"There's Hope For Recovery"

To find out whether that faint trace of light on the Asian horizon is indeed the dawn of a new global recovery, TIME convened a meeting of its Asian Board of Economists last week during the World Economic Forum's East Asia summit in Singapore. Excerpts from the freewheeling, two-hour discussion:IS ASIA'S CRISIS DEEPENING?David Hale, global chief economist, Zurich Group: This is no longer an Asian crisis, it's a global crisis. The bad news for Asia is that America, which has been a great market in the past year, is about to slow down. That will delay Asia's recovery.Jeffrey Sachs, director, Institute for International Development, Harvard University: I have always thought this was a crisis of capitalism, not just Asian capitalism. It was a crisis of international capital flows and their instability. But the fact that it was treated as a crisis of Asian capitalism has had real consequences. It exacerbated the sense of panic in Asia and did collateral damage to other parts of the world.Kenneth Courtis, chief economist and strategist, Deutsche Bank Group Asia Pacific, Tokyo: What's pushed this crisis so deep is the enormous financial implosion in Japan. We've had seven years of irresponsibility, with 520 Japanese politicians dancing around the carcass of an insolvent banking system and doing nothing. There's no way to stabilize the rest of Asia without stabilizing Japan.Tommy Koh, Singapore's Ambassador-at-Large: Isn't the real problem that private capital flows, hedge-fund flows have grown so enormous and that you need institutions to oversee them?Mari Pangestu, executive director, Centre for Strategic and International Studies, Jakarta: But even if you can get the hedge funds to disclose things, new instruments will pop up. Isn't it better to focus on getting the policies right in each country, so that the capital flowing in is used productively?DID THE WEST MAKE IT WORSE?Sachs: The U.S. and the IMF made the crisis worse than it had to be by pounding hard on Asia's economies, riling the markets. They tried to use the crisis to push a reform agenda. The problem was that they misunderstood the real source of the crisis, and things blew up in their hands.Richard Koo, chief economist, Nomura Research Institute, Tokyo: A lot of what happened in Asia was driven by Europe. There was a sense that Asia had been lost to the Japanese and the Americans. The Europeans felt they had missed the boat and had to get back in as quickly as possible.Sachs: True, German banks came in late and built up to the very last moment. Many started pumping money into South Korea in 1996 just as others were starting to pull back. This suggests that there's been a lot of ill-informed lending based on a thin understanding of specific conditions--and therefore easily reversible in a panic.RECOVERY AHEAD?Hale: The Asian recession is probably at its most intense now. But the potential for recovery is limited, because the banks haven't been recapitalized and because the American economy is headed for a slowdown that will limit the potential for export-led growth. For Asia, the declines in output in the last 12 months have been like the U.S. in the 1930s: we're back in the Great Depression.Sachs: I'm a bit more optimistic. There is hope for some recovery in Asia, even delinked from the rest of the world. These countries are not sitting on the edge of a balance-of-payments precipice as they were 12 months ago. Countries like Thailand and South Korea now have current-account surpluses. They can have domestic-led growth for a while without hitting a wall. I would guess that in 1999 we'll see positive growth for Thailand and Korea.Hale: But they haven't got a banking system anymore.Sachs: True. A lot will depend on whether there can be effective workouts of the bad banks and of enough bad enterprises to enable some reflation. If the U.S. goes into a deep crisis, all bets are off for everybody. But if the U.S. avoids a deep crisis, it's not as if Asia hangs by the thread of the speed of U.S. recovery. For 1999 in Asia, there can be some domestic-led recovery, at least for the countries that have pushed farthest for adjustment.Courtis: Consider Korea. It has foreign-exchange reserves of around $45 billion, up from zero a year ago. It has a healthy current-account surplus. The bridge loans have come in; banks rolled over and then extended maturities. And Korea has sold, at an annualized rate, assets worth $10 billion for the year. So as soon as world markets settle down, Korea is in a position to issue an oodle of long-term government bonds; it will be in position to socialize an important part of the debt of Korea's companies, allowing them to rebuild their working capital. Then we'll see a strong bolt from Korea of $7,000 cars, $400 desktop computers and $50 microwave ovens. That's exactly the IMF strategy: export or die. Korea's not going to roll over and die; it's going to rebuild itself. It could come out of this transition stronger. But the only way to stabilize things is to get more growth in the main markets.Sachs: Asia will see a little bit of light next year, but it will be a tough year for Latin America, mainly because Brazil hasn't depreciated its currency and made the adjustments Asia has already taken.Pangestu: Reality check. The social and political effects of the crisis can affect how recovery takes place. I don't think we've seen the worst yet in an unraveling situation. Can countries like Indonesia withstand the social pressures that will come out? My guess is Indonesia will need to form a coalition that accommodates populist and nationalist pressures--and that will slow down reforms.PAGE 1|
There's still plenty of pain to come, but hope is on the rise that the region's troubles may be waning. Japan's bank-overhaul plan and the Fed's interest-rate cuts bolster the new optimism
Eisuke Sakakibara, Japan's Mr. Yen, emphasizes the need for cooperation
Are the region's troubles waning or is the worst yet to come?
