Quotes of the Day

Ten years ago a financial typhoon known as the Asian Crisis smashed into Bangkok. Over the next 15 months it swept through Jakarta, Kuala Lumpur, Hong Kong and Seoul. Tens of thousands of people lost their jobs. Others paid a higher price. Hundreds of Indonesian Chinese, accused by rioters of being accomplices to a corrupt regime, lost their lives or were raped in the violence that accompanied the ouster of Indonesia's long-serving autocrat Suharto. Abandoned half-built buildings throughout Asian cities stood as mute reminders not only of the shattered hopes of many an empire builder but also those of ordinary workers who could no longer send home money to their village for their daughters' schoolbooks or their sons' medicines.

Could it happen again? No—at least not in the same way. The glaring economic imbalances of 10 years ago are no more. Asia has not only repaired much of the damage but taken out insurance—perhaps too much insurance—against a similar accident. During the 1990s Asian countries borrowed and spent beyond their means, a spree fueled by economic liberalization, overvalued local currencies and a flood of cheap foreign investment. But liberalization was badly executed, with political cronies running roughshod over regulators. Companies and consumers borrowed too much, much of it in foreign currencies. When Thailand's central bank ran out of foreign exchange and had to let the baht plunge, other currencies fell as investors lost confidence. There was no shelter when the typhoon hit.

Now, the region is flush with surpluses, not deficits. Asian countries have piled up more than $3 trillion in foreign-exchange reserves. And while currencies were overvalued a decade ago, they are undervalued today. The bitter fight between Beijing and Washington over China's massive surplus and undervalued currency is just the most visible part of this phenomenon. With the numbers the region is racking up, no currency trader would bet her Starbucks latte against Asian economies, let alone put real money into attacking Asian currencies. Banks around the region have been cleaned up. The fanciful projects of a decade ago—such as Indonesia's foolish and expensive effort to create an aircraft industry—have been abandoned (although some budding white elephants can be found in China and India). Most of the worst companies have been restructured or sold off.

So Asia doesn't need to worry? Hardly. With the notable exceptions of China and India, key countries in Asia are growing at about 2 percentage points a year more slowly than they were before the crisis, largely because of lower investment. Thailand's banking and corporate sector is in far better shape than a decade ago, but allegations of cronyism under ousted Prime Minister Thaksin Shinawatra and erratic policies by the current military government have unsettled investors. Nationalism is on the rise throughout the region, reflecting a belief that there is so much cash that countries can do without foreign investment.

Some corporate deadbeats of a decade ago are back in the market for cash—and investors are happy to stump up, at rock-bottom rates, just as they were before. The risk premium that Asian borrowers have to pay is near historical lows. It's a worrying sign of global exuberance. Ironically, Asia has played a role in stoking dangerous imbalances in the global economy. Its 'dirty-peg' currencies, which ostensibly float but in fact are controlled by central banks, have kept exports higher and imports lower than they would be otherwise. In the case of China, with its $1.2 trillion of foreign-exchange reserves, the cash is inflating an asset bubble in stock and property markets.

Asia has fixed many of its own problems. But by being voracious buyers of U.S. government debt, the region is allowing America to live beyond its means. At some point the U.S. consumer is going to run out of steam and Asia is going to be hurt. China is especially vulnerable to being whipsawed. If the U.S. economy slows modestly, China and the region can handle the adjustment without too much pain, especially if they take the stiff medicine of currency appreciation and shift to a policy of increased domestic demand. The danger will occur if the U.S. slumps badly, hurting Chinese exporters so much that they can no longer repay their loans. That's when we'll find out whether the hundreds of billions of dollars pumped into the Chinese banking system have bought the stability Chinese leaders expect.

Asia has come a long way in the past 10 years. But accidents happen. Global market crashes come along every decade or so. Asia's best insurance policy is to build its institutions—keep improving corporate governance, keep working toward more transparent and resilient financial systems. Economic storms are a fact of life. But just as with real ones, the best protection is to build strong houses.

• Mark L. Clifford