Going Backward In Asia

Nearly a year into the Asian crisis, economic reform has barely begun, and the penalty is near-depression. Korea's gross domestic product contracted by nearly 4% in the first quarter. Thailand's recession will shrink the economy by 6% by yearend. Indonesia is in chaos. Hong Kong is near recession. And Japan remains stalled out. The realization that Asia has shifted from a financial crisis to a deep economic downturn is slamming stocks around the world, from Seoul to Moscow. Just five months ago, the markets were celebrating the quick recovery in Asia. Now, a second wave of Pacific Rim market declines is washing over the global economy. Recovery is now two to three years away.

Or more. Japan is seven years into its recession. Korea, which copied Japan's dirigiste strategies to success, appears ready to follow the same policies into decline. The chaebol are battling the government's demands to sell off operations, slim down, and release the economy from their grip. Korean companies, which totally depend on foreign markets, continue to block access to their own. Korean banks keep lending failing chaebol money, delaying their own reform. The jobless rate is soaring as Korean workers are fired, and people are taking to the streets. Japan is making matters much worse by letting the yen sink toward 150 to the dollar. At this level, Korean exports become much less competitive, profits evaporate, and the chaebol put pressure on the government for a competitive devaluation. Once the won goes, China will find it difficult not to devalue the renminbi. The cycle of competitive devaluations in Asia will begin all over again.

Asia urgently needs recapitalization to stop this desperate plunge toward depression. But without serious structural reform that opens up economies, breaks up monopolies, and establishes modern, crony-free banking systems, nothing will help. The world economy is now at risk.

Before it's here, it's on the Bloomberg Terminal.