GLOBAL DANGERS

Hong Kong's latest mishap underscores a question that has become more insistent as Asia's economic crisis enters a deeper phase: Are the policy remedies being applied suited to the illness at hand? The concern is growing that they are not. The latest economic news from Hong Kong - whose contraction is its first in 13 years - and elsewhere suggests that the global outlook is bleaker than it was six months ago, when the "Asian contagion" seemed confined to a handful of countries in the region.

Indonesia's financial system is now in ruins, after rampant inflation sparked riots that toppled Asia's longest-lived government. A sharp recession in South Korea has dragged Seoul stocks to new lows. Japan, the world's second-largest economy, gets sicker by the day as domestic demand sputters and the banking system creaks under the strain. Additionally troubling is the fact that previously vibrant emerging economies outside Asia are showing symptoms too. The Russian economy may be descending into chaos and Brazil has hit the skids. Such developments have heightened anxiety about a global recession.

They also suggest that it may be time for the International Monetary Fund, as well as governments and other organizations that influence markets, to take a larger view when ministering to struggling economies. When asset bubbles burst in Asia, the remedy to what was basically a problem of huge overborrowing by a few countries seemed to be this: Use a greatly devalued currency as a competitive lever to boost exports, and constrict domestic demand and growth. The aim: to generate a payments surplus and increase foreign-exchange reserves, so debt can be paid and confidence restored.

As economic ills spread, however, the formula seems to be creating more problems than it is solving. For example, Thailand's exports contracted in January. Why? Because other hard-hit competitors, such as South Korea, were selling cheaper electronics goods on world markets. Moreover, regional demand for Thai products has shrunk partly as a result of newly imposed austerity packages. If every country in intensive care singlemindedly pursues a policy of restricting imports and boosting exports, a vicious circle is likely to develop, foiling the best-laid plans for everyone.

How bad could things get? The last time the world's economies engaged in widespread beggar-thy-neighbor trade behavior, the result was the Great Depression. Wrote economist John Maynard Keynes in 1932: "We are now in the phase where the risk of carrying assets with borrowed money is so great that there is a competitive panic to get liquid. And each individual who succeeds in getting liquid forces down the price of assets in the process of getting liquid, with the result that the margins of other individuals are impaired and their courage undermined. And so the process continues."

True, the world may not be on the brink of crossing a black rubicon equal to the Wall Street crash of 1929. The economies of Europe, the United States and China are growing at relatively healthy rates, and the demand they generate will help maintain the value of struggling nations' exports. But other key players are either in stagnation (Japan), under IMFstrictures (Latin America, Eastern Europe) or both (Korea, Indonesia and Thailand). With these economies so dependent on exports for growth, the restrictive policy regimes in place may be breeding a deflation monster.

How can growth be rekindled? The U.S. Congress must stand willing to sanction extra money for the IMF - whose funds will likely be needed soon to bolster the Russian economy. And creditor banks in the U.S. and Europe, whose financial sectors are sound, must continue to exercise forbearance when considering debt rollovers. As Keynes also noted, strict foreclosures during the 1930s only served to kick the crutches from under already crippled companies, creating greater unemployment and less consumer spending worldwide. As he rightly observed: "I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity."

For their part, governments should persist with their efforts to restructure financial and corporate sectors. Asia sits on mountains of domestic savings which, if put into play, could inject life into moribund economies. That money will remain stuffed in mattresses as long as people believe that stock markets are rigged against small investors, and that only the rich or well-connected can benefit from fuller participation in the economy. To start spending and investing again, ordinary citizens must be convinced that their leaders are taking the right steps to pull their economies out of the quagmire. As Japan has proven, ascetic austerity programs and too-timid, too-late pump-priming and reform efforts only heighten the sense of crisis. What is needed now are programs that stimulate demand and measured growth - not cable cars for tourists.