Asia Can't Afford To Sidestep Financial Reform

Before last fall's Asia-Pacific Economic Cooperation forum in Jakarta, Clinton Administration officials had a compelling argument for developing countries wary of joining an ambitious free-trade pact: Look at Mexico--where exports and foreign investment were booming because of the North American Free Trade Agreement. But the Mexico analogy came back to haunt U.S. Treasury Secretary Robert E. Rubin in mid-April when the APEC finance ministers convened again in Bali.

In a year when financial markets from Indonesia to China have been walloped by currency fluctuations and derivative-trading debacles, Rubin's proposals to further open Asia's capital markets got little response. Although the Asian ministers signed a bland statement citing the need for "broad, deep capital markets," Rubin admitted that "many of them feel they need to do it in a deliberate and phased fashion."

"SCARCE SAVINGS." Asian technocrats can hardly be blamed for feeling skeptical about advice from Washington on how to manage their economies. Over the past decade, East Asian Tigers such as Malaysia, Singapore, Taiwan, and Thailand have produced spectacular growth with low inflation, balanced budgets, and enviable savings rates. U.S. economic performance hasn't come close.

Still, many of Rubin's suggestions deserve to move higher on Asia's agenda. Some of those fixes include greater disclosure of financial data, better accounting standards, and policing against insider trading. In its just-released 261-page report on the region's outlook, the Asian Development Bank warned that heavy restrictions on capital flows cause many Asian nations to "squander scarce savings on unproductive investments." What's more, the report noted, accounting standards, disclosure, and investor protection in cases of default remain woefully weak in such countries as India, Indonesia, South Korea, and Taiwan.

Few Asian nations can afford to ignore the structural flaws in their financial systems. Competition is intensifying for the estimated $1 trillion needed over the next five years to finance infrastructure. Even though the region is full of companies boasting 20% to 30% annual earnings growth, Western investors are unlikely to regain their excitement over Asia's emerging markets as long as they are perceived as high-risk bets.

Fortunately, aside from China, most Asian countries are moving in the right direction. Take India, where critics of free-market reforms had used the Mexico debacle to call for a go-slow approach. In January, the country lifted a 38-year ban on stock options, and it is now expected to reintroduce margin trading soon. A new computerized stock-trading system is also in the works, which will make trading less opaque. Regulators have taken action to beef up oversight, after a shoe company in March failed to meet a margin call while trading in its own stock and wound up $6 million in default. The incident forced the Bombay exchange to close for three days.

Thailand is pushing ahead with a five-year blueprint to open up its financial markets, even though foreign fund managers yanked billions out of the stock market in 1993 and sparked a run on the Thai baht in January. In addition, Singapore is improving its oversight of futures trading, in the wake of the $1 billion Barings Securities fiasco in March.

To Washington's free-market crusaders, the pace may seem like it's in slow motion. But Asian nations that stay the course now are likely to attract a lot more foreign capital over the long haul.

By Pete Engardio

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