(Updated: January 1999)

It's been less than three years since economic forecasters were proclaiming the coming of a "New Asian Century," an appellation intended to convey remarkable economic strength. Instead, many Asian economies are now in trouble and face long, painful reconstruction. What caused this reversal?

By 1996, several countries – using Japan's model of high savings, close cooperation of government and business, and export-oriented growth – had transformed themselves from poor states to industrial giants. Double-digit expansion was not uncommon in places like Thailand, South Korea, Malaysia, Indonesia, China and Hong Kong.

But while the model was efficient at catching the West, it also spawned corruption and speculation in several countries. With governments protecting major industries and providing financial guarantees, businesses were free to gamble, ignore market signals and invest in projects that often had little relevance to profits.

The worst problems came from real estate speculation. Japan's Finance Ministry announced in 1998 that Japanese banks held more than $575 billion in bad loans – much of that stemming from real estate investments made in the 1980s. Sixteen banks in Indonesia, 14 merchant banks in South Korea, and 56 finance companies in Thailand had their operations suspended as of January 1998 due to bad debts.

Many Asian governments also pushed investment toward specific, targeted industries, decisions that often poured money into non-profitable sectors. In South Korea, companies borrowed huge sums and began amassing large debt to finance projects in such mature industries as electronics and steel. When those sectors turned sour, a wave of corporate failures resulted, including the high-profile bankruptcy in January 1997 of the giant conglomerate Hanbo, which had $6 billion in debt.

In July 1997, the problems continued as Thailand let its currency float freely, causing panic in several neighboring countries. For an export-dependent Asia, a devalued baht meant cheaper Thai exports compared to those from Malaysia, Indonesia, Korea, the Philippines and Hong Kong. To stay competitive, many countries devalued their own currencies. That automatically increased the debt owed by those companies whose loan contracts obliged them to use devalued local funds to repay in still-strong foreign currencies. The currency meltdowns also meant a huge retreat of foreign money from Asian stock markets, sending several indexes to record lows during the fall of 1997.

Several countries began negotiating with the International Monetary Fund for financial assistance in 1997. Thailand negotiated a $17 billion deal in August 1997. In December, Seoul agreed to a $57 billion rescue package. The IMF insisted the aid be paired with reform in South Korea's financial system. Meanwhile Indonesia negotiated a $43 billion bailout with the international lending agency, although it continued to squabble over the implementation of the plan for several months into 1998.

The uncertainty in the region continued as Indonesian President Suharto stepped down under pressure in May 1998 after 32 years in power. Meanwhile, several Asian countries began to push Japan to stabilize its economy, claiming the weakening yen was putting increased pressure on the region's already battered economies. In June, the yen hit an eight-year low against the dollar – a drop that makes Japanese exports cheaper in key markets, but also grabs market share from Asian competitors. By the summer, few analysts were predicting a quick recovery in Asia. Instead, many saw the problem worsening.

One ominous sign was Malaysian Prime Minister Mahathir Mohamad's move in September 1998 to fire his deputy, Anwar Ibrahim, a free-market policy advocate. The sacking of Anwar marked the last step in Mahathir's longstanding effort to jettison Western economic orthodoxy in favor of a go-it-alone approach. Markets around the region fell sharply on the news.

In November 1998, the Japanese government unveiled a $200 billion package of loans, tax cuts, and investment projects aimed at stimulating its economy. Yet like previous efforts, the package failed to convince critics, who quickly assailed it as another simple makeover for the economy, rather than a serious attempt to address Japan's more-structural problems. Since 1991, Japan has spent an estimated $800 billion in an effort to stimulate its economy.

The effect of the crisis on the U.S. economy continued to be seen throughout 1998. In June and August, and September, stocks of many large and small companies were hit hard because of fears that the bottom lines of those firms would be affected by weak demand from Asia. In November, airplane maker Boeing announced plans to expand its job cuts from 28,000 to 48,000 workers over two years – in part due to slumping orders from the region.

Although the situation in many Asian countries seemed to stabilize by January 1999, the outlook remained grim. Economists say that it may take anywhere from two to five years before the region even begins to show signs of recovery.

On the flip side, analysts say the crisis has already translated into lower prices for American consumers on such items as computers, clothing, toys and automobiles that are produced in Asia.
– By Tim Ito, washingtonpost.com producer