As Asian Reforms Go Into Eclipse, Growth Outlook Darkens 
International Herald Tribune
January 24, 2001
Michael Richardson 

The signs are surfacing across Asia.

In South Korea, officials decide to bail out heavily indebted conglomerates. In Indonesia, the central bank announces that it will enforce aggressively what it says are existing curbs on the supply of rupiahs available to offshore institutions. In Malaysia, Prime Minister Mahathir bin Mohamad renews his call for Asia to reject "unfettered predatory capitalism and the absolutely free market" that he says are being imposed on the region by Western powers.

East Asian governments apparently are retreating from free-market principles and abandoning key reform efforts just as their export-oriented economies are slowing because of shrinking sales to the United States. The backsliding is expected to intensify as the U.S. economic downturn and the threat of continued high oil prices bring tougher times to many East Asian countries in coming months, making it more difficult for political leaders to make economically painful and unpopular decisions.

But the cost, economists and bankers warn, will be bigger debts and slower growth that will further undermine business and investment confidence, already sagging as a result of political instability in the region.

For the first time since the financial crisis of 1997 and 1998, East Asia faces a difficult external outlook. The United States, which absorbs more than 20 percent of the region's exports, is slowing more quickly than had been forecast just a few weeks ago, and orders for electronics, East Asia's leading export, are falling.

The regional monitoring unit of the Asian Development Bank warned recently that the slowing of the drive for reform in some countries, particularly Indonesia, the Philippines and Thailand, was a cause for serious concern.

"Implementation of reforms may be more difficult in a context of slower growth," the bank said, "but the costs of inaction are likely to increase in a less hospitable global environment."

It added that South Korea and Malaysia as well as Indonesia, the Philippines and Thailand were facing "the double whammy of increased external and domestic risks."

Other analysts said that China, widely considered to have played an important role in helping East Asia recover from the last crisis by sticking to its market-reform efforts and not devaluing its currency, was likely to be less resolute this year as slowing exports to the United States put a brake on growth.

David Roche, managing director of Independent Strategy, an investment advisory company in London, said many Asian countries had failed to reform the financial systems that were the root cause of the currency turmoil that started in Thailand in mid-1997. "Banks were bailed out, not reformed," he said.

Among the signs of backsliding that worry foreign bankers and investors are: - South Korea's bailout of its chaebol, or big conglomerates. - The newly elected Thai government's aversion to selling banks to foreign interests and its pledge to use $12 billion to buy bad debt from Thai banks. - The unraveling of Malaysia's privatization program. - The slowing of state enterprise and bank reform in China. - Indonesia's curb on the free movement of capital. The International Monetary Fund, which marshaled billions of dollars in emergency loans to help Thailand, Indonesia and South Korea recover from the 1997 crisis, has called on the region to intensify, not slacken, reform efforts. The Fund's managing director, Horst Koehler, said the IMF expected economic growth in Asia, excluding Japan, to slow to around 5 percent in 2001, from about 8 percent last year, as exports faltered. ''I would consider such a slowdown more as a normalization than a cause for doom and gloom, and justifying neither panic nor frantic actions,'' he said, noting that East Asian countries had cut their short-term debts, rebuilt their foreign-exchange reserves and were operating more flexible exchange-rate policies. ''The slowdown that causes me greater concern is that of progress in structural reforms in many Asian countries,'' Mr. Koehler said. In South Korea, officials said action to rescue chaebol was just a temporary measure. The state-owned Korea Development Bank is to pay about 25 trillion won ($19.62 billion) of 65 trillion won in corporate debt that is maturing this year. In Indonesia, the central bank's actions would make it more difficult for speculators to attack the rupiah, which fell about 25 percent against the dollar in the past year as the country's problems grew. In the Philippines, the weeks of political turmoil that forced President Joseph Estrada to resign over the weekend sent stocks and the peso into a tailspin, diverting policymakers from the urgent task of improving tax collection and reining in the budget deficit. Former Vice President Gloria Macapagal Arroyo was sworn in as president Saturday, and Rafael Buenaventura, the Philippine central bank governor, predicted the peso would bounce back. But Stephen Cheng, an analyst in the Hong Kong office of UBS Warburg Asia, said the sovereign rating of the Philippines was still likely to be downgraded, given the sharp deterioration in the country's creditworthiness in the past few months. ''Our view on the fundamentals remains the same,'' he said. Analysts also said Malaysia's once-vaunted privatization policy was unraveling as sales of state assets slowed amid a government push to prop up troubled companies, many with political connections.

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