Restructuring Asia the Asian Way

"The crisis that has hit Asia will rank as a defining moment for the region, just as the Great Depression ranks for the rest of the world," explained Ramesh Thakur, a vice rector at the United Nations University.

Thakur and three other members of the Council of the UNU earlier this month discussed the key events of 1998 with The Japan Times. They concluded that despite the uncertainty and gloom, there are encouraging signs. Asian nations are likely to emerge from the crisis stronger than ever.

Although economics dominated the headlines in 1998, India's and Pakistan's nuclear tests were a troubling reminder that security concerns cannot be ignored. The two issues overlap in the realm of diplomacy. China's response to the economic crisis have given it a boost in its relations with the United States. That, in turn, poses serious questions for Japan.

Yoginder Alagh: In South Asia, the perspective that East Asian meltdown is not a temporary aberration but is going to have a lasting impact is this year's key event. As of last September and October, South Asian countries hadn't grasped that.

In India itself, for the last 23 years we have had only three years in which growth was low. On average it has been around 6 percent in the '90s. Now we have industrial growth of around 2 or 3 percent and exports, especially agricultural exports, have been collapsing be- cause East Asia was a very big market for us. It is now sinking in that this is something that needs policies and coordination.

The second thing was the decision of the present government of India to con- duct nuclear tests. India has always had a security doctrine that we should have the capability to do these things but not do them. To keep the fist closed. Previous governments had considered this, but the current government did it.

Ramesh Thakur: Economically, the key event of this year has been the depth, sweep and durability of the financial crisis and its consequences domestically, regionally and globally, including for multilateral institutions. It is astonishing how much more widely accepted is the view now that the IMF mishandled the response in the early stages of the crisis. When you even have the World Bank implicitly criticizing a sister institution that indicates the level of discomfort.

Also there is the limit to how much major players can do to resolve the crisis. In the early months when the crisis started in Thailand, there was a feeling that the rest of the world could be insulated or quarantined from the crisis. That is gone.

The big question mark for 1999 is how this fares for China and will it be able to survive the particular contagion. The specifics of the crisis and the questioning of the models and the unbridled globalization and free flow, especially of short-term capital, across borders: We are going to have to look at these things within the context of the architecture of global financial management and institutions.

On the security side, the nuclear tests by India and Pakistan were a rude shock to most people who thought this issue had been settled and was already a part of history.

And now at the end of the year, the same unsettling questions and uncertain situation in regard to North Korea have reappeared as well. Whether it was a missile or a rocket that was launched over Japanese territory, that had a global resonance as well. It has fundamental long-term questions for Japan.

The Clinton visit to China was absolutely crucial. Question marks remain over the wisdom of some of the statements he made in China. The whole question remains unanswered as to the long-term fundamental impact of the changing relationship with China and the repercussions for Taiwan, Japan and India, to name three prominent examples. In a sense we leave the year with as much uncertainty as we entered it.

Giovanni Andrea Cornia: Until two years ago, the world was divided into "virtuous" countries - such as the tigers and the First World - and the poor countries. The Asian financial crisis has brought to the fore the fact that the crisis is much more systemic than certain culprits in specific parts of the world. The world financial architecture and world financial institutions ought to be restructured in a massive way. The so- called "Washington consensus," at least in this particular area, needs a thorough revision. The fact that the World Bank is distancing itself quite visibly from the fund, which is the leader in the formulation of this global solution, is very significant.

Second, the crisis of the last year and a half will send a signal to some - for example Paul Krugman - about the end of the Asian miracle. This is false.

The issue should be raised and there are problems, but after the crisis and the countries recover, they are likely to be stronger than they were before. The reason for that is that there were certain problems in each country, such as the banking sector, but other institutions have been developed - and by institutions I mean such things as contracts and social relations.

The third lesson, which is hotly contested, is the two Asian giants (India and China) have not been affected. In relative terms they come out with a more important role to play. There is quite a debate over the policy lessons. Many people say you should close your capital account or control the exchange rate. That is not sufficient to insulate you. We need to look at countries that pursue policies at variance from the mainstream and continue to prosper.

Wichit Srisa-An: The major concerns among the Southeast Asian countries would be the economic crisis which also leads in some countries to political crisis and social problems. Unemployment is one of the serious problems in quite a number of countries in Southeast Asia.

The lesson that we learned from the bubble economy in the previous years led to the restructuring of financial institutions, as well as reconsideration of social development programs in the case of Thailand. We regard this as a major concern, but also a challenge because the lessons learned from the crisis will lead to an improvement in the economic, political and social systems of the country.

Thakur: The crisis that has hit Asia will in time rank as a defining moment for the region, just as the Great Depression ranks for the rest of the world. At the same time, the other thing that has been brought out by the crisis is the extent to which civil-society elements have already been developed throughout the region. And therein lies the hope for recovery and eventual stability and regeneration.

