Is Asia Heading For A Crisis? - Asian economy - Brief Article

Business Asia, July, 2001 by Art Pine

WHEN ASIA'S economies unexpectedly bounced back from the region's 1997-98 economic collapse, not everyone was sanguine about the good news.

Critics pointed out that Asian governments, made complacent by the rebound, had begun shelving the financial reforms that economists had warned were needed to ward off future crises. What if the US economy slowed? Wouldn't Asia be vulnerable again?

Now, with the US economy growing at only a fraction of its earlier pace, Asia's income from exports has fallen off dramatically. Many Asian governments have given up on financial restructuring, saying their economies can't cope with it now.

"All the weaknesses that got covered up in the recent boom are once again exposed," said Gregory B Fager, Asian expert at the Institute of International Finance, an umbrella organisation for banks that lend to emerging market countries.

That doesn't mean the region is on the brink of another financial crisis. Asian countries still are better off now than in 1997. They're no longer plagued by bubbles in real estate and stock prices. Currencies aren't fixed. Capital is staying put.

Nevertheless, the countries' financial systems still are very fragile. Corporate restructuring is incomplete. Accounting standards remain spotty. Banks are laden with non-performing loans. Governments still are propping up state-run corporations.

Indeed, many Asian governments appear to be backsliding. South Korea has resumed bailing out state-run conglomerates, which it had pledged to sell. Thailand has stopped prodding banks to liquidate non-performing loans. And so it goes, region-wide.

Adding to the Asians' difficulties is that Japan, which had been growing, albeit sluggishly, only a few months ago, is now in a full-fledged recession and dragging down the smaller countries in the region.

The decline of the yen already is having reverberations all over Asia, weakening the currencies of emerging market countries such as South Korea and Thailand and eroding the value of their exports and their financial assets.

Together with the worsened outlook in the United States and Europe, the slump in Japan and other Asian countries could raise the risk of a synchronized global downturn, an economic version of the "Perfect Storm" chronicled in the book of that name.

The economic slowdown already has helped spawn political turmoil in several Asian countries. Governments in Indonesia, the Philippines, Thailand and even Malaysia all are facing some unrest, Adam Posen, Asian expert at the non-partisan Institute for International Economics, notes. Indonesia is facing serious uncertainty.

"If we get another massive slowdown in Asia, you're going to get a lot of finger-pointing," Posen said. "The US will say, `You didn't do enough reform'. The Asians will say, `We played by the rules, and here we are out of luck'."

Optimists hope that the new squeeze will prod governments into resuming their financial restructuring. Yet that's not likely, Posen contends. "The fact is that protected industries tend to become more protected in a downturn because they have the most political friends," he argues. "If all it took was bad times, Russia would be in good shape now."