The international response to the Asian financial crisis has become clearer after the collapse of the Japanese securities firm Yamaichi and the prospective bailout of the South Korean economy by the International Monetary Fund. Last night the Asia-Pacific Economic Co-operation summit in Vancouver agreed to support an IMF initiative, while Japan's main partners have piled pressure on its government to guarantee financial institutions, stimulate its economy and be prepared to spread its resources around the region in support of the tiger economies which have so relied on it through their growth path of recent years. Never has a summit meeting been more appropriately timed. By bringing together 18 countries bordering the Pacific ocean just at the moment when the regional financial crisis threatened to go global the APEC meeting has forced their leaders to develop common policies, almost to institutionalise their response. Over the last few days there has been the opportunity to make decisions in full awareness of the interdependence between south-east Asia, South Korea, Japan and the core of the developed capitalist world which stands to suffer profoundly if this crisis is mishandled and the correct policies are not pursued. On foot of the APEC decisions there can be no certainty that these pitfalls have been avoided. Basic national interests are at stake, specifically in South Korea, which present its leaders with what the president, Mr Kim Young Sam, appropriately described as "bone-carving sacrifices". It does not help that he is currently in the middle of an election campaign. His apology for delayed decisions on financial regulation may cut little ice with an electorate shocked by the speed with which the crisis has broken and a strong trade union movement in no mood to accept orthodox IMF medicine likely to be aimed at increasing labour market flexibility and reducing high wage rates. Even assuming such orthodoxy were to prevail the policy of exporting their way out of difficulty will not be easy to sustain in target markets. Devaluation of the won - and of the yen - cuts both ways.
Japan is directly exposed to South Korea's travails as an investor, banker and trader. But Japan is the world's second-strongest economy. Geographically it is close to South Korea, but in most economic respects they are very different. Japan is the largest creditor nation and capital exporter, with one of the highest levels of savings. Its unemployment rate is one of the world's lowest and its rates of productivity among the highest. It should therefore be relatively simple, in theory, for its government to mobilise these resources in support of a financial system afflicted by bad debts and corruption but servicing an economy that is fundamentally sound. The same argument applies to its regional responsibilities. The problem is that this crisis has caught Japan's leadership ill-prepared for the immediate expansionary response required, having staked most of its policy options on medium-term structural reforms. Politically, too, there is a question mark over its government's capacity to decide rapidly on a coherent response to the collapse of such important banking and security firms. If it fails to do so this Asian 'flu could indeed prove infectious. But it may well have been emboldened by the APEC summit to take the necessary decisions in coming days.