MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | DAVID ELDON
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | DAVID ELDON
Regional Vitality in the 21st Century
April 6-10, 2001 — Tokyo, Japan
David Eldon
Good afternoon. The question before us today relates to reform, namely have we finished the job? The short answer is no. That said, to understand why the reform process in Asia hasn't met expectations in the wake of the Asian crisis, one only has to think of the arcade game 'Whack-A-Mole'. For those of you who are not familiar with this game or haven't visited an arcade recently, let me explain. The objective of this game is for a player, armed with a rubber hammer, to 'whack' or hit little plastic rodents on the head as they pop in and out of a series of holes. Every time a player hits a rodent before it disappears down the hole, they score a point. The game offers an interesting parallel to what has been happening in Asia. Each time the reform process appears to be gathering momentum in Asia another obstacle pops up, impeding progress. Quick recovery The first obstacle to reform has been Asia's rapid recovery. Following the sharp declines in 1997 and 1998, many economies experienced an equally sharp rebound. Consumers who had padded their savings accounts in anticipation of a prolonged downturn suddenly had extra money to spend as confidence returned. Companies that had cut inventory and laid off staff to maintain cash flow suddenly had to scramble to rebuild inventory as global demand picked up. Governments that had been contemplating accepting fire-sale prices for distressed assets suddenly had more leverage to seek higher bids or forego sales altogether. And foreign investors who had fled the region in panic suddenly had reason to return. Although the headline GDP growth rates recorded during this period were in part statistical due to the low base of comparison, the Asia crisis was largely consigned to the history books. Most would agree that while the faster-than-expected recovery was welcome, it also had a negative side. Namely, the pressure to change was less and the desire to introduce the necessary reforms was diminished. Domestic anxieties Another obstacle to reform in Asia has been domestic difficulties. There has been political and social turmoil. Impeachment. Attempted impeachment. Corruption scandals. Increased labour tensions. Strikes. Sit-ins. Violent protests over potential job losses. Managers refusing to vacate offices even after creditors have taken over. Brazen attempts to intimidate people working on the restructuring process. And so on. Collectively, these distractions have been considerable. Obviously governments in Asia cannot nor should they ignore domestic concerns just to keep overseas investors happy. However, internal interests have to be balanced with external expectations. Countries and corporates in Asia cannot expect inflows of foreign capital and the related economic benefits such capital brings to be unconditional. Consider the restructuring and consolidation of the banking sector for example. In some jurisdictions there has been a relaxation of restrictions on foreign ownership of banks. Yet the actual number of consummated transactions remains low. The reason is twofold. First, the stigma of foreign ownership of banks lingers. For some, foreign banks are still seen as a form of 'economic colonialism' rather than as conduits for new capital, new technology, new products, and new services. Foreign banks are also sources of additional expertise in areas such as credit analysis and risk management. Another reason for transactions being below expectations is the foreign banks themselves. Most banks do not want to get saddled with a loss making, bloated infrastructure just for the sake of making a deal. The rapid evolution of e-banking is also making it harder for banks to justify large outlays to acquire the branch networks of troubled counterparts. Of course, to be able to strike a successful deal, there must also be a seller who is willing to accept a price that serves the interests of the buyer's shareholders. False expectations A third obstacle to reform that continues to pop up is false expectations. There have been and continue to be expectations that Asia should be more receptive to rapid reforms, no matter how painful. That legal and regulatory changes should become instant market practices. And that western prescriptions equivalent to, for example, demanding that the United States cut expenditures, raise taxes, change its banking regulations and restructure many of its largest 100 companies, can be completed quickly. Of course, it is impossible for reforms to happen overnight or without setbacks. Likewise, it is unrealistic to assume there is a single solution that will solve all the problems in a region as economically diverse as Asia. Another source of false expectations: Asian governments who overstate progress. Admittedly measuring the progress of restructuring is an imprecise science, particularly when sharp cyclical fluctuations distort historical data. Typically, however, the economies that demonstrate the most commitment to restructuring tend to attract the most capital. Hammer time Against this backdrop of reoccurring obstacles, there is renewed hope that the reform process will gain some new momentum. The impetus: a dose of the 'American flu'. As you are well aware, Asia's rapid recovery was largely driven by exports. For some economies, the reliance on trade has increased dramatically during the past few years. Obviously some economies, particularly small open economies such as Hong Kong and Singapore, have always relied heavily on exports and remain exposed to fluctuations. However, the increasing role of exports in other economies in Asia illustrates the relative weakness of domestic demand since the crisis. It also means there is no hiding place if export growth drops sharply. At this point it is unclear how severe and of what duration the US downturn will be or how much of an impact it will have in Asia. What is clear is that if Asia is to achieve sustained growth in an increasingly complicated and volatile global marketplace, the region has to further develop its financial systems to be able to withstand unpredictable flows and efficiently allocate incoming capital. Conclusion To summarise: I am optimistic that Asia is not on the verge of another economic crisis. As for the progress of reform in Asia, I believe it is unfair to suggest that Asia learned nothing from the crisis and that we are back to square one. As I look around the region, I see a number of positive developments. Governments have tackled issues that were formerly taboo. Local markets have been opened to greater foreign ownership. Many ailing banks have been recapitalised and restructured. Credit-approval and risk management processes have been enhanced. And in some centres, regulatory supervision has been strengthened. That said, more remains to be done. The pace of debt reduction has been mixed. Balance sheets remain stretched. Bankruptcy laws are still inadequate or largely untested in many jurisdictions. Accounting standards need to be raised. More transparency is needed. And corporate governance must be strengthened in order to maintain the confidence of investors, both domestic and foreign. In short, Asia must continue to work hard to overcome the obstacles to reform as they arise. To use arcade-speak: the 'whacking' must continue. Thank you. |
![[ Regional Vitality in the 21st Century ]](../logo128.jpg){kind=logo}