The World Economy in Turmoil

When Thailand devalued its currency in July 1997 it started a world financial crisis that continues to spin out of control. After a year of turbulence, what can we say about the crisis?

Beware of experts. Before the crisis, money managers with supposed expertise in Asia saw free-market liberalization, fiscal balances, strong savings and investment rates, solid growth, low inflation, and, most important to them, very positive rates of return. After the crisis they saw only weak and poorly regulated financial systems, corruption, current account deficits and external debts, excess capacity and looming bankruptcies, bursting real estate and other asset bubbles—in short, a system of crony capitalism. (See a fascinating paper by Christopher Rude: “The 1997-98 East Asian Financial Crisis: A New York Market-informed View.” United Nations: Department of Economic and Social Affairs, 1998.

The crisis was more severe than many initially claimed or hoped. The ...