JULY 21, 2000 VOL. 26 NO. 28 | SEARCH ASIAWEEK

What, me Worry?
You should. An Asiaweek Roundtable warns against complacency

Not long ago, Asians were desperate for economic recovery. They had seen the crashing end to more than a decade of superior growth. But the Crisis now seems safely in the past. Is it? Many economists and business people worry today that recovery has come too soon and too easily. During the Asia Development Forum in Singapore last month, Asiaweek gathered seven leading economic thinkers for a discussion of what the region has and hasn't done in the wake of the financial meltdown. Also, what dangers lurk in the event of another downturn? The participants: Vinod Thomas, vice president of the World Bank Institute; Chia Siow Yue, director of Singapore's Institute of Southeast Asian Studies; Sanjaya Lall, professor of economics at Oxford University; Ernesto Pernia, a senior economist for the Asian Development Bank; Anwar Nasution, acting governor, Bank of Indonesia; Kawai Masahiro, chief economist of the World Bank's East Asia and Pacific Region; and Graham Scott, former treasury secretary for New Zealand. Excerpts from their discussion with Asiaweek Associate Editor Tim Healy and Senior Correspondent Assif Shameen:

ON LESSONS FROM THE CRISIS AND THREATS TO RECOVERY

Thomas: One key lesson is that, in the face of globalization, the basic fundamentals of East Asia [such as a skilled, relatively low-cost workforce] are a great advantage. But there are also limitations such as the lack of transparency and lack of institutional development that have become exposed.

Chia: We should never have taken our economic performance for granted. You know, it was a real shock. And so that has wiped away any complacency and even arrogance that the region might have been experiencing.

Lall: I'm extremely optimistic. The fundamentals have always been very strong by every possible indicator. They remain strong. But a few words of caution. Because of the pace of technical change and the dynamism of globalization, the past may not be a good guide to the future.

Pernia: We should probably look at the Crisis countries on two levels: more advanced and less advanced. In the more advanced economies like Korea, Malaysia and Thailand, the problem was that high-level human capital development lagged behind macroeconomic progress. [Fortunately] there's greater attention being paid to that particular problem now, and I think that has to be sustained. For the lower-tier Crisis countries such as Indonesia and the Philippines, I think the problem has been more the neglect of the social sectors. Poverty and unemployment quickly became huge problems in the wake of the Crisis.

Nasution: One of Indonesia's weaknesses in the past was that everything centered around president Suharto. He was not an institution builder. In Thailand I think there has not been any real political crisis, but in Indonesia we are still there. [Many of] the political parties are new. Many were established only one year before the election. They don't have a platform, and they don't know how to govern.

Kawai: We never put great emphasis on the importance of financial systems being well-managed and well-run before the Crisis. After all, East Asian countries were growing very fast and corporations were doing well, so what was the problem? This recovery appears to be sustainable, but financial sector restructuring may be just half done, corporate restructuring may be just half done. When a future external or domestic shock hits economies, the systems remain vulnerable. In addition, during the Crisis the public sector increased its debt because of the cost of financial sector resolution and the need to run an expansionary fiscal policy. This increase in public debt is putting a large strain on public finance. And when the next crisis hits, headroom for fiscal policy will be quite limited.

Scott: The shock has been dealt with by damaging the government's balance sheet to improve the private balance sheet. Now you've got all these governments with damaged balance sheets.

Asiaweek: That cannot be sustainable.

Scott: [Governments need to] get those debt levels down so that the resilience is back in the public balance sheet. [During the Crisis], that was the main way of absorbing the shock. In that sense complacency is a problem because there will always be another crisis.

Asiaweek: So it is governments, which are typically not driven by the same economic forces as companies, that are getting complacent?

Chia: I don't really agree. I think complacency comes from the government sector in terms of policy changes and policy implementation. But there's also complacency on the part of the private sector. Basically, when the Crisis hit, there were a lot of corporate problems and there were a lot of governmental problems. When the recovery came so rapidly, people said, hey, we're recovering. What's the big deal?

ON WHETHER ASIA SHOULD BE AFRAID OF GLOBALIZATION

Lall: If the region is strong, then there is a strong regional effect [from recovery] and globalization is wonderful. If the regional effect gets dispersed because of globalization, then certain activities could shift, say, to Eastern Europe or Latin America. Because of globalization, we could see threats emerging from anywhere in the world simply because communication crosses borders so [easily].

