(FORTUNE Magazine) – Two years ago a wave of financial jitters swept Latin America after the devaluation of the Mexican peso. Now a similar case of financial contagion has spread across Asia following Thailand's currency crisis. First the Thai baht, then the Philippine peso, then the Malaysian ringgit, then the Indonesian rupiah; what's next?

Actually, that's the wrong question. Almost every economy in Asia will feel the ripples from this summer's wave of devaluations: higher interest costs because international markets fear further devaluations, lower export prices because the devaluations will intensify competition, reduced capital inflows because once ebullient foreign investors have become suddenly wary, and maybe a growth slowdown. The real question is whether and how fast the region's economies will bounce back. Is this just a blip, a temporary setback--or is it the end of the Asian miracle?

Or was there any miracle in the first place?

A little background here: Three years ago I published an article in Foreign Affairs that made me enemies all over Asia (and among American pundits who preached the gospel of Asian superiority). The article summarized research by Alwyn Young of Boston University and Larry Lau of Stanford, who suggested that Asian growth, impressive as it was, could mostly be explained by such bread-and-butter economic forces as high savings rates, good education, and the movement of underemployed peasants into the modern sector. What they found was that once you took account of the growth in these measurable inputs, you could explain most, and in some cases all, of the growth in output. What Young and Lau found was, if you like, that Asian growth has so far been mainly a matter of perspiration rather than inspiration--of working harder, not smarter. These results were and are controversial--partly because many people don't want to believe them and are eager to accept contrary calculations--but their basic message has held up quite well under repeated challenges.

Why does this matter? After all, nobody is questioning the awesome reality of Asia's growth over the past 20 years. But the "perspiration theory" of Asian growth upsets two cherished beliefs held by both Asian leaders and their admirers.

First, if there is one thing that believers in an "Asian system" really admire, it's the way Asian governments promote specific industries and technologies; this is supposed to explain their economies' soaring efficiency. But if you conclude that it's mainly perspiration--that efficiency isn't soaring--then the brilliance of Asian industrial policies becomes a lot less obvious. The other unwelcome implication of the perspiration theory was that the pace of Asia's growth was likely to slow. You can get a lot of economic growth by increasing labor force participation, giving everyone a basic education, and tripling the investment share of GDP, but these are one-time, unrepeatable changes.

So the perspiration theory suggested that sooner or later Asia's growth would slow down--sooner in the case of the original Asian tigers like Singapore, which is already investing half its GDP; later in low-wage countries like China that still have vast reserves of underemployed rural labor to exploit. And sure enough, Asia is in trouble. In Thailand, a financial bubble has burst, leaving behind plunging stock and real-estate markets and a banking system in shambles. In South Korea, high-profile bankruptcies have highlighted the runaway debts of many corporate empires--and the shakiness of the banks that own those debts. And international capital markets have suddenly noticed that countries throughout the region have been running world-class trade deficits--bigger relative to their economies than Mexico's was just before the big peso collapse. Is this the slowdown the perspiration theory predicted?

The perspiration theory predicts a gradual loss of momentum, not a crash. The recent news from Asia has been so bad that in a way it's good: the size and suddenness of the slump shows we're dealing with financial snafus that don't tell us much about Asia's long-term prospects. But sometimes a slump reveals deep problems that were papered over by a boom. Japan is the classic case: It's now clear that growth in Japan's potential output (the output it can produce on average over the business cycle) began declining more than a decade ago, just when Western pundits became convinced Japan had all the answers. That slowdown was masked by the "bubble economy" of the late 1980s, when runaway stock and land prices--Remember when the grounds of the Imperial Palace were supposed to be worth more than the whole state of California?--created an unsustainable boom. Then the bubble burst, revealing a dreary reality.

Growth rates in the rest of Asia, by contrast, have stayed pretty high, even in the countries that are having a hard time. By last year it became clear that South Korea's and Thailand's torrid growth rates of the first half of the 1990s had to end--wages were rising faster than productivity; overheated domestic markets were spilling over into imports, creating massive trade deficits. To perspiration theorists, these troubles were an early sign of the diminishing returns that will force a gradual slowdown in growth.

The biggest lesson from Asia's troubles isn't about economics; it's about governments. When Asian economies delivered nothing but good news, it was possible to convince yourself that the alleged planners of those economies knew what they were doing. Now the truth is revealed: They don't have a clue.

Even during the glory days, a visit to one of those planning agencies--say, Japan's all-powerful Ministry of Finance--was enough to inspire a few doubts. I visited the MOF in 1985 and saw what looked less like the Pentagon's War Room than like the Department of Motor Vehicles: dusty hallways, broken furniture, guys padding around in their socks, centerfolds taped to the dirty glass partitions. But maybe, I thought, appearances were deceiving. Then things started to go wrong, and the MOF proved itself as hapless in action as it was in appearance. It's easy to look competent in a prosperous economy (ask Bill Clinton), but the true test is whether you can cope with adversity. So much for the legendary managers of Japan Inc.

Officials in many other Asian countries are no better. We now know that the financial problems of South Korea and Thailand have been obvious to policymakers for a long time, but government officials, like their Japanese counterparts, temporized. When the crash came in Thailand, officials dithered in classic fashion--declaring they would never devalue, but failing to make any convincing policy moves that would support the baht, and finally doing exactly what they had promised they wouldn't.

The list goes on. Malaysia has not yet had a crash, but its policies--from grandiose plans for a new capital to attempts to banish its trade deficit by imposing import restrictions--sound like the kinds of things that ended Brazil's economic miracle in the 1960s. Then there's Indonesia, whose idea of a farsighted industrial strategy is to promote an inefficient auto industry with special tax and regulatory breaks.

Asia's growth will probably resume, driven, as before, by education, savings, and growing labor force participation. It probably won't be as fast as it was: some Asian economies have already pushed savings, education, and labor participation as far as they can. But there are still a lot of peasants in China waiting to be pulled into the modern world, and there are even more in other places where the process of joining the modern world has barely begun. No doubt Asia will eventually account for most of gross world product--but only because most human beings are, after all, Asian.

PAUL KRUGMAN is a professor of economics at the Massachusetts Institute of Technology.