FIGHTING THE ASIAN FLU

November 23, 1998
		Asian leaders struggle to find a way to turn around the region's ailing economy and stem the growing political unrest. Margaret Warners and economic experts examine what is being done to solve Asia's economic troubles.

Nov. 17, 1998: Vice President Gore criticizes Malaysia at the APEC conference. Nov. 16, 1998: A look at the flow of money in and out of Asia. Oct. 9, 1998: A discussion on the world economic crisis. Oct. 8, 1998: The president of the World Bank discusses the world financil crisis. July 24, 1998: Keizo Obuchi becomes Japan's new prime minister. May 21, 1998: B.J. Habibie becomes Indonesia's new president. Feb. 3, 1998: Exploring the impact of Asia's economic woes. Jan. 19, 1998: A discussion on the IMF's handling of Asia's economic crisis. Nov. 26, 1997: APEC's annual conference concludes. Nov. 25, 1997: Asia's leaders look for answers at the APEC annual conference. Browse the NewsHour's coverage of Asia and Economic issues   Asia-Pacific Economic Cooperation International Mondetary Fund	MARGARET WARNER: President Clinton returned today from a 5-day trip to Asia, a region that has been buffeted by economic and political turmoil over the past 16 months. The President urged governments there -- particularly in Japan -- to take further steps to pull the region out of its persistent slump. PRESIDENT CLINTON: If Japan is very strong, that brings back Asia. If Asia is strong, that's good for the American economy; it also means it's good for stability.
	Ripple effect.
	MARGARET WARNER: The president's attitude was far different a year ago, when he downplayed Asia's economic problems as simply "a few glitches in the road." Asia had been the world's fastest-growing region until the meltdown began 16 months ago in Thailand, with the collapse of the currency, the baht. In the months that followed, as foreign investors pulled their money out of the region, the crisis spread virtually everywhere in east Asia. The International Monetary Fund put together bailout packages for Thailand, South Korea and Indonesia. But still the turmoil spread. Stock markets and banks, construction and real estate, currencies and growth rates collapsed, throwing tens of millions out of work. The economic problems triggered political turmoil as well -- from street protests, to changes of government. By the middle of this year, Asia's problems were having a ripple effect on markets in Russia, Latin America, Europe, and the United States. Last week, in Malaysia, Vice President Gore urged Asia's leaders to step up to the challenges of the fiscal meltdown. VICE PRESIDENT GORE: This much is clear. Just as the global financial crisis started here in Asia, the global economic recovery can and must start here in Asia as well. Tonight I challenge the Asian-Pacific nations to lead the way. MARGARET WARNER: Mr. Gore was in Malaysia for the 6th annual heads-of-state meeting of the Asia Pacific Economic Cooperation group, or APEC -- the leaders of 21 pacific rim countries gathered to assess the fallout, particularly in the countries hardest hit by the crisis. Malaysia's leader, Prime Minister Mahathir Mohamad, still blames international currency speculators for Asia's troubles. And last month imposed limits on the flow of capital in and out of his country. The government faces street protests triggered in part by the economic crisis. In Indonesia, despite an IMF bailout, millions of middle class workers have slid back into poverty. Unrest prompted the resignation of longtime President Suharto. South Korea and Thailand both have elected new leaders. Both countries have adopted some IMF-backed reforms, but their business sectors, stock markets and currencies are still badly depressed. The key to any turnaround, by all accounts, is Japan, now in its 8th straight year of economic downturn. Last week, Prime Minister Keizo Obuchi announced the latest in a series of stimulus moves -- a $195 billion package of tax cuts and new government spending. But business investment continues to slide, unemployment is at a 40-year high, and Japan's banks hold an estimated $800 billion in bad loans. MARGARET WARNER: For more on Asia's economic problems and progress we have four perspectives: Winston Lord was Assistant Secretary of State for East Asia and the Pacific in President Clinton's first term. Mike Mochizuki is a senior fellow at the Brookings Institution. Robert Brusca is chief economist for the investment firm Nikko Securities. Adam Posen is a research fellow at the Institute for International Economics and author of the recent book, "Restoring Japan's Economic Growth."
