just an interesting excerpt from Barron's interview of David Hale, Zurich Insurance's chief economist re Asia:Nor is Hale especially optimistic about the effectiveness of the $100 billion in International Monetary Fund bailout plans that have been put into place in Thailand, Indonesia and, most recently, South Korea. According to Hale, the IMF staples of fiscal austerity (higher taxes and reduced government spending) and higher interest rates may be appropriate for the deadbeat nations that typically solicit IMF assistance, but not for countries like South Korea that have had high national savings rates, low inflation and budgetary discipline. The result of the IMF's plan for Korea is likely to be massive unemployment, spiraling bankruptcies and, ultimately, a severe recession, Hale predicts.
Such economic turbulence wouldn't help Korea achieve such microeconomic goals of the IMF-sponsored program as reforming its banking system, restructuring corporate governance, reducing the dead hand of state control of the economy or promoting "transparency" and fairness in a system that has rewarded a corrupt elite rather than the public at large. At a minimum, Hale believes, Korea can expect virulent protest from its labor unions, long the beneficiary of French-type labor laws that make it difficult for employers either to fire workers or restructure the workplace.
To Hale's credit, he sensed a number of the economic problems brewing in Asia and even penned a report on the subject ("Is Asia's High Growth Era Over?") in April, several months before the wheels started to come off the region's economy and markets.
Among other things, he focused on Asia's increasing appetite for risky investments as the region became awash with the surplus liquidity of an economically stagnant Japan and Europe. Bank loans and direct investment from overseas surged. In Southeast Asia, much of that largesse sluiced into zany condominium projects, office buildings and other speculative real estate. The Koreans, on the other hand, rushed to add to the worldwide glut of steel, petrochemical and semiconductor capacity, despite corporate debt loads in the country that soared to the nose-bleed territory of more than 400% of underlying corporate equity.
Hale pointed to several indicators of growing imbalances. Significant currentaccount deficits were beginning to crop up in a number of Asian nations like Thailand, Malaysia, Indonesia and the Philippines as the necessity of servicing their surging foreign debt burdens added to the deficits that most were already running on their trade in goods and services. Likewise, the merchandise trade numbers of Korea and many other Asian exporters were being hurt by global inventory overhangs and falling prices in semiconductors and electronic products, which account for 44% of Malaysia's and 34% of Korea's exports.
Asia's deepening problems were also writ large in the ebbing returns on equity of its corporate sector, Hale pointed out. In 1995, for example, the return on equity of U.S. corporations was 19.7%, compared with 6.3% for Korea and 11.4% for Indonesia. Hale glumly concluded that this underperformance was a clear indication of the failure of government targeting of investment, serious overexpansion of the area's capital stock and poor corporate governance that emphasized size and market share over profitability.
Still, Hale had no inkling of the firestorm that was about to erupt. In fact, at one point, he baldly stated: "It is difficult to imagine a Mexican-style financial crisis in the Asian region during the 1990s." He expected more evolutionary than revolutionary change there, with increasingly powerful interest groups, such as pension funds, working to improve the way corporations conducted business.
In the wake of the baleful events of the past six months, Hale is already beginning the lugubrious task of damage assessment. At a minimum, he expects the Asian crisis to cost U.S. GDP at least half of one percentage point in growth next year as a result of Asia's increased trade competitiveness (currency devaluations of 50% or more in Korea, Thailand and Indonesia certainly help on that score) and the catastrophic effect the Asian financial meltdown will have on consumption and investment spending in the region. And the toll on 1998 U.S. GDP could rise to a full percentage point if the crisis isn't contained, he added. The "Thirties spectre of competitive devaluations by other nations looms. Mainland China and Japan may have helped set in motion the recent currency collapses when the former sharply devalued the yuan in 1994 and the latter allowed the yen to erode against the U.S. dollar from 80 to 130 since the spring of 1995. It put the rest of the region at a severe competitive disadvantage on the trade front. Hale also pointed to Taiwan, which recently let its currency float, in effect devaluing it, despite emerging virtually unscathed from the latest contretemps with huge trade surpluses and foreign-currency reserves.
"What began in May as a real-estate lending crisis in Bangkok has already spread as far as Estonia, Russia and Brazil. Who knows how far the contagion will go before it has run its course?" Hale mused.
In Hale's estimation, significant political risks also exist as a result of Asia's problems and America's exposure to the region. The U.S. trade deficit is likely to balloon as high as $300 billion by 1999 from $192 billion last year, particularly if the yen continues to depreciate, as well as the currencies of developing nations in Latin America, South Asia and Eastern Europe.
While the flood of cheap imports into the U.S. would spur continued disinflation if not deflation ("we have the sophisticated monetary policies today to avoid the deflation that boosts in output in the late 19th century triggered," Hale observed), a protectionist furor would likely erupt. As proof, Hale points to President Clinton's inability earlier this fall to win fast-track authority to negotiate freetrade agreements because of Congressional claims that free-trade pacts like Nafta and GATT had brought little to the U.S. but trade deficits, job losses and growing income inequality. Nor was Congress willing to approve additional U.S. funding for the IMF.
And what of the possibility that some Asian nations might simply back away from free-market reforms? "So far, it has been heartening to see the way most of Asia has reacted, but we're still early in the work-out when these nations have every incentive to go along with the IMF. That attitude may change once recession sets in and the policies start to bite," Hale observes.
The situation is far from hopeless, Hale adds, because the region has many strengths -- high national savings rates, budgetary discipline, work ethic, heavy investment in human capital through education and decades of past success in export markets. Yet Asia's period of convalescence promises to be long and fraught with setbacks. And that's what worries David Hale. |
