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Wednesday, July 1, 1998 Published at 13:49 GMT 14:49 UK


Business: The Economy

Meltdown in Asia - part 2: the impact on the world economy

Financial markets have been rattled by the crisis

The slowdown in Asia is having mixed effects on the economies of the West and the developing world - but its influence is not going away.

The benefits include lower prices for Asian goods, due to the drop in the exchange rate, and possibilities for Western companies to buy into some of the formerly closed economic sectors, like heavy industry in Korea and financial services in Japan.


[ image: A grieving investor at a closed bank in Seoul]
A grieving investor at a closed bank in Seoul
But the financial problems of the real economies of Asia are making a real impact on world growth. Europe was on the road to economic recovery; now this may be less robust.

And as a result of the crisis, the Organisation for Economic Co-operation and Development has continually revised downwards its projections for world growth, especially as Japan's economy is now contracting at a rate of 5% per year.


Andrew Walker investigates whether Asia could start a world recession.
Economic growth has not turned negative in the West, but the financial markets have been rattled by the crisis and - especially in the US - stopped rising. Central banks - mindful of the international effects of their actions - have been more reluctant to raise interest rates than they might have been.

In June this year, the US government for the first time intervened on the currency markets and tried to stabilise the yen. This could be seen as a new phase which involves sharing the costs of the crisis with other countries.

The high dollar has helped keep US interest rates low and inflation in check. However, in the long run the exchange rates are hurting Asia - and the world economy - too much, and the US government decided to act.


[ image: The dollar's growth could be blighted]
The dollar's growth could be blighted
The result could be a weakening of the golden scenario of high growth and low inflation that has made the US economy so impressive over the last few years.

The European financial system has more exposure to Asia than the US, and it is also more exposed to the peripheral emerging markets like Russia which are showing signs of the Asian contagion.

Another facet complicates the economic picture: As Europe's new single currency, the euro, looks like it might be another safe haven in a world of currency gyrations, the United Kingdom is may run an even higher risk by staying out of European Monetary Union.

The two-edged sword

Many Asian countries had hoped that they would be able to buy their way out of the crisis, with revenues from exporting natural resources like wood, oil and copper.

At the same time, the devaluations should have made their products more competitive.

In the end, neither hope has come true. The economic bust has led to a drop in demand for commodities and the over-supply in turn has caused a price crash. This dragged yet more countries into the crisis, as exporters of raw materials saw their profits dwindle.

And as most currencies in Asia have plummeted, the competitive advantage of devaluation is disappearing fast.


Meltdown in Asia:
  • the origins of the crisis;
  • the lessons which can be drawn;
  • chronology of the economic crisis.



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  • The Economy Contents

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