[from The Asian Wall Street Journal
Wednesday, November 18, 1998]
 
 
 

The APEC Summit in Kuala Lumpur takes place at a critical time for the Asia-Pacific region. A mere 18 months ago, many of those who have gathered for the summit were still lauding the achievements of the "Asian Tigers" heralding the dawn of the Pacific Century. Asia, it seemed, would be the promised land of sustained economic growth.

But the Asian flu has left in its wake economic devastation, shattered dreams and severe social dislocation that will take decades to repair. Indeed, as we stand on the threshold of the new millenium,  it seems apt to paraphrase Dickens: The best of times has turned out to be the worst of times.

It is not normal to conduct economic discourse from behind prison walls. But these are not normal times in Malaysia, nor indeed in much of Asia. Detention has its benefits; solitude has given me time to pause and reflect on the reasons for Asia’s economic decline, and consider what remedies may be possible.

Just as Asia’s boom in the last decade was no mirage, there is also no great mystery behind its sudden collapse. The Asian crisis has been debated at great length and its causes are well-known. It turns out that some of the factors behind the success story were the very forces that triggered the crisis. Unregulated flows of capital seeking high returns led to reckless investments, manifested in towering skyscrapers and stratospheric stock prices. Liquidity flowed like hot lava to emerging markets where corporations were hungry for capital at low interest rates. These flows were unrealistically insulated by inflexible exchange rate systems, which pegged the Asian growth story to low U.S. interest rates. This in turn left currencies vulnerable to attacks by speculators and rogue traders.

Yes, there were indeed forces lurking in the shadows, waiting for any opportunity to make a fast buck from betting on the ability, or inability, of central banks to defend currencies. Any reform in the international financial must address ways to combat this menace. But what of the affected countries themselves? Do we not take the individual and collective responsibility for our problems, just as we have taken credit for our successes in the last decade? Were not the countries which exposed themselves to vulnerabilities in their external accounts not indirectly inviting attacks on their currencies?

The underlying problem in Asia is deeper than what is suggested by conventional analyses of boom and bust cycles, or by the criticism levelled at dark forces out to destroy the international financial system. Instead of pointing the finger at speculators and blaming "unrealistic demands" set by international agencies acting as lenders of last resort, Asian nations would do well to put their houses in order first. The international financial system does indeed a new architecture, but structural reforms must begin at home. The place to start is by containing the exuberance of  political and corporate leaders for projets that do not add to the competitiveness or well-being of a nation, in particular real estate and oversized infrastructure undertakings.

We in Malaysia are as guilty as anyone else in the region.  The frenzied rise of the equity and property markets in the early to mid-nineties spawned an overwhelming desire to outdo the rest of the world in infrastructure development. Barely had the paint dried on the world’s tallest twin towers, when we were starting work on a multi-billion ringgit government administrative centre and a massive hydroelectric dam and laying out ambitious plans for outlandish projects such as the world’s longest city.

Asian nations must firmly commit themselves to wiping out corruption and nepotism. Clearly, many of our problems could have been avoided if there had been greater commitment to eradicating subsidies, monopolies and favoritism. In the case of Malaysia, it is unfortunate that Dr. Mahathir Mohamad, who in the past has lectured the peasantry about their "subsidy mentality", has descended from his pedestal to promote the worst kind of subsidy mentality among his cronies and the super rich.  Is Asia, where cronyism is entrenched in many quarters, ready for this sea change towards a more ethical and moral political leadership and better corporate governance? So many vested insterests are at stake. Unless the gale of  creative destruction is unleashed on these rent-seeking and parasitic corporate activities, however, the Asian economy will never regain its past vigour. This process of house cleaning, along with the removal of tariff barriers, will serve as the cornerstone for revitalised global trading system and underpin the success of APEC.

This Asian renaissance should encompass not only political transparency and better corporate governance, but also reforms to society and culture, and respect for human rights, the environment and the independence of the judiciary. Without this commitment to these values, debate on resolving the Asian crisis may well turn out to be mere lip service.

That said, APEC leaders would do well to drive home several key points to revitalise the emerging markets in Asia, Latin America, and also Russia.
 

•  At the outset, higher standards should be set for financial transparency in a globalised economy so adequate warning signals are sent out whenever a country veers significantly off course. The regional and international financial institutions were caught off guard last year by rapid falls in the international reserves of some countries. Continued opaqueness will only foment uncertainty and delay a return of the confidence needed to rehabilitate the region.
• Financial institutions need to be properly supervised – by individual countries as well as regional and international agencies. And, as the recent case involving Long Term Capital Management has shown, developing nations are not the only ones that must heed this call. Risk assessment -- for central banks and international financial institutions, and lenders and investors -- can only be made properly only if prudence is observed supervising the financial sector. Non-performing loans and the contingent liabilities of banks in Asia rose dramatically because of poor management and even poorer regulation. Balance sheets were hammered when risky assets tilted unfavourably against capital and reserves.
• APEC should make a commitment toward openness in international capital markets. Although some have blamed liberalisation of the capital account for the crisis in Asia and Latin America, the general process of opening up markets should not stop. More important, measures must be taken to emphasise foreign direct investment over short-term capital flows. The corollary to that argument must be that capital controls can be at best a temporary measure. Exchange controls cannot be used to artificially cocoon a country from the realities of the market place. APEC was founded on the principle of free-market policies, and despite setbacks in several sectors, achieving further trade liberalisation should remain a key goal.
• A strong message must be sent to Japan, the largest economy in Asia, that it must play a more dynamic role in restoring confidence in the region. It can do this only by committing itself to a reform of its financial system and spurring domestic economic growth. After five years of economic slumber, Japan must now rouse itself up and herald a new dawn for the rest of Asia. The example it sets in liberalisation will be followed by the rest of Asia, helping the region to rebuild itself. The economies of Asia will revitalise themselves and APEC will be one of the key pillars.

It has been argued that APEC is an economic organisation, not a political forum. But economics and politics are so intermingled that any clear-cut separation is an illusion. The great Asian boom was certainly founded upon political stability. Thus a re-engineering of political stability must again be the pre-condition for sustained growth in Asia. Yet there is a difference between true stability – the lasting one which is a reflection of public participation and confidence in a system of governance – and illusory stability based on power wielded by an elite. 

For decades, some aging Asian leaders have tried to convince their people that soft authoritarianism is necessary for prosperity. But a new generation has emerged for whom such arguments have lost their persuasion. Indeed, they see in these arguments only self-serving justifications for all forms of excesses, including corruption. To the new generation of  Asians, political stability is just as important, but it must be based on freedom and justice, not coercion and denial of fundamental rights.