Economic stability slow to come
By Christopher Lingle
DENPASAR (JP): Confusion continues to reign over when East Asia will move from crisis to recovery. Many analysts insist the worst for East Asia is over. This includes officials from the International Monetary Fund and other international agencies. A recent Reuters poll of over 100 research organizations indicates a consensus on what is expected to be widespread recovery in 1999. But then it is worth remembering those expressing the most optimism were not among the few who saw the crises coming.
The first step in grasping the nature of the problems in East Asia is the simple realization that the region's economies will not recover until they have stabilized. Unfortunately, there is little evidence stabilization has occurred. Indeed, there is good cause to expect China is an accident waiting to happen, a victim of irrational economic policies ingrained from 50 years of communism.
In June 1998, the Japanese yen fell to just below 147 against the US dollar, its lowest level since 1990. Then there was a strengthening of the yen back to about 110 per dollar before another sharp decline.
Likewise, Japan's Nikkei industrial average fell to its lowest level in almost 11 years before bouncing back. This sharp volatility does not suggest any sense of imminent stability.
Meanwhile, leaders in Beijing continue to insist the yuan will not be devalued. The deputy governor of China's central bank recently urged speculators to consider he had US$140 billion in foreign exchange reserves to ward off any assaults. Despite these claims and assurances, several reality checks are in order.
First, it is an iron law of politics that urgent and frequent protestations by government officials presage the very thing they are denying. A week before the devaluation of the baht in July 1997, the Thai prime minister insisted "we will never devalue the baht. We would all be poorer for it". Attempts to support the baht led to a rapid depletion of a large cushion of reserves with little result. The subsequent devaluation of the Thai currency was generally seen as the beginning of the crises afflicting the region.
Second, most high-ranking government and central bank officials have little understanding of local market conditions. Being chauffeured to and from work, they experience little of real life. Currently, the judgments of small-shop owners and others who function directly and daily in the economy conflict with China's leaders. Black market transactions for US dollars in China now offer a 10 percent premium over the official rate. There should be no question as to which parties have the best understanding of economic realities and who is playing political games.
What is happening in most of the affected countries is a disappearance of personal wealth due to the asset deflation in the property and stock markets. Regardless of other factors, this will reduce household consumption. The fallback in the values of exchanges throughout most of East and Southeast Asia reflects a loss of up to a decade of personal savings.
Perhaps more ominously, the continuously ballooning record of bad debts will retard banking systems ability to finance long- term capital investment.
Until East Asian economies are equipped with the appropriate supportive institutional structures, they will have difficulty finding foreign capital willing to commit to long-term investments as the basis for their stabilization.
Many countries have no bankruptcy laws and those that do often have inadequate enforcement. Indonesia's bankruptcy statutes are derived from those left by their former Dutch colonial masters, but many believe the Indonesian judiciary is inadequately independent for fair adjudication.
At the heart of the crises in East Asia is dysfunctional democracy. On the one hand, government interventions throughout the region restrain freedom of choice in market decisions. This works through policy-induced distortions like subsidized interest rates or monopoly privileges which divert resources toward special interests.
On the other hand, there is very little political accountability due to the dominance of single-party states and restraints on the free flow of information. In the end, the voices of citizens are muted and the entrepreneurial instincts of small and medium-sized enterprises are stifled.
At the same time, the political culture of East Asia limits open international competition and contributes to inefficiencies so evident in their domestic enterprises.
Old habits die hard, so it can be expected that there will be a continuation of technocratic interventions and interest rate subsidies for favored domestic enterprises.
The cozy political interactions which bred corruption and crony capitalism have not broken down. Too little has changed in East Asian financial markets to provide assurance economic stability can be expected soon. Therefore, recovery can only be expected after many more years.
The writer, a Hong Kong-based consultant and adjunct scholar at the Center for Independent Studies in Sydney, is the author of The Rise and Decline of the Asian Century (Seattle: The University of Washington Press: 1998). His e-mail address is: CRL@po.cwru.edu.