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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

THE BIG SLUMP

How long, how deep -- and how Asia can get back on the right lane

By Assif Shameen / Hong Kong


AS PRESIDENT OF THE world's biggest financial institution, the Bank of Tokyo-Mitsubishi, Takagaki Tasuku has a finger on the pulse of Asia. "Economies are cyclical -- they tend to grow, then slow down, and then grow again," he says as he strolled one afternoon last week through the Hong Kong Convention and Exhibition Center. The chief executive ticks off the economies currently in a slump or about to slow: "Japan, Korea, almost all of Southeast Asia." The exceptions are China, India and Taiwan, which are in recovery mode after a recession. Takagaki motions with his finger -- a cycle.

Kim Suk Joon is not so sure. He is chairman of SsangYong Business Group, South Korea's sixth-largest chaebol, which is trying to reschedule its debts and sell assets to stay afloat. "Our economy has been weak for nearly two years now," he frets. For him and many others, Asia's problems are also structural. This view holds that the region's economies need to reinvent themselves. That means cutting current-account deficits, deregulating the economy, opening up markets -- and improving infrastructure and productivity.

Welcome to the annual talkfest of the World Bank and International Monetary Fund (IMF). Takagaki and Kim were in Hong Kong last week to join the world's largest gathering of finance ministers, central bank governors, CEOs, financiers and academics. More than 14,000 participants tackled a host of international issues. For Asia, the most interesting was the near constant attention given to the region's economic problems. The good news: the consensus is that Asia is still one of the world's most dynamic areas. The caveat: it would remain so only if wide-ranging reforms are implemented.

What about Southeast Asia's currency woes? "Our experience has been that this sort of crisis lasts three or four months," says Stanley Fischer, the IMF's first deputy managing director. The devaluations started when Thailand allowed a managed float of the baht July 2. In his view, the necessary steps for recovery have been taken. "Thailand has sought help from the IMF," says Fischer. "The Philippines is already under an IMF program. Indonesia has made structural changes while Malaysia has postponed some of its mega-projects."

Asia will continue to grow -- most at the mega-meeting agreed -- but not at the same phenomenal rates. Because of the currency crisis, the IMF trimmed its 1997 GDP growth projection for Thailand by more than three percentage points. But it cut forecasts for others only slightly. "Asia's expansion this year, by 7.5%, will still significantly exceed average growth in the 1980s and early 1990s," it says. Andrew Buxton, chairman of Barclays Bank, agrees. "Some economies that were growing at 8% a year for nearly a decade may now grow at 5% or 6%," he says. "But that doesn't mean we should be writing off one of the world's most exciting growth areas."

Still, brace yourselves. The slowdown -- and the measures needed to ensure it does not mutate into a recession -- mean hard times. Thailand, the epicenter of the currency quake, will be the most severely affected. Other economies, especially Indonesia, the Philippines and Malaysia, will also get hit (see below). "Interest rates will remain high, companies will start to hurt, profit margins will fall, unemployment will rise," warns Kenneth Courtis, chief economist for Deutsche Bank Group Asia Pacific. Many in Asia are already paying more for rice and other commodities (and much worse for luxury goods) and shelling out bigger amounts on mortgages and loan repayments.

How long will the pain last? Most experts at the Hong Kong meeting say one to two years. But keep an eye on Japan and China. Ueda Kazuo, a professor at the University of Tokyo, says the currency contagion and Asia's economic slump are "actually symptoms of bigger regional problems -- the emergence of China as a major low-wage competitor and the arrival of a weak yen." Between them, the two giants are squeezing out their Asian rivals in nearly all segments of the export market.

"People have underestimated the role of Japanese money, funneled through Japanese banks, in the Asian growth story," argues the academic. "Japanese manufacturers did not relocate to Latin America because they thought the economies there were not as well managed as some in Asia. Now, of course, Latin America is booming. And with fixed exchange rates in Asia a thing of the past, the attraction here is really just the geography." Ueda expects Japanese manufacturers to invest more in Latin America and Eastern Europe.

