'Wild Cards' Will Affect How East Asian Crisis Plays Out

A week recently spent in East Asia doesn't qualify this economist as an expert on that region's financial troubles. Yet, some insights can be obtained by seeing for oneself. Warning to readers: Given the volatility of the situation, these observations may be out-of-date by the time of publication.

The dramatic financial effects of the Asian currency "meltdown" may have peaked, but the full impact isn't over. The Korean won and the Thai baht lost more than two-fifths of their value in terms of US dollars during 1997. Indonesia's rupiah suffered an even greater loss - three-fifths - while the Philippine peso declined by one-third.

Those massive devaluations are just the start of the adjustment process. Many industrial companies are likely to go under, or at least "postpone" paying their obligations. An even greater number of firms can be expected to default on existing contracts or cut down their purchases and production. Aggregate domestic effects will range from recession (Thailand) to substantial slowdown (Philippines).

The effects on US business, in general, should be moderate, given the small role of our trade with Southeast Asia. Western Europe is even less oriented to Asian markets. All this, however, is of little solace to investors and businesses with major commitments in the Orient.

There will be losers and winners, especially on this side of the Pacific. US consumers will benefit from lower prices for clothing and other products from that part of the world. US companies with subsidiaries in East Asia should benefit from lower costs (especially in terms of US dollars), as will firms that import components and raw materials. On the other hand, some US producers - as exporters and competitors - will face rougher price competition.

Japan and China are two potential wild cards. International credit rating agencies estimate that 15 to 30 percent of the loans held by China's banks are unrecoverable. With no foreign investors ready to pull out of its financial system, however, Beijing has time to deal with the problem at its own pace. Vice Premier Zhu Rongji, likely to be China's next prime minister, has been quoted as saying that its currency won't be devalued. Should China do so in the months ahead, that could trigger another round of regional devaluations.

Given its economic power, if Japan can take the needed tough financial and budget actions, East Asia could be out of the financial woods fairly soon. There's no guarantee on that score, however. A recent survey reported that a majority of business leaders in Thailand, Korea, Malaysia, Indonesia, Taiwan, and the Philippines believe Japan's situation has a "great" effect on their economy; far fewer expect strong repercussions from the Korean crisis.

Taiwan is an interesting special case that has been receiving little attention. It is a strong economy with huge foreign exchange reserves (about $90 billion) and a steady trade surplus ($10 billion in 1996). And unlike South Korea, Taiwan is not dominated by a few huge conglomerates. Rather, there is a large array of competitive and mainly medium-size companies.

Thus far, Taiwan has been weathering the financial storm better than anyone else in the region. The island's biggest problem is dealing with mainland China. The Taiwanese are tiring of playing along with the notion that they are a "breakaway" province of China that should be treated as a pariah in the councils of nations. Nevertheless, they have not done too badly under this galling restriction.

For all of East Asia, the economic and financial outlook remains worrisome and uncertain. But for Americans with diversified investments, feelings of doom and gloom seem premature.

* Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.