Three years ago this month, a financial storm of enormous proportions broke over Southeast Asia. A region that had experienced unheard of economic growth for two decades found itself reeling from depreciated currencies, corporate defaults, rising unemployment, and fleeing investors.
Asia's crisis hasn't been just financial and economic, but political as well. The onset of the financial crisis coincided with the promulgation of the most democratic constitution in Thailand's history.President Suharto's autocratic leadership fell in Indonesia, and fair elections were held as that country took a major step toward genuine electoral democracy.
On the surface, Southeast Asia appears to have recovered remarkably from the economic crisis. Currencies have recouped some of their lost value, current account balances have stabilized, inflation has been kept low, and exports are rising. All of this has contributed to positive economic growth throughout the region.
But Southeast Asia's recovery looks increasingly fragile as domestic difficulties and signs that the US economy is slowing make foreign investors cautious.Indonesia and Thailand face significant problems - investment remains far below pre-crisis levels and their banking systems have substantial nonperforming loans.
While such loans have fallen in Thailand from 67 to 38 percent of all loans, those remaining nonperforming loans amount to 54 percent of GDP.Indonesia's banking system is in shambles, with 82 percent of all loans listed as nonperforming.
Much of Southeast Asia's growth has been contingent on the robustness of the US economy.The US is the largest buyer of Southeast Asian goods, accounting for more than 20 percent of exports from Thailand and Malaysia and 30 percent from the Philippines.While Americans have been buying Thai silk and Indonesian sneakers, they've also been purchasing value-added commodities, such as computers and electronic products.If the US economy stumbles, particularly in the technology sector, economic growth throughout the region will be severely weakened.
Another difficulty Southeast Asian economies are facing is the recent rise in US interest rates.Higher interest charges on foreign debt will hamper economic recovery in the region as Southeast Asian governments have assumed a mountain of debt to shore up their banks and corporations.Rising interest rates have also moved short-term capital to America for higher returns and have begun to exert pressure on regional currencies.Foreign investors have sold off a net $700 million of Thai stock in five months, putting pressure on the Thai baht. The rise in US interest rates puts added pressure on the Thai and Indonesian central banks to raise their rates when the viability of both nations' private sectors requires lower rates.
Full recovery and sustained growth won't be possible in Southeast Asia until nations begin reforming their banking and financial systems, and adopt better standards of governance and transparency.Understanding and adopting best practices and standards of corporate governance is greatly needed if Southeast Asia is to effectively compete in the global economy.For markets to work, governments must become effective by adhering to international accounting standards, financial disclosure norms, and rule of law.Moreover, governments must make greater efforts in combating the corrosive effects of corruption, which only serve to retard economic growth and threaten political stability. Foreign investment will return to Southeast Asia as memory of the crisis fades, but those countries that can make the most rapid progress on reforms in a transparent and accountable manner stand to benefit the most.
Southeast Asian policymakers also need to diversify their economic model of growth assustainable recovery is not possible through exports alone. Though exports will remain important to the region's economic well-being, the future engine of growth will be predicated more on service industries, consumer demand, and productivity gains. To accomplish this, Southeast Asia will need to further liberalize its economies - including the privatization of state-owned enterprises - but progress on this has been too slow.
Good governance and corporate reform are critical in order to achieve sustainable economic development.The pay-off, over time, should be better jobs, higher economic growth, and a brighter future for Southeast Asia.Weak legal systems, corruption, unaccountable government, and poor corporate oversight cannot factor into the equation.
*John J. Brandon, a Southeast Asia specialist, is assistant director of The Asia Foundation. The views expressed here are his own.
(c) Copyright 2000. The Christian Science Publishing Society