Exchange rates should be kept flexible, and with an eye on the yen and the euro as well as the U.S. dollar. There is no simple rule that can guarantee success, but rigid formulas are sure to produce failure. Financial supervision should be tightened to prevent the next generation of banks and corporations from borrowing short-term funds in such large amounts from overseas. A separate word should be said about Japan. Though obviously not a debtor country, Japan has seemed paralyzed in overcoming its domestic banking and financial woes.
Japan now sits with a massive budget deficit and little growth in domestic demand to show for it.
The greatest challenges to long-term Asian growth, however, probably lie elsewhere. East Asia will restore its competitiveness in world markets only if the investments in social software are now given their due priority. Most of Southeast Asia is deficient in higher education, science and technology, and the quality of political institutions. Latin America and Central Europe are ahead of much of Asia in this political transformation, and are likely to reap economic benefits from this advantage unless the laggard parts of East Asia make a determined effort to catch up in this respect, also. Fortunately, the experience of democratization in South Korea, Taiwan, and Thailand gives some important regional evidence of vitality and success in this aspect of change.