Where does Asia go from here?

By Mar'ie Muhammad

The following article is based on a paper presented at the Pacific Rim Forum in Shanghai on Sept. 23, 1998.

SHANGHAI: The prolonged and deepening crisis in Southeast and East Asia provides considerable scope for a re-evaluation of, and even further contemplation about, the essential nature of the crisis itself; the mistakes which brought it about; the extent to which solutions undertaken, including the International Monetary Fund (IMF) assistance, have succeeded in achieving their goals; and the preventative measures undertaken to ensure that such a crisis is not repeated in the future.

This is also the case with Russia, and if it is not quickly contained could well develop into a crisis of global dimensions.

Previously, the countries of Southeast Asia and South Korea received much praise for their economic successes based on the implementation of economic policies increasingly oriented towards liberalism and market-friendliness, but this was in the context of an oligarchic political environment. Such environments encourage "ersatz capitalism" and "cronyism" and are characterized by an absence of public accountability and transparency.

Many groups, within political elites and societies as a whole, believe that one source of the current crisis is the globalized financial market, frequently characterized by speculative transactions. Such a situation, has led to excessive exchange rate fluctuations.

As a consequence, the governments of countries suffering the crisis are increasingly inclined towards policies of capital account control and the abandonment of the full floating rate system for their currencies. Such policies will increasingly constitute a major correction, and might even be seen as the swing of the pendulum against liberal policies considered to have already been tried and as having contributed to the crisis.

In this context, we can fully understand any policy aimed at applying foreign exchange controls and pegging a currency to the U.S. dollar, as applied by Malaysia recently.

In the course of further development, such policy responses could lead to economic policy that is more nationalistic, more inward-looking and populism. This development could create a dichotomy between global imperatives vis a vis local imperatives. Opinions such as these are also growing stronger in Indonesia. Such reversal policy could hamper liberal ties such as the World Trade Organization and the Asia Pacific and Economic Cooperation.

The extent to which this growing trend becomes a reality still depends upon a number of developments. In the case of Indonesia, Thailand and South Korea, it will depend on the effectiveness of the IMF medicine, which up until now, has attracted an increasing number of critics. A further determining factor is the interaction between political forces within the countries involved, that is between pro-market forces and those somewhat less friendly to the market mechanism.

A significant determining factor will be whether corporate restructuring can succeed, including debt rescheduling and debt restructuring. In the same vein also, the success of banking reform will be of critical importance.

Among the hugely depressing consequences of the crisis are the increases in the number of poor and unemployed on a truly horrifying scale. Although the social safety net programs are impressive, it is difficult to expect the issue will be resolved in the near future.

Social disintegration could easily turn to class conflict which, in turn, would become a destabilizing factor in Indonesia and in the region as a whole.

Japan is currently engaged in putting its own house in order, particularly in terms of strengthening a financial sector which from time to time has acted as the trigger for an even deeper crisis. China, in the meantime, appears reasonably relaxed about the state of its economy, and is engaged in efforts to safeguard the competitiveness of its exports, which also depend on the competitiveness of its currency. Even so, the accelerated state enterprise reform on which China has embarked will have political effects, since it will be followed by a wide-scale reduction in the labor force.

Developments in Asia are also much influenced by the attitude of the United States. Many groups are of the opinion that the prolonged and systemic crisis is due, in part, to a less than fully sensitive policy response from the United States.

This is completely different to the situation with Mexico, since the United States has direct interests in the Mexican economy. As far as the crisis in Southeast Asia is concerned, the United States has only relied on the IMF and the World Bank, in which the role of the U.S. is very dominant.

The decision makers of the United States appear to have taken the short-term view and are mainly concerned with that country's short-term interests, in particular its export goods and services (including financial services).

The economies of Southeast and East Asian countries will experience slow and even negative growth over at least the next three years. In the meantime, the issue of good governance, at the government level and at the business level, will constitute a growing concern.

In this regard, these countries will have to implement structural reform in terms of securing good governance within the government and businesses as well. Since such reform will involve the restructuring of institutions and various regulations, it will take time to see the results.

In the meantime, economic policy at the national level will increasingly move in the direction of regulated economies, something which is necessary in order to neutralize the negative effect of a globalized money market, judged to be speculative and resulting in excessive exchange rate fluctuations.

A regulated economy is also needed to bring about a more populist economy which corrects distortions in the distribution of natural resources, even though populist economic policies are not always easy to undertake.

Large-scale businesses or conglomerates in Southeast and East Asia grow and develop swiftly because of the support and privileges made available by the ruling government. Such governments have already changed or are in the process of changing.

This will result in large firms losing their political umbrellas, which in itself will constitute a threat to their very existence.

Meanwhile, the growing strength of foreign firms is not always welcome by the political and business communities in the countries of Southeast and East Asia because of the inclination towards stronger nationalist sentiments.

Mar'ie Muhammad is former finance minister (March 1993 to March, 1998) and now chairman of the Indonesian Society for Transparency.