Asia's familiar signs of economic woe

U.S. boom fueled region's recovery, not needed reforms


TOKYO - Across Asia, the dark headlines are alarmingly familiar: plunging stock markets, sluggish exports, bad bank loans, and local currencies losing value against the dollar.

As the new year dawns over Asia, the region seems poised to produce "Asia Financial Crisis Part II," an unsettling sequel to that singularly bad movie of 1997.

From Japan to Indonesia, unemployment is set to rise in the new year as exports to the United States and Europe weaken. Political instability is on the rise.

Yet economists say a rerun of the 1997 Asian crisis looks unlikely now. That's because a two-year spending spree by American consumers gave Asian nations a chunk of cash for their national checking accounts. Thanks to surging exports, countries such as South Korea, Thailand and Malaysia, once on the brink of bankruptcy, have huge foreign reserves and the wherewithal to fight a short-term global downturn.

Even so, the outlook is hardly cheery, because the same export boom that helped Asia rebound so quickly encouraged governments to mark time rather than fix their economies.

In many respects Asia is suffering from a continuation of the old crisis, and there doesn't appear to be any quick fix.

"The Asian nations looked like they got out of trouble, but to some extent it was an illusion driven by the export boom," said Ron Bevacqua, chief economist for Commerz Securities in Tokyo. "The only thing that really got Asia out of its crisis was its massive exports to the United States and Europe."

"There has been a lack of sustained momentum" to reform Asia's economies, making the region vulnerable once again, said Bill Belchere, chief Asian strategist with Merrill Lynch & Co. Inc. in Singapore. "The export tide is ebbing, and you're going to see a lot of the debris left on the beach."

Today's problems have a lot to do with the debris from 1997. During the second half of that year, Asian currencies, led by the Thai baht and the Indonesian rupiah, collapsed, and markets imploded from Jakarta, Indonesia, to Seoul, South Korea.

The International Monetary Fund lent billions to Thailand, Indonesia and South Korea after their central banks ran out of dollars trying to defend local currencies from speculators.

In exchange for financial assistance from the world's lender of last resort, governments agreed to undertake deep and difficult reforms. They were to close failed financial institutions, reduce real estate loans and start imposing Western-style measures of profitability and risk on new loans. In the past, banks often lent on the basis of friendship and political clout.

In some nations, the first stages of reform took hold. But as they faced the most painful choices, such as shutting huge conglomerates or closing loss-making factories, the U.S. economy went into high gear.

Investment in America's technology industry spurred demand for the computer products that Asians built. A surge in U.S. consumer spending boosted sales of Korean-made appliances, Indonesian textiles and Thai-produced auto parts.

As U.S. equity markets soared, investors began pouring money into Asian stock markets, helping many of them recover.

The export boom alone permitted East Asia's current accounts, the broadest measure of the trade balance, to swing from huge deficits into an estimated $100 billion surplus, earning these nations sufficient foreign reserves to pay off creditors. But it also killed the incentive to reform.

With painful financial reforms left only half-finished, many nations were left "with inefficient management, misallocation of resources and overcapacity in many industrial sectors," Bevacqua said.

Today they may be paying the price, because the export boom proved relatively short-lived. As the American economy throttles back this year, Asian economies will retrench as well, analysts say - growing about 5 percent, instead of the vibrant 7.5 annual rate of last year. China appears to be escaping the downturn and expects 8 percent growth over the next few years.

"You take away the exports that have been the motor of Asia's recovery and there isn't another motor. The other motor is off in the shop being fixed," said Geoffrey Barker, chief Asian economist for Hong Kong & Shanghai Banking Corp. in Hong Kong.

Exports to Europe and the United States - as well as Asia's traditional high savings rates - have been the keys to Asia's economic prosperity.

In the past six months, however, "the terms of trade have turned dramatically against Asia," said Kenneth Courtis, vice chairman of Goldman Sachs Asia.

Import prices for essentials such as oil have soared while exports such as memory chips have plummeted. Spot prices for 64K DRAM memory chips, which sold for more than $17 in October 1999, were less than $5 in October last year.

"So what may seem like a soft landing in America may hit Asia pretty hard," Courtis said. "What does that mean for Asia? Earnings will fall, investment will fall, capacity cutbacks will follow and consumers will pull in their horns."

And as the economies slow, the importance of addressing old problems increases. "Unresolved problems are being forced back to the top of the agenda," Courtis said. "And as growth slows dramatically, political tensions will rise."

What is evident throughout the region, Merrill Lynch's Belchere said, is that "a whole model of economic relations needs to change dramatically, and that's going to take decades, not months or quarters. You are trying to change an old, comfortable structure, and there is always going to be opposition."

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