TIME's Asian Board of Economists evaluates the chances for recovery in the region
Thailand has better reviews than returns
Korea accepts a bitter pill
David Roche sees trouble, but no depressionRATING THE IMFHale: The one real achievement of the IMF in the last 12 months was preventing formal sovereign defaults, as we had in 1982 in Latin America. As a result, Korea was able to sell bonds in the American financial markets at a few hundred basis points over Treasurys, Thailand was able to maintain credit flows, Indonesia is renegotiating in a harmonious way--it's not acting unilaterally. The IMF has prevented a loss of access to the market. When Mexico defaulted in 1982 it lost access to the market for seven years.Sachs: I'm not sure I'd credit the IMF. What saved Korea was getting the government to get creditors [and lenders] together for a direct discussion. It wasn't the bailouts.Courtis: Having been part of those discussions, I can tell you they would never have taken place without IMF money. Without the $57 billion from the World Bank and the IMF, the banks would not have rolled over [Korea's] debt.Koo: I think the U.S. Treasury had a very narrowly defined model for what the world should look like. Japan tried to recapitalize its banks in March, but that was torpedoed by the Treasury. Now, of course, they are regretting it and saying, yes, you guys have to recapitalize.Hale: The fact is the IMF is the only institution that can play the role of international lender of last resort. The challenge is to make it more effective, and to enhance its capital.HYPOCRISY?Koh: Asians are entitled to ask Americans what's the difference between the recent rescue of the hedge fund Long-Term Capital Management and other bailouts the U.S. has criticized. Have the Americans lost the moral high ground?Sachs: In a financial crisis you can't just do nothing, and you don't just close banks willy-nilly. A coordinated outcome of some sort is the proper response. This is where the IMF was absolutely horrendous, for example, in the shocking closure of Indonesian banks last November. That was one of the worst blunders in the annals of modern monetary management. And it created one of the biggest bank runs in modern history. But with ltcm, there's a valid question: Why did the Fed seemingly give insiders a better deal when an outsider could have come in and purchased the firm?Courtis: But remember, the LTCM bailout was done by the private sector. There was no public money brought into it. That's very different from going to the Ministry of Finance in your country with a hat and saying, Fill it up.GLOBAL ECONOMIC RETHINKKoh: Many Asians also wonder whether they were right to follow the U.S. view that countries that liberalize their economies benefit most. Maybe the contrary is true. Countries with capital controls--Chile, India, China, Taiwan--seem able to attract investment. Why shouldn't Malaysia do the same?Sachs: We've seen a regrettably well-trod path: financial liberalization is often followed by financial crisis. Banks have a way of getting themselves into trouble. They use other people's money. They're highly leveraged. They're subject to swings in sentiment. There are large instabilities, particularly in international capital markets where you don't have the same kinds of systems of protection--lenders of last resort, deposit insurance, etc.--that keep national markets generally under control.Koo: When I was working for the Federal Reserve Bank of New York at the foreign exchange desk, the first day my boss told me: In all the economic books they say the market is efficient ...Sachs: ... and if you believe that you're fired! [Laughter.]Koo: ... but in fact, 15% of people in the market know what they're doing, and 85% are sheep. And it's the sheep that cause the problems.Courtis: Taiwan is getting through the crisis with focus and discipline. Singapore is also playing a strong leadership role. The temptation for Singapore, like other economies, is to say, Stop the world, I want to get off. Those that do that will end up paying an enormous price to get back into the world economy.Koh: I agree. Asians don't really have an alternative but to be part of this globalized world. And if they think they can opt out and then opt in again, it's very difficult.FIXING THE SYSTEMSachs: We can never make things fail-safe, but there are three things that can improve the situation. First, the vast majority of developing countries ought to maintain flexible exchange rates. Once you get into a fixed relationship and the real economics change, you don't know it until disaster has struck. Second, there really are ways to limit short-term capital inflows. It's possible to design ways that aren't going to limit foreign direct investment or tie up trade but can still stop the hot money that has done a lot of damage. I'm against what Malaysia has done because I don't believe in locking money into a country. I believe in preventing hot money from coming in in the first place. Locking it in is just an invitation to abuse by the government. What Malaysia has done was neither necessary nor wise, nor likely to be effective. Third, we need to find more effective workout mechanisms.Courtis: There needs to be more thinking about lenders of last resort. In domestic economies, to operate as a financial institution you have to meet certain preconditions. You're permanently monitored, and if you don't meet the conditions, you're closed down. If you meet the conditions and a panic breaks out, the central bank steps in as a lender of last resort.In the world economy, if we're going to have a lender of last resort without preconditionality it would require so many hundreds of billions of dollars that it's just not going to happen. We may need to move forward on a regional basis, setting up a sort of monitoring system. Create an institution that says, for example, Thailand, this is what we see happening and you have to deal with it, otherwise we're all going to have problems.Koh: For Asia to rise again, it's necessary for the U.S., Europe and Japan to have a common agenda of growth. Hopefully out of this will come a new sense of regional unity. The foreign reserves of East Asian countries add up to more than $600 billion. The region lacks not money, but unity and a shared sense of vision.Sachs: We've had another illusion shattered by all this, namely, that the Group of Seven [industrialized nations] could run the world. We now know the rich countries can't run the world by themselves, even for their own good.|2
There's still plenty of pain to come, but hope is on the rise that the region's troubles may be waning. Japan's bank-overhaul plan and the Fed's interest-rate cuts bolster the new optimism
Eisuke Sakakibara, Japan's Mr. Yen, emphasizes the need for cooperation
Are the region's troubles waning or is the worst yet to come?
TIME's Asian Board of Economists evaluates the chances for recovery in the region
Thailand has better reviews than returns
Korea accepts a bitter pill
David Roche sees trouble, but no depression