Asia and the Midwest real economy.

• Author: Hervey, Jack L.

Editor's note: The following article presents excerpts from the original, which appeared in the March 1998 issue of Chicago Fed Letter, published by the Federal Reserve Bank of Chicago.

During the summer of 1997 the fabric of the Asian economic miracle began to unravel. The outlook for continued high rates of real gross domestic product (GDP) growth, which had averaged 7 percent to 10 percent for many countries in the region during the previous decade, turned abruptly less favorable. National currencies, most of which had been pegged to the U.S. dollar (or a basket of currencies heavily weighted toward the dollar), depreciated sharply. Financial markets and banking systems became severely stressed. Several of the Asian "tigers" of a few years ago were forced to appeal to the international community for financial assistance in order to meet short-term international debt obligations.

The impact of the recent developments in Asia will be felt in the U.S. Midwest. Asia is important to this region's economy, as a market for locally produced goods and services, as a source for imported goods and services, and as a competitor in foreign and domestic markets. This article reviews several key developments in the recent Asian situation and how these developments might influence Midwest trade.

Asian Growth: A Model for the World?

By U.S. standards, most east and southeast Asian economies have recorded comparatively high levels of economic growth since the early 1960s, supported by high rates of investment growth, especially in export-oriented industries. Facilitating much of this investment were close ties between Asian lending institutions and the domestic firms to which they lend. Government-led industrial policies were directed toward stimulating economic expansion and promoted investment in "targeted" industries. Governments sanctioned, even encouraged, close relationships between the financial and industrial sectors, which sometimes led to investment and lending decisions that did not meet the rigors of market discipline. This tendency, in part, underlies what has happened in Asian markets during recent months.

While many date the current economic turmoil in Asia to the speculative attacks on Thailand's currency (the baht) in foreign exchange markets in June and July 1997, a more careful reading of history places the origins of the "Asian problem" much earlier. For example, in Japan the close ties underlying the financial/industrial/government structure predates World War II. This closely integrated structure continued during the...