Let Asian Markets Do Their Work

If Asian economies were truly market-driven instead of government-directed, they probably would be pulling out of their recessions by now. Instead, government efforts to solve the financial problems behind the Asian crisis are, in many cases, making matters much worse by delaying the painful corrections needed to restart growth.

Take Korea. Seoul recently released a list of 55 companies it wants to fail. Despite the plunge in the won, a huge International Monetary Fund rescue, and a deep recession, banks have continued to bail out Korea Inc. But why is the government and not the marketplace choosing which company lives or dies? Why aren't the banks doing the financial triage? Despite promises, the state continues to dominate the Korean economy. As a result, the financial markets are not clearing and growth stagnates.

Hong Kong, that bastion of free-market capitalism, is beginning to follow in Asia's state-capitalist footsteps. To strengthen a plummeting real estate market, the government just announced it would suspend for nine months a longstanding program of government land sales. Tung Chee-hwa, Hong Kong's new leader, yielded to pressures from real estate tycoons, whose investments contracted 40% in the past year.

Bad move. Hong Kong's real estate bubble needed to be pricked. The faster the market deflates, the faster it will recover. With the Hong Kong dollar pegged to the U.S. dollar, real estate and the stock market are the mechanisms needed to absorb financial shocks. Tung now has interfered with the free movement of those markets. The result may well be renewed pressure to delink and devalue the Hong Kong dollar.

Japan, of course, is suffering the most from government control. Its seven long years of stagnation largely stem from the Ministry of Finance's refusal to have banks disclose their bad-loan portfolios, price them, and sell them to investors. With these bum loans on their books, Japan's banks can't lend to new borrowers. Even calls by the Bank of Japan for more disclosure go unheeded.

The Pacific Rim is moving into a second year of economic decline thanks to the efforts of its politicians and bureaucrats to stem the pain. Unless Asia's markets are allowed to work soon, the anguish could last well into the next century.

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