	Turnaround?
	MARGARET WARNER: Adam Posen, just a couple of months ago there was great alarm that Asia was going to pull the global economy into the tank. Today, the U.S. stock market is at an all time high. Does this say something about Asia, and does this say that the Asian situation is turning around, or does it say Asia wasn't as important as we thought? ADAM POSEN, Institute for International Economics: It says that the American and the rich countries' response to the Asian situation is turning around. And this is something that's gotten lost in recent years – not recent years – recent weeks. The idea that when we keep focusing on the problems in these countries, in Thailand, Korea, Indonesia, for what the IMF does, actually what the U.S. and what Japan and Europe, who have a great deal, matter as well. And when see today's stock market high, it shares with the Asia crisis of last summer an aspect of we're restoring the yen to a panic. When the stock market went down, it was, in part, a bunch of 12-year-olds in suspenders running around, "I got to re-price risk, I got to re-price risk." Well, risk has been re-priced, and people have noticed that we have made progress. Just to put in short terms, the U.S. did finally stand up, the Congress did finally pass the $18 billion to back the IMF, which gave the IMF programs much greater credibility and allowed us to draw the line at Brazil. The Europeans have admitted that they do have a stake in keeping their markets open and that this will affect them and they've left open the possibility of there being an interest rate cut. The Federal Reserve has cut interest rates. And when we close the gap in interest rates between here and Asia, capital starts to flow back there, and that improves their situation. MARGARET WARNER: Robert Brusca, what do you see as the connection between what's happening in Asia right now and the U.S. stock market? ROBERT BRUSCA, Nikko Securities: Well, I think there is a connection. I think that a decline in the stock market previously was a loss of confidence because of the contagion we had seen and the Pacific Rim problems attacking Latin America, the collapse in Russia, the debt problems, the feeling that this wasn't going to stop, and the feeling, in fact, by some that this could drag the U.S. economy into recession, I think that was getting locked into stock prices. I think now with the Federal Reserve acting aggressively to cut interest rates, people no longer fear recession in the United States. They're getting more optimistic about world growth, but we still have this problem that the stock market is back up to where it was, a touch higher, and you really have to ask yourself whether the world economic situation, which is still in a workout mode in so many different countries across the globe, whether it can really justify the kind of values people are putting on stocks as of the close of business today. MARGARET WARNER: And what's your view about Asia, is it in workout mode now? Is the workout mode working?
	Japan's role.
	ROBERT BRUSCA: Well, it's working out, but our judgment is that the policies in Japan are going to have less impact on Japanese growth than what the officials there are saying, that they still are very stubborn about taking away this consumption tax hike, and that suggests they're not really pulling out all of the stops. We already have one Japanese prime minister, Mr. Hashimoto, say very clearly, Japan will be part of the solution, not part of the problem. And Japan now is really quite part of the problem. Now, Mr. Obuchi is making a pledge. You know, this is two pledges in a row. What we need are things that Japan will do, and the problem is that they give us these great, big beautiful packages that have all kinds of things inside of them. When we open them up, these things seem to escape before they come out to really be implemented and affect the economy and help growth. MARGARET WARNER: Mike Mochizuki, what's your view of how Asia is coming – Japan and the rest of Asia is coming to grips with the crisis they've been in? MIKE MOCHIZUKI, Brookings Institution: Well, I think Japan for one thing has finally come to realize that they are in a very deep recession, perhaps a depression, and they finally shifted gears, and they announced a very large stimulus package. But the problem is, is it's been coming out in such drabs – and very slowly – that it hasn't really turned around the psychology of Japanese consumers. And so I think that it's going to be a while before this package really takes effect, and it's quite clear that some of the tax breaks aren't really going to be implemented until much later. Japan may be one of the keys to restoring growth in Asia, but it is not the only thing. You really do need to restore demand, domestic demand in the Asian countries and bring capital back to improve industrial production. And I still think Asia has a long way to go there. MARGARET WARNER: So would you say the glass is half-empty or half-full? Is Asia better off than it was a year ago, or worse off? MIKE MOCHIZUKI: Well, I think that it still hasn't hit bottom, and I think things could get worse. The political situation is still quite fragile in countries like Indonesia. There's a lot of turmoil now brewing in Malaysia. South Korea and Thailand are still having very fragile political systems. So I think still major challenges lie ahead. MARGARET WARNER: Winston Lord, how do you see what's happening in Asia? I mean, where would you put – which direction do you think the trend is going, both economically and politically?
