“Tigers Adrift”
Mar 5th 1998
>From The Economist print edition

After three decades of whirlwind growth, many of East Asia's tiger economies are in the doldrums. Need this be the end of the Asian economic miracle? No,
says Pam Woodall; but governments must abandon their bad habits

THE gleaming high-rise buildings that fill the skylines of East Asia's capital cities used to be seen as symbols of the region's economic success. Malaysians boasted about having the world's tallest building; Bangkok bankers joked that the crane had become Thailand's national bird. But now these towering monuments look like a
testimonial to financial excess. The cranes are idle, and snazzy offices and luxury apartment blocks stand empty. In Bangkok an urgently needed road and rail link between airport and city centre has been abandoned half-finished, its concrete pillars reminiscent of Roman ruins. Is East Asia's economic miracle now also a thing of the past?

If anybody had predicted a year ago that Indonesia, South Korea and Thailand would have to go cap in hand to the IMF, they would have been thought mad. This was, after all, the East Asia whose economic policies the international financial community was forever applauding: a world away from Latin America or Africa,
where trouble was always on the cards. East Asia's three decades of growth averaging almost 8% a year (or 5.5% per head) had inspired pride at home and envy abroad (see chart 1). Never before had any economy sustained such rapid growth for so long. The four original "tiger" economies (Hong Kong, Singapore, South Korea and Taiwan) had worked themselves up to developed-country status, and Indonesia, Malaysia and Thailand were catching up fast. There was much talk about an "Asian century" ahead, when the region's economies would leap ahead of America's and Europe's.

But plunging currencies and stockmarkets have put the economic miracle in the deep freeze, and minds are now concentrated simply on survival. At its low point, the Indonesian rupiah was more than 80% down against the dollar, and the currencies of Thailand, South Korea, Malaysia and the Philippines have all dived by 35-50% (see chart 2). These countries' foreign-debt burdens have therefore swollen alarmingly in local-currency terms. The stockmarkets of all five countries have
also seen losses of at least 60% in dollar terms since the start of 1997, and shares in Hong Kong and Singapore too have taken a severe beating. Despite the recovery in share prices this year, in total some $600 billion, the equivalent of two-fifths of the region's GDP, has been wiped off the stockmarkets' value.



Deflated pride

The financial crisis might seem to be over: currencies have steadied and stockmarkets are recovering. But the economic crisis has barely begun. In the Chinese
calendar 1998 is the year of the tiger, but in the region it is looking more like the year of the slug. For the first time in at least three decades, the East Asian tiger
economies (excluding China and Japan) as a group will grow more slowly than the rich industrial economies, with average growth of only around 1%. Indonesia, South Korea and Thailand will suffer outright recessions as high interest rates choke investment and consumption. And until the mess in East Asian banking systems has been cleaned up, new lending will be severely curbed, so in many of these economies GDP growth may remain weak until 2000 at the earliest. Asians feel shocked and humiliated. Gone are the self-confident claims about the superiority of Asian values. In South Korea and Thailand the government has encouraged people to hand over their gold jewellery for melting down to boost the country's foreign reserves. In Bangkok former high-fliers have been reduced to selling
their Mercedes and designer clothes in secondhand sales. At the airport, visitors are greeted with banners that sum it all up: "Amazing Thailand Grand Sale."

Some westerners have rather enjoyed pronouncing the "Asian economic model" dead. The Asian miracle, they say, was always a sham: rapid growth depended on
governments pouring cheap credit into favoured firms. The cosy relationship between governments, banks and firms insulated business from market forces, encouraging excessive borrowing and a wasteful use of resources. Doomsayers now predict a decade of lost growth in East Asia, like the one that Latin America went through after its debt crisis in the early 1980s.

To express certainty about the future is always foolish, but such gloom looks premature. Provided that the East Asian governments take sensible measures, these
economies can return to strong growth. Indeed, the tigers are, to a large extent, victims of their own success. Years of breathtaking growth attracted vast inflows of
foreign capital in the 1990s. At their peak, net private capital inflows accounted for as much as 17% of Malaysia's GDP in 1993 and 13% of Thailand's in 1995, causing overborrowing and overinvestment which could not continue indefinitely. Rapid growth also concealed structural weaknesses such as inadequate bank regulation, a lack of transparency in business and endemic cronyism, which made a dangerous mixture with the excessive borrowing. And so many years of unmitigated success inevitably encouraged complacency, so that governments were slow to act when the first signs of trouble emerged.

