Asian recovery seen dependent on Japan aid

Asian recovery seen dependent on Japan aid

BANGKOK (Reuters): Japan's assistance for crisis-hit Southeast
Asian countries under the Miyazawa Plan could serve as a catalyst
for a revival of foreign capital flows to the region, a senior
Asian Development Bank economist said on Thursday.

But ADB chief economist Jungsoo Lee said governments and
financial sectors in troubled Asian nations must also display
determination to sustain structural reforms needed for them to
ride out the turmoil.

"The fact that Japan is willing to help is a key to boosting
market confidence, an important symbolic value. It will help
these countries which depend very much on Japanese investment,
both direct and portfolio investment," Lee told Reuters in an
interview.

Lee said part of the $30 billion Japanese aid for the region
could be well used for improving its export competitiveness.

"Where money should go is difficult to say, but it is crucial
to enhance export competitiveness. The original trigger of the
Asian crisis in 1996 was the slowdown of regional export growth
which spawned and aggravated market concern," he said.

Lee said, however, that Japan's own economic problems, the
yen's volatility, and market concerns about possible economic
policy changes in China and Hong Kong have also sidelined
investors.

"What is happening in Japan and the overall performance of the
yen is very important...it is difficult to predict medium-term
recovery because foreign investors have turned a bit more
apprehensive due to uncertainties in Japan and China and anti-
market sentiment in Hong Kong and Malaysia," he said.

The International Monetary Fund forecast last month that gross
domestic product in Indonesia, South Korea, Malaysia and Thailand
would average 0.6 percent growth in 1999 against a projected 8.7
percent contraction this year.

It forecast that the four countries would likely recover to
post an average 3.0 percent economic growth in 2000 and raise it
further to 5.3 percent during 2001-2003.

"At least some countries like Thailand and Korea have managed
to turn the corner. They would likely come out of the woods
sooner than Indonesia," Lee said.

Lee told an economic seminar here on Thursday that in the wake
of weak export performance, East Asian countries may need to
boost domestic demand with the help of more flexible fiscal and
monetary policies.

"Boosting domestic demand is a way of utilizing excess
capacities that have emerged in the region. More flexible
monetary policies and manageable drawdowns of fiscal funds may be
no less important than structural reforms in providing an initial
impetus of recovery," he said.

He cited an IMF forecast that if regional countries, including
Japan, were to raise deficit fiscal spending by one percentage
point of GDP, it could generate new demand leading to two
additional percentage point GDP growth for these countries.

"We take a cautious but optimistic view. We expect foreign
capital inflow will resume earlier than expected and believe that
when the dust settles, Asia will still remain the most favorable
destination of global capital flows," he said.

Lee said he shared an IMF view that bruised Asian countries
should emphasize moderate, productivity-based growth and avoid
expansion that depends on fast capital accumulation experienced
before the current crisis.