Krugman sees no major financial reform in Asia

Krugman sees no major financial reform in Asia

BANGKOK (Reuters): Asia's financial system probably won't get the reforms it needs to make sure there is no repeat of the region's economic meltdown in 1997 and 1998, American economist Paul Krugman said on Tuesday.

Krugman told Thai bankers in a speech the Asian crisis had ended too quickly to ensure the system was cleaned up properly and economies would have to be content with half measures.

"If you are looking for major international architecture financial reform -- don't bother," he said. "This crisis has come to an end too soon. I have watched proposals that appeared very likely to be adopted last spring just fade away."

Krugman, professor of economics at the Massachusetts Institute of Technology, was one of the few to warn of the fragility of Asia's tiger economies at a time when it was fashionable to talk of an Asian "economic miracle".

In the mid-1990s he warned that impressive Asian growth rates were more due to cheap capital and imported technology than higher productivity. Money had been pushed into any sectors in Asia as foreign cash chased the high growth rates, he said.

The bubble burst in July 1997 when Thailand allowed its baht currency to devalue, triggering two years of severe recession and a series of painful reforms of the financial system.

But Krugman suggested some of the reforms were skin deep: "I have sat at some meetings where I have actually become very angry watching the representatives of the banks basically say 'No way. We are not going to take any responsibility and we expect the IMF to bail us out again in the next crisis.'"

He said the Asian economies most affected by the crisis -- South Korea, Malaysia, Thailand and Indonesia -- had all recovered some ground over the last 12 months.

"Things are a lot better than they were a year ago or even six months ago. Recovery is fast -- very fast in South Korea."

He said expansionary policies were the key to recovery but warned much of it was based on spending by governments rather than private investment.

This was building up unsustainable fiscal deficits and public debt and private investment remained very low in many countries.

"The current process of recovery is not a way of getting long- term growth, because to get long-term growth you need to invest...If the entrepreneurial class has been decapitated by the burden of debt, then the prospects for growth are not good."

"The Asian economies have not succeeded in restoring their financial system. What they have done is succeeded in adapting their economies to the fiscal implosion," he said.

Krugman said fiscal stimulus had to end but rushing fast to end stimulus was very risky unless recovery was certain.

"You are going to have to find a way to get monetary policy to take the burden from fiscal policy," he said.

Asia's massive debt problems needed to be tackled and a future economic boom would not help them go away.

"The debt needs to be absorbed and it is not enough merely to take it away from the banks. We are talking about massive restructuring. As long as it is not restructured there are going to be problems getting growth going," he said.

Krugman said he saw no immediate signs of another crisis looming on the horizon, but stressed he thought the fallout from the Asian crisis would be prolonged:

"The likelihood is that the financial morass will last for quite a prolonged period of time."

The recovery had shown him his "pessimism was excessive", he said, but added: "I am not exactly an optimist yet."