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1997 In Review: Economic Globalization And Market Volatility Affect Millions

Prague, 9 December 1997 (RFE/RL) -- The year 1997 will be remembered as one in which globalization of the economy ceased to be an abstract theory and took on concrete form, visibly affecting the lives of millions of people.

Two main developments shaped the year in this context: namely the collapse of the East Asian Tiger economies, starting in summer, and the equally stunning wave of volatility which hit the world stock markets in the autumn.

The Asian Tigers were for years regarded as modern miracles of economic growth, and their sudden fall like a row of dominoes has touched off a chain of events which is still in motion.

The problem, in brief, was that vast sums of outside investment money had been flowing for years into East Asia. But this year, when investors saw local current account deficits growing, and currency exchange rates becoming uncompetitive, they moved in increasing numbers to retrieve their money. Local banks, which had loaned out much of the investment money on unwise projects, began to suffer severe liquidity problems. So the spiral began.

The trouble spread rapidly from Thailand to Malaysia, the Philippines and Indonesia. Currencies and local stock markets lost up to half their value, joblessness rose, the consumer spending boom ended abruptly. Korea, one of the dozen biggest economies in the world, was caught up in the contagion and had to arrange a multi-thousand million dollar financial assistance package from the International Monetary Fund. Japan, the world's second-ranking economic power, suffered the collapse of several finance houses, and is still struggling with an opaque, unreformed banking and finance sector.

At a particular moment, when the Hong Kong dollar came under pressure, panic spread to the world markets. A wave of selling began which wiped thousands of millions of dollars in value off the markets, starting on October 27 with the New York Stock Exchange on Wall Street, then spreading at fever pace to bourses as far flung as Tallinn, Sydney, Moscow and Johannesburg.

Judged on strict economic criteria, there was no rational reason for the global "meltdown", as it is sometimes called. But it was another textbook illustration of how the global economy is growing increasingly interlinked, how a crisis which started with unwise property investments in Thailand can have a direct impact on the lives of small, family investors in say, the Baltics or Hungary.

The good news is that once the short spasm of nerves was passed, the markets began to recover in almost every case. In particular Wall Street has bounced back as the huge U.S. economy has continued to grow in strength and vitality.

As a result, fears have lessened that the Asian troubles will have a domino-effect on the rest of the world, causing global recession. Experts say they expect international growth rates to be dampened by the Asian Crisis, but not curtailed. But the potential for serious trouble still exists. One danger is that if the situation in Japan worsens in the new year, the Japanese banks might start selling their massive holdings of U.S. bonds, thereby throwing the American market into turmoil.

Another consequence of the crisis is that Asian products have gained immensely in price competitiveness through the fall of local currencies. Coupled with the determination of the former Tigers to export their way out of present difficulties, this means there will be intense downward pressure on prices of a vast array of manufactured goods. This in turn could lead to a wave of international deflation, meaning a general downward slide of prices, which would squeezes company profits and could seriously strangle growth.

What does all this mean for the transition economies of Europe? A major lesson, according to Frankfurt-based analyst Peter Cornelius of the Deutsche Bank, is that the Central and East European countries must stick firmly to the path of reform and restructuring. He said the progress made by countries like Estonia, Poland and Hungary show that proper reform efforts are rewarded by the financial markets. But he said it's now abundantly clear that the market is able to punish countries which do not pursue credible reforms. This was a reference to the structural weaknesses exposed in the Asian countries, which are now seen to have ignored sound economic practice in favor of what's being labeled as "crony capitalism".

An important economic panel, the UN Economic Commission For Europe (ECE), has forecast average economic growth over the former-Soviet transition region in the new year as just over 3 per cent. The Baltics are seen as most likely to have the top growth rates in the region.

However, the ECE cautions that the fragile markets in the post-Soviet countries remain very vulnerable to disturbance because of their growing current account and trade deficits, and their weak institutional structures, including banks.

But the ECE report also foresees solid growth for much of the Caucasus area, including Georgia and Armenia, and somewhat less for Azerbaijan. It says that among the lowest performers in 1998 will probably be Ukraine, but at least that country may record some positive growth after sustained contraction of its economy.

On Russia, the ECE says expectations that growth would resume in 1997 failed to materialize, and that the outlook for sustained recovery there is still uncertain. Russia was hard hit by the market turmoil which started in Asia, and many investors, worried about the weakening ruble, fled, taking thousands of millions of dollars in foreign investments with them. Another factor adding to the uncertainty was the weakening of the influence of Anatoly Chubais, the key figure in the privatization process, who was involved in a publishing scandal.