International Herald Tribune

Paris, Tuesday, October 20, 1998

East Asian Recovery Requires Political Reforms

By Gerald Segal International Herald Tribune
SINGAPORE - There is nothing inevitable about an East Asianrecovery. If the optimists are determined to make their case, they willhave to argue that the political andnot merely the economic fundamen-tals are improving.

 The optimists see some signs of economic recovery in Thailand, South Korea and even Indonesia. But don't hold your breath. Exports (measured in dollar terms) are hardly increasing, and in the absence of persuasive banking reforms it is hard to see exporters being able to finance operations, especially when imported components for exports are now far more expensive. So much for an export-led recovery.

 The optimists are on the shakiest ground when they tout the enduring strength of their economic fundamentals - high savings rates, a strong work ethic in a large young work force, anda stress on education. Leaving asidethe fact that these supposed fundamentals did little to forestall the crisis, they are all questionable.

 High savings rates are arguably a dangerous virtue when cheap money encourages profligate investment. Workers may have good basic education, but higher education in most East Asian countries is recognized as below world class.

 The risk of complacency is that Asians obsessed about regaining supposed past virtues will emerge from their crisis only to find that the Atlantic world has set the new rules for the innovation economy of the future.

 A young work force means that there will be a steep demographic curve leading to a heavy welfare bill in the future. Koreans and others in the region are learning the hard way that alleged Asian family values are no substitute for a costly welfare net.

 Where there has been some progress is in the political reform that needs to underpin economic reform. Without political reform there can be no reliable transparency and accountability, nor the rule of blind justice.

 Economic fundamentalists might reflect that democratic Taiwan has weathered this crisis better than anyone else. Thailand benefits from its most democratic government yet as it undertakes difficult IMF-led reforms. Without a change of president, South Korea would be wracked by labor unrest; Kim Dae Jung is best placed to take his country to the next and even more difficult stages of reform.

 Arguably, Japan stands little chance of serious banking reform without breaking up the power of the oligarchs in the ruling Liberal Democratic Party.

 Indonesia is perhaps the most impressive case where democratic forces coupled with a firm IMF line have given the country a fighting chance to undertake even more of the political reforms necessary to sweep away past cronyism and corruption.

 Interestingly, the World Economic Forum's survey of its recent Singapore ''summiteers'' showed that the CEOs understood that the region's recovery required prior political reform. Singapore's ambassador at large, Tommy Koh, went out of his way to argue that economic recovery without far-reaching political reforms would be temporary at best.

 Other articulate Singaporean officials were quick to debunk another variation of the ''Asia is really all right'' school - the argument that recovery hinges on cuts in European and U.S. interest rates. They know that Asia has grown in the past with far higher rates in the West, and that blaming the West is both an excuse for inaction and a barely veiled version of the Malaysian mantra that the crisis is all the fault of Western speculators. What matters most is Japanese growth.

 The writer is director of studies at the International Institute for Strategic Studies, in London, and director of Britain's Pacific Asia Programme. He contributed this comment to the International Herald Tribune.