HOW SWEET THE RECOVERY?
Ten years after the Asian crisis.
By Tom Leander

July marked the ten year anniversary of the onset of the Asian currency crisis. A decade down the road, the frontline crisis nations – Korea, Thailand, Indonesia, Malaysia, and the Philippines – appear to be flush with health. Asian Development Bank (ADB) president Haruhiko Kuroda endorsed this view at a speech commemorating the onset in Manila. “Asian leaders took the opportunity for reforms and restructuring, and with restructuring came dynamism,” he declared.

But have they done enough? The extent of that dynamism comes into question from the ADB itself, which published a report arguing that real growth rates have never returned to anything near pre-crisis levels. The report, by Frank Harrigan, assistant chief economist at the ADB, contends that the shortfall is the result of lower fixed investment (see chart, left), and comes despite a rebound in total factor productivity in the crisis nations, a condition that would ordinarily trigger new investment. Harrigan sees a broad trend of slower growth across the nations. The exceptions are the Philippines and South Korea, which are growing slowly for other reasons – Philippine growth languished even during the pre-crisis boom period and South Korea has the lower growth rates of a maturing economy.

Harrigan says that a perception of risk continues to deter investors from putting money into the crisis nations, South Korea included. Contrary to the ADB president’s dictum, banking reform and corporate governance have not been pursued aggressively enough and risk to investments remains high. Also, these countries have generally lost out as investments have been diverted to China. Even when investors have chosen to diversify out of China, notes Harrigan, it has been the non-crisis nations – such as Vietnam – that have benefited.

Other reform efforts have been halting. In 2000, the crisis nations, plus China and Japan, met in Thailand and hammered out a “Chiang Mai Initiative” pledging regional economic cooperation to protect against future shocks. The group identified the creation of a regional bond market as key to the return to prosperity. Such a market would give local investors a way to assess and price risk and widen the pool for long-term capital. Governments can support this by establishing uniform procedures of conduct, disclosure, and transparency. Here, too, progress has been meager.

“Regional financial cooperation is still lagging behind other forms of economic cooperation, such as free-trade agreements,” says John Wong, a visiting professor at the East Asian Institute, a Singapore think tank. Speaking at the same Manila commemorative meeting as the ADB president, Duck-Koo Chung, a former minister of commerce for South Korea, called for faster progress toward a new, regional financial architecture. “A sense of complacency may bring about another crisis,” he said.

Wong says that persistent political rivalries have contributed to this complacency. Whatever the reason, inaction has left those nations hardest hit in 1997 still bereft of the investors they most want and need.