'Your Brakes Are Fine, but the Engine ...'

The Asian financial crisis won't go away soon.

Until last July, Asia was an engine of growth for the world economy. No more.

"It's in the repair shop - for three years," says Harald Malmgren, a Washington economic consultant. "This engine is going to pull nothing. This will be a prolonged, painful restoration."

Three to five years before it's over, estimates Tim O'Neill, chief economist at Harris Bank/Bank of Montreal in Toronto.

For the United States and Canada, the Asian crisis is in one way "good news," Mr. O'Neill says. By knocking about half a percentage point off economic growth, it should restrain the inflation-sensitive Federal Reserve from raising interest rates.

The crisis will have its worst and most extended consequences in South Korea, Indonesia, and Thailand. O'Neill expects their economies to decline this year and only then slowly revive.

"This is no Mexico," says Mr. Malmgren, referring to Mexico's rapid recovery from the 1995 peso crisis - a comeback not enjoyed fully by many working Mexicans.

And it could get worse. Malmgren reports rumors in the region that Indonesia's military is getting restless.

"There could be a coup," he says.

Observers also worry about the potential for riots against the ethnic Chinese minority, the backbone of Indonesia's business community. Many Chinese are reportedly fleeing or planning to do so.

O'Neill sees three "uncertainties" that could worsen the crisis:

* Korea could fail to satisfy the reforms required by the International Monetary Fund (IMF), bringing financial chaos.

* China could devalue its currency, the renminbi, this summer. Huge currency devaluations by its neighbors put Chinese exports at a competitive disadvantage.

* Japan's economy may weaken further. More trouble in the world's second-largest economy hurts both Asian and Western countries.

Aware of the risks in the Asian crisis, Federal Reserve Chairman Alan Greenspan has encouraged Congress to give more money to the IMF. On Friday, he told the House Banking Committee that if the US fails to help refund East Asia, the consequences could be severe in the US.

President Clinton wants another $18 billion for the IMF. Congress turned down a similar request last year, and the administration places such a high priority on the issue that it sent not just Mr. Greenspan but also Treasury Secretary Robert Rubin and Defense Secretary William Cohen to plead the cause.

Malmgren suspects Congress will provide an initial $3.5 billion this spring but may hold back on the other $14.5 billion - the US share of an increase for the IMF.

Some members of Congress want to let American banks and those of other industrial countries do the work of negotiating deals with Asian banks, companies, and governments that need more repayment time or some relief for their debts.

As a safety measure, the Fed has been leaning on American banks to be generous in "rolling over" debts - stretching the due dates on loans. They did agree last week to extend $24 billion of Korean short-term loans for up to three years.

But the banks worry about sending new money after bad in East Asia. In fact, the region has been drained of capital.

Some $12 billion fled the economies most affected (Indonesia, Thailand, Korea, the Philippines, and Malaysia) last year, according to the Institute of International Finance (IIF).

That compares with net inflows of $93 billion of private investment in 1996.

The IIF - whose members include 280 of the world's largest financial institutions - notes that while Asia was losing money in 1997, other emerging markets were gaining it: $212 billion, up from $202 billion in 1996.

"Remarkable ... in these circumstances," said Georges Blum, IIF chairman. But the IIF expects uncertainties from the Asia crisis to catch up with other emerging markets, squeezing money flows to $170 billion this year.

"Should some Asian economies not stabilize, net flows will be sharply lower," IIF managing director Charles Dallara predicted last week.

IIF economists expect Asia-Pacific nations to grow by a real 2.8 percent this year, the lowest level seen in a generation, one more accustomed to 8 percent.

With bankers and other private investors frightened out of East Asia, the IMF and other governmental agencies stepped into the gap. They contributed a net $30 billion last year, up from $3 billion in 1996. The IIF expects them to stay at $30 billion this year.

Oddly, some of the cure for what ails Asia is as simple as better bookkeeping. Accounting practices in some countries are years behind Western standards.

No one knows, for example, the full extent of Korea's financial crisis, because its accounting practices are defective, Malmgren says.

"There was little pressure to keep accurate books," he notes. "Credit depended upon long-term personal relationships, including family, school, and industrial/financial conglomeration, or upon real estate collateral, which was valued at original purchase price. In other words, credit was based on handshakes.

"Due diligence was an alien idea of no relevance to Korean lending or investment practices," Malmgren writes in a paper prepared for some members of Congress.

Korea pursued growth without regard to the usual profit, capital cost, and credit constraints faced by businesses in North America and Europe. "The objective each year was simply to do more."

"These are structural problems new to the world," says O'Neill.

Could the recovery gloom be too thick?

O'Neill admits his three-year forecast could be wrong. "It might be shorter."

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