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The following article appeared in Left Business Observer #81, January 1998. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.

Asia melts

Just three years after Mexico's disaster, the world is seeing the second great global financial crisis of the 1990s. Mexico was "saved" thanks to a $50 billion bailout and an imposed depression. If the authorities get their way, Asia's crisis will be treated with similar medicine in dramatically larger doses.

Bigtime punters like George Soros didn't create the crisis, but to say that isn't to get foreign capital off the hook. On the contrary, it was the combination of foreign capital and domestic weaknesses that brought about the cataclysm. Since the U.S. press is all too busy listing the local Asian weaknesses -- corruption, cronyism, etc. -- let's look first at the role of foreign capital flows in what might be the final act of the Asian "miracle."

As the nearby chart shows, total capital flows to the so-called developing countries (which exclude the former socialist world, officially "countries in transition") soared in the run-up to the debt crisis. When that melodrama broke out in 1982, capital flows dried up as old loans were restructured and new loans were issued mainly to keep old ones afloat. But as the 1980s debt crisis faded from memory, capital flows more than quadrupled between 1988 and 1996. The falloff in 1997 represents the overture to the Asian crisis.

The composition of those flows also changed enormously over the last two decades. Between 1978 and 1982, nearly half of the flows came from commercial banks and official lenders like the World Bank. Direct investment (foreign investors' purchase of existing firms or plants or the creation of new ones) and portfolio investment (foreigners' purchase of financial assets like stocks) accounted for under 10% of the flow. During the crisis years, official lenders' share increased to 39%, as commercial banks withdrew. But with the "resolution" of the crisis, bank and official finance shrank to just 10% of the total, and direct and portfolio investment increased to 46%. Some "developing" countries found a welcome on global bond markets, which contributed 40% of the total. In other words, the financial markets, which move at lightning speed, replaced the slowe