Two years ago today, the world got its first exposure to “bahtulism.” The Asian contagion then circled the globe, infecting governments in Northeast Asia, Russia and South America. The crisis that followed was the worst since the Great Depression and has shaken the foundations of the world economic architecture. Now, prevailing opinion is that the worst has passed. That may be true, but a relapse is possible; without reforms, it is inevitable.
In April, the International Monetary Fund concluded that the outlook for the world economy was “easing.” For Asia, in particular, prospects were improving. Thailand and South Korea, two of the hardest-hit countries, have made remarkable progress. Growth is forecast to reach 2.5 percent and 6 percent, respectively. Output is increasing and rising foreign-exchange reserves have given both governments breathing room. Indonesia has been harder hit by the crisis, but its outlook is also improving. The rupiah has stabilized at more than twice its value at the peak of the crisis and a climbing stock market shows increasing confidence in the economy. A recent survey of business executives across the region reveals that 80 percent say their profits have returned to precrisis levels.
The return to normalcy is welcome. Unfortunately, financial statistics only tell part of the story; the human damage is only now beginning to be understood. Crime is on the increase and public-health expenditures have been falling. More troubling are longer-term dangers: Children have been pulled out of school to help earn money. The opportunities they have been forced to abandon may never return. The Asian Development Bank warns that the crisis has created unprecedented environmental strains as people turn to alternative sources of food and income. Asia will resume its growth, but it will be slow and steady; the roaring expansion of the past decade is gone. It will take decades to undo the human and environmental damage that has been done.
Odd as it may sound, recovery is not without risk. The chief danger is that Asian nations will ignore the lessons of the crisis and return to old habits. There is much room for debate on the world’s response to the crisis, the role played by the IMF, its solutions and the best way to ensure that another shock does not occur. But there is also agreement on the chief causes of the crisis and the basic steps that must be taken.
Banking reform is the single most important feature of any lasting recovery. Without a stable financial system, another crisis is inevitable. Even as recovery continues, Thailand’s nonperforming loans equal 45 percent of its total loans; experts estimate that Indonesia’s NPLs total $87 billion, while South Korea has $32 billion in dud loans. Malaysia’s banking sector is consolidating, and every day there is news in Japan of another bank in trouble. Government attempts to recapitalize banks are meaningless if the same people and the same mind-set squander those funds in turn.
A new financial infrastructure is required. A new legal framework, with credible and effective bankruptcy laws, must be adopted. Serious oversight is needed. The cozy relationships of the past have singularly failed to protect taxpayers’ money. Regulators must be trained and given new technology — as must the region’s next generation of bankers.
The hardest part will be changing the thinking of bankers and their overseers. Not only must the cooperative relationships of the past be jettisoned, but the nationalism that dominates the sector must also go. The persistence of the belief has been much in evidence recently: In South Korea and Thailand, for example, the nascent recovery has encouraged finance authorities and domestic bankers to back away from deals with foreign investors that were in place. This is the complacency that truly threatens the durability of the Asian recovery.
The crisis has proven that Asian societies are stronger and more resilient than many people had thought. Only Indonesia has lost a government because of the troubles. Asians have been shaken, but they should take pride in the fact that they have recovered so quickly and with so much intact. Recent surveys show that, despite the hardships, their optimism is undiminished. They have the power to see their hopes realized. A commitment to reform is the key. But fears that distinctive national identities must be shed along with the outdated thinking and practices of the past are unjustified. The economic crisis has revealed Asian strengths and weaknesses. The trick is distinguishing between the two.
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