The worry is that they may bypass Asia altogether. When the yen strengthened from 250 to the dollar to 125 in the 1980s, Japanese companies set up operations in Southeast Asia. Now, the yen is weakening. "Medium and small Japanese manufacturers, the main investors in Asia over the past five years, have very little incentive to relocate," says Ueda. "At 80 yen to the dollar, yes. At 100 to the dollar, it's debatable. At 130, I'd rather not think about it." The yen is trading at 121 to the greenback, from 112 a few months ago. "The Japanese are tempted to drive it down even further," says economist Courtis.

The problem is Japan's fragile recovery. GDP contracted an annualized 11% in the year's second quarter, the biggest three-month fall experienced by any developed economy since the oil shock of 1973, though the IMF still forecasts 1.1% growth for the whole year. "Nearly half of Japan's exports now go to Asia," says Courtis. "As Asia slows down, Japan would need to export its way out of trouble by selling to the U.S. and Europe." Those markets are in good economic shape to absorb Japanese goods -- although Tokyo runs the risk of provoking a backlash if its trade surpluses with Western partners rise too rapidly.

Japan's export surge could hurt Korea, which has a roughly similar product mix. Others in Asia sell shoes, garments and intermediate electronics like computer parts, which Japan no longer makes. But there is China. Despite Southeast Asia's round of devaluations, says Ueda, "China still has the price advantage at the low end." It is also showing political will to restructure the economy, especially state enterprises. "We will speed up the opening of our banking sector to foreign investors," Vice Premier Zhu Rongji promised in Hong Kong.

To compete on exports and win their share of foreign investment, others in Asia must match these initiatives. There is debate about the pace and scope of the region's market-opening moves. By and large, however, the accepted wisdom is that liberalization could bring long-term gains. Take banking. "Problem loans can only be written off as the economy improves and banks get stronger or have capital infusion from outside," says Barclay's Buxton. There is also broad agreement about the need for fiscal discipline, including cutbacks in big-ticket infrastructure items to slim down current-account deficits.

But some projects must go ahead. "If Asian countries are to keep their edge in the global marketplace, they should embrace telecommunications and information technology," says Thomas Elliott of U.S. consulting firm Arthur Andersen. "Multinationals looking at Thailand over the next five years would want to ask about Internet access and telephony charges." Governments seem to be making the correct choices. Malaysia, for example, is deferring the $8.7-billion Putrajaya administrative complex, but not the $15-billion Multimedia Super Corridor linking the country to global information grids.

With the IMF as counselor and taskmaster, other macro-economic adjustments are being promised. To be sure, a lot depends, again, on political will. But that seems in reasonable supply these days. At the Asia-Europe Meeting in Bangkok Sept. 19, IMF Managing Director Michel Camdessus assured Thai Prime Minister Chavalit Yongchaiyudh that the Fund was happy with the way Bangkok was moving on the IMF's rescue program, which calls for deep budget cuts and higher taxes. "Asia's decision-makers cannot turn back the clock," says Linda Tsao Yang of the Asian Development Bank. "I'm confident that they will take the right path."

What else needs to be done? Masood Ahmed of the World Bank wants governments to tackle corruption. ASEAN has proposed a $100-billion fund to bail out distressed economies. Japan has been won over and the U.S. has agreed to join talks. But the IMF is worried that the fund, if it does not prescribe conditions, will propagate the notion that tough measures are not needed for economic recovery. The Asian Fund will function as "a standby facility to enhance the IMF's efforts toward economic and financial stability," responds Malaysian Finance Minister Anwar Ibrahim. Don't expect to see the plan implemented soon. But the fact that it is being discussed underlines Asia's new reality. The problems of one country eventually spill over to the rest. The whole neighborhood must search for the solutions.

-- With reporting by Julian Gearing / Bangkok and Law Siu-lan / Hong Kong


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