Asia Gets Back on Its Feet

Saturday, October 30, 1999

The much-publicized Asian economic crisis, which began with the collapse of the Thai baht in July 1997, is over. Instead, the economic performances of Asian countries now vary widely, some better than others.

When hospitals and doctors issue bulletins about the condition of a patient, the patient’s progress is sometimes described as moving from “critical” to “guarded” to “stable.” Applying the analogy, the Asian economic condition can be characterized as having progressed from critical to guarded. Stability and significant real growth lie a year or two away. To be sure, individual countries in the region still face major economic problems, with sharply different prospects for alleviating, let alone solving, them. But the collective record is both better and more promising than the crisis rhetoric implies.

Consider the four original crisis countries: Thailand, South Korea, Indonesia, and Malaysia. Following the mid-1997 collapse of the baht, these countries sustained asset deflation between 40 and 70 percent, currency depreciations between 30 and 80 percent, and dramatic reversals of annual economic growth from high positive rates to negative ones.

But Korea and Thailand have turned the corner. Gross domestic product is contracting at a much slower rate than in the previous year; by the end of 1999, the economies of the two countries will probably be growing again. Foreign direct investment has resumed in Korea and Thailand. Their foreign-exchange reserves have risen, slightly in Thailand and substantially in Korea. Moody and Standard & Poor have both upgraded Korea’s international credit rating.

Indonesia and Malaysia are not yet experiencing a turnaround. Their GDP growth remains negative, their currencies weak (Indonesia) or inconvertible (Malaysia), and their assets continue to plunge in value. Political rather than economic factors predominantly account for the economic quagmire the two counties find themselves in. Until political stability and a favorable and predictable policy environment are realized, the outlook for Indonesia and Malaysia will be dismal.

Although Japan and China’s economic problems are serious, in neither is the term crisis appropriate. Japan’s problems predate and transcend the Asian financial crisis. Indeed, its problems have only been marginally affected by the 1997 meltdown. The Japanese economy has been stagnant for most of the 1990s, growing at an annual rate of nearly 1 percent; this year, it has contracted by 2 percent. This record is a striking contrast to Japan’s performance in the 1980s. The country’s deep-seated structural problems include an industrial system driven by considerations of size, market share, and exports, not profitability; a banking system weighed down by nonperforming loans; and a regulatory regime marked by the heavy hand of government limiting entry, innovation, and market access both within and outside the economy.

Yet Japan’s per capita gross domestic product remains among the highest in the world (about $40,000), and its current account surplus ($125 billion) and foreign-exchange reserves ($220 billion) are the world’s largest. Most observers believe that Japan’s three-pronged reform strategy—easing monetary policy and bailing out major banks, increasing public spending, and modestly deregulating—are too little and too timid to deal with the economy’s fundamental problems. Yet it cannot be said that Japan is in a crisis condition.

China, too, has been only marginally affected by the larger crisis. Its recent economic performance and near-term prospects are decidedly mixed. Among positive indicators, its GDP growth has been high and sustained. Even allowing for the occasional fuzziness of China’s statistics, annual growth has been and currently is between 5 and 7 percent. Its current account surplus has been running at an annual rate of more than $30 billion; foreign-exchange reserves are about $150 billion, and annual foreign direct investment in China totals more than $35 billion, the largest of any emerging market country. Still another positive indicator is the progress the government is making in buying out the military’s ownership of many commercial businesses.

There is an equally impressive list of negative signs, though. Hundreds of large state-owned enterprises continue to lose money. The four major state banks are loaded down by nonperforming debt, accumulated to cover the losses of the state-owned enterprises. The financial system continues to misallocate credit to favor the inefficient state enterprises and restrict credit for the more dynamic private sector. Still, China is not in economic crisis.

The final piece in the Asian economic mosaic is the smaller, more resilient economies: Taiwan, Hong Kong, and Singapore. Although they differ, they also have certain similarities. Each has been seriously affected by the economic reversals elsewhere in the region, Hong Kong most severely because its bubble burst in property and stock prices. The GDPs of Singapore and Hong Kong have contracted. Still, the three economies have displayed an impressive capacity to adapt to changing circumstances and to maintain or resume significant economic growth in the near future.

Once again, the term crisis does not accurately describe the relative buoyancy of these economies. Clearly, it is time to deflate the rhetoric of economic crisis that mischaracterizes the widely differentiated, as well as generally improving, Asian economic environment.