This article deals with the adjustment following external shocks in two open Asian economies: the Republic of Korea and Malaysia. There were important differences in the economic structure of the two countries as well as significant differences in the way external events produced crises that interrupted their dynamic economic growth. Detailed analyses of economic cycles in the two decades preceding 1987-88 show that the behavior of factor markets, particularly the markets for labor and foreign exchange, helped Korea to adjust quickly to the shocks but in Malaysia actually caused the crisis to deepen. For economies heavily dependent on exports, the unit cost of labor in dollars is of central importance as an index of the competitiveness of exports and hence of their ability to mount a sustained recovery after a difficult period. Accordingly, the heart of the analysis is the determination of the unit cost of labor and the factors affecting its change throughout the cycles. Concentration on this critical variable helps to spotlight the crucial differences in the factor markets of the two economies.