Saturday, April 22, 2000

Asia’s Meltdown

The article I selected this week I found in the archives at Fortune Magazine’s web site while doing some research earlier in this course. Entitled “Asia’s Meltdown” by Jim Rohwer, the article is a little more than 2 years old. However, I felt it presented a great backdrop for the week’s text as it touches on worker migration flow, IMF rescue programs, money supply shifts, and interest and currency risks (oh my!).


Synopsis

Rohwer links the Asian Meltdown to the trilogy of “debt inflation, excessive private-sector leverage, and weak financial systems.” The three have combined to make for a particularly messy situation which Singapore Prime Minister Goh Chok Tong calls “Asia’s worst crisis since the Second World War.” Regardless of the analogy though, it seems clear that the Asian financial crisis may domino through the rest of the world if solutions aren’t found and found quickly in spite of the fact that there really is no “quick fix.”

The IMF’s efforts to date, have been largely ineffective mostly, because of Asia’s “structural rigidities such as monopolies and the absence of workable bankruptcy laws.”

Additionally, compounding the currency collapse many in the region have experienced, is the fact that any bank workout will be “hard to manage because three kinds of risks have become entangled and reinforce one another.” These three risks include interest rate risks, currency risk, and credit risk. The interest rate risk comes from the huge amount of short term borrowing which was invested for long returns. The currency risk can best be understood via the plummeting valuation of various regional currencies which has, at the extreme end, culminated in corporate sectors in Indonesia for instance, actually having negative equity.

All of this is further complicated by the “dollarization” of the world economy which is forcing the Asian companies to “meet the standards of corporate and financial performance set in the U.S. This dollarization process was previously part of the region’s ability to lend stability to their own currencies. On the downside however, many of Asia’s banks and companies had the incentives to borrow heavily in dollars. The problem with this was that as the currencies of the region collapsed, the dollar-denominated debts ballooned “as much as fivefold” and the debtors found themselves unable to continue repayment. Coupled with the “strong aversion throughout Asia … to acknowledging losses and cleaning them up” such heavy debt related issues are far from being readily resolved.


Impact

If there is any positive theme in this crisis, beyond the long, long term benefit of the lasting impact of dollarization as to forcing the efficiency and productivity improvements of having to match the U.S. standards, it might be found in how the crisis coerces regional leaders to step forward.

China, “often seen as Asia’s last bulwark” may be the region’s “best hope.” Given the Chinese yuan’s “closed capital account” the currency’s stability versus the rest of the region may give it the power necessary to forge forward in this time of regional trouble. While it’s true that “China’s leaders are engaged in a tricky process of trying to reform their debt-laden, state-owned enterprises and banks… if China survives the crisis with its currency intact, its regional influence would be mightily enhanced.” In Rohwer’s opinion, if China remains stable, the Asian crisis is far less likely to become a global one.


Summary

Though it is difficult to draw a direct relationship to my work at Sony versus the Asian Meltdown, I particularly enjoyed the manner in which this article pulled together so many of the lesson from the text. With that said, the fact that Japan in general could truly spark part of the solution for the region is something that many within Sony Japan’s management recognize.

If in fact Japan can “loosen fiscal and monetary policy” adequately so as to enable their own economy to continue growing, then Asia in general could begin to grow again. This is mostly because “Japan is the economy that Asia depends on most for trade and investment flows.” Sony management does recognize this and the Chairman, Norio Ohga has been fairly vocal in calling for reform.

Regardless of the outcome, the situation in Asia should very clearly show that we are all members of the same planet. Further, today’s "wired" world is eliminating many of the previously segmented economic sectors in such a manner as to give each region a direct and definitive interest in the other.


Sources

Rohwer, J. Asia’s Meltdown. Fortune, 02/16/98.

Pugel, T. A., & Lindert, P. H. (2000). International Economics. New York: Irwin McGraw-Hill.

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