	Forecast.
	WINSTON LORD, Former State Department Official: On the economic front it looks like it's bottoming out, certainly with respect to the financial crunch currencies – stock markets, interest rates. The question is whether we're in a U-turn or whether we're sort of in a middle-of-the-bottom of a capital "L" I think. It's not going to go up quickly. There's a lot of pain ahead. On the political side I think the key question is the relationship between democracy and free political systems and economic reform. And as the Vice President said eloquently in Malaysia, you cannot separate these two. And I think in the case, for example, of Thailand and Korea, as we saw in Mexico and Eastern Europe, the freer political systems with transparency, where people can change their government if they don't like the policies, make for greater political stability than more repressive systems like Malaysia and the former situation in Indonesia. So I keep my eye on whether the Malaysian model of closing off the world and blaming the world at least temporarily and somewhat repressive system for the Thailand and Korea models where they've accepted the fact that they were responsible essentially for what has happened and are trying to solve this new open systems – IMF reforms and democracy – which one of those models succeeds. MARGARET WARNER: Adam Posen, do you agree with Winston Lord that – well, first of all, there are differential rates of sort of improvement in the economic situation – but that it's tied to the degree of political openness between say a South Korea and Thailand versus a Malaysia or Indonesia? ADAM POSEN: I think Amb. Lord has hit two major points. The first one is not just that the countries are behaving differently – one from the other – but the markets are beginning to distinguish one country from another. And we've heard the term "contagion" or I use the term "panic." Things work out when Korea or Thailand do something that looks more like a three quarters full glass and get rewarded, and Indonesia does something that looks like a one eighth full glass and doesn't get any money. That's the way you want it to work, and that keeps things going. In terms of the politics, it's both a question of these things distinguished amongst the countries. Certainly, Indonesia is unique in its political situation, whereas, Korea, one gets more optimistic because you have a brave new democratic regime. But in addition, it's a question of how you force through the necessary reforms. And this actually is I think one of the reasons to be more hopeful about Japan. It's not just that we had two identical prime ministers making identical pledges. It's we had a big election in the middle of the summer. The LDP, the ruling party, got scared. There's a real opposition. It was a real change in the identity of the prime minister and his team, and so democracy, even there, has started pushing harder for more reform, so I agree with Amb. Lord and the Vice President. MARGARET WARNER: Robert Brusca, is it true that the markets – that is, foreign investors really starting to distinguish among these countries much more than they did say a year ago?
	Workout mode.
	ROBERT BRUSCA: Well, there's some evidence if you take a look at the stirring of the stock markets and investors are starting to pick winners and losers, and time is going to tell whether or not this is right. Let's remember, this is the same private capital market that had been dysfunctional, so I want to be a little bit careful about glorifying what the capital markets are doing right now. And let's also remember that with this risk of contagion, it may not matter who's recovering first. If somebody trips and stumbles, we could wind up in the soup, all of us, so this is the thing that I'm concerned about, that there are so many countries around the world that are having difficult problems, we're hoping Brazil's going to be successful, we've got all these Pacific Rim countries, we have China lurking in the background with difficulties -- Japan we hope doing a workout, I hope that it's real. I'm perhaps not as optimistic as some of the other people here. And right now we do see investors making choices, picking winners and losers. But if anybody stumbles, that nasty word contagion comes, and if it's back in play, then it doesn't matter who stumbled, everybody gets attacked. MARGARET WARNER: Mike Mochizuki, when people were talking about the Asian economic miracle – and there really were 10 years of that – it is based on this so-called Asian model, which was kind of – kind of free market economics but a very close relationship between business and government. Has this crisis forced Asian – both business and government leaders to rethink that? Are they accepting that they become essentially more like us? MIKE MOCHIZUKI: Well, I think some people feel that the crisis has challenged that East Asian, so-called East Asian model of economic development. But there are a lot of Asians who feel – that is, the more market-oriented brand of capitalism that the United States is promoting that has really triggered the crisis, this emphasis on short-term capital flows, and so I still think that the debate is not over, that if the economies don't recover, those people who feel that there need to be some at least short-term controls on capital flows will become more persuasive, and so it really depends upon the outcome, but I don't believe that the so-called East Asian model of development is dead by any means. MARGARET WARNER: Winston Lord, what's your sense of – I mean, this is an old struggle between – both politically and economically the Asian values and western values and this perceived difference between them.
