It’s easy to be pessimistic about Asia now the US is slowing. US growth and imports helped Asia rebound from the crisis in 1998. In 1999, Asian finance ministers proclaimed to the IMF/World Bank meetings in Washington that exports had kick-started growth – Korea’s economy grew by 7% in 1999, following a 5.8% decline in 1998; Thailand’s grew by 4% after a 10% fall in 1998. Huge current account surpluses restored currency reserves to healthy levels, rebuilding sovereign creditworthiness despite the assumption of huge contingent liabilities from derelict banking systems.
The real work, reforming banking systems and restructuring corporate sectors, was just beginning and only the foolish believed this would be as speedy or as straightforward as the V-shaped rebound of macroeconomic indicators. Today, as economists debate the extent and depth of the US slowdown, fears of a dramatic decline in the volumes and prices of Asian IT-related exports to the US are depressing stock prices. Asian currencies have been declining for several months against the dollar, a trend likely to continue. Asian governments are now happy to accept weak currencies as they seek to restore flagging growth by cutting interest rates. At a time when the yen is weak, they don’t want to see imports suddenly booming.
Against such a backdrop, foreign investors are keen to understand how Asian reforms are proceeding. The picture is confused. Governments used the cover of the recovery in 1999 to disguise slow progress and back-sliding. Now, slowing economies and contracting credit mean that delivering ruthless reform is unpalatable.
It’s particularly tough in democracies. Asian governments being lectured by westerners steeped in free-market orthodoxy to let bad banks and companies go to the wall, must answer to voters at home. In Thailand, the Democratic Party, which came to power amidst the crisis of 1997, introduced IMF-inspired austerity measures to halt the outflow of foreign funds and strove to pursue reforms, has been ditched. In its place comes the Thai Rak Thai party which campaigned on vague populist promises of increased public spending and a moratorium on farm debt.
With the worst of the crisis past, Thai voters turned against politicians who they saw inflicting painful measures dreamt up by the IMF and the World Bank and attached as conditions to emergency financial aid provided at the worst point in the crisis. The new government is vague as to how it will pay for its spending, and the further assumption of non-performing loans of Thai banks in its proposed national asset management corporation. Outgoing deputy prime minister Supachai Panitchpakdi assumes leadership of the WTO, having learned a bitter lesson which he outlines in an interview beginning on page 38. He regrets the failure to temper IMF-style free market solutions to Asian culture and says reform will have to be slow if it is to succeed at all.
In Korea, this lesson has been learned. Elections are due in 2002 and growth has slowed. Kim Dae-Jung’s government, which also came to power at the depth of the crisis and scored early successes, is not going for the quick fix. Public funds continue to be poured into the banks. Contrary to western prescriptions for market-based reforms, the government continues to intervene in credit allocation by intermediaries. Most recently it came up with a plan for Korea Development Bank to buy up illiquid and distressed corporate bonds. It then pressured other banks to buy some of this exposure. The few who resisted felt the sting of politicians’ displeasure. Most went along with the scheme: Korean banks endorse their government’s right to expect private sector lenders to co-operate.
And perhaps they are right. Korea has no tradition of benefits for the unemployed. Closure of impaired corporations would bring down the banking system – which even now refuses to lend to domestic companies – and throw workers on to the streets. The government has taken a tough line with the unions, arresting senior officials and scaring others into hiding. But speedy, full-scale market-based reform – however desirable in theory – would bring the whole country into crisis.
Western investors understand this. What promotes confusion is Asian politicians talking up their reform efforts and discipline, for fear of being seen as back-sliding by the multilaterals. Quietly they do less than they proclaim. It might be in everyone’s best interests to do away with such pretence. Privately, many at the IMF admit the folly of prescribing prolonged high interest rates and budget surpluses to crisis economies. Reform will be slow and uneven in Asia. It has to be. Let’s admit it.
But it had better not be too slow. Japan is the example of what to avoid. With a political system that endlessly delays restructuring, even zero interest rates and vast public spending cannot instill growth. Other Asian governments do not have the luxury of Japan’s pools of domestic savings to fund public debts. Asian governments will have to show enough progress with reform to attract foreign capital to provide the financial strength to continue restructuring. If they don’t set this virtuous circle in motion, the world’s providers of capital will turn their backs on Asian economies one by one.