Chia: I think we will see the emergence of more regional clusters. So if more regional production clusters and things like that emerge, then that will offset the globalization trend.

Kawai: As economies are more globalized, more shocks are coming from abroad, and the East Asian economies will experience more ups and downs. Growth will no longer be in a straight line. Governments must establish a good macroeconomic policy framework to ensure that the financial systems and the corporate systems are resilient to such ups and downs.

Thomas: I disagree with somebody. I don't know who [laughter]. My sense would be that globalization is growing faster and more intensely than is generally recognized. The [past] regional contagion that makes us ask the question -- Is East Asia going to face another crisis? -- will [not be] the right question [in the future]. The more you globalize and integrate with others, in a curious way the rest of the world will better understand the Asian risk. This Asianization of risk assessment will help everyone to understand and put in perspective the perceived risks.

Lall: I appreciate that globalization is an enormous resource. It is also very, very frightening for countries that are not prepared to deal with it.

Chia: Singapore is maybe one of the most globalized economies in the world. And yet we see that if we talk about the Crisis as the downside of globalization, Singapore suffered the smallest ill-effects. I think it's a question of policy -- how [a government] manages globalization in order to minimize vulnerability and risk.

Scott: To be for or against globalization is foolish really. In the part of the world where I come from, Polynesians left Southeast Asia thousands of years ago, sailed out over the Pacific and ended up in New Zealand -- that's globalization. If there is one thing that comes out of the Crisis which is a lesson for managing globalization, it is to tidy up the relationship between the private sector and the government.

Lall: Countries [in Asia] are today reluctant to freely allow acquisitions. I think perhaps they should [accept them more readily]. Acquisitions can be very, very powerful tools. From the point of view of the host country, they can actually save a domestic firm rather than letting it undergo a slow, painful death.

Chia: In developed countries, acquisitions are [usually] driven by business competitiveness. In many of the East Asian countries, they are seen as a fire sale of assets. [Asians] don't think [acquisitions] are driven by competition.

Asiaweek: Look at what's happening in Malaysia. The government said, we don't want the foreign companies, and our companies need not go bust.

Scott: Who is "we"? Usually, what lies behind these political statements are the managers and the shareholders of these companies who have [all but] lost their jobs and lost their capital.

Chia: Hold on. Workers' interests are often on the side of the national owners. They're worried that with every merger and acquisition and restructuring of the firm comes retrenchment.

ON ASIA'S NEED TO IMPROVE TRANSPARENCY AND DISCLOSURE

Kawai: In the pre-Crisis period some important indicators, such as current accounts, capital inflows, and international bank exposure, were available. People knew that they were putting a lot of money into Thailand, Indonesia and other East Asian economies. Global investors knew that the banking systems of these countries were not very healthy, but still they poured more money in. Availability of information is different from private investor behavior.

Asiaweek: You are saying: "Wait a minute. One possible consequence of globalization is that you have a lot of outside influences on what happens"?

Scott: The average intelligence of foreigners is about the same as the average intelligence of local people. These influences can be benign or malign. You can't always know in advance.

Asiaweek: Isn't Mr. Kawai saying that in Asia the lenders didn't listen to the warning signs? And yet they didn't suffer.

Scott: You've raised a moral hazard problem that's been left behind from the way the Crisis was managed. It may be that the only way that problem goes away is if we get another, smaller crisis [nervous laughter].

ON THE FUTURE

Scott: I am quite optimistic because I believe that capitalism, unfortunately, proceeds through crisis. Democracies don't get around to fixing problems until they're forced to. And this region of the world is becoming more capitalistic and more democratic, which means it's probably more likely to have these forces let loose in it from time to time. But what I find very optimistic is that there's an enormous amount of work going on around the region for strengthening the very institutions that failed last time.

Thomas: When we look at the next two decades, we had better recognize some important trends. Today about 7% or 8% of the population is over 65. That will triple in about 30 years, which is an extraordinary increase compared with the experience of industrial countries. Those social and demographic factors may be key contributors to potential crises in the future.

Chia: One of the elements of the Asian miracle was the fact that the population dependency ratio was very low. Now we are entering an era in which the population will age rapidly. In another 20 years Singapore will have about 20% of its population above the age of 60. That is as bad as, if not worse than Japan.

Lall: You know what that means. Much more labor mobility. Japan needs 800,000 workers per annum to sustain its economy. But what happens if you project that through the whole of Asia. Is it a worrying picture or a good picture?

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