FORGET THE 'ASIAN CRISIS'
A new report says the problems are global
By Alejandro Reyes
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A plan for recovery
HARVARD ECONOMIST JEFFREY SACHS is perhaps the best-known critic of the International Monetary Fund. So when The Asia Competitiveness Report 1999 was released earlier this month by the Harvard Institute for International Development, the Boston Consulting Group and the World Economic Forum, no one was surprised with a key recommendation - a complete overhaul of the IMF. Sachs, the director of the Harvard Institute and one of the report's principal authors, has long criticized the Fund's insistence that ailing economies like Thailand and South Korea raise interest rates and keep them high to protect their currencies. This policy, says Sachs, triggered deep recessions in those countries.
But the report goes beyond that. The IMF-induced economic slump is nearly over. Sachs says East Asia is definitely headed for recovery, with Thailand and Korea blazing the way. (Last week, Moody's Investors Service followed the lead of other credit-rating agencies and raised the sovereign rating of South Korea from junk-bond level to just above investment grade.) After more than 18 months of turmoil, "the mood will swing back again, not to the euphoria [of pre-Crisis times] but away from this deep pessimism," says World Economic Forum managing director Claude Smadja at the group's annual meeting in the Swiss town of Davos.
In a departure from tradition, the 1999 report did not rank economies according to their competititiveness. Instead, the researchers offered a largely qualitative analysis of Crisis-hit Asia. Sachs and Woo Wing Thye of the University of California at Davis present a 30-point plan of action for global reform in seven areas. Their thesis: The Crisis is not just a regional problem but part of the global turmoil resulting from rapid international economic integration. "There was little particularly 'Asia' about the Asian financial crisis," Sachs and Woo argue. "Even though official Washington, led by the IMF, proclaimed the crisis to be one of Asian capitalism, the more generic character of the crisis became all too clear during 1998, as the crisis spread to Russia, South Africa and Latin America."
The solution must therefore be international, including changes at the IMF and the way it goes about rescuing ailing economies. But East Asia must also play its part. "While the region is moving beyond the panic stage, and thereby poised for the start of economic recovery, the pace of recovery is still open to question, because of remaining uncertainties about the clean-up of debt and of long-term institutional reforms," says the report. And it warns: "Optimism is conditional on the U.S. and Europe maintaining sufficient liquidity in world financial markets by cutting interest rates as necessary [and keeping] their domestic markets open to imports despite the left-of-center character of their governments."
What about Asia's ability to compete? "Asia is competitive," says Sachs in an interview. "It's not hyper-competitive, but there are great strengths." One advantage: the region's manufacturing prowess. "The aggressive growth strategy over recent years has been problematic, but it has also led to the development of a much stronger industrial base," notes Thomas Lewis, senior vice-president of the Boston Consulting Group in one of the report's chapters. "Manufacturing and distribution infrastructure has evolved, labor skills have been fostered and management capabilities have grown."
And Asian companies are restructuring. Lewis tells of one electronics company that started changing its organization, boosting cost efficiency and raising asset utilization even before the Crisis hit. It improved return on investment by increasing inventory turns from two to seven times, cutting annual capital spending in half and pushing up capacity utilization from 65% to 85%. Previously, the company had focused on expansion, with assets growing at 25% a year. From 1994 to 1996, the firm's stock market capitalization plunged 30%. By the end of last year, it was outperforming the local market index by 135%. "It's a model that many Asian manufacturers would do well to imitate," Lewis reckons.
The study also has advice for Western multinationals - they will have to get used to a more volatile environment. "The best strategy is to embrace the uncertainty and develop tools to manage through it," counsel Boston Consulting analysts Mark Blaxill and Alison Sander. They believe that success will come to multinationals that can take advantage of Asia's low costs, another of the region's competitive advantages. "Companies that can successfully build Asian supply networks to serve their home markets have perhaps the best opportunity to prosper in the long run," says the report.
Perhaps the most interesting essay deals with the issue of cronyism, a pet topic among East Asia's post-Crisis critics. Sarah Sievers of the Harvard Institute of International Development and colleague Wei Shangjin conclude that, while "the overall effect of corruption on economic development is negative, this is just as true in Asia as it is elsewhere." They reject the notion that "corruption in Asia has smaller negative consequences" - a view advanced by those who believe that cronyism helped push economic development by greasing bureaucratic wheels. The message from their investigation and the other sections of the report: Let's stop talking about the Asian Crisis and start tackling the enormous global problems that badly need fixing. Is anyone listening?
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A PLAN FOR RECOVERY
Harvard economist Jeffrey Sachs and his colleagues have a plan of action to enhance competitiveness. Some key recommendations: • Overhaul the International Monetary Fund and make sure IMF rescue programs do not defend fixed-exchange rates, which risk triggering sharp recessions
• Encourage long-term capital inflows, particularly foreign direct investment, but limit short-term foreign funds
• Control short-term borrowings from foreign banks
• Accelerate bank recapitalization efforts
• Raise the standards of science and technology and the quality of public institutions, particularly the civil service and judiciary
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