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.