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From: yfyap@pop.jaring.my (Yap Yok Foo)
To: sangkancil@malaysia.net
Subject: [sangkancil] Might Asia lose a decade?
Date: Thu, 27 Nov 1997 06:09:17 GMT
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Reply-to: yfyap@pop.jaring.my (Yap Yok Foo)
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>From Financial Times, UK www.ft.com
Might Asia lose a decade?
THURSDAY NOVEMBER 27 1997
------------------------------------------------------------------------
Stephen Fidler , Latin America Editor, asks what Asia could learn from
the Latin American debt crisis of the 1980s
------------------------------------------------------------------------
As new victims succumb almost daily to Asia's currency plague,
parallels are being drawn with the deep crisis that followed Mexico's
disastrous devaluation of the peso in 1994.
That comparison is not wrong. But it is superficial. The more telling
parallel is with Mexico's 1982 debt crisis, which heralded Latin
America's lost decade. The question for those nervously watching
events unfold in Asia are: does this mean that the tiger economies are
also on the verge of a prolonged economic slump?
Many will think the comparison between Asia and Latin American
strained. Asia seemed like a miracle, at least until recently. Latin
America is often seen as an economic failure. But this is too narrow a
perspective. "Look at Brazil in the 1960s," said Paul Krugman, a
professor at the Massachusetts Institute of Technology. "Everyone
regarded it as a miracle economy." Even now, growth in many Latin
American countries over the 20th century stands comparison with that
of Asia. Turn the clock back 15 years, as our charts show, and Latin
America looked as if it too had discovered the secret for perpetual
motion.
Throughout the 1970s, western banks were pouring money into the region
not under the influence of some collective madness, but because they
believed in the Latin American growth story. Using arguments that
resemble those that have assigned importance to the role of Asia's
"special values", it was even said that rapid growth in countries such
as Brazil owed something to their authoritarian governments.
It is now clear the Latin American debt crisis that followed Mexico's
1982 payments difficulties represented the death of an exhausted
economic model. The consequence of this was a long period of painful
economic decline. It is equally clear that the crisis delivered a
fatal blow to military governments across the region.
If Asia were at the beginning of a similar process of painful economic
adjustment, what would this mean for the authoritarian political
masters of the region?
Victor Bulmer-Thomas, an economics professor who heads London
University's Institute of Latin American Studies, says there are some
parallels between Asia's currency troubles and those Mexico suffered
in 1994-95 - for example, in the devastating effects on the banking
system of a big devaluation after a long period of a pegged exchange
rate.
But he says that the deeper parallels are with 1982. In both Asia now
and Latin America then, "this is the moment is when a particular
paradigm or growth model has come to an end. It is not a cyclical
problem."
Some economists are more forthright still. "There is no Asian
miracle," says Jerome Booth, chief economist at ANZ Bank in London,
echoing Prof Krugman's celebrated article The Myth of Asia's Miracle
(Foreign Affairs, November 1994). "The Asian strategy typically
involved strong state intervention and direction of investment
decisions - just what Latin America had gone through from the late
1940s to the 1970s." In Latin America, this had yielded high growth
rates until inefficiencies in the allocation of resources were finally
revealed by the 1980s crisis.
It is true that there are significant differences. In comparison with
Asia, Latin American countries were closed to trade and ran
inflationary economic policies. Asian countries also have many
export-oriented companies with world-class technologies.
But both Latin America in the 1970s and Asia in the 1990s were using
imported capital to help generate high investment rates. The rate of
investment was higher as a percentage of gross domestic product in
Asia's case and the imported capital was intermediated differently -
largely through the state in Latin America and through the banking
system and private companies in Asia.
In both examples, imported capital had as its corollary large current
account deficits. In both instances too, the crises were worsened by
badly run and poorly supervised banking systems, as well as by sharply
overvalued exchange rates. (Asian leaders might do well to recall the
1982 promise of José López Portillo, Mexico's former president, to
defend the peso "like a dog". He could not appear in public for years
afterwards without being followed by people making barking noises.)
