recovered its 1997 value. When Thailand backslid into capital controls earlier this year, it quickly realized its mistake -- and returned to the straight and narrow of market capitalism.
Regional exports are up, but better yet so is Asian consumption. With that has come demand for greater democratic freedoms. Governments are far less afraid of speculation, investment or higher currency values derived from exports and more willing to let markets work.
In virtually every country of the region, the IMF has been paid off and sent packing.
Asia's crisis was an object lesson in the value of free markets and capitalism. The less the states made their presence felt, the better. That lesson remains valid for the rest of the world too, proving that Asia continues to lead.
