Storm clouds are gathering over Asian economies. Although the region has recovered from the worst of the 1997 financial crisis, the slowdown in the United States will give Asia a jolt. The region can overcome those difficulties if Asian economies continue their corporate and financial reforms, but unfortunately, recovery has produced complacency. Reform has stalled, and bad habits are reasserting themselves. Asian businesses and governments must fight those impulses and stick to the reform agenda.

According to a report released earlier this week by the United Nations Economic and Social Commission for Asia and the Pacific, the 25 developing Asian nations surveyed grew 7.1 percent on average last year; developed countries in the region grew considerably more slowly, a mere 1.8 percent. Growth this year was forecast to reach 6 percent, but ESCAP has already lowered those estimates to reflect the impact of the slowdown in the U.S. Now, there is a general consensus of 4 percent to 4.5 percent growth in the 10 Asian economies, with hot ASEAN economies like those of Thailand, Malaysia, Singapore and Indonesia slated to grow only 3-4 percent.

The effects are already being felt. Taiwan’s manufacturing output is expected to have fallen 5.75 percent in the first quarter of this year, the largest drop in 26 years. In Thailand, where exports account for nearly 60 percent of economic output, January saw the first monthly trade deficit in 30 months. Singapore’s economy expanded 9.9 percent last year; original forecasts targeted 5-7 percent growth in 2001, but next week new figures will be released that economists expect will range from 4 to 6 percent.

The slowdown does not mean that the region faces another crisis. The 1997 meltdown was triggered by asset bubbles and shortages of foreign exchange. Most Asian economies have built up substantial foreign-exchange reserves and the speculative bubbles have been burst.

Nonetheless, the U.S. slowdown will force regional economies to make adjustments. Regional stock markets tend to follow movements in the U.S. exchanges; as a result of the U.S. slide, business confidence in Asia is slipping and financial systems, which hold corporate shares as assets, are under strain. Japan’s inability to stimulate its own economy has compounded the pressure, as U.S. Federal Reserve Chairman Alan Greenspan noted in Senate testimony this week. If the yen continues to weaken against the dollar, Asian businesses will find themselves at a competitive disadvantage. Finance ministries around the region are already complaining; there are rumors of central-bank intervention in currency markets to support the yen. The South Korean government has promised to invest $2.2 billion from state-run pension funds to prop up a market that has fallen to its lowest level in three years.

Such ad hoc measures will not work. Systemic solutions are needed. Businesses have to increase transparency and improve corporate governance, and governments have to create a legal infrastructure that encourages them to do so. The region’s reliance on exports renders it vulnerable to external shocks. Domestic demand needs to be stimulated.

At the same time, the regional financial infrastructure must be strengthened. ASEAN officials are meeting this week to discuss ways to blunt the anticipated slowdown. Among the topics is the Chiang Mai Initiative, which aims to provide a safety net of currency swaps for regional currencies in the event of another crisis. The initiative has two components: an expanded ASEAN currency-swap arrangement and a network of bilateral arrangements among ASEAN countries and Japan, China and South Korea. In the event of a crisis, member governments could borrow money to stave off temporary liquidity problems.

The safety net is a good idea, but implementation will not be easy. Participants are divided over the role to be played by the International Monetary Fund. Some governments still feel the pain of the IMF-backed austerity packages that were imposed in the wake of the 1997 crisis; they want the organization to have no role in the new arrangement. Others argue that the IMF’s stern hand is needed to prevent moral hazard. The two positions are unlikely to be bridged this weekend.

The best solution is laying the base for solid economic growth and making crises less likely. Asian governments have squandered an opportunity to do just that in recent months. The impetus for reform has slowed as regional economies have recovered. South Korea’s market-supporting operation is a troubling reversion to old practices, but the Koreans are not the only guilty party, as the dithering over Japan’s bank plan makes painfully clear. Asia will pay for that loss of nerve.

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