Asian Flu?

Accepted Wisdom

In 1997, the OECD said the economies of its 29 members were in excellent shape. The IMF said that for the next few years, the world's economies would steadily grow.

The January 1997 meeting of the World Economic Forum in Davos went even further by suggesting the global economic situation was "just right" with a "Goldilocks recovery" going global.

Inference Reading

Picking Up the Critical Facts

We were picking up signals that suggested the global economy's "just right" was just not right. After all, in 1996, we had noticed that Asian economies seemed "addicted to growth," meaning they believed growth could be assumed and elevated expectations were reasonable. Production and export problems, we wrote then, hinted that growth-addicted countries "were losing their edge as their growth phase hits its squeeze period."

Soon a critical anomaly caught our attention: Panasonic workers in Thailand burned down their plant because their bonuses were too small - that is, they burned down their place of employment not because of job cuts or salary cuts but because their bonuses did not meet their over-elevated expectations.

Thailand devalued its currency, and observers, not wanting to see that the world economies faced challenges, labeled the situation "an Asian currency crisis." In 1998, the IMF moved into the region, insisting that the crisis was the result of the region's crony capitalism and overly managed markets. We noted the IMF had made an incorrect diagnosis of the situation.

Deductive Inference

Diagnosing the Change

In 1997, we said three consequences of the addiction to growth were elevating economic risk worldwide, not just in Asia: too much production, declining demand and fewer new markets. "Too many companies were making too many things, and too many countries needed to export those things to too few countries with expanding economies." Rather than the Goldilocks economy the World Economic forum predicted, we said, "Goldilocks had left the building."

In 1998, we identified a Suharto (Indonesian) Model, Cardoso (Brazilian) Model, a Beijing/Schroeder (German) Model, a Mahathir (Malaysian) Model, and a Clinton (American) Model. The variety of responses said a lack of agreement on the issues still existed, which meant no organized and effective response was imminent.

Domestic issues had surpassed global issues as the primary concern of world leaders.

Struggling to sustain growth remained the central focus for most countries - in short, denial remained strong.

Inductive Inference: Identifying Areas of Impact

We inferred: The IMF, with its bad diagnosis, would make things worse (it did, especially in South Korea, the Philippines and Thailand.)

The international community's denial of global risks would lead to surprises in corporate profit reports and GDP figures. (It did, especially in the U.S., Europe, Argentina, Russia and Mexico.)

Competitive currency devaluations would take place, battles for market share and new markets would become intense, trade tensions and protectionism would surface and governments would get even more involved in their economies.
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