In 1997/98, Asia fell into the economic abyss because of a dependence on inflows of foreign capital, which suddenly turned tail.

Ten years on, the region is again in economic freefall because of its dependence on foreigners, who this time can no longer afford to buy Asia's manufactures.

Will the region ever learn to stand on its own feet?

The question is a little unfair. Governments did in fact learn from the Asian financial crisis. They built up current account surpluses and vast stockpiles of currency reserves that have provided a buffer during the turmoil: no Asian country has suffered a currency and banking meltdown like Iceland has.

Moreover, export-led growth is a tried-and-tested economic development model. No one is saying Asia should stop exporting.

But rather than decoupling from the global economy, Asia has been steadily increasing its exposure to external demand.

Asian exports of goods and services rose to 53.4 percent of GDP in 2006 from 42.8 percent in 1998, according to a European Central Bank working paper. By comparison, the ratio in 2006 was 11 percent in the United States and 16 percent in the euro zone.

The corollary is that domestic demand in Asia has been suppressed. California consumes about as much as all of China, while Texas consumes about as much as all of India, notes Rob Subbaraman, an economist with Nomura in Hong Kong.

So if they are to turn a crisis into an opportunity, now is the time for policymakers to start implementing the plethora of reforms prescribed down the years to spur domestic consumption.

A partial list would include introducing competition in industries that are frequently dominated by one or two state-owned or politically well-connected firms; making it easier to start service businesses; nurturing deep financial markets, especially for household credit; and building social safety nets so people don't need to save as much for a rainy day.

Greater emphasis than has been given in the past now needs to be paid to the development of reliable health services, broader access to education and the loosening up of the service sector, from Internet sales to domestic helpers, David Mahon of Mahon China Investment Management Ltd said in a report.


Such deep-seated changes pose a daunting challenge for countries with sometimes creaking administrative machinery. Reform will also entail taking on vested interests that do well out of the present growth model.

All these issues are often political economy issues. So it's a question of whether countries have the maturity to proceed with this transition. Maybe, maybe not, said Dominique Dwor-Frecaut, an economist with Royal Bank of Scotland in Singapore.

It is also hard to imagine a successful rebalancing of Asian growth -- a crucial element of a sounder global economy -- without an eventual strengthening of regional exchange rates.

Firmer currencies would enable Asian consumers to buy more from abroad, including services such as tourism and education, and induce a shift in investment away from export industries and into domestic sectors that make non-tradable goods.

Protective of its exports, Asia has long resisted currency appreciation and will evidently not switch tack when trade is collapsing. But it is not too soon to start making plans.

Finance ministers from 13 Asian countries will discuss expanding a currency swap and pooling arrangement to $120 billion from $80 billion at a meeting in Thailand this weekend.

But they are fighting yesterday's war: the swaps have not been needed and, even if the mechanism was activated, the sums involved are a drop in the bucket next to private capital flows.

Instead, ministers should spend their time thinking about how they can cooperate to bring about collective structural change.

At the moment it would be completely impractical for them to appreciate their currencies, Dwor-Frecaut said.

But once this crisis is over -- and in my view we're talking about a 2-3 year time horizon -- they should have coordinated currency appreciation and some fiscal expansion to support their domestic sector, she added.


Subbaraman with Nomura agrees that it would be suicidal for Asia's open economies to push up exchange rates in the eye of an export storm.

The Japanese bank expects Taiwan to report this week a 4.5 percent year-on-year contraction in fourth-quarter GDP. It is also forecasting a 45 percent plunge in Singapore's non-oil domestic exports in January from a year earlier.

But Subbaraman said the omens for currency appreciation in Asia were more auspicious now than at any point in the last decade.

There's been a collapse in global demand, which raises question marks about whether the region should continue to rely on an export-led growth model, he said.

Subbaraman is telling clients that Asian exchange rates could appreciate substantially within the next two years as global capital flocks back to the region.

It's hard to envisage it now, but Asia's the least ugly of all the regions, and when risk aversion eventually comes down -- and it will -- Asia will attract massive inflows, he said.

The risk of continued intervention to brake currency appreciation is real, but Subbaraman thinks central banks will be more tolerant if fiscal stimulus packages now being implemented across the region succeed in replacing lost export demand.

If they see signs in a year's time of demand improving, maybe they'll be more willing to let currencies appreciate, he said.