Military

DATE=10/24/01

TYPE=BACKGROUND REPORT

TITLE=ASIA ECON / BLEAK OUTLOOK

NUMBER=5-50368

BYLINE=STEPHANIE MANN

DATELINE=WASHINGTON

VOICED AT:

INTRO: Four years ago, much of East and Southeast Asia was hit by a financial crisis -- bank failures, corporate collapses and mass layoffs. The affected countries were implementing reforms and making good strides at recovery, but then the high technology industry began its slowdown. And now, experts say, Asia is beginning to feel the economic impact of the September 11th terrorist attacks. V-O-A's Stephanie Mann has more on what analysts say is a grim outlook for Asian economies.

TEXT: Even before the September 11th attacks, the U-S and Japanese economies were showing signs of strain. The high-technology sector was suffering, and economists were talking about a possible recession.

Now, there is no question. Demand is down and companies are reporting sharply lower profits. These declines are being felt throughout the global economy, especially in Asia where governments are lowering their growth targets. David DeRosa, a professor of finance at the Yale University School of Management, says Asia is going to be in substantial economic trouble for some time to come.

/// DeROSA ACT ONE ///

I don't think that Asia, by itself, is going to return to prosperity and growth until the United States and possibly Europe return to some really solid growth. I think they're passengers on the train at this point.

/// END ACT ///

The signs of economic downturn are visible throughout the region. Taiwan reports a record high unemployment rate for September. The world's largest microchip maker, South Korean company Samsung, posted its first operating loss in 14 years in the July to September quarter. Leading Japanese technology companies, like Fujitsu, Hitachi and Toshiba, are reporting lower profits and job cuts. And Indonesian vice president Hamzah Haz has warned of an economic collapse, saying there have been massive layoffs and the gap between rich and poor is widening.

Professor DeRosa who has written a book about Asia's economic troubles, called "In Defense of Free Capital Markets," says Indonesia is a separate case because its economy is tied to its political uncertainty. But he says other economies -- such as Malaysia, Thailand, and Taiwan -- have suffered greatly because their governments promoted business growth in just one sector -- the high technology industry.

/// DeROSA ACT TWO ///

What you had was a prolonged period of time in which governments coerced and incentivized investment in specific industries. So you had government directed investment in what the government thought was hot and would stay hot. ... And you know what? The government was wrong. They didn't diversify. It wasn't a diversified plan. It was a highly focused bet on technology. In other words, "If we can't become a manufacturer of electronic components for computers, if it doesn't say 'made in Malaysia', we've failed."

/// END ACT ///

Mr. DeRosa says that approach worked for several years with double-digit growth rates. But he says it came from government-directed development, not free market factors, and he is concerned about continued government involvement in the private sector in Asia.

/// BEGIN OPT /// A United Nations experts group recently recommended that Asian countries try to offset the decline in demand from other regions by engaging in targeted state spending on rural infrastructure projects. Professor DeRosa says that presumes that fiscal stimulus through infrastructure projects can promote economic recovery. He says Japan has tried that repeatedly without success since 1990.

Mr. DeRosa expects the U-S and European economies to recover from the downturn caused by September 11th by the end of next year. That will help Asian economies, he says, but their governments also need to step back from economic planning and instead let capital markets function.

/// DEROSA ACT THREE ///

When was the last time you saw a real good proxy fight with management being ousted in Asia? Are the banks doing arms-length lending. In other words, do the banks have the power to say, "No, I'm not going to lend you money for another chip factory. That's stupid. We don't need it."

/// END ACT /// /// END OPT ///

Southeast Asia specialist James Clad expects a severe economic fallout in Asia from the September 11th attacks, including a new wave of corporate bankruptcies and bank failures. And he says Asian officials do not seem to be addressing the problems. Mr. Clad, a consultant with Cambridge Energy Research Associates in Washington, says countries such as Indonesia and Thailand used two main tools to pull out of the financial crisis of 1997 and 1998 -- increased exports and government economic incentives. He says those options are no longer available.

/// CLAD ACT ///

The way those countries have responded -- by seeking to pile on exports to what was at least for many years seen as an inexhaustible American import appetite and to also give tax breaks and other things that amounted to domestic stimuli for economic activity -- both those approaches, relying on foreign trade and relying on domestic stimuli, are now used up. They're exhausted. Exports to the United States are declining precipitously. The deficit per G-D-P in most of these affected countries is very high, and there's no room to further finance public sector debt in order to keep economic growth going.

/// END ACT ///

Mr. Clad says the ministers at the recent Asia-Pacific economic meeting in Shanghai all know about what he calls "the pending second wave consequences" of the Asian financial crisis. But he says they chose instead to focus their talks on terrorism and trade globalization through the World Trade Organization. (Signed)

NEB/SMN/MAR