Johnson School's Bailey examines Asia's economic crisis

By Darryl Geddes

A meltdown of confidence is what Warren Bailey says is partly to blame for the current economic crisis in Asia.

"It's really not a currency crisis that's been directly precipitated by some government's failed economic policy or from over printing money or hyperinflation," said Bailey, a professor of finance in the Johnson Graduate School of Management, in an interview last week in his fifth floor Malott Hall office. "It originated in the private sector as investors borrowed a lot of money and made poor investments. Now the currencies are worth less, causing huge debts that seemingly can't be paid off."

The Asian economic crisis has come about in part because of plunging currencies and stock prices and bankruptcies, he said. Bank capital has eroded, drying up funding sources and increasing the risk of defaults. "There's a lack of confidence in the region's economic system," Bailey said, "and that only aggravates the problem."

Since Asia's economic instability first appeared on the world's economic radar this past fall, Bailey has offered his opinions and expertise to dozens of journalists.

And he doesn't just study the Asian markets from afar, he visits the area annually and he holds stock in various Asian companies, including Indonesia's best-known auto maker, Astra International, and China's most popular beer, Tsingtao.

Bailey was the subject of a Q-and-A in the Business Section of The New York Times Nov. 9, 1997, in which he offered the following advice on investing in Asia's emerging markets: "Buy safe, big companies that make sense, hold them for a long time and buy them when everyone else is afraid."

Bailey is a keen observer of Asia's current economic crisis, not only because he's an investor in the region but because he's a scholar of international finance, and what is playing out on the other side of the world is intriguing, he says. "It's unusual to see the magnitude of the problem and at the same time it's interesting to watch and see how the governments react to the situation."

The United States, for one, is closely watching the crisis and will likely throw its support behind a bailout plan inked by the International Monetary Fund, although there is some Congressional opposition.

"I think one wants to help in this situation but there are some Luddite blockhead politicians in Washington that won't want to offer any financial support and they have a point," Bailey said. "They say, 'Why should we pay to reward bad behavior, bad investments. Errant lenders should be punished.'

"It's clear, however, the IMF will come to the aid of the region, but how much money will be needed and how it's used, isn't clear."

Bailey said the fallout from this economic instability cannot yet be measured. Certainly, he said, job losses and bankruptcies will continue.

"This is the time that can be ripe for religious fanatics to rise up against the government," he said. "It's a sorry example of what happens in various regions when there is frustration with the government. We saw it in Iran when people were angry with the Shah."

Bailey notes that the climate could worsen and spawn support for populist anti-market policies or isolationism. "There are other reasons besides economics that require the United States to watch this situation extremely carefully," he cautioned.

But for the most part, Bailey doesn't expect the crisis to wash ashore here. "I don't see our economy threatened by these circumstances in Asia," he said.

Bailey said the impact of the crisis could be felt in lower prices at outlets such as K-Mart. "The United States is likely to be on the receiving end of more Asian imports as Indonesia, Thailand and South Korea attempt to export their way out of the mess," he said. "That could mean falling prices on low to mid-level technology products, clothing, shoes and building materials. Traveling to those countries should also be less expensive."