Commentary: Asia Is Catching the Japanese Disease

By Pete Engardio

It's a terrible malady for young economies that should be full of vigor. The symptoms: banks that have money but don't lend. Lots of exports but no profits. A teeming workforce with dim prospects. Politicians who know urgent measures are needed but won't act. Call it Japan disease--and it's starting to set in across the once-booming emerging markets of East Asia.

Mind you, it's not yet a full-blown epidemic. The governments of Southeast Asia and South Korea aren't nearly as indebted as Tokyo, and growing workforces mean most of the region is unlikely to see the zero growth Japan has endured for most of a decade. What's more, there still are many things Asian officials and companies can do to get back to strong growth.

Unfortunately, East Asia has not used the nearly four years since its financial meltdown wisely. Lulled by a U.S.-driven export boom and a short-lived bounce in equity markets, the region has failed to finish the reforms that could have cleansed their financial systems of hundreds of billions of dollars of nonperforming assets. That's the big mistake Japan made after its bubble burst in 1989.

As a result, much of Asia now risks sliding into a long period of growth in the 3% to 4% range. For developing nations, that's tantamount to stagnation. "The Japan problem is starting to be seen all over Asia," says American Enterprise Institute economist David L. Asher. Let's assess the symptoms:

-- Debt overhang. Despite reforms, bad loans still approach 20% of total loans in Korea and Thailand, and 30% in Indonesia. Public sector debt, once minimal, has hit 40% of gross domestic product in Korea when government guarantees are included and is much higher in Indonesia and the Philippines. These levels are still far below Japan's 120%. But they'll keep rising as bank and corporate bailouts continue.

-- Sick companies. Like today's Japan, there's a sharp corporate divide in Asia's former crisis countries. In Korea and Thailand, a handful of outfits, such as Samsung Electronics Co. and Siam Cement PLC, have restructured and become competitive. But thousands of others, in sectors from construction to chemicals, still operate although they are insolvent, thanks to weak bankruptcy systems. As in Japan, the collapse of such dinosaurs will haunt these economies for years.

-- Liquidity trap. Interest rates have plunged, and many Asian banks are flush with cash. But they still aren't lending because most corporations are bad risks. "Asian banks now want to behave like world-class banks, but corporations are in Never-Never Land," says Institute of International Finance Asia Director Gregory B. Fager. That's also why the IIF predicts foreign banks, which have pulled $113 billion out of Asian emerging markets since 1997, won't return this year.

-- Export overreliance. Most of East Asia's ballyhooed recovery was driven by exports to the U.S. Now, exports are tanking. And the boom hid another problem: Bank Credit Analyst Research Group calculates that while unit volumes swelled across the region, prices for Asian exports have fallen by 20% since 1997. Deflation, which has been sapping real growth and profits in Japan for years, may now be spreading across the region.

Most of Asia still can arrest Japan disease before paralysis sets in. But politicians seem to have lost their will to force sales of distressed assets, close failed banks, and open markets wider to foreign investors. Let's hope they snap out of it fast. If not, years from now the rest of Asia may be pondering its lost decade.

Engardio covers globalization issues from New York.

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