UNFINISHED AGENDA
Asia’s unfinished post-crisis business
By Abe De Ramos

When the Asian Development Bank (ADB) holds its four-day annual meeting in Kyoto next month, delegates including finance ministers and central bankers will spend only two hours reflecting on the crippling 1997 Asian financial crisis. For the Manila-based lender, that is water under the bridge. Higher on the agenda are Asia’s pressing needs to create more jobs for the poor, make efficient use of energy, and improve intra-regional trade.

“Many factors have come together to make the region certainly much more resilient and robust than ten years back,” says Rajat Nag, the bank’s managing director general. In its annual Asian Development Outlook report released March 21, the ADB notes that “an air of normality has returned” to the five countries most affected by the crisis – Thailand, Indonesia, South Korea, Malaysia, and the Philippines – with higher per capita incomes and better social indicators than ten years ago.

But other institutions detect worrying portents. Last February, the United Nations warned that the region might be facing the same risks it did just before the 1997 crisis hit.

For one, Asian countries are seeing a boom in financial liquidity, fueled by hedge funds and investments through carry trades, where investors borrow funds from low-interest-rate countries, such as Japan, to buy assets in higher-yielding ones. The amount of hedge funds managed in Asia is currently estimated at US$130 bn, or about one-tenth of the global total, and BNP Paribas expects it to double by 2010. JPMorgan, meanwhile, believes that the size of the global carry trade is about 40 trn yen, or US$339 bn.

“The rapid growth of these financial instruments increases uncertainty and heightens the possibility of contagion and ‘herd behavior’ in response to any adverse event in the region,” warns Kim Hak-Su, undersecretary of the UN Social and Economic Committee on the Asia Pacific. Such liquidity, he adds, is resulting in “worrying” asset-price inflation, as seen from the 55% gain in the Indonesian stock market to the 24% rise in apartment prices in South Korea last year.

Currency speculators are also at work, the UN adds, as Asian central banks face the dilemma of taming inflation and keeping their exchange rates low against the dollar. Kim is skeptical even of Asia’s buildup of foreign-exchange reserves – now valued at US$2.5 trn from US$249 bn in 1997 – as a defensive weapon. “The regional funds currently available for financial support are not sufficient as a primary means of response compared to the scale of possible need,” Kim says.

While acknowledging the worries, the ADB is confident that the reforms made in response to the crisis have improved the region’s corporate-governance structures, legal and regulatory frameworks, and financial institutions. “A mechanism for sharing information is also now in place, so there is a much better system of early warning,” says Nag, referring to the Chiang Mai Initiative, a regional financing arrangement extended to countries that are experiencing disruptive capital outflows.

A potential destabilizing factor, the ADB believes, is the failure to deliver the fruits of economic growth to the poor. While Asia as a whole has seen a reduction in the numbers of the impoverished from 50% of the total population in 1970 to 19% today, there are still 600m people living on US$1 a day. “Social tensions arise from one group being left behind and seeing the other group grow,” says Nag. “The global capital imbalances are obviously a concern, but Asia needs to focus more on the real sector; growth that is not inclusive enough probably causes more risks than anything else.”

Not surprisingly, the ADB emphasizes two ways to bring long-term stability to the region: generate more manufacturing and agricultural jobs, and invest more in education, healthcare, and infrastructure. These are key issues that make the development lender relevant. Of the five countries affected by the crisis, it notes, Malaysia, Indonesia, and the Philippines have seen a decline in the contribution of the industrial sector to GDP growth, a marginal improvement from agriculture, and a strong activity in services. “By its very nature, the service sector
doesn’t produce that much employment; the manufacturing sector does,” says Nag. Call it Asia’s 2007 crisis.