A keenly – even uncomfortably – topical theme brought together at Ditchley a group which, though it lacked (despite much effort) a large representation directly from the East Asian region, embodied a wide range of relevant interest and expertise. None of us however laid claim to having foreseen – though hindsight could now readily identify warning signs of a boom-bust sequence, like evident property-value “bubbles"”- the scale, speed and bushfire near-simultaneity of the setback to East Asia's tale of mounting prosperity which the 1997 collapse of the Thai baht had initiated. (We registered accordingly a due lesson in humility for forecasters, commentators and foreign investors to observe.)
We were reasonably reminded that what had happened so far – though the end was not securely in sight – was mostly recession, not depression; the equivalent of at most a few years’ growth had been lost. But though the regional scene was not homogeneous (and Japan in particular was a case on its own) several disturbing proximate causes could now be widely discerned – massive debt burdens often perilously denominated in foreign currency; unwisely pegged exchange rates; over-valued assets, and excessive business emphasis upon market share rather than profitability and return on capital; overtrading on an equity supply that had failed to match economic growth; inadequate or even misleading financial information, notably in the banking sector; over-reliance on macroeconomic rather than micro-economic indicators, and on the efficacy of governments. The cumulative effect, even though by global standards the traded economies of the region’s countries (Japan again apart) were small, was to administer to an increasingly interactive world economy a shock whose ripples outside the region – as already visible in Russia – were substantial.
The setback, many of us thought, reflected a widespread though not universal mismatch between the development of economic activity on the capitalist model and the capacity of political systems to recognise, forestall or adjust promptly to the emerging stresses of over-ambition in that activity. There had been, to some minds, inadequate separation of functions and responsibilities between political and business leaders; and whether or not that was so, there was now a widespread ebb of confidence in governments following years of excessive expectation, both domestically and externally, that governments could always fix problems or underpin business structures. The outcome was that in several countries difficult and painful decisions on adjustment confronted political structures suddenly shorn of the public trust and perceived legitimacy needed for the taking of such decisions. In one or two places the crisis had forced healthy political change, and in others decision-taking legitimacy, whatever its formal basis, had so far been able to take the strain; but there might be worse to come, and some participants remained uneasy about whether economic health could be securely re-established unless political reform made further headway, not least against habits of cronyism and corruption. We noted also that regional international groupings such as APEC and ASEAN, seen as ineffectual amid opportunity and even demand for collective action, had in some degree lost public credit.
Weak and poorly-regulated banking systems were much criticised. Internally, so it was suggested, banks had accepted too little responsibility for assessing and insisting upon creditworthiness; and governmental regulators had imposed on them too little discipline to that end, for example in respect of transparency and honest balance-sheets. Outside actors in their turn had failed to recognise these inadequacies of approach, and had taken for granted the readiness and ability of government to serve as last-resort bailer-out.
The result had been an unhealthy disproportion between debt and equity finance and an associated mispricing of risk on a massive scale, leading – once recognised – