Fri, 17 Nov 2000

Asia's recovery hinges on world growth

By Philippe Ries

TOKYO (AFP): Asia's economic recovery will continue but it remains dependent on a favorable international environment and reform efforts in the countries worst affected by the 1997-1998 financial crisis, according to international economic officials meeting here.

After the spectacular rebound in 1999, 2000 was marked by sharp falls in stock markets, weakening currencies, a rise in political instability and serious doubts about the will of governments to take difficult decisions to reform the financial and corporate sectors.

"Is the recovery of East Asian Economies sustainable? Yes, but with two strong caveats -- if the global environment remains supportive and if there is a renewed effort in the reform process," said Charles Dallara, Managing Director of the Institute of International Finance (IIF).

"These are two big ifs," he added.

Dallara was speaking at a conference here organized by the Institute for International Monetary Affairs (IIMA).

"A soft landing in the U.S. may not be an easy one for East Asia," he said. "Problems loom ahead in terms of the (U.S.) current account deficit."

In addition, growth is softening in Europe and a recovery in Japan remains uncertain.

Chartsiri Sophonpanich, General Director of Bangkok Bank, said, with reference to the case of Thailand, that the most critical concern was "that the recovery is not evenly spread but is concentrated in a few exports sectors.

"The rest of the economy is still suffering stagnation," he added.

According to Hubert Neiss, Deutsche Bank Asia chairman and IMF representative in the region during the financial storm, "present market pessimism seems exaggerated."

He estimates that the five countries most hurt by the crisis -- South Korea, Indonesia, Malaysia, the Philippines and Thailand -- are in a stronger position today with large surpluses in their current accounts and more comfortable foreign exchange reserves.

Above all, he added, "every country has remained on the reform course, although the pace has been uneven and there have been occasional setbacks."

Dallara however argued that "against historical standards the pace of change has been impressive but against current challenges, progress has not been so impressive."

He added that amid the consequences of globalization "standards have risen considerably", in terms of both government and corporate governance.

"Asian leaders have to realize that they are not marching on a flat floor but on a very steep slope and if you fall, you fall further down," he added.

According to Dallara, after an initial effort which was encouraging within the stride of the crisis, governments have become complacent.

The proof of this is delays in the restructuring of enterprises, which compromise the financial sector recovery in spite of enormous budgetary efforts agreed by the different countries.

To finance future growth, even at the more modest rate of five percent predicted by Hubert Neiss, East Asia would have to attract stable capital flows in the form of increased foreign direct investment.

But for that to happen, Dallara said, such countries have to move beyond this period of complacency and make the difficult choices. "Bringing in equity capital involves political choices, more difficult decisions than governments are ready to make," he said.