- The Washington Times - Wednesday, June 27, 2007

BANGKOK

Ten years ago, a plunge in the Thai baht sparked a wave of recessions across Asia’s high-flying economies, bankrupting entire nations, putting millions out of work and shaking markets around the world. Some feared that a decade of growth would be lost.

Today, the region as a whole has bounced back from the 1997-98 crisis and is better equipped to deal with financial emergencies. Banking is more transparent, corporations are better managed, poverty rates have dropped and the region’s collective economic growth has doubled.

Still, the recovery has been uneven. The three countries hit hardest by the crisis that began July 2, 1997 — Thailand, Indonesia and South Korea — have charted sharply divergent paths over the past 10 years, reflecting their differing responses to the crisis and policies since then.

South Korea, which received a humiliating $58 billion bailout arranged by the International Monetary Fund, quickly cleaned up its banking system and started reforming its heavily indebted family-owned conglomerates. The economy shrank and the jobless rate soared, but by 1999 it was robustly growing again.

The crisis, while painful, forced South Korea to make changes that paved the way for more stable long-term growth. Today, it is one of Asia’s powerhouses, led by Samsung Electronics Co. — the world’s biggest memory chip maker — and Hyundai Motor Co.

Indonesia, however, has struggled. The crisis helped bring about the downfall of former dictator Suharto and created greater political freedom, but the economy remains beset by rampant corruption, a weak legal system and limited foreign investment. Economic growth has been ticking along at about 5.5 percent for the past two years, but unemployment is rising.

Thailand hovers somewhere in between. Bangkok, where hundreds of skyscrapers froze in mid-construction when the crisis erupted, now has an elevated Skytrain, a subway, a brand new airport and dozens of glitzy malls. Japanese investment has made Thailand a major auto and electronics exporting hub.

But a rise in the baht and political uncertainty caused by a tainted election in 2006 and military coup last September have been a drag on growth.

In the wake of the crisis, Thai authorities shut down dozens of insolvent financial firms, vastly improved banking supervision and updated archaic bankruptcy laws. However, it can still take years for creditors to pursue claims, and further reforms of laws governing bankruptcy and repossession of assets from recalcitrant debtors haven’t gone beyond the drafting stage.

“Korea restructured its financial sector, but the problem in Thailand has been the inconsistency of reforms,” said a Thai academic.

Authorities quickly exempted stocks and foreign direct investment from the rules, helping the market bounce back. Investors were also reassured to know that Thailand had $65 billion in foreign currency reserves, far more than in 1997.

Still, Thailand’s bungled effort to impose capital controls underscored the lingering challenges that Asia’s emerging economies face in handling international money flows in search of higher returns.

It was the dramatic outflow of funds from Thailand that forced the central bank on July 2, 1997, to finally cut the baht’s peg to the dollar, causing the Thai currency to plummet and triggering the crisis.

Unlike today, many Thai companies at that time were burdened with huge dollar-denominated debts. When the local currency plunged, the value of those loans suddenly ballooned in baht terms, forcing many companies to go bankrupt.

That kindled speculative pressures that also forced currencies in Indonesia, Malaysia, the Philippines and South Korea to fall, driving more companies out of business, including one of South Korea’s largest conglomerates, the Daewoo Group.

The turmoil rippled around the world, affecting markets as far away as Brazil and Russia.

In ensuing months, the IMF orchestrated emergency loans of $17 billion for Thailand, $50 billion for Indonesia and $58 billion for South Korea — and imposed austerity measures such as raising interest rates and cutting public spending that many believe exacerbated the crisis.

Since then, Asian nations have taken steps to protect themselves by bulking up their foreign currency reserves and brokering regional agreements to supply emergency funds through bilateral currency swaps.

South Korea’s effective use of the IMF funds to repair bank balance sheets and moves to improve corporate transparency set the stage for a rapid recovery. After contracting 7 percent in 1998, the economy surged 9.5 percent in 1999.

Many of the major conglomerates survived, but not without changes. The Samsung Group streamlined its business structure, shedding its automobile unit and reforming its financial structure by reducing debt. The Daewoo Group, however, collapsed spectacularly under mountains of debt.

South Korea also responded by opening its economy wider to foreign investors, bringing changes virtually unimaginable before the crisis.

For example, U.S. private equity fund Newbridge Capital in late 1999 purchased a controlling stake in Korea First Bank, becoming the first foreign investor to acquire a South Korean financial institution.

But the outlook for Indonesia — hardest hit by the crisis — is mixed.

The turmoil accompanying Suharto’s ouster in 1998 made it difficult for authorities to tackle structural problems in the economy, including bad lending practices and corruption.

Today, greater investment in factories, roads and ports is needed to achieve economic growth of more than 7 percent — the minimum level needed, specialists say, to create enough jobs to put a dent in unemployment, now around 10 percent.

“The country is still dealing with the long-term fallout from the crisis,” says Peter McCawley, a specialist on the Indonesian economy at the Australian National University.

Progress on improving the investment climate has been patchy, and many businesses prefer to locate factories elsewhere in Southeast Asia, where wages are lower, setting up is easier and corruption is less of a problem.

Exploration for Indonesia’s vast copper, gold and zinc deposits remains dormant despite record metal prices. Companies say it is too risky investing millions when there is no certainty they will be able to mine the minerals later. A mining law aimed at ensuring legal certainty for investors is still being debated in parliament.