Chalmers Johnson:

Sebastian Mallaby's screed is the mirror image of what Moscow's old Marx-Lenin Institute used to do - try to convince people that, in Mallaby's words, "the tide of history is flowing in the West's [conversely, the Soviet's] favor." Like his magazine, The Economist of London, Mallaby is an ideologist for the economic system that exists at least formally in the United States, Britain, and some other English-speaking countries (places that he and his fellow defenders of the faith like to call "the West" in their metaphysical writings). Just as the biggest problem for Mallaby's predecessors at Pravda was to find evidence of proletarian immiseration in the democracies, the biggest problem for the American triumphalists is to explain East Asia in ideologically acceptable terms.

These ideologists did not even notice the enrichment of East Asia until after it had become self-sustaining, could not explain it using their Nobel Prize-certified textbooks, and now predict that it will either collapse or start to copy the United States since no other outcome is "theoretically" possible. They want people to believe that "America enjoys world dominance in diplomacy, warfare, industry, science, media, and the sheer sense of how to live", as implausible as this is on the surface, and they insist that it is only a matter of time until the American way of life is "universally adopted."

The true mark of ideology is not what it asserts but what it leaves out. The ideologist suppresses evidence that contradicts what he or she is trying to sell. The group of scholars, journalists, businessmen, and government officials that Mallaby so disdainfully calls "revisionists" were in fact the first to investigate how Japan became the world's richest big country in per capita terms rather than simply defining Japan as America's "little brother." Even though Mallaby and other American triumphalists (e.g., Paul Gigot of the Wall Street Journal) now accept the revisionists' main premise - "an economic style [in Japan, South Korea, and elsewhere in East Asia] that differs markedly from Western laisser-faire" - they must still denounce revisionism because it subverts their ideological conviction that the West will triumph.

What Mallaby and his fellow true believers do not want to discuss includes the following:

1) Japan is the leading source of long-term capital for the world today, whereas the United States is the world's biggest debtor nation. The United States is financing its mountainous debts with the help of Japanese savers.

2) Japan's savings would be better used to bail out its own failed banks and reflate the Japanese economy so that it could serve as a locomotive of growth for the rest of East Asia. This, however, would cause a recession in the United States that would cripple Japan's export machine. So our two economies remain locked together in a perverted embrace.

3) Standing behind the current economic crisis in East Asia is serious overcapacity in manufacturing, exacerbated by American multinationals moving many American jobs to low wage areas, thereby undercutting demand in the United States. So far from the East Asian economic crisis being a sign of "the triumph of the West", it more seriously portends a potential collapse of global demand and depression.

4) Mallaby's magazine likes to think that Japan does not change because it is run by bureaucrats (something The Economist used to deny) and beset by crony capitalism. Both may be true but are irrelevant. The Japanese trust their bureaucrats more than their politicians and also admire how successfully the Chinese are dismantling some of their Leninist institutions while avoiding the disasters of Yeltsin's Russia. They cannot think of a single example in which a foreign nation listened to Mallaby's "technocrats of the International Monetary Fund" and got anything better than Russia's mafia capitalism or Latin America's permanent dependency. Thus, Japan's bureaucrats will continue to do things their way.

Mallaby's most serious ideological distortion is to omit the United States from the East Asian crisis. He notes casually that Japan "hosted (and later paid for) large American bases on its soil." If he thinks the locals are willing hosts, he should visit Okinawa. Those bases for 100,000 American troops in Japan and South Korea got there exactly the same way the former Soviet Union's bases in former East Germany and Poland did - through conquest and Cold War military intervention. Japan is America's East Germany, its richest Cold War satellite, and the primary beneficiary of American militarism in East Asia. Japan still finds this status useful. It therefore pays to support foreign troops in Japan, helped reelect Bill Clinton by keeping Japanese capital flowing to the United States, and pretends to listen to American advice.

This charade will continue until some crisis forces either the Americans or the Japanese to face up to how the world has changed around them. When that happens we will see what form of capitalism has the strength to survive. But I wouldn't place all my bets on the longevity of the insanely inflated New York Stock Exchange.

Chalmers Johnson is president of the Japan Policy Research Institute.