In this sense, East Asia is much further ahead than the two standouts or exceptions, China and India. If you look at the human capital figures - literacy, life expectancy, infant mortality or whatever - it is a remarkable distance from East Asia to South Asia and China. And some East Asian countries have better figures than the industrialized countries. The relationship between politics and economics has been brought home, as well as the larger question that this is, in a more fundamental sense, a crisis of governance, rather than an economic crisis.

Alagh: I don't think of this year as a sort of cataclysmic year. Asian societies and Asian economies do have the inner strength and resilience to cope with these problems. We think a strategy that phases and sequences reform is an appropriate one.

We have been at this game for eight to 10 years now - I am talking about India. You first concentrate on domestic reform, focus industry by industry, remove quantitative restrictions, move to price competition. Then open up the economy toward trade. In our discussions with ASEAN and others, there has been an acceptance that this has been a more appropriate strategy.

It means that it is going to take more time. originally we were thinking about l.5 to two years, now we are talking about three to five years. But we are not thinking about giving up our objectives in spite of what has happened.

Plus there is more cooperation, In the SAARC (South Asian Association for Regional Cooperation), the growth of trade in the '9Os has been remarkable. We see for the first time, India is attempting to solve river valley disputes with Nepal, Bangladesh.

After the nuclear explosions, the commitment by the two countries not to have any further tests and a far more open stance toward the CTBT (Comprehensive Test Ban Treaty) and a much better understanding between countries like India and France and Italy and I hope, India and Japan. The situation today is very different from what it was on May 14. There are a number of two-track diplomacies that are working.

I am not underestimating the impact of the Asian crisis. But I think there are alternative models. We think that what we have been doing, it is possible to cope with the consequence of this year, which is perhaps no growth. I don't see it in cataclysmic terms.

Thakur: It is important to highlight that: the need to debate this on our own terms. There is insufficient understanding that India is one of the few countries that has the depth and the resilience to say that. And until the rest of the world recognizes that, it will be difficult to achieve some reconciliation with what India wants and does.

Cornia: The Great Depression triggered the birth of Keynesian economics, the New Deal, social security systems and many other mechanisms. The reason that the crisis was worse in Thailand or South Korea than it would have been in say, Europe is the absence of a system of unemployment compensation and public assistance. These economies were growing steadily, they were close to full employment, so they didn't need these kinds of shock absorbers. The crisis forces them to create that as well as clean up their own balance sheets in the financial sector.

What may emerge after the crisis which will be much less severe than the Great Depression, is a system which is even more resilient than before. Because they have good education, labor-intensive exports, but they did lack some of this mechanisms which permits them to face the business cycle.

Institutionally there is a chance - with the major exception of Indonesia or maybe one or two others where the problem is political and a consensus is lacking - the economies may come out slightly more robust than they were at the beginning.

The budgetary cost, the total social cost to establish this kind of institutions is affordable by these countries if it is done in a proper way. The degree of preparedness in the future when these institutions are set up - and it won't be a year, just look at Eastern European countries, it has taken four or five years, - means they will be stronger than before.

Alagh: India is making its case. The Indian economic model is one that says first, in the context of a democratic economy, there are no free lunches. You have to keep the government's budget deficit down, and we have never had hyperinflation. Second, we have never believed that you cannot borrow for investment. In other words, for the fiscal deficit. We believe that there is a lot of social infrastructure that needs to be built. Third, when we started the reform process in the '8Os, we did not take the Washington consensus.

It is an alternative model. We said we would do domestic reform first. We abolished quotas, we abolished price controls, we were always floating. We did not have the market mechanisms of some East Asia economies. But we made the rupee convertible in the current account. For foreigners, the rupee is free, even for investment purposes.

Then in the '90s we started on the more difficult process of trade reform. And now we have an average tariff of 25, 28 percent. We said that we are going to work for capital account convertibility in three to five years and we are not going to change that. We see the difficulties. And there has also been a big step forward for regional cooperation. India now has an explicit strategy for regional cooperation for energy, water. And there is pursuit of technology. All of these are alternative strategies. Whether all of this is understood in the rest of the world is a separate question.

Alagh: The implications of the kind of strategy I am talking about - pursuit of the market objective with strategic intervention - require much greater thinking at the international level. We have been making this case in ASEAN and other forums.

Cornia: The situation of India is obviously quite peculiar. It is a large chunk of the world, a country of 85O million people. There are advantages of size. In many ways India, has always been a separate paradigm. Now it is less alternative than it was before. But what happens to the Jamaicas, the Sierra Leones, where there aren't Yoginder Alaghs, nor are there the human re- sources for domestic market: there is no human capital.

If there are problems in the more successful parts of the world, then the problem is more likely to be systemic. So it is important that there is a more global tackling of this situation. This is where the debate is now wide open. We at WIDER (UNU World Institute for Development Economics Research) are arguing that there is a case for much wider systemic regulation bound by some kind of world financial authorities. We recommend that it be placed in the BIS, rather than the IMF, because there is path dependence. There is a certain view of the world and unless they kick out everybody, and change their governance structure, there won't be a change. The BIS would have the capacity and the political support for doing that.

