Don’t think that Asia is in the clear. Recovery is shaky, and reform is a minefield. True, the nations most affected by the crisis are not going the way of Japan, which stagnated for almost a decade before showing a surprising, probably ephemeral, burst of energy early this year. South Korea and Malaysia have responded to the kind of massive government spending that has failed in Japan. Growth has surpassed expectations in all the crisis nations–but that still leaves some pretty anemic numbers. Worse, there is no guarantee that the recovery will lay a new foundation for the sort of industrial expansion that once drove the Asian miracle. “The 1999 growth will come at the expense of 2000,” says Seema Desai, regional economist for Schroders Securities in Hong Kong. “Next year these recoveries are going to run out of steam.”
The danger is real. With Asian markets rising and currencies stable, some economists warn that premature optimism threatens to choke off efforts to shake up the triangle of politicians, banks and businesses that colluded to amass Asia’s mountain of bad debts and misguided investments. Malaysia is littered with partly finished or unfilled megaprojects like Petronas Towers, the world’s tallest building, and the new national capital at Putrajaya. Even in reform-minded Thailand, there is concern that new money might one day chase the same old hollow ventures in real estate and shopping malls (following story). “Recovery is not reform, and they’re setting themselves up for a double dip,” warns Catherine Mann, senior fellow at the Institute for International Economics in Washington.
Most Asians dismiss the threat of a new crisis. Yes, reformers have been swept into power in South Korea and Thailand, while in Indonesia, Suharto has been swept out of power. But the political map of Indonesia is murky, and Malaysia is still ruled by Mahathir Mohamad, a hostile opponent of the free-market solutions to Asia’s troubles. Reform has left key politicians and businessmen in place; it is only the banks–the weakest leg of the old power triangle–that have felt the heat. In Thailand, for example, the government has closed or seized two thirds of the nation’s financial houses and seized or forced the sale of most of its 15 major commercial banks.
Among the family-run conglomerates that dominate the Asian economies, there is little sign of change. Reform would mean shrinking their sprawling empires and opening up debt-ridden businesses to foreign buyers. In South Korea, that’s not happening. While publicly playing along with President Kim’s demands to retrench and wean themselves from government loans, the five big chaebol privately have other ideas. Since March 1997, they have quietly expanded their share of nonbank financial institutions, including insurance and securities firms, from 22.5 percent to 34.7 percent–gaining what critics call a “private purse” to finance their ambitions. “Kim Dae Jung is the first president to gain the upper hand over the chaebol, and he has these guys running scared,” says Tae Hee Yoon, head of Korea Economic Intelligence, a consulting firm. “But that doesn’t mean the chaebol will lose the war. They’ve got very sophisticated ways to defend their position.”
A new crisis would not look like the last one. The role of foreign investors has changed. Bargain hunters have been buying Asian factories and businesses, but this is stable long-term investment, not the “hot money” in stocks and short-term dollar loans that fled Asia after Thailand’s collapse in July 1997. The rise in stock markets from Hong Kong to Malaysia and Indonesia has been driven mainly by local investors, not outsiders. Foreign banks, meanwhile, continue to cut their overall exposure to Asia. And in one of the most successful of the IMF-sponsored reforms, all of the crisis countries except Malaysia now have new supervisory institutions to guard against short-term hot money from foreigners.
Still, there are other dangers. Though largely beyond international scrutiny, top banks in China are believed to be in worse shape than Thailand’s before the fall of the baht. A collapse of the Chinese banks could wipe out the savings of millions of ordinary Chinese, triggering social unrest that might make Indonesia’s 1998 riots look tame. And some observers worry about the recent issues of corporate bonds to finance recovery in Malaysia and South Korea–also beyond the reach of the new regulatory agencies.
So far, recovery is not leading to a thorough overhaul of the “Asian model.” Instead, the region may end up with a partly and unevenly Westernized hybrid. Businesses hardest hit by the crisis–from banks to luxury consumer goods–will be the most likely to open to foreign owners and directors, professional management, modern accounting standards and other changes pressed for by the IMF. The countries that had long traditions of political meddling in business and finance will prove the least likely to move toward more modern models. Thailand, a revolving-door democracy, may prove more open to change. “Five years from now,” predicts Mann, “Korea is going to look very much like it does today. Thailand is going to look most like the United States, with a clear separation between government and business and an aggressive entrepreneurial class. And Indonesia may be somewhere in between.” That’s assuming, of course, that recovery doesn’t wash the reforms away.
