Business

Saturday August 22, 2009

Structural transformation

Review by CHOO LI-HSIAN


Asia’s Turning Point: An Introduction to Asia’s Dynamic Economies at the Dawn of the New Century
Authors: Ivan Tselichtchev and Philippe Debroux
Publisher: John Wiley & Sons

AS THE global community attempts to recover from the wealth destruction of the 2008-09 economic earthquake, Asian economies can take comfort from the fact that it was not the epicentre of the crisis.

The indirect hits we have suffered are caused largely by aftershocks felt along the global supply chain fault lines – an inevitable consequence of Asia’s export-oriented growth, which is highly dependent on demand from the large consumer base in the US and Europe.

Painful reforms launched in the aftermath of the financial tsunami suffered in 1997-98 have put some East Asian nations in better shape to weather the deep crisis now gripping the global markets.

A few have even recorded decent growth rates, helping to compensate for the drastic downturn in the West.

Malaysia, Thailand, Indonesia and South Korea were in the eye of the economic storm of a decade ago – a tornado of crushing debt, minimal reserves, weak regulation and currency speculation, triggering a contagion that spread from Jakarta to Moscow.

East Asia, as a whole, has become more resilient as it has been quietly rebuilding its financial architecture and correcting previously weak domestic fundamentals. Hence, a full-fledged financial crisis in the region looks unlikely.

Asia’s Turning Point looks deceptively like yet another dry academic textbook, doomed for the reference shelf of a university library.

However, further reading reveals an engaging examination of the collective and individual structural transformations experienced by countries in the region after the 1997 crisis and of the changes instigated in reaction to the recent one.

The book comprises two parts. Part One sets the tone and explores the reasons leading up to the rapid growth of the 1990s, that is, high saving rates, high percentage of working age population, the willingness to invest in education, relative political stability, sound macroeconomic policies as well as the values and work ethics of East Asian workers that are “impossible to measure but also matters a great deal”.

The original East Asian model of capitalism was touted to be different from the conventional American or European models in a few key areas.

Some of the pillars of the Asian model include the “developmental states” that “actively guide” the private sector by creating and supporting strategically important industries, family-owned and controlled conglomerates, bank lending (especially connected and directed lending) versus equity finance as the major source of corporate finance, labour relations emphasising the notions of family and loyalty, and foreign affiliated companies as leaders in the technologically advanced, export-oriented industries.

However, the 1997 Asian crisis exposed several serious flaws in that initial model: crony capitalism, high leverage and corruption. The crisis helped to underscore a real need for change.

It is debated that robust regional growth rates may still be largely driven by growth in labour and capital input; not by real improvements in resource efficiency or quality.

Such input driven growth, it is cautioned, is inevitably limited and will not be sustainable in the long term. Another noteworthy discussion relates to the advent of state-owned enterprises (SOEs) and government-linked companies (GLCs).

Creating a powerful cohort of globally oriented companies with the state as a major stakeholder has also been one of this region’s many economic trends in the new century.

While such companies exist in Europe (e.g. the French Government’s stake in Renault), these tend to be private companies that have been nationalised and not companies which actually started out as stated-owned entities as per in Asia.

A variation of SOEs unique to Asia i.e. sovereign wealth funds such as Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional Bhd, with interests in a wide range of industries, have also appeared on the landscape, aggressively pursuing globalisation.

Due to modernisation and globalisation, “Asia’s economic and business systems are Westernising” but the transformation is “systemic, not cultural” and takes place within very “Asia-specific cultural and social contexts”.

There have been fundamental changes to the Asian company model, which can no longer rely on massive state support and government bailouts. In this timid credit market, banks have had to curtail indiscriminate lending and increase monitoring of its borrowers.

This has forced a shift from bank loans to equity as a source of financing – a move which has in turn increased the influence and power of outside “Western style shareholders”, who demand maximisation of dividends, company value, professional management and increased competitiveness as well as improvements in corporate governance.

The authors see the current crisis as only a short interruption to East Asia’s growth and anticipate that these changes will allow the region to bounce back to a higher growth track in the next decade.

The second part comprises 14 chapters covering the countries in the region. Though the charts admittedly could do with some jazzing up, each country chapter uses vivid examples to illustrate key points.

Every chapter starts with “A Few Basics”, moving on to discuss specific postwar development and structural reforms, present performance, foreign trade, the FDI situation and business environment before wrapping up with some good concluding remarks.

  • E-mail this story
  • Print this story