"There's Hope For Recovery"
A TIME panel of experts says Asia's future lies in cleaning up bad loans and keeping the U.S. healthy
To find out whether that faint trace of light on the Asian horizon is indeed the dawn of a new global recovery, TIME convened a meeting of its Asian Board of Economists last week during the World Economic Forum's East Asia summit in Singapore. Excerpts from the freewheeling, two-hour discussion:
IS ASIA'S CRISIS DEEPENING?
David Hale, global chief economist, Zurich Group: This is no longer an Asian crisis, it's a global crisis. The bad news for Asia is that America, which has been a great market in the past year, is about to slow down. That will delay Asia's recovery.
Jeffrey Sachs, director, Institute for International Development, Harvard University: I have always thought this was a crisis of capitalism, not just Asian capitalism. It was a crisis of international capital flows and their instability. But the fact that it was treated as a crisis of Asian capitalism has had real consequences. It exacerbated the sense of panic in Asia and did collateral damage to other parts of the world.
Kenneth Courtis, chief economist and strategist, Deutsche Bank Group Asia Pacific, Tokyo: What's pushed this crisis so deep is the enormous financial implosion in Japan. We've had seven years of irresponsibility, with 520 Japanese politicians dancing around the carcass of an insolvent banking system and doing nothing. There's no way to stabilize the rest of Asia without stabilizing Japan.
Tommy Koh, Singapore's Ambassador-at-Large: Isn't the real problem that private capital flows, hedge-fund flows have grown so enormous and that you need institutions to oversee them?
Mari Pangestu, executive director, Centre for Strategic and International Studies, Jakarta: But even if you can get the hedge funds to disclose things, new instruments will pop up. Isn't it better to focus on getting the policies right in each country, so that the capital flowing in is used productively?
DID THE WEST MAKE IT WORSE?
Sachs: The U.S. and the IMF made the crisis worse than it had to be by pounding hard on Asia's economies, riling the markets. They tried to use the crisis to push a reform agenda. The problem was that they misunderstood the real source of the crisis, and things blew up in their hands.
Richard Koo, chief economist, Nomura Research Institute, Tokyo: A lot of what happened in Asia was driven by Europe. There was a sense that Asia had been lost to the Japanese and the Americans. The Europeans felt they had missed the boat and had to get back in as quickly as possible.
Sachs: True, German banks came in late and built up to the very last moment. Many started pumping money into South Korea in 1996 just as others were starting to pull back. This suggests that there's been a lot of ill-informed lending based on a thin understanding of specific conditions--and therefore easily reversible in a panic.
RECOVERY AHEAD?
Hale: The Asian recession is probably at its most intense now. But the potential for recovery is limited, because the banks haven't been recapitalized and because the American economy is headed for a slowdown that will limit the potential for export-led growth. For Asia, the declines in output in the last 12 months have been like the U.S. in the 1930s: we're back in the Great Depression.
Sachs: I'm a bit more optimistic. There is hope for some recovery in Asia, even delinked from the rest of the world. These countries are not sitting on the edge of a balance-of-payments precipice as they were 12 months ago. Countries like Thailand and South Korea now have current-account surpluses. They can have domestic-led growth for a while without hitting a wall. I would guess that in 1999 we'll see positive growth for Thailand and Korea.
Hale: But they haven't got a banking system anymore.
Sachs: True. A lot will depend on whether there can be effective workouts of the bad banks and of enough bad enterprises to enable some reflation. If the U.S. goes into a deep crisis, all bets are off for everybody. But if the U.S. avoids a deep crisis, it's not as if Asia hangs by the thread of the speed of U.S. recovery. For 1999 in Asia, there can be some domestic-led recovery, at least for the countries that have pushed farthest for adjustment.
Courtis: Consider Korea. It has foreign-exchange reserves of around $45 billion, up from zero a year ago. It has a healthy current-account surplus. The bridge loans have come in; banks rolled over and then extended maturities. And Korea has sold, at an annualized rate, assets worth $10 billion for the year. So as soon as world markets settle down, Korea is in a position to issue an oodle of long-term government bonds; it will be in position to socialize an important part of the debt of Korea's companies, allowing them to rebuild their working capital. Then we'll see a strong bolt from Korea of $7,000 cars, $400 desktop computers and $50 microwave ovens. That's exactly the IMF strategy: export or die. Korea's not going to roll over and die; it's going to rebuild itself. It could come out of this transition stronger. But the only way to stabilize things is to get more growth in the main markets.
Sachs: Asia will see a little bit of light next year, but it will be a tough year for Latin America, mainly because Brazil hasn't depreciated its currency and made the adjustments Asia has already taken.
Pangestu: Reality check. The social and political effects of the crisis can affect how recovery takes place. I don't think we've seen the worst yet in an unraveling situation. Can countries like Indonesia withstand the social pressures that will come out? My guess is Indonesia will need to form a coalition that accommodates populist and nationalist pressures--and that will slow down reforms.
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R E L A T E D S T O R I E S :
LIGHT AT THE END OF THE TUNNEL? There's still plenty of pain to come, but hope is on the rise that the region's troubles may be waning. Japan's bank-overhaul plan and the Fed's interest-rate cuts bolster the new optimism
INTERVIEW Eisuke Sakakibara, Japan's "Mr. Yen," emphasizes the need for cooperation
POLL Are the region's troubles waning or is the worst yet to come?
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OUTLOOK TIME's Asian Board of Economists evaluates the chances for recovery in the region
GOOD START Thailand has better reviews than returns
THE RIGHT MEDICINE Korea accepts a bitter pill
VIEWPOINT David Roche sees trouble, but no depression
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