Is the Asian Flu Fatal?

Why Asia's economies got sick--and what can be done to cure them.

James K. Glassman from the May 1998 issue

(Page 9 of 11)

Lindsey: Allow me to be cautiously optimistic. I don't think Japanese foot-dragging is necessarily a model for the rest of the countries in this region. Japan suffers from the advantage of having enormous domestic resources which allow it to avoid facing up to its own internal problems. These other countries don't, and perhaps they will do the right thing of having intense short-term pain in exchange for a longer-term gain.

I think it is quite likely that over the medium-to-long term, you are going to have significantly greater foreign presence of banks in these economies, and you are going to have significant financial liberalization so that equity markets in these economies are not so suppressed. You are going to see a lot more foreign players involved.

It's quite hopeful and even a little bit astonishing that all of these countries signed on to the World Trade Organization Financial Services Agreement last December. Ten or 15 years ago, the idea that any developing countries would allow foreign banks to come in even to a limited extent was unthinkable.

Litan: I agree with that 100 percent.

Glassman: And you think that that was the result in part of the problems that they are having now?

Lindsey: I think that certainly goosed things along.

Meltzer: Whether they'll let them operate there in a competitive way remains to be seen.

Glassman: Just quickly, what did this agreement say?

Lindsey: In general it's going to allow much greater competition in financial services, allow foreign banks and foreign financial institutions to set up shop and compete in the domestic markets of countries around the world.

Glassman: Japan has been in the doldrums now for eight years. If Japan could wake up its economy, then maybe these Asian problems would be solved very quickly. Is that an accurate characterization?

Mallaby: It's true that if Japan was booming right now, it could suck in Asian imports. That would help the Asians and [provide] the foreign currency they need to service their debts.

It is also true that if Japan was booming right now, it would be perhaps exporting a lot of capital through its banking system and other mechanisms into Asia. A nice flood of yen into the region would be wonderful because that would also buoy East Asian currencies and ease their debt service burden.

The problem is that Japan has moved during the 1990s from a position where it ran budget surpluses to a position where by some measures Japan's budget deficit is at 5.4 percent of GDP, which is the biggest of any of the G7 countries.

There isn't really much room in Japan for a big fiscal boost. The Japanese are just talking about a [yen]1 trillion supplementary spending package. If you compare that to 1995, when they did two packages which collectively were worth more than [yen]20 trillion, you see the scale of the problem. They have just spent so much money recently that they can't do much more about it. And they have a demographic crunch coming which makes America's entitlement problem look like a picnic.

Glassman: What about a monetary boost, Allan?

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