The global economy is looking good, reports the International Monetary Fund in the latest issue of its World Economic Outlook. According to the IMF’s biannual forecast, released earlier this week, growth will rise 4.2 percent. The pace is picking up: Only six months ago, the Fund projected a 3.5 percent increase. The future looks promising, too: The IMF forecasts 3.9 percent growth in 2001.

From Korea to Indonesia, the outlook has brightened. All the nations of Asia, excluding Japan, posted 2.2 percent growth (on average) for 1998, the year after the worst financial crisis since the Great Depression; in 1999, that figure more than doubled to 5.7 percent. The IMF anticipates 6 percent growth in the region this year; Goldman Sachs, the investment bank, forecasts 5.9 percent growth in 2000. Seven key economies of the region — China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore and Thailand — are expected to grow about 5 percent this year.

Don’t break out the champagne just yet, though. While the numbers are worth celebrating, there are eddies of discontent. In its annual review of economic prospects, the World Bank, the sister institution of the IMF, voiced concern over the heavy liabilities that continue to hang over financial systems throughout the region. That view is shared by the Asian Development Bank, which has identified China, India, Pakistan and Vietnam as particularly vulnerable to another currency crisis because of weaknesses in financial sectors.

Moody’s Investors Service joined the chorus last month, warning that the slowing pace of financial reform risked another financial crisis. And the Political and Economic Risk Consultancy, a Singapore-based advisory service, warned recently that corruption poses a real danger to regional recovery.

Finally, Yilmaz Akyuz, chief economist at the United Nations Trade and Development Agency has argued that the failure of international policymakers to reform the global financial system means that the vulnerabilities that created the last crisis could do so again. Akyuz is worth listening to: He is one of the few economists who identified the problems that triggered the 1997 crisis before it hit.

The chief danger is, in a word, complacency. After a tremendous scare, Asia is coming back. The world economy averted a crisis and the system proved more robust than anticipated. Per capita income in many Asian countries is near or has surpassed pre-1997 levels. (Let’s not talk about the 15 million people whose income has dropped below the poverty level.) As a result, the commitment to reform has slackened throughout the region. Vested interests are fighting a desperate battle to protect their stake in the status quo — and, in many cases, are winning.

Stalling is the preferred tactic. Desperate managers across the region are dragging out negotiations with creditors in the hope that recovery will create sufficient cash flow to allow them to fend off bankruptcy. Underdeveloped legal systems are a powerful ally in the fight. Recently, there have been important decisions to help expedite restructuring in Thailand and Indonesia, but they have been the exception, not the rule.

Complacency is dangerous because crises are the norm, explains Stephen Roach, chief economist at Morgan Stanley Dean Witter. “There’s little talk that crisis could ever recur. Yet that flies in the face of a painful reality,” he notes in a recent research report. From 1975 to 1997, the IMF has identified 158 country-specific crises, 54 banking crises and 32 instances when a country experienced a combined currency/banking crisis. In the 1990s alone, there were three wrenching events: the ERM (exchange rate mechanism) crisis in 92-93, Mexico’s peso crisis of 1994 and the Asian crisis.

Nor does the frequency of those crises suggest that the word is being overused: In 12 of those cases, the cost of fixing the mess topped 10 percent of the country’s GDP.

“Financial crises have become the rule, not the exception. As surely as night follows day, the next crisis is inevitable,” writes Roach.

By definition, a crisis is unpredictable. That doesn’t mean we can’t identify possible triggers. Another oil shock, instability in China, yet more revelations about Japanese finances, an earthquake. Worse, the way that markets have become linked and the speed with which information — or a shock — is transmitted around the globe means that there is still less margin for error. Last week’s gyrations in stock markets all over the world, ostensibly the result of the U.S. court decision in the Microsoft case (a ruling that could have been foreseen), should be warning enough. But, Roach notes, “policy follow-through has been woefully disappointing.”

The biggest danger, in the eyes of many economists, is the continuing loose money policy tolerated by central banks. The extremely fast growth that the IMF has forecast is a warning sign, not a cause for celebration. “Under these circumstances, monetary accommodation is inappropriate and dangerous. It’s like pouring fuel on an already smoldering fire,” says Roach.

They don’t call economics the dismal science for nothing.

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