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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

ASIAN REBOUND

It's important not to let the new optimism derail needed changes


DON'T LOOK NOW, BUT the 16-month-old Asian Crisis may be bottoming out. Stabilizing currencies, rebounding share prices and mounting trade surpluses are feeding optimism from South Korea to Indonesia that the whirlpool sucking regional economies into depression is no longer pulling as strongly as before. The positive metaphors - turning point, light at the end of the tunnel - are piling up. Governments, private analysts and the International Monetary Fund are speaking of recovery taking root as soon as mid-1999.

It is all a bit reminiscent of March and April this year, when sharp financial-market rebounds also spurred talk that the Crisis was nearing its end. The subsequent months showed not only that Asia still had a long way to sink, but also that the entire world economy was vulnerable to a soaking. This time, though, there are firmer grounds for saying that the Crisis may be turning. The challenge is not to let the justified - and much-welcomed - hope derail the tough decisions that still need to be made in the months ahead.

Why the hope? First, the major economic powers have finally admitted that Asia's Crisis is the world's and moved to shore up the global economy. Interest-rate cuts in the United States and several European countries should ensure that their economies - vital markets for Asian exports - will not slow drastically. Coordinated efforts to contain market turmoil, reaffirmed by the G7 industrial nations last week, should prevent the Crisis from spreading to Latin America and reassure investors that emerging markets do have a future.

Second, Japan has finally passed into law a plan to recapitalize its debt-burdened financial system. The nation's banks are starting to face reality by closing unprofitable operations, seeking mergers and swallowing their pride to ask for public assistance. Third, numerous hedge funds and speculators that profitably rode - and fueled - Asia's woes have been so wounded by wrong bets on Russia and elsewhere that they should be unable to cause much trouble for a while. And finally, governments and companies across the region have made grim progress in digging their way out of the rubble.

But perils still abound. The most obvious ones are external. Brazil, despite G7 aid, may still crash, which would sorely test confidence in the U.S. and Europe. Russia remains on the brink of an abyss, with the shaky health of President Boris Yeltsin compounding nervousness. The upward momentum of the U.S. economy and Wall Street are not assured even after recent monetary easing. If more hedge funds like Long-Term Capital Management confess to big losses, that could severely dent creditor banks. And China could be shaken if the collapse of Guangdong International Trust and Investment Co. triggers more failures.

Even if no fresh crises erupt, much work needs to be done before Asia fully arrives at recovery. One obstacle is the lack of money. The collapse of bank credit is choking companies regionwide, while rising unemployment and poverty are feeding social distress. The $30-billion fund promised the region by the Japanese government will help, and the G7 should also make money available to ensure that Asian economies can continue to function and work toward recovery.

Ultimately, the answer is to get private capital flowing again. That requires tough decisions by both creditors and borrowers. The former need to accept "haircuts" on their worst-judged loans. Writing them off will not only help Asian borrowers, but also boost creditors' chances of getting the rest back. Borrowers have to accept that they must pay back what they can. Already, some who have the cash flow are using the overall payments freeze as an excuse to avoid their creditors.

But the hardest decisions may be those still to be made by individual companies and governments. With the glow of a new dawn just beyond the horizon, some politicians and business chiefs who have survived so far are thinking they may not need to change their ways after all. They are wrong. Unproductive capacity must still be shut down. Opaque books have to be made much more transparent. Convoluted lines of ownership must be clarified. And foreign investment and managerial input has to be accepted. The old ways made Asia vulnerable to the devastation of the Crisis. An impending end to the Crisis is no reason to go back to bad old ways.

The upcoming summit of the Asia-Pacific Economic Cooperation forum will be a good chance for Asian nations and their key trading partners to strike a consensus on the way forward. The issues include how to alleviate Asia's debt burden, how to curb dangerous hot-money flows while promoting investment, and how to quash moves toward protectionism.

The respite brought by rebounding markets and the improvement in some macroeconomic numbers remains fragile. Trade surpluses are rising not because exports are strong but because imports are down due to weak demand. Currencies are firming not because underlying fundamentals are much better, but because moribund economies have little need for dollars and the greenback is flagging against the yen from doubts about the U.S. economy. Still, the respite is real. But the hope that it brings is no reason to let the guard down. Rather, it should be a spur to redoubled efforts to lay the foundations for a sound, sustainable recovery.


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