Eyes On.... ASIA'S ECONOMIES: Case of Taiwan
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Economists still debate the underlying cause of the crisis in East Asia.... In July 1997, the value of Thailand's currency, the baht, started to plunge. Bankers who had been able to exchange 25 baht for one U.S. dollar in early January soon had to pay 50 baht per dollar. Thailand's stock market also began to fall....

Investors who had paid — say — $1 million for Thai stocks could hardly sell them at half that price. Currencies and stock prices in other East Asian economies — Indonesia, Malaysia, and South Korea — tumbled, too. Speculators traded huge amounts of these currencies, hoping to make a profit before their value slid further. (This made the slide worse.) Others simply dumped the region's currencies and stocks. Overall, $80 billion in investment money fled East Asia.
    Without capital, businesses failed, trade dried up, and unemployment soared. Seven of East Asia's leading economies — Hong Kong, Indonesia, Japan, Malaysia, Philippines, South Korea, and Thailand — saw their gross domestic products actually shrink. Only China, Singapore, and Taiwan escaped this degree of setback.

Taiwan... #1. Indeed, Taiwan was the clearest survivor. Its exports continued to exceed imports, and a 1999 UN report declared it "the only major economy ... to withstand the ... effects" of the crisis. What saved Taiwan? Experts cite three points: (1) At approximately $150 billion, Taiwan's foreign exchange reserves are the fourth largest in the world — thus guaranteeing that its foreign debts can be paid in a crisis (see below). (2) Its flexible economy responds quickly to changes in the global market. (3) And its government follows a hands-off policy toward the free-market economy.

Funded, flexible, free. Foreign-exchange reserves include whatever foreign currency a country's central bank holds on tap. Because such currencies (the U.S. dollar, for example) are strong and in big demand, they serve as a sort of "insurance." Say the value of "Country A's" own currency drops slightly. If "A" has big reserves, foreign investors will judge that it can still pay its debts, so they keep doing business there. In 1997, Taiwan's businesses didn't owe much foreign debt. And its huge reserves calmed investors. By contrast, when Malaysia let its reserves drop by 23 percent, many investors moved their money elsewhere.
    How did Taiwan build its reserves? With an island-based, trade-dependent economy, Taiwan exports more than it imports — thus earning more than it spends. Its businesses have an edge, too, when seeking new markets. Most of Taiwan's manufacturers are small- to medium-sized enterprises (SMEs) that turn out just one product (bikes) or one product component (semiconductors). These SMEs are flexible and can retool quickly to meet demands for a new product — thus cornering its market.
    SMEs are "allowed" to fail, too. Years ago, Taiwan's leaders pledged to develop a free-market economy, in which businesses would survive — or fail — on the basis of competition. So its SMEs learned to trim costs and avoid debt. Governments in other Asian countries, however, frequently protect indebted companies that keep building more factories and plants than they need — a practice that troubles investors.

Eyes On... What direction is Taiwan taking, now that the regional crisis seems to be receding? For one thing, it is working to prevent the kinds of currency trading that hastened the crisis in 1997. But Taiwan's chief focus is on the future. As the world's fourth largest producer of computer hardware, it plans to keep on exporting high-demand goods and services. In fact, it is preparing to become a regional center for transportation, media, finance, and other services that East Asians will need in coming years. Keep your eyes on Taiwan. It makes things.... happen.