Introduction

Following two decades of rapid growth, social change, and industrialization, the countries of the East Asian region are experiencing their first regionwide economic crisis. The responses of leaders in Asia and the United States will have an impact far beyond the immediate task of restabilizing near-term confidence in increasingly integrated economies. Current events will in time reshape political and security trends and relationships within the Asia-Pacific region. These changes will bring new challenges for policymakers and political leaders seeking to restore stability and growth to the region that until last summer had been characterized as the engine of global growth. A "paradigm shift" in Asia's economic and political dynamics thus seems well under way.

The Asian financial crisis--which tests our ability to effectively manage an increasingly globalized, interdependent economy according to uniform international standards--represents one of three major global challenges that are now at the top of the international agenda now that the Cold War is over. The other two are the continuing Gulf confrontation with Iraq and Iran over proliferation of weapons of mass destruction and current efforts in Bosnia and the Middle East to make peace agreements stick.

The immediate economic causes of Asia's financial crisis--especially unsustainable short-term foreign debt incurred by the private sector and exposed by the sudden devaluation of overvalued local currencies--have been identified. The first stage of a policy response to contain the crisis has been implemented to varying degrees in the countries most immediately affected: Thailand, Indonesia, and South Korea. However, the crisis is not over; in fact, its most challenging aspects may lie ahead--the political and social effects of economic recession and reform in the countries whose economic vulnerabilities have been exposed by the crisis.

Recent developments underscore that economic, political, and security trends remain inextricably interrelated, forcing difficult political choices that were avoidable during times of prosperity and economic expansion. The onset of recession and reforms needed to stimulate new growth will affect social stability and public support for political leaders. This is a lesson of the global recession of the 1930s, which created conditions leading to World War II.

Asia's financial crisis raises several fundamental questions. For example, what is the relationship between transparent, regulated, market-based economic systems integrated into the global economy and the institutionalization of broadly based participatory democratic practices? What is the impact of global interdependence on national sovereignty? Will the prescribed "cure" of International Monetary Fund (IMF) intervention actually make the patient worse or stimulate a nationalist backlash? How will economic crisis affect major power relations in East Asia? And does the United States have the long-term capacity and willingness to extend its role in the region to that of economic as well as political and security stabilizer?

Over the past two decades, Asia's economies have flourished in a stable and secure environment, and America's economic ties to the region have shown remarkable growth. East Asia today is a market for 30 percent of American exports, and the estimated half-point slowdown in U.S. gross domestic product (GDP) growth attributed to the Asian crisis represents $40 billion in lost expansion. Asian capital provides the underpinnings for the U.S. Treasury bills that have financed our budget deficits. The United States has sustained essential military and security relationships with Japan and South Korea, and has developed cordial economic and security relationships with almost all of the Association of Southeast Asian Nation (ASEAN) member countries.

The challenges for U.S. leadership in response to the region's current financial crisis are to contain the damage so that it does not cause a round of global economic deflation and domestic instability that could harm regional security and to sustain confidence in U.S. leadership to stimulate reform of the regulatory system for managing global capital flows. At the same time, it is in the U.S. interest to provide support to individual countries that are trying to stabilize their own economic systems. This will require complex, assertive policy management to avoid serious political instability, nationalist backlash, or the "moral hazard" of bailing out either irresponsible investors or unreformed political leaders. But proactive management of such complex policies will require the development of congressional support for programs that will sustain U.S. international leadership while containing the political fallout from growing U.S. trade deficits with Asia, an unpalatable but necessary part of Asian recovery programs. And the United States must take the lead promoting reforms of the international financial institutions to prevent the recurrence of this type of financial crisis.