Estimates of elasticity of substitution between exports of individual East Asian countries and China, with very long lags (24 mos.), based on monthly data since Jan. 1, 1994, indicate that it was a misguided policy of individual small economies to tie their exchange rates to the US dollar. This cost them market share, as the dollar gained strength.

The East Asian Crisis should be examined in the context of other crises, especially the Mexican Crisis of December 1994. Mexico, after one year's deep recession, started to recover. The current account deficit was reduced. Gradually unemployment stabilized or fell, and production picked up. Inflation was reduced.

Some of the same patterns can be seen in Korea and other East Asian economies. Korea has had increasing current account surpluses in the 4 mos. leading up to February, 1998. The economy shows many of the same dynamic features as Mexico but has not yet stopped the rise in unemployment or the fall in industrial production.

Basically, Korea has a strong economy and an industrious population. The recession now is very sharp, but should start to recover in one or two years. A likely pattern is: a cessation of decline in 1998, followed by a recovery of production in late 1998 or early 1999. At the end of 1999, there will not yet be a full return to the old growth line, but a start should have been made.

In the past, Korea had experienced rapid GDP growth, at rates above 8%, but the recovery is not likely to reach such high levels. Korea, as was true of Japan much earlier, will probably settle down to an expansion path that is 2 or more percentage points lower.

Korea's ability to borrow on the world capital market now is a good sign that the crisis atmosphere is being held in check.