Has Asia Recovered?

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Bizarrely, the Japan syndrome seems to have spread to Asia's other giant. China never caught the Asian flu, because foreign-exchange regulations--though they fostered inefficiency and corruption--prevented hot money from leaving and deterred it from coming in the first place. Instead, the problem is, believe it or not, excessive thrift. Incredibly for a developing country, China is experiencing pronounced deflation. In the end, China, like Japan, may be forced to roll the printing presses--a move that would not be possible without a devaluation of the renminbi, which would make the lives of the country's neighbors considerably more difficult.

In short, Asia will probably not have the same problems over the next two years that it had over the past two, but it is at considerable risk of having different problems. It ain't over until the sumo wrestler sings.

Did the Crisis Help?
Adversity is supposed to come with a silver lining. Has Asia's crisis laid the foundation for sounder economic growth in the future? The answer is a definite maybe. The crisis has curbed some of the worst abuses of crony capitalism, and it has tempered the dangerous belief that "Asian values" somehow made the region's economies bulletproof. The crisis has also probably done some good by softening free-market fundamentalism: countries are less likely to be pressured into throwing their capital markets open to the world before their financial markets are ready, and Washington is less likely to view the main purpose of economic diplomacy as making the world safe for hedge funds. Above all, the crisis has reinforced democratic tendencies and made it much harder for paternalistic strongmen to claim they know best.

Still, it is hard to escape the feeling that a dangerous complacency is setting in. When Mexico started to recover from its 1995 "tequila" crisis, policymakers and investors alike acted as if it had been a one-time event, never to be repeated. But it turned out to be a dress rehearsal for the Asian crisis a year later. Because the world didn't end this time around, everyone is starting to believe that the situation is under control--even though proposals for international reform have been watered down to homeopathic levels. Could investors and countries really be foolish enough to make the same mistakes yet again? Of course they could.

Paul Krugman, a professor of economics at M.I.T., is the author of The Return of Depression Economics (W.W. Norton & Co.; $23.95), which was published in May