If valid parallels exist, what can Asian governments learn from Latin
America's 1980s experience? It is plain that Latin American
governments (schooled by bitter experience) are more adept at handling
financial crises than their Asian counterparts.
True, the Mexican government made fundamental mistakes before and
immediately after its 1994 devaluation that ensured deep recession in
1995. But the errors were quickly righted and, with US-led financial
support, a tough adjustment programme has brought a rapid recovery.
Similarly, the Brazilian government's response to its Asian-induced
financial battering since October has been swift and resolute - it
sharply increased interest rates and tightened fiscal policy. It is
too early to know whether these actions will save the Brazilian
currency from disorderly devaluation. But its actions provided a sharp
contrast with the weak initial response to the crisis of many Asian
governments.
Analysts at fund managers Foreign & Colonial Emerging Markets, for
example, who characterised the South Korean response to its crisis as
"too little, too late", have praised Brazilian action as "vigorous".
A more fundamental lesson from Latin America would be to avoid an
early misdiagnosis of the crisis. Latin America's debt crisis was
initially seen as a liquidity problem rather than an issue of
solvency. Valuable time was lost - in effect until 1985 when important
changes in Mexico and other countries were introduced - before
governments began to recognise that a fundamental change in economic
policy was necessary.
"The Asian countries that prosper from this will be those that realise
the depth of the structural reforms they will have to carry out," says
Mr Bulmer-Thomas. "Not just in economics but also in politics."
The political task, he says, will be to rid countries of the
"corruption and cronyism" to which too many are prey and which will
hold back economic recovery if not addressed.
The simple answer to the question of whether the currency troubles
will presage a lost decade for Asia is thus (assuming the crisis
triggers no worldwide financial meltdown): it depends on the region's
governments.
Asia has myriad political systems, and a broad comparison with Latin
America as a whole can say little light on how exactly each country's
political system will respond.
But there are generalisations that a Latin comparison permits. The
initial political response from parts of Asia has not been
encouraging. In Thailand, for example, the government's political
weakness is clearly hampering efforts to change. In Malaysia, where
political decision-making is more concentrated, the crisis has
provoked a search for foreign scapegoats, amid huge resistance to the
idea that current difficulties have home-grown characteristics. In
Indonesia, where the government has been more willing to act, it is
clear that there are important obstacles to reform within the
presidential family.
Emerging Asian economies are likely to become increasingly
differentiated from one another depending on how their governments
respond. In some, a prolonged downturn or the reforms which now appear
necessary will provide the trigger for political change.
The undoubted parallels between Latin America and Asia should not
obscure important differences. One of the most crucial is the Latin
countries' wide income and wealth disparities. For various reasons,
including successful land reform in Korea and Taiwan and the lack of
rural areas surrounding the city states of Hong Kong and Singapore,
income distribution in Asia's societies tends to be much more equal.
This provides for more social coherence in tackling economic problems.
Moreover, Asian countries have been more open to international trade
than was Latin America in the 1970s. As a result, the prices of
tradeable goods are unlikely to be so distorted as they were in Latin
America - though that is not necessarily true of the prices of
non-tradeables. Because the discipline of the market has not been
applied to sectors such as property - which are shielded from
international competition - big price distortions have developed,
opening the way for damaging asset price bubbles.
Last, Asia enjoys a higher savings rate than Latin America does now
and did back in the 1970s. As a response to crisis, savings rates in
Asia may now fall: that would be helpful to economic recovery. But
they are likely to remain high enough to generate reasonable levels of
investment and so avoid the investment collapse that has been the
underlying cause of Latin economic weakness over the past 15 years.
There are thus important grounds to believe that the Asian economies
can avoid a lost decade. Mr Booth at ANZ argues that speculators may
have done the region an enormous favour - by catching the distortions
in the Asian economies at a relatively early stage.
Asia may be able to reap the benefits of its model - without having to
pay the enormous price in growth and high inflation that was paid by
the people of Latin America in the 1980s. "That supposes though that
the lesson - to turn away from intervention and clientilism and to
embrace the market economy for the non-tradeables sector - has now
been learned," he says.
© Copyright the Financial Times Limited 1997
www.ft.com (Free Subscription)
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