First, let’s be clear that the “Asian miracle” was not a mirage — it really happened. Over the course of a single generation, per capita income has multiplied many times over, life expectancy has soared, and poverty levels have dropped sharply. Although times are rough now, that historic transformation has not been reversed. It stands as a continuing testament to the creative power of relative economic freedom: low taxes, decent respect for property rights and openness to the world economy.
Still, as the saying goes, mistakes were made. The details differ for each country, but as a general matter the Asian economic mess is attributable to three different kinds of policy (not market) failure: (1) mismanaged exchange rates, (2) backward and closed financial systems, and (3) reduced punishment for bad investments provided by an IMF safety net. Admittedly, there is probably also a herd instinct during boom times that leads investors to overrate the quality of investment opportunities. But that human foible alone could not have produced the present calamity; the herd was driven over the cliff by egregious policy errors.
The countries that have experienced currency collapses — Thailand, Indonesia, Malaysia and Korea most prominently — all tried to maintain independent monetary policies while at the same time pegging their exchange rates. Like Mexico before them, they have learned a cruel lesson: you can’t do both indefinitely. Over the long term, you must either give up monetary policy and adopt a currency board (as Hong Kong and Argentina have done), or you must give up the peg and let your currency float.