By Paul Blustein
Washington Post Staff Writer
Saturday, August 2, 1997; Page F01

Of all the leaders in the developing world who perceive plots by rich countries to oppress poor ones, few are as outspoken as Mahathir Mohamad, the prime minister of Malaysia. So Mahathir's reaction was predictable last month when crisis beset Thailand's currency, the baht, before spreading to the currencies of Malaysia and several other emerging markets.

Denouncing "rogue speculators," Mahathir singled out American billionaire trader George Soros as the chief villain behind the wave of selling in Southeast Asian markets. "We have worked 30 to 40 years to develop [our] economy," the prime minister said, "and here comes someone with a few billion dollars and, in just two weeks, he has undone most of our work."

Such pique is understandable. In the new world of globalized, computerized financial markets, nations can come under economic attack with what seems like the heartless caprice of an earthquake or monsoon. And while markets are supposed to focus their punishment on poorly performing economies, their actions may seem perverse when, as in the Southeast Asian case, the victims are nations with growth and savings rates that have become the envy of the world.

But markets rarely move in major ways without some underlying economic justification, even though they may often overreact and behave with herd instincts. And the current financial turmoil is teaching that even star performers may be subjected to sudden and potentially crippling bouts of instability if they allow their economic fundamentals to erode below the levels required to support high-flying currencies and stock markets.

"If you're willing to be in the phone book, you're willing to have strangers call you. It's no more or less than that," said Mark Siegel, managing director at Darby Overseas Investments Ltd., a Washington firm that invests in emerging markets. "If you're willing to be connected to global markets, in order to get a lower cost of capital and greater access to capital, the downside of that is that you're exposed."

Particularly instructive is the case of Thailand, which Monday reluctantly agreed to seek a financial rescue from the International Monetary Fund to forestall further speculative assaults.

Although Thailand posted spectacular growth in the 8 percent to 10 percent range during much of the past decade, ranking some years as the world's fastest-growing economy, the boom was built in part on heavy investment in real estate -- shopping malls, office buildings, condominiums and the like -- financed by borrowings from abroad. As in the United States in the late '80s and Japan in the early '90s, the bursting of the property bubble left banks saddled with billions of dollars in bad loans.

"This kind of weakness can be overlooked when a country is growing like 8 percent per annum," said Devi Aurora, a Southeast Asia specialist at DRI/McGraw Hill Inc., an economic forecasting firm in Lexington, Mass. "But when it became clear last year that Thai growth was slipping, people suddenly sat up and said, 'What has been done with all the money invested in the past? Has it gone for productive things?' "

IMF officials say they quietly began warning the Thais last year that the economy, for all its many strengths, was sailing into trouble. Bangkok had tightly linked the baht to the U.S. dollar, and up until 1995, that policy helped spur exports because with the dollar generally weak, Thai products sold cheaply on world markets. But then the dollar began to soar, lifting the baht with it, and Thai exports slowed dramatically.

The Thai authorities temporized when the IMF privately exhorted them to take actions aimed at boosting exports and curbing imports, such as letting the baht drift downward and cutting government spending. Instead, the government used precious government holdings of dollars in a vain attempt to prop up the baht against speculators betting on a devaluation.

"I think it clearly would have been in their interest if they had moved earlier," said Bijan Aghevli, deputy director of the IMF's Asia-Pacific Department, adding that he prefers to dwell on the fact that "they are doing the right thing now" by allowing the baht to fall.

Whatever Thailand deserved to suffer for its sins, neighbors such as Malaysia, Indonesia and the Philippines deserved far less, many economists and market experts agree, because their trade deficits and banking problems were less severe than Thailand's.

And what has happened to those countries highlights another lesson of the recent turmoil. Although their currencies have been hit by speculators looking to score quick profits from countries with some similarities to Thailand, none of these markets has fallen even half as far as that of Thailand, whose baht has dropped 25 percent.

"The speculators are not omnipotent," said C. Fred Bergsten, director of the Institute of International Economics. It shows that markets are considerably more capable of discriminating between countries with good and bad policies than critics such as Mahathir suggest, he said.