Martin Feldstein:

Contrary to the theme of Sebastian Mallaby's essay and to many of those whose views he cites, I believe that the recent currency crises in Southeast Asia and in Korea should not be seen as a test of the fundamental economic strategies of those countries. The currency collapse in Thailand and its neighbors is just what conventional economics would predict in any country that had an overvalued and fixed exchange rate. The same can be said of Indonesia and Malaysia. Korea's problems had a different origin: allowing some of its financial institutions to incur substantial short-term dollar liabilities and to invest those funds in risky and longer term assets. The severity of the subsequent collapse throughout the region and of the economic downturn that followed reflect the management of the crisis rather than the fundamental features of these economies. It's worth looking more carefully at the problems in Southeast Asia and in Korea to see clearly that they are not related to such "fundamental" features as government-business relations, labor market rules, the degree of import protection, the reluctance to permit foreign ownership, and other features of these economies that have been blamed for the current troubles and taken as harmful aspects of Asian economic policy.

The Thai baht collapsed because Thailand's overvalued exchange rate produced massive and sustained current account deficits with the rest of the world. When those current account deficits surged to 8 percent of Thailand's GDP in 1995 and 1996, creditors became increasingly nervous and sought to reduce their exposure. The Thai government tried to stem this withdrawal of funds but eventually gave in to the inevitable currency decline. No country has been able to sustain such large current account deficits. Although the combination of high interest rates, promises of fixed exchange rates, and stories about special conditions may keep funds coming to finance such current account deficits for a few years, eventually fear exceeds greed and foreign investors want out.

The current account deficits of Indonesia and Malaysia were also unsustainably large: over 5 percent of GDP in Malaysia and over 4 percent in Indonesia. While no one could predict when their fixed exchange rates would collapse, such a change was inevitable.

Korea did not have a serious current account problem. Although the current account deficit had risen temporarily in 1996 (because of the decline of the world semiconductor market), by early 1997 Korea was heading toward current account balance. Its problem was weak bank supervision that allowed short-term foreign liabilities to exceed foreign exchange reserves.

The impact of the currency collapse in Asia was not dissimilar to what happened a few years back in Mexico or in the 1980s throughout Latin America. A currency decline and the jump in interest rates that follows weakens creditors and undermines banks. The economy is forced to contract in order to reduce imports. This is the standard experience and says nothing special about Asia.

The recent situation was exacerbated by the IMF's policy response. Instead of emphasizing that these are basically sound and healthy economies that were facing a temporary liquidity problem, the IMF declared that these were unsound, mismanaged, and corrupt systems that needed fundamental reforms. This contributed to the sense of panic and frightened away creditors and investors. Instead of seeking to meet immediately with representatives of the creditors and debtors to arrange for a smooth restructuring of loans, the IMF gathered a huge war chest of potential financial aid that it said would only be available as those countries reformed. This too undermined confidence and made adjustment slower and more difficult than it might have been.

There are of course problems with the Asian economies, just as there are with the economies of Europe, Latin America, and the United States. The Asian economies would no doubt outgrow some of their current policies and procedures as they mature and as their incomes rise. But there was no moral or economic justification for the IMF to use the period of economic crisis to force such changes on these countries. And there is no reason to interpret this textbook currency crisis as evidence of a more fundamental weakness of the Asian economies.

The recent situation was exacerbated by the IMF's policy response. Instead of emphasizing that these are basically sound and healthy economies that were facing a temporary liquidity problem, the IMF declared that these were unsound, mismanaged, and corrupt systems that needed fundamental reforms. This contributed to the sense of panic and frightened away creditors and investors. Instead of seeking to meet immediately with representatives of the creditors and debtors to arrange for a smooth restructuring of loans, the IMF gathered a huge war chest of potential financial aid that it said would only be available as those countries reformed. This too undermined confidence and made adjustment slower and more difficult than it might have been.

There are of course problems with the Asian economies, just as there are with the economies of Europe, Latin America, and the United States. The Asian economies would no doubt outgrow some of their current policies and procedures as they mature and as their incomes rise. But there was no moral or economic justification for the IMF to use the period of economic crisis to force such changes on these countries. And there is no reason to interpret this textbook currency crisis as evidence of a more fundamental weakness of the Asian economies.

Martin Feldstein is president of the National Bureau of Economic Research and professor of economics at Harvard University.

Francis Fukuyama: