Economic stability slow to come

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.