DAWN - Business; 12 January, 1998

What went wrong in South-east Asia
By Dr Farrukh Saleem

JAPAN's bubble busted in the early 1990s. First, the Tokyo Stock Exchange crashed. Then came a free-fall in property prices. Japanese leaders have been reluctant to reform and the country's economy, as a result, continues to stagnate.

Thailand went belly up in the July of 1997. Thailand's bust was followed by Indonesia, Malaysia, the Philippines and then South Korea.

The current crop of Japanese leadership is attempting to turn the economy around through "big infusions of public money and tax cuts."

In Thailand, the "new government is taking harsh measures to shut down troubled finance companies" but even more suffering lie ahead.

Thai state-owned firms now face a 65 per cent budget cut. The Thai Farmers Bank predicts that "an estimated 2.4 million Thai will lose their jobs in 1998" and the Thai economy may "experience negative growth in 1998 for the first time in decades."

In South Korea, even a $60 billion "IMF bailout .... may not be enough to halt the free-falling won."

The real strength of the once High Performing Asian Economics (HPAEs) has been their extraordinary social sector spending, high domestic savings, a literate labour force, a strong work ethic and low wages.

Their weaknesses: Crony capitalism (ruling party and its associates accumulating enormous wealth), bad bank loans and a closed "command-and-control" politico-economic structure.

All of the strengths of HPAEs have collectively been reducing poverty among the masses for the past 20 years while creating billion-dollar empires for the ruling elite and its affiliates.

According to a recent Asiaweek report, the financial "earthquake exposed economic weakness that had been ignored during more than a decade of exuberant growth. Of course, some of the practices now condemned had helped Asia advance. For many years, the state-led, export-driven was model for lifting countries out of poverty. Only now, in an age of increasingly open and complex markets, has it become evident that some of the traditional ways contain serious liabilities as well."

With the advent of global financial integration, the weaknesses are now being exposed and the 'global village' does not like what it sees. Southeast Asia's is cracking at the seams.

In Thailand, the banking sector is in a terrible shape. Dozens of finance companies are technically bankrupt. Bad bank loans seem to be unmanageable. Government favourites, on the other hand, are adamant in saving their faltering empires.

Add political uncertainty to that and its a recipe for disaster. A $17 billion IMF rescue package is available but at the cost of an economy-wide restructuring.

In Indonesia, the IMF now wants President Suharto "to curb his family's influence in return for a $40 billion bailout."

Suharto's six children, their in-laws and the President's friends have indeed been major beneficiaries of the Indonesian march towards prosperity. They are all fighting back.

Lack of transparency, lack of market-based decision making and the lack of a liberal democracy are the factors that Indonesia would have to overcome. Resisting the IMF's logical approach to resolving the country's problems is certainly not in Indonesia's own long-term interest.

Malaysia

The Malaysian story is one that of an over-ambitious government throwing too much of public money on hugely expensive, controversial projects.

The $4 billion Kuala Lumpur International Airport, the $6 billion Bakun Dam, the $2.5 billion Malaysia-Indonesia Bridge or the $15 billion Multimedia Super Corridor.

Most of these projects are essentially show-pieces, political statements for the rest of the world to see as to how far Mr Mahatir has brought an under-privileged Malaysia in a matter of just 16 years.

The global village, however, does not buy into any of these politically motivated, financially unviable stream of expenditures.

In South Korea, around two dozen top companies (or chaebol) still control almost 75 per cent of the economy.

The lethal combination of wealth and political influence of the chaebol has been a guarantee for an endless streak of cheap, easy bank loans. Unlimited credit has created a massive over- capacity. Financially insolvent chaebol went on expanding without ever fearing the threat of bankruptcy.

South Korea now owes some $150 billion, $30 billion of which falls due for repayment between now and the end of March. The treasury has almost nothing in it. IMF now wants transparency in business dealings and an end to the chaebol culture in return for a $60 billion bail-out package. None of the Asian economies in trouble have any choice but to follow a genuine reform agenda. The lender of last resort remains the IMF.

To be fair, a protracted period of economic expansion along with the accumulation of huge hard currency reserves had created an illusion of invincibility. The ASEAN leadership never realised that there just isn't "enough money in the vaults of all the central banks on the planet to stop any currency from rising or falling if the market really moves it.

Their combined reserves barely match a single day of global currency trading. The central banks of the richest countries have time and again failed in efforts to maintain target exchange rates against determined assaults; with less resources, Asian monetary authorities would be harder put to turn back a speculative" attack of a similar nature.

The assault against the Thai baht in July 1997 actually shocked the entire ASEAN leadership leading them into denying reality, followed by blaming George Soros (a known currency speculator) and only recently accepting their own pathetic state of affairs.

In a nutshell, the international investment community now wants an end to crony capitalism, a restructuring of the financial sector, transparency, a market-based economy, a viable allocation of scarce resources and a liberal democracy.

These six now appear to be the minimum pre-requisites for success.

In a post-Berlin Wall world, anyone who wants to join the global village and be able to tap into its huge financial reservoir would have to pass through the pre-requisites. Its a test, a test that neither Malaysia nor Thailand neither South Korea nor Indonesia have yet been able to pass.

India, China

Can India or even China pass the test? Is India going to be the next casualty of the Asian meltdown? How far can Pakistan be? Can we learn from the experiences of others or do we actually have to burn our limbs to find out what fire can do? Is our economy also vulnerable to a Thailand-like or a Malaysia-like crisis?

On a more positive note, Mr Nawaz Sharif now stands on the threshold of a real opportunity. The PML is the only political entity that has successfully beaten back forces that had been obstructing civilian supremacy.

While the element of financial uncertainty lingers on, political uncertainty has certainly diminished. Can our PM also rid Pakistan of crony capitalism and give us a liberal democracy?