Commentary: Asia Needs A Safety Net. But What Kind?

A few weeks ago, Banthoon Lamsam, president of Thai Farmers Bank PLC, tried to do what every boss does in tough times: Cut back on a bloated workforce. Then a local newspaper reported on the rumors of layoffs, and the unions reacted with fury. Stung, Banthoon backed off. But the harassed banker also understands his workers' position. "There is no [social] safety net in Thailand," Banthoon says. "If we send people off, they will just starve."

No welfare state. For years, those three words summarized one of Asia's key advantages. Unlike Europe or the U.S., most Asian countries have no costly social security systems, no coddled labor forces. Workers in France might make a career out of living on the dole. Not so in Asia. But now the boom is over--and Asia should build a safety net of its own. Granted, it's tough to build institutions in the midst of economic turmoil. But the work must start now: Without a safety net, complete recovery from the crisis may not be possible.

MAKE-WORK. The most obvious reasons for better social welfare programs stem from Asia's need to lay off workers without forcing them into dire poverty or sparking strikes like those that convulsed Korea. Executives know how catastrophic the consequences of unemployment can be. "Asian-run corporations are less willing to fire people for that reason," says Mark Greenwood, managing director of Paribas Asia Equity's Bangkok office. Still, many companies are becoming so weak that they force through layoffs anyway. But the delays in implementing the necessary cuts are making the companies that much harder to save.

Another reason for some form of welfare state is that old remedies don't work anymore. Asians could once fall back on extended families to get through the hard times. But this tradition has been withering away for years. Now Asia's urbanized workers live in cramped, expensive apartments and are ill-equipped to take in jobless relations from beyond the nuclear family. Even before the crisis, Singapore tried to force middle-aged Singaporeans to care for their elderly parents. Such state action would have been ridiculously redundant in a Chinese society a generation ago.

The indirect safety net is not much of a help now, either. In Thailand, the huge state sector served as a government-funded jobs program. In South Korea, thousands of workers owed their jobs to bureaucrats who jawboned the chaebol, or conglomerates, into hiring generously. But no company can afford to hire indiscriminately anymore. And governments may have to sell the state-owned corporations that once dispensed make-work jobs to the needy.

So Asia's leaders have no choice but to build a real welfare system. "We are building one from scratch, and it's not easy," says You Jong Keun, an adviser to South Korean President Kim Dae Jung and governor of North Cholla province. Korea is expanding jobless benefits and training programs to meet the challenge of an unemployment rate that could reach 10%.

But Asians should not repeat the mistakes made in the West, where costly welfare programs have often overwhelmed budgets and stifled business. "A social safety net doesn't have to equal the classic Western unemployment benefits," says Christine Loh, a member of Hong Kong's Legislative Council. A European model would be far too expensive, but U.S.-style unemployment insurance, funded by a small tax, could be affordable. And in Thailand and Indonesia, governments are also working with the World Bank to fund New Deal-style public-works projects. Such programs will expand budget deficits, but Asian countries have run such lean governments in the past that there is some room now for extra spending.

Older Asian institutions need revival too. In Indonesia, local charities used to assist villagers. Those groups faded away during the boom years. "What must be done is to re-establish those institutions at the local level," says Jusuf Wanandi, chairman of the supervisory board at the Center for Strategic & International Studies in Jakarta. And Asians need to learn that welfare states, wisely built, can help restore their economies to economic health.

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