No. 11 — March 17, 2000

 

Weekly Review

JAPAN'S RECOVERY CRUCIAL TO EAST ASIAN REBOUND
--- by Marc Castellano

East Asia's developing economies will continue to recover and strengthen in 2000 on the back of a robust global economy, the Manila-based Asian Development Bank forecast in a report released March 10. However, the head of the group that produced the study warned that growth in Japan is crucial to sustaining the region's rebound since that country is the top or second-biggest market for the exports of its transitioning partners. The linkage made by economist Yoshihiro Iwasaaki obviously is not new. For more than two years, regional leaders have been calling on Japan to play its historical role of an engine of expansion for its neighbors, but the world's second-largest economy, stuck in a slump since the early 1990s, has not provided much help on the trade front. In yen terms, Japan imported just 2.7 percent more from Asia in 1999 than the year before (see JEI Report No. 5B, February 4, 2000).

Mr. Iwasaaki also urged Tokyo to continue restructuring the banking industry to alleviate the credit crunch that has stifled economic activity not only in Japan but also in the rest of East Asia. Japanese banks traditionally have been the largest lenders to the region. However, their outstanding loans to other Asian economies plunged 39.6 percent to $74.8 billion at the end of June 1999 from $123.8 billion two years earlier (see JEI Report No. 44B, November 19, 1999). Some observers have suggested that this massive pullout aggravated crisis conditions in East Asia. It certainly angered the many borrowers that indirectly depend on foreign funds to keep their businesses going.

Prospects for the five hardest-hit countries — Indonesia, Malaysia, the Philippines, Thailand and South Korea — were the focus of the ADB report. Its authors cautioned that although most of the affected economies have managed to stage a comeback, reform and restructuring need to continue apace; complacency or a less-vigorous approach might invite a recurrence of the problems that tripped up most of developing East Asia in the aftermath of the collapse of the Thai baht in mid-1997. Moreover, while East Asia as a whole has rebounded faster than expected, personal incomes and living standards still are below precrisis levels. Not surprisingly, progress has been uneven, with South Korea leading the pack and Indonesia lagging behind (see Table).

aaaa Real Growth in Countries Hardest Hit by East Asian Crisis

Year

Indonesia

Malaysia

Philippines

South Korea

Thailand

1994

7.5%

9.2%

4.4%

8.3%

9.0%

1995

8.2

9.8

4.7

8.9

8.9

1996

8.0

10.0

5.8

6.8

5.9

1997

4.5

7.5

5.2

5.0

-1.8

1998

-13.2

-7.5

-0.5

-5.8

-10.4

1999

0.23

5.4

3.2

10.2

4.0

Source: Asian Development Bank

 Of the five countries examined, bank and corporate restructuring is proceeding fastest in South Korea and Malaysia, where a government-led initiative has succeeded in reducing the proportion of nonperforming loans. Thailand got off to a slower start but recently has made progress, with the share of problem loans dropping to 38 percent of all lending from 50 percent in the space of just six months in 1999. Indonesia sustained the worst damage from the crisis and remains in difficult economic shape, in large part because most banks are insolvent. The Philippines, in contrast, was affected the least by the crisis; consequently, Manila has not had to tackle wholesale reconstruction of the banking industry. However, signs of strain have emerged, evidenced by a recent rise in nonperforming loans.

The authors of the ADB report noted that many of the fundamental factors that fueled the East Asian financial and economic crisis still need to be addressed. Such problems as weak legal structures, lax business standards, excessive corporate debt, political influence in the private sector and abuses by majority shareholders continue to plague institutions and companies in the region. Moreover, although asset markets have recovered, thanks to favorable exchange rates and rising equity valuations, property markets remain depressed. Larger investments in education and health as well as in social safety nets also are essential if a sustainable expansion is to be achieved, the ADB economists argued.

Despite numerous challenges, the overall outlook for the five countries is fairly good. Growth is expected to accelerate this year except in South Korea, where the increase in real gross domestic product may slow to a more manageable rate of 6 percent to 7 percent. Indonesia's recovery has been constrained by political instability and uncertainties, but the democratically elected leadership now in place could improve economic prospects. Both Malaysia and Thailand have made substantial progress and are on track to reach previous peak levels of per capita GDP in about two years. South Korea achieved this short-term goal in 1999, although the pace of chaebol (industrial conglomerates) restructuring remains a concern. The Philippines could regain or even exceed its most recent economic record by the end of 2000.

The ADB staff concluded that, so far, exports and public spending have been the main contributors to the recovery of developing East Asia's real economy. If Japan could get on a sustained recovery track of its own, its neighbors' turnaround might gather more steam.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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