In 1993 the World Bank published ‘The East Asian miracle’, a report that aimed to explain why Southeast Asian economies had experienced 25 years’ worth of remarkable economic growth.
Hailed as a landmark study, it was nigh on 400 pages long, commendably exhaustive, and for the most part spectacularly wrong. At its heart was the indisputable fact that these economies had enjoyed annual economic growth rates averaging 5.5 per cent, and as high as 8 per cent between 1965 and 1990.
These rates were more than double and sometimes treble those found elsewhere in Organisation for Economic Co-operation and Development countries. The phenomenon gave rise to the dominant investment theme of the period, the ‘Asian tigers’, and no portfolio was complete without a significant allocation to the region.
Four years later, in 1997, a sequence of currency devaluations laid waste to the economies of Thailand, Indonesia, Hong Kong, Malaysia and South Korea. A basket of Asian currencies fell by between 45 and 80 per cent against the US dollar during the 12 months from July that year, while regional stockmarkets plunged by between 40 and 50 per cent.
Attacks on the Hong Kong/US dollar peg triggered further sharp sell-offs – not just in Asia but around the globe. The Malaysian prime minister, Mahathir Mohamad, resorted to capital controls to limit the depreciation of the ringgit, locking in investors and delivering another major blow to confidence. In all, capital inflows to the region fell by $100bn (£77bn) in the first year of the crisis.
As we can now appreciate, the reality is that the East Asian miracle was nothing of the sort. It was just another financial bubble masking deep fractures in underlying economies. The World Bank and others chose to interpret excess investment as soundly based economic growth. China is the obvious parallel today.
The crisis encapsulates one of investors’ deepest frustrations, which is that our knowledge is always imperfect. However much we think we know, we can never know enough. The taming of the tigers came largely out of the blue and defied informed opinion.
The report pointed to very real successes in Southeast Asia, including rapid and sustained growth, decreasing income inequalities and dynamic industrialisation. None of the obvious macroeconomic warning signs were flashing. The region had manageable fiscal deficits, stable interest rates, moderate inflation rates and, as economist Paul Krugman noted at the time, no irresponsible creation of credit or monetary expansion.
So where did it all go wrong? Even now there is no settled consensus. Explanations include the breakdown of political governance, reliance on foreign capital, crony capitalism, International Monetary Fund interference, precipitous liberalisation and moral hazard.
The debate will no doubt rumble on, but a point that seems especially interesting now is that the episode can be located within a period of frequent and perhaps systemic crises. It may be that where we see a series of discrete crises, starting in 1987 and leading up to the present, future economic historians might discern a unity that is obscured to us; and in doing so they might divine a truer assessment of the causes of, and solutions to, chronic financial instability.