	Asian values?
	WINSTON LORD: First let me enter, if I could, a caveat on our discussion so far, lest we be accused of being too optimistic. A couple of things to keep in mind that may be negative – first, the Asians depend on the U.S. market a great deal for their exports, and our trade deficit is ballooning, more than a billion dollars a week deficit with Japan and China, and if our economy stumbles, all this could become a real political problem with forces for protectionism. Secondly, we haven't talked about security. I'll get to your question in just a minute. But we face a possible very severe crisis this spring in Korea, which could jumble all the economic factors, as well as the security factors. And we've got to keep our eye on that, because that's a real wild card. Now, with respect to your questions, I've never liked the word Asian values. Who are we talking about, Mr. Mahathir or his deputy he now has in jail, North Korea or South Korea? The Vietnamese and the Chinese – or Aung San Suu Kyi – Taiwan and the Dalai Lama. So there's always been a mixture of views there. But to the extent that Asian values stress discipline, family values, education and community values, that's a plus, and western nations can share that. To the extent it encourages cronyism and nepotism, lack of transparency and autocrats using stability as an excuse for repression, then I think that is going to be denigrated in the coming years, and I'm fairly optimistic that one of the pluses of this will be some melding of the best of both approaches with an emphasis on freedom in an age of globalization. MARGARET WARNER: Adam Posen, feel free to weigh in that, but also, address Mike Mochizuki's observation about the backlash, at least, in some quarters against globalization, the interest in putting limits on the sort of hot money that comes in and out from foreign investors. ADAM POSEN: I think we have to distinguish between closing the barn door after everyone's run out, which is what Malaysia is doing, and over the long run deciding are there benefits or costs to being more or less integrated in the financial system, and what you cannot predict, as Mike's pointed out, what the domestic political backlash is going to be. And that can happen, irrespective of the economic arguments. But what people seem to be converging on in the economic argument is you want countries to only take in as much capital as their financial system is capable of handling. And we're starting to see agreement about that both within the leadership of the Asia economies in Latin America and at the G7 level; that you need certain standards of supervision, certain standards of responsibility, property rights, that allow you to handle the amount of capital that comes in. And this relates to the whole model question. No, we're not being overly-optimistic. When I, for example, say that a lot of this has to do with progress the U.S. and Germany and we think Japan will make, that can, of course, all fall apart. But the thing is we're getting away from these archetypes of it's all or nothing. Either Korea overnight looks like Ohio, where they're doomed, either Indonesia looks like an American democracy or they're doomed. Just as the U.S. in the 80s benefited from learning about Japanese-style inventory control, Japanese-style worker rights, Japan can learn from fixing some of its financial system. Asia can learn. They don't need to do all or nothing. MARGARET WARNER: Mr. Brusca, quickly, before we go, do you see a sort of more sober assessment of both – on the part of investors, where to put their money and also on the part of these countries, whether they can use the money and how? ROBERT BRUSCA: Well, I think investors have learned a lot but I'm also concerned about maybe lasting damage done in this region. You know, there are some attacks against ethnic Chinese who are a source for a lot of capital to this region, and one wonders whether that money will easily come back. So I think investors have a lot of things they're going to worry about; they're going to look at the polices, look at the openness. It's important because it tells you what kind of sticking power these changes in policy will have. The politics, the economics do work together, and the international community knows that now pretty well. MARGARET WARNER: All right. Well, thanks, Robert Brusca and Amb. Lord, and Mike Mochizuki, and Adam Posen, thanks.