Alagh: That is why it is a mistake to think in cataclysmic terms. Most of the possibilities lie at the margin. The point is that countries will be forced into change. Countries are facing the consequences of choices. Pressure will matter at the margin. But it will not change the fact that there is a close linkage between the banking system and the investment and production systems in East Asia and South Asia.

On the other hand, unless you give up objectives like exchange rate convertibility, then you are forced to adapt. The change might not be that which the IMF wants in the next three months, but it might be a step in the right direction. The collapse of interregional trade is going to require a lot more coordination. One area is international financial markets. Another is agricultural commodities.

Cornia: I look at Asia through the experience of Eastern European and Chinese reforms. Any deep institutional change is bound to be slow, anywhere, even if you look at the emergence of markets and the formation of capitalism in Western Europe and the U.S. This is clearly a process. It may be excessively optimistic even if there is immediate recognition of the nature of the problem, and the solution may lie in drastic institutional change - which could be the perception of the elite or the leadership. For that to occur, there must be a change in attitude in many economic agents. And this by definition is a slow process.

When I speak to my Japanese colleagues, there is no perception at all of the gravity of the situation as there is in the West. There may even be an element of complacency. That represents that things are as good as they were but the system is not eminently wrong. Viewing the debate from Finland, the U.S. seems too pessimistic and the Japanese seem too optimistic.

Institutional changes by definition are very slow. Rapid change only occurs in emergency situation. In non-emergency situations, which exists throughout the region except perhaps in Indonesia, perhaps the situation is not yet at the breaking point.

Cornia: The big question is how the collapse of a medium-size middle income country like Thailand has almost wrecked the whole world economy. We did not know enough about how crises in a country can affect so many other countries. In the end, it seems to be not too plausible that all these countries all of a sudden made all these policy mistakes. There is this phenomenon of contagion that does not seem to be understood by the standard economic theory. This is what we need to focus on.

The crisis was born in Southeast Asia. Originally there was a big debate about whose business it was to solve it. The Japanese proposed a Japanese-led stabilization fund. It was strongly opposed by the U.S., the IMF and the World Bank with the argument that we didn't want to have 90O regional stabilization funds.

But there are also political-economic arguments. If Japan had been allowed to do that it would have acquired perhaps an even greater role in the region, which perhaps is not what ASEAN had desired, what China desired or America desired.

Then the crisis started to spread further east and Japan has in a way found itself in a situation where it is not a potential savior but a reluctant self-savior with its modest willingness to reform its financial sector and resistant to pressure from anyone to reflate. They might be right, but the Japanese consumers cannot be forced to buy more goods because of their own perception of future insecurity. In standard demand management terms of a Western country, they are being rather prudent.

I see a two-phase situation. First: when Japan wanted to but was not al- lowed to. The second was when Japan should have but has not. That appears in rather stark contrast with the China trip by President Clinton and the Chinese willingness to forgo action when the yen started to slide against the dollar. The Chinese emerged in the region with many political advantages in relation to the situation of Japan because of their willingness to absorb part of the costs and not to devalue.

The OECD group and the West should make up their mind whether they want Japan to play a local role or bet all their money on China or India.

Alagh: I am not an astrologer.... but high growth is really dependent on trade increasing, . . . and that will depend on better regional cooperation. Trade with- in Asia is significant. The slowdown is having an effect on the region as a whole.

In the various fora, particularly in ASEAN, in the discussion groups in which we (India) are a partner, these things are discussed, but action is symbolic. If there is more action - and there are proposals such as a stabilization fund, etc. - the economies will recover faster. And I don't think it will be at the expense of Asian economies integrating themselves into the rest of the world. The Asian market itself has collapsed.

Alagh: If you are going to forge exciting links then it will mean politics of a different kind. on the economic side, at least, there is no worsening of what is called the political economy, at least in South Asia. In fact, there are more regional cooperation projects being talked about right now.

Cornia: The important point is that much depends on how the social, political and economic costs of the crisis is apportioned. Domestically, some of the people who have suffered the most have been migrant laborers. By and large there is no mechanism to share the pain. So countries with surplus labor are seeing their labor returning in a rather unpleasant way. That does not make for better relations between countries.

It is in part justified by the lack of institutions in all these countries to deal with the problem. My impression is that after all, we are friends because we buy each other's products. In the end, I don't know if there will be a general deterioration of political relations in the region or there will be new forms of aggregations. Because if you do pay a cost in not devaluing when you are under pressure, and you are perceived by others to be more generous or more responsible, and those like Japan that are in a sense unwilling to bear a total part of the regional burden of adjustment, they may lose a little in terms of foreign friends. Japan remains the largest donor in terms of ODA. They have ample opportunities to recover their lost position. What is most significant is the visit of Clinton to China and the tone of that visit. I don't know if it reflects a conscious foreign policy decision by the U.S. - which is likely - but it may reflect a perception that China is playing a more important role.