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A Great Slide Backward In Southeast Asia

International Outlook


When he presided over a landmark meeting of Pacific Rim heads of state in 1994, Indonesia's President Suharto was hailed as a dynamic advocate of free trade and modernization. But the Suharto who hosted a series of meetings of the Association of South East Asian Nations (ASEAN) in late July came off more like a run-of-the-mill dictator. As the meetings droned on in Jakarta, thousands of protesters assembled across town to jeer the government's efforts to suppress an opposition party. And the avowed free trader was taking heat from Tokyo and Washington for allowing his son to set up a cushy car venture.

As his health declines, Suharto, 75, seems obsessed with tightening his family's hold on the nation's wealth. Such behavior is very much in vogue in Southeast Asia today. After roughly a decade of economic reform and political liberalization, several countries are backsliding. That clouds the outlook for these nations, which have long been the darlings of investors.

In Thailand, the scandal-plagued government of Banharn Silpa-Archa is undoing much of the economic and political reforms put in place earlier. In Malaysia, the government of 70-year-old Prime Minister Mahathir Mohamad has been privatizing everything from the national airline to the telephone service--but most of the spoils are going to cronies.

STELLAR GROWTH. There are signs that the penchant for money politics could hamper these countries' efforts to shift to more sophisticated export industries. While export growth is still high, it has declined dramatically in Indonesia, Malaysia, and Thailand, which is running a ballooning trade deficit. Of course, the ASEAN countries are making strides in some areas. They are slashing tariffs, and their 8% average growth rate remains the envy of the world.

But critics are saying that the failure to rein in corruption and coddled cartels is starting to take its toll. "Growth is unsustainable if your economy is not based on a high degree of competitiveness," says Jakarta-based business consultant Laksamana Sukardi. He figures that corruption adds up to 30% to the cost of doing business in Indonesia.

Technocrats and foreign investors worry that these countries just aren't taking the steps in such areas as education, labor relations, and investment regulations that are a must to move to the next level of development. Resources needed for education and infrastructure projects are being siphoned off in sweetheart deals for cronies and relatives.

This is already hurting some countries. Ford and General Motors recently called off major expansions in their Indonesian auto assembly operations after Suharto gave big breaks on duty and taxes to his son's auto venture with South Korea's Kia Motors. In Thailand and Malaysia, foreign electronics manufacturers say that a growing shortage of educated workers is becoming a constraint.

But the region's aging autocrats aren't getting the message. A defensive tone emerged from the Jakarta sessions. The ministers vowed to resist efforts by the West to discuss corruption, environmental woes, and labor abuses at the World Trade Organization. Shrugging off Western objections, they also embraced the harsh regime in Burma as a prospective ASEAN member.

How stiff a price Southeast Asia will pay for stagnant leadership remains to be seen. Much of the world would love to have its problems. But glaring political and social ills are starting to hurt prospects.EDITED BY STANLEY REED By Pete Engardio in Jakarta, with Robert Horn in BangkokReturn to top


With President Boris Yeltsin safely reelected, the central bank is finally showing signs of getting serious about dealing with the troubled banking system. It recently closed TverUniversal Bank, one of Russia's larger financial institutions, with $1.2 billion in assets. This is the first time the government has closed a major private bank. The central bank blasted management for making risky real estate investments.

A major shakeout in the banking industry could soon follow. With some 2,100 financial institutions, Russia is widely considered overbanked. Many of these have severe problems. Over the next few months, many of the smaller banks are likely to be shut down. The government will try to keep larger banks afloat, however, perhaps by taking over their management.EDITED BY STANLEY REEDReturn to top

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