> RETHINKING ASIA
> Revving for Recovery
> By Manu Bhaskaran
> April 15, 1999
> As the dust settles on emerging Asia's crisis, the outlines of post-crisis
> Asia are beginning to appear. Two features stand out: Economic recovery
> will be faster than expected, and new drivers of longer-term economic
> growth are coming into play. With a bit of luck, the recovery will lead to
> a period of moderately strong growth.
> Sieving through the mass of recent economic information, a number of
> important developments point to a revving up of key engines of economic
> First, imports of raw materials and intermediate goods are beginning to
> recover. Recent trade data show a steady pick-up in Malaysia, Thailand and
> South Korea, as well as a reduced rate of contraction of this lead
> indicator for Singapore and the Philippines. Data from ports in the United
> States, which aren't distorted by volatile price and currency movements,
> show a much stronger recovery in volume terms.
> Second, bank lending behaviour is beginning to change positively. Corporate
> failures and financial distress are beginning to decelerate. And as banks
> are recapitalized, the stronger ones seem prepared to lend to companies
> with better credit, at least for working-capital financing. This is now
> showing up in data for new loan approvals in South Korea and Malaysia. Such
> a change in bank lending behaviour is a crucial turning point in the crisis.
> Third, business expectations are improving, as reflected in surveys in
> Singapore, South Korea and Malaysia. Animal spirits are returning to the
> Asian business scene. Businesses are adjusting to a new equilibrium,
> seeking out export markets and restructuring their balance sheets.
> Finally, consumers are finding their feet again. Retail sales are edging up
> month-on-month in several countries. It's clear that the big shock to
> consumption took place last year and a further contraction is less likely
> in 1999.
> Hence, we see positive economic growth in emerging Asia, except in
> Indonesia where political uncertainty is handicapping recovery. This, in
> turn, points to a degree of resilience in emerging Asia that many had
> All these signs indicate that those parts of the economic machinery that
> were dislocated as a result of the economic shocks of 1997-98 are falling
> back into place. As banks are recapitalized, nonperforming loans peak and
> economies bottom out, banks will see less risk in lending to corporations.
> In other words, they're likely to fulfil their role as financial
> intermediaries again. As businesses return to converting opportunities into
> profits by hiring and paying workers, investing and stepping up production,
> economic growth is likely to return.
> What are the drivers of this new phase of growth that will begin by the end
> of 2000?
> First, rising investment won't be the booster of growth it was before the
> crisis--not with the massive excess capacity in manufacturing, property and
> infrastructure in most of emerging Asia. But there will still be some
> investment growth, as businesses exploit the benefits of devaluation, such
> as new export opportunities and import-replacement activities.
> Substantially reduced costs of labour, land and raw materials will help
> raise returns in many activities that would otherwise have been
> unattractive. These factors should also serve to attract foreign
> investment. Restructuring in developed economies, particularly Japan, will
> give rise to new sources of growth such as outsourcing and remote services
> such as customer-service call centres that will require new investment.
> If investment will be less of a driver, growth in total-factor productivity
> will be a more important one. In simple terms, TFP measures the underlying
> efficiency of an economy. The wide-ranging reforms and restructuring in
> Asia will raise the ability of the region's economies to extract more
> growth from a given amount of capital, labour and land. Much hinges on how
> much has really changed in Asia. The fashionable answer is: not much. But
> if one adds the reforms at the industry level and in trade and investment
> to the improved regulation of the financial industry, the increased pace of
> privatization, capital-market development, corporate restructuring and
> corporate governance, they do add up to a material improvement.
> Putting all this together, we should see much of emerging Asia recover in
> the longer term to growth rates of between 4% and 6%--South Korea and
> Malaysia are likely to be at the higher end; Taiwan, Singapore and Thailand
> only a little behind.
> True, the restructuring process has a long way to go. And sure, there are
> still a lot of things that can go wrong--the U.S. economy could slow, Japan
> could fall into a downward spiral, China might fail to avoid a deflationary
> death trap and Indonesia could yet explode. But on reasonable assumptions
> on these global factors, what has already taken place in terms of reform
> and restructuring is significant enough to raise TFP growth to levels
> sufficient to produce the rates of economic growth mentioned above.
> Manu Bhaskaran is managing director and group head of research at SG
> Securities (Singapore) Pte. Ltd.