Economic stability slow to come<\/p>\n
By Christopher Lingle<\/p>\n
DENPASAR (JP): Confusion continues to reign over when East
\nAsia will move from crisis to recovery. Many analysts insist the
\nworst for East Asia is over. This includes officials from the
\nInternational Monetary Fund and other international agencies. A
\nrecent Reuters poll of over 100 research organizations indicates
\na consensus on what is expected to be widespread recovery in
\n1999. But then it is worth remembering those expressing the most
\noptimism were not among the few who saw the crises coming.<\/p>\n
The first step in grasping the nature of the problems in East
\nAsia is the simple realization that the region's economies will
\nnot recover until they have stabilized. Unfortunately, there is
\nlittle evidence stabilization has occurred. Indeed, there is good
\ncause to expect China is an accident waiting to happen, a victim
\nof irrational economic policies ingrained from 50 years of
\ncommunism.<\/p>\n
In June 1998, the Japanese yen fell to just below 147 against
\nthe US dollar, its lowest level since 1990. Then there was a
\nstrengthening of the yen back to about 110 per dollar before
\nanother sharp decline.<\/p>\n
Likewise, Japan's Nikkei industrial average fell to its lowest
\nlevel in almost 11 years before bouncing back. This sharp
\nvolatility does not suggest any sense of imminent stability.<\/p>\n
Meanwhile, leaders in Beijing continue to insist the yuan will
\nnot be devalued. The deputy governor of China's central bank
\nrecently urged speculators to consider he had US$140 billion in
\nforeign exchange reserves to ward off any assaults. Despite these
\nclaims and assurances, several reality checks are in order.<\/p>\n
First, it is an iron law of politics that urgent and frequent
\nprotestations by government officials presage the very thing they
\nare denying. A week before the devaluation of the baht in July
\n1997, the Thai prime minister insisted \"we will never devalue the
\nbaht. We would all be poorer for it\". Attempts to support the
\nbaht led to a rapid depletion of a large cushion of reserves with
\nlittle result. The subsequent devaluation of the Thai currency
\nwas generally seen as the beginning of the crises afflicting the
\nregion.<\/p>\n
Second, most high-ranking government and central bank
\nofficials have little understanding of local market conditions.
\nBeing chauffeured to and from work, they experience little of
\nreal life. Currently, the judgments of small-shop owners and
\nothers who function directly and daily in the economy conflict
\nwith China's leaders. Black market transactions for US dollars in
\nChina now offer a 10 percent premium over the official rate.
\nThere should be no question as to which parties have the best
\nunderstanding of economic realities and who is playing political
\ngames.<\/p>\n
What is happening in most of the affected countries is a
\ndisappearance of personal wealth due to the asset deflation in
\nthe property and stock markets. Regardless of other factors, this
\nwill reduce household consumption. The fallback in the values of
\nexchanges throughout most of East and Southeast Asia reflects a
\nloss of up to a decade of personal savings.<\/p>\n
Perhaps more ominously, the continuously ballooning record of
\nbad debts will retard banking systems ability to finance long-
\nterm capital investment.<\/p>\n
Until East Asian economies are equipped with the appropriate
\nsupportive institutional structures, they will have difficulty
\nfinding foreign capital willing to commit to long-term
\ninvestments as the basis for their stabilization.<\/p>\n
Many countries have no bankruptcy laws and those that do
\noften have inadequate enforcement. Indonesia's bankruptcy
\nstatutes are derived from those left by their former Dutch
\ncolonial masters, but many believe the Indonesian judiciary is
\ninadequately independent for fair adjudication.<\/p>\n
At the heart of the crises in East Asia is dysfunctional
\ndemocracy. On the one hand, government interventions throughout
\nthe region restrain freedom of choice in market decisions. This
\nworks through policy-induced distortions like subsidized interest
\nrates or monopoly privileges which divert resources toward
\nspecial interests.<\/p>\n
On the other hand, there is very little political
\naccountability due to the dominance of single-party states and
\nrestraints on the free flow of information. In the end, the
\nvoices of citizens are muted and the entrepreneurial instincts of
\nsmall and medium-sized enterprises are stifled.<\/p>\n
At the same time, the political culture of East Asia limits
\nopen international competition and contributes to inefficiencies
\nso evident in their domestic enterprises.<\/p>\n
Old habits die hard, so it can be expected that there will be
\na continuation of technocratic interventions and interest rate
\nsubsidies for favored domestic enterprises.<\/p>\n
The cozy political interactions which bred corruption and
\ncrony capitalism have not broken down. Too little has changed in
\nEast Asian financial markets to provide assurance economic
\nstability can be expected soon. Therefore, recovery can only be
\nexpected after many more years.<\/p>\n
The writer, a Hong Kong-based consultant and adjunct scholar
\nat the Center for Independent Studies in Sydney, is the author of
\nThe Rise and Decline of the Asian Century (Seattle: The
\nUniversity of Washington Press: 1998). His e-mail address is:
\nCRL@po.cwru.edu.<\/p>",
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