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Tuesday, 31 March, 1998, 17:57 GMT 18:57 UK
The downward spiral of the Asian tigers

BBC Economics correspondent James Morgan explains the fundamental flaws in the East Asian economies which led the entire region into turmoil.

The crisis started on July 2 last year when Thailand ceased to peg its currency, the baht, at a rate of 25 to the US dollar. The maintenance of such pegs was widespread in much of East Asia, and so too were the problems that went with such a system.

The general difficulty was that over the years the residents of Thailand or Indonesia had found it advantageous to borrow US dollars rather than their own currency. This was because the dollar interest rates were lower than those of the baht or the rupiah.

The Thai baht
Banks in the region led the way

Financial institutions found they could make money out of borrowing cheap dollars and then converting them into local currency. So banks in Japan, Europe and North America became major creditors of institutions in Thailand, South Korea and Indonesia.

These are the three that are now subject to rescue programmes led by the International Monetary Fund. But even those countries that were not in quite the same position as those three have faced enormous difficulties.

Contagion sets in

In Malaysia, for example, there was not the same level of foreign borrowing but there had been enormous lending to the property sector. The government had built huge, apparently prestige projects, such as the Petronas Towers in Kuala Lumpar, which were, briefly, the tallest buildings in the world.

Suddenly the markets took fright. There was a general problem of over-lending, over-investment and in some cases over-production.

Each country had its own peculiar characteristics

A demoralised South Korean trader in Seoul
In South Korea, it was not the property sector that undermined stability, but manufacturing. The huge industrial conglomerates, known as chaebols, had invested without regard for profit. The 49 biggest, with output worth hundreds of billions of dollars, are estimated by the investment house Goldmann Sachs to have earned profits of only $65m in the last financial year.

These chaebol reflected the vices associated with what has become known as "Asian Values". They operated in a close network consisting of themselves the government and the bureaucracy, receiving cheap loans and offering gifts, bribes and rapid growth in return. This was built on borrowed money.

In Indonesia it was the friends and the family of the nation's leader, President Suharto, who seemed to be the beneficiaries.

Investors took fright

As long as things seemed to be going well these fundamental flaws in local systems of governance were overlooked.

This was partly because they did not know what was going on in the opaque political processes that governed economic development. They knew that these countries were pursuing their individual policies and that even in regional economic groupings such as the Association of South-east Asian Nations (ASEAN), there was no coordination of economic policy.

Finally they took note of the colossal foreign debts that had been built up in some countries.

Hong Kong
Hong Kong managed to keep its peg to the dollar
The contagion spread because even better-run territories, such as Singapore, Taiwan and Hong Kong, saw the currencies of the competitors and customers declining. They could not compete in such circumstances.

Hong Kong alone has kept its dollar peg but has paid a price also in terms of rising interest rates and a collapse of share prices.

Mixed feelings about IMF help

The IMF-led programmes have so far brought together well over $100bn to help the three countries. But even the promise of such huge sums has not been enough to halt the downward spiral.

In the case of South Korea international banks took action over Christmas and the New Year to roll over huge amounts of debt.

The IMF itself has been the subject of much abuse because of its policy of imposing the same programme regardless of circumstances and in some cases making the situation worse.

Links to more Asian economic crises stories are at the foot of the page.

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Links to more Asian economic crises stories

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