All this makes East Asia's crisis another (and particularly serious) example of the financial instability which often afflicts economies in the early stages of development. Economic growth never proceeds in a straight line. Moreover, contrary to popular wisdom, the East Asian tigers have been in trouble before. South Korea saw its GDP fall by 3% in 1980; Indonesia and the Philippines suffered financial crises in 1983, Thailand in 1984, and Malaysia and Singapore in 1985. Taiwan had a banking crisis in 1989. Each time the future looked grim, but the economies concerned eventually bounced back.

There is every chance that they will do so again, but it may take longer than before, for three reasons. First, in contrast to previous occasions, the tigers have all
caught a chill at the same time. Since they do a large proportion of their trade with each other, that will magnify their problems. Second, thanks to international capital liberalisation these economies now have much higher levels of foreign debt than a decade ago. And third, and most worrying, whereas in the past governments were fairly adept at handling a crisis, economic policymaking in many countries has become more politicised, and therefore less effective.

Governments have also been slow to admit that their policies were flawed. Mahathir Mohamad, Malaysia's prime minister, denounced foreign speculators as criminals and morons, and criticism almost everywhere was discouraged, sometimes quite forcefully. Last year the research boss of a foreign bank in Thailand, who had issued a critical economic report, was sent the severed head of a dog through the post.


The darkest hour

The gloom in East Asia is likely to deepen in the months ahead as more firms and banks go bust and unemployment and inflation rise. The most worrying country is
Indonesia, where fears of food shortages and hyperinflation have triggered panic buying and some bloody riots in provincial towns. Anti-Chinese sentiment is simmering: ethnic Chinese account for 3% of Indonesia's population but control 70% of its wealth. Indonesia has the worst economic problems in the region, yet its government's response has been the least convincing by far. The economic crisis is now being compounded by a political one. While the economy grew in leaps and bounds, voters tolerated corrupt politicians and authoritarian rule, but if the economic goods are no longer being delivered, they could become much less accommodating. In South Korea and Thailand, the new pressures have already produced a change of government. Yet in Indonesia President Suharto, now aged 76, has stubbornly resisted attempts to dissuade him from standing again for the "election" for his job that started on March 1st.

The most serious risk is that deep recession could lead to widespread ethnic violence and a breakdown of social and political order. It could also provoke a backlash against globalisation and a general resentment of westerners. If desperate governments were to react to social unrest by reimposing tight capital controls and declaring a moratorium on foreign-debt payments, then Asia could indeed suffer a "lost decade" of prolonged stagnation, cut off from international capital.

If, on the other hand, governments implement the reforms urged by the IMF to restructure their financial sectors, and start to deal with the weak spots in their economies-such as inadequate bank regulation, too much government intervention, corruption and the lack of transparency-then strong growth can and probably will return.

The East Asian economies still retain some important economic advantages over other parts of the world, notably their high savings rates and their openness to trade, which continue despite their financial troubles. However, the crisis has exposed deep flaws in the way their savings are invested, often for political or personal favour rather than maximum rates of return. Such policies contributed to the crisis, and if left in place would harm long-term growth. East Asia needs a more efficient financial system and better corporate management to improve the allocation of capital and so boost productivity. This year's likely surge in bankruptcies and tumbling property prices will be widely seen as further bad news; yet in truth it will show that market forces are at last being allowed to work.

Will the tigers' growth return to the dizzying levels of the early 1990s? "I hope not," says Banthoon Lamsam, president of the Thai Farmers Bank. Economies had
become dangerously overheated, so slower growth would be no bad thing. If governments put their economic houses in order, East Asia's growth might average 5 6% a year over the next decade rather than 7-8% over the past decade, but this growth would be better balanced and more sustainable. And it would still be twice as fast as the average in the rich industrial countries.

There are plenty of reasons for cautious optimism. East Asia's current woes are in large part the price of its previous success-and that success itself has been much
misunderstood. This survey will debunk many old myths about it, including the belief that all these economies are highly flexible and well-governed, and that high
investment is always a sign of strength. But the biggest myth of all is that of a single Asian economic model. These economies differ hugely in structure and political
system, and have applied quite different policies, from fairly heavy government intervention in South Korea, Indonesia and Malaysia to a more flexible regime in Hong Kong and, to some extent, Thailand. That implies that the economic prospects for some tigers are better than for others.

With luck, the crisis may prove a blessing in disguise. Some economists had been warning the East Asians about their inefficiencies for years, but while the economies were booming the warnings went unheeded. The best hope is that governments will use the financial crisis as the reason for speeding up reforms. But first they need to understand exactly where they went wrong.