Asian tigers lose their way in the jungle

The Pacific Rim economies have been a model of excellence for the West but plunging currencies and political instability are now threatening the miracle

A fortnight ago the leaders of East Asia's tiger economies gathered in Kuala Lumpur to celebrate their togetherness. They behaved as though all was for the best in the best of all possible worlds. As though the world's currency markets were a merely a minor irritation.

The occasion was the 30th anniversary of Asean, the Association of South- East Asian Nations, whose members, together with South Korea, Taiwan and China constitute the standard bearers of what, it is confidently predicted, will be the "Pacific century". For a week, at a hotel resort outside Kuala Lumpur, they talked, played golf and patted themselves on the back. It was an unconvincing, cant-laden and faintly desperate spectacle, for East Asia's economic miracle appears to be over not long after it began. The tiger economies are starting to look rather mangy.

On 2 July, after a defence of its currency costing billions of dollars in foreign reserves, the Bank of Thailand threw in the towel and let the baht float on the foreign exchange markets. Since then its value has plunged: Thai money is worth about one-fifth less than it was two months ago. Government spending plans must now be reassessed, and companies that generate an income in the puny baht, but pay off loans in dollars, are threatened with ruin. Last week, the International Mon- etary Fund (IMF) and Japan led a group of Asian countries in promising $16bn (pounds 11.2bn) to bail out Thailand.

There was nothing altruistic about their generosity. Like a summer 'flu bug in an air-conditioned office, the Thai financial crisis has passed from one tiger economy to the next. First the currency speculators forced the Filipino peso to float downwards. Last week the Indonesian rupiah fell to an all-time low after the central bank gave up trying to keep it stable. Even the Malaysian ringgit and the robust Singapore dollar were weaker than they have been for years. The governments assembled in Kuala Lumpur were looking distinctly cowed in the face of the worst financial crisis since the 1994 collapse of the Mexican peso.

IN THAT same year, the Malaysian prime minister, Mahathir Mohamad, said: "The West would do well to learn from the success of east Asia and to some extent 'Easternise'. It should accept our values, not the other way round." His sentiment has been echoed by a generation of leaders in the West. Tony Blair, much impressed by Singapore, wrote: "There really is a new world being built there, and the 'old world' needs to look at its institutions, its economy, and its education system to ensure that it keeps up." But in the last few weeks, the adulation for the "Asian way" has looked increasingly overexcited and misplaced. The turmoil in Thailand has shown there is nothing miraculous about the prosperity of South- East Asia. The normal rules of economics apply; the region's growth over the past 30 years is no guarantee of future prosperity; and breakneck economic growth brings its own risks and susceptibilities.

But the tigers are having none of this: Dr Mahathir, their elder statesman, blamed the turmoil on "rogue speculators ... wanting to destroy weak countries" and called on colleagues to "protect ourselves from self-serving rogues and international brigandage". The truth is that the speculators, among them Dr Mahathir's bete noire, George Soros, are no more than vultures taking opportunistic lumps out of an ailing wildebeest.

Much of the praise directed at East Asia reflects the fact that it has become the fastest-growing region in the world, despite the absence of the natural resources, especially energy, abundant in poorer parts like Africa. Growth in countries such as Thailand is a consequence of high- quality primary education (with an emphasis on literacy), high rates of saving (providing a pool of ready money for investment) and the targeting of key industries. Asia has mobilised rural populations, educated them and achieved in a few decades the degree of industrialisation that took two centuries in Europe.

But this kind of growth has limitations, and they have been analysed trenchantly by the American economics professor Paul Krugman. Given the scale of these "inputs" of skill and capital, Krugman says, it is only natural to see impressive "outputs" in the form of high growth. Poor agrarian nations can be transformed into industrial societies only once, however. After that, economies compete by improving efficiency - and there has been little evidence of that. "Asian growth has so far been mainly a matter of perspiration rather than inspiration," Professor Krugman wrote last week, "of working harder, not smarter. When Asian economies delivered nothing but good news it was possible to convince yourself that the alleged planners knew what they were doing. Now the truth is revealed: they don't have a clue."

Krugman's analysis, attacked when it was published three years ago, has been borne out by events in Thailand which have exposed for the first time how rife mismanagement had become among Bangkok's economic planners. Rather like Japan 10 years ago, expectations of further high growth had fuelled a property boom. This was enthusiastically supported by the banks, which lent freely. When growth turned out to be lower than anticipated, the lenders found many of their loans turning sour. But rather than biting the bullet and letting inefficient banks fail, the Bank of Thailand has squandered $19bn (pounds 13.3bn), one tenth of the nation's GDP, attempting to bail them out. Since Thailand faced up to its troubles and turned to the IMF, 58 of the country's 91 financial service companies have to all intents and purposes gone under.

The IMF's solution involves a regime of measures designed to cool the economy by reducing spending and harnessing inflation. VAT is to be raised and growth - for decades the measure of the tigers' success - must be kept to a maximum of 4 per cent. This raises the prospect of unemployment for the growing numbers of school-leavers. Symbolically, it strikes at the heart of South-East Asian economic machismo.

In the past few years, newly industrialised Asian countries have been drawing attention to themselves with extravagant construction projects: the tallest buildings in the world, the Petronas Twin Towers, will soon open in Kuala Lumpur, and in Jakarta, there are plans for a skyscraper that will eventually surpass them. Such monuments may soon look more like gravestones in a region that has begun to spend more than it saves.

Whether Thailand is able to stomach the IMF's medicine depends to a large extent on political factors because lavish spending, in return for political support, is an integral part of the political culture. Constitutional reform is in the pipeline, but is accompanied by political risks. Thailand is still vulnerable to a military coup (in the past 65 years one has occurred on average once every three years and 10 months).

THE politics of East Asia are about to become turbulent - between rival nations and between governments and their people. Education and improved communications have spawned productive entrepreneurial citizens. They have created aspirations for democratic freedoms to go with the new economic opportunities. In Indonesia, educated, middle-class dissidents are coming into frequent conflict with the authoritarian government of President Suharto. There are simmering ethnic and religious tensions, between Muslims and secularists in Malaysia, for instance, and between Chinese and Malays in Indonesia.

With more to protect and to spend, Asia has begun to arm itself: China is building a navy to challenge the supremacy of the US in the Pacific; Thailand last week unveiled a Spanish aircraft carrier, and Malaysia will soon take delivery of two sophisticated British frigates. But traditions of consensus and non-confrontation have left Asian diplomats poorly equipped to resolve numerous disputes - from China's claim to rich Taiwan, to the tiny Spratly Islands, suspected of containing oil or gas reserves, and contested by no fewer than six governments. In Kuala Lumpur, the sun remained hidden behind a haze of smog all week, a token of the damage caused by Asian governments (the real tigers, by the way, the ones with fur and stripes, are increasingly threatened by hunting and deforestation).

To most Europeans, the affairs of East Asia are too distant to be compelling. There is no doubt that over the next 30 years they will exert an increasing influence over the rest of the world, and that the Far East will move steadily closer to home. But Asia is becoming the most interesting region of the world largely because it is the most unstable, and the Pacific century is as likely to be about the region's political tragedy as its economic triumph.

If Asia's newly industrialised countries avoid armed conflict, if they sustain high growth as their economies mature, and if they develop political systems and diplomatic skills to match their new status - then some of the rhetoric which has been heaped upon them will turn out to be justified. And that would certainly be a miracle.