The economic crisis in Asia grows worse by the day, in a week that has seen stocks and currencies collapse in Indonesia, Thailand, Malaysia and South Korea. Unemployment, deserted shops, reeling banks, social unrest and preparations to send home millions of economic migrants are just some of the traumatic evidence. Suddenly the rest of the world is becoming aware of the possible global consequences of these events, and raising searching questions about how the crisis has been handled by the International Monetary Fund (IMF). It is certainly true that the remedies proposed and implemented by the IMF have not had the desired effect of restructuring the affected economies and enabling them to recover from the indebtedness and collapse of confidence afflicting them in recent months. Instead, they have spun into recession, threatening long-term deflation. Critics point out with justification that the techniques adopted may well be inappropriate for economies such as these, and that the IMF has simply applied crisis measures used elsewhere, such as higher interest rates, cuts in expenditure, and restructuring of public services. As Jeffrey Sachs of Harvard University has put it, "the Fund turned a dangerous situation into a calamitous situation by very publicly and ostentatiously closing banks, raising interest rates, tightening credit". As a result currencies have gone into free fall and many basically healthy industries may go to the wall because of escalating indebtedness.
Alternatives are still available. These would involve a much more co-ordinated macroeconomic policy, pushing capital into the economies to prevent deflation. Only then, would policies designed to restructure the economies, make them more transparent and open them up to freer trade, be introduced. Such an approach could only be co-ordinated through the Group of Seven industrialised states in co-operation with regional bodies such as APEC and ASEAN. It would put a much greater onus on the United States and Japan to extend credit and support in order to prevent a spiralling regional collapse which would be bound to spread to China.
If such a deflation was to happen on a long-term basis there would undoubtedly be worldwide consequences. We have already seen how the Asian currency crisis has driven up the dollar and sterling and the effect of that on European currencies, notably the Irish pound, as the glide path to economic and monetary union is entered into. European growth rates are also likely to be affected, changing the economic context within which EMU is introduced. Alarmist talk comparing these circumstances to the 1930s is illjudged and premature, but it does underline how serious are the issues at stake. These include the need to create a new set of institutions capable of handling such a crisis more effectively than the IMF has been able to do. Private banks - which extended credit to these economies up to the last minute - stand to see their funds guaranteed, irrespective of their grave misjudgements. There is indeed a case for a new set of lending institutions, as has been advocated by the international financier, Mr George Soros, to cater for the fallout from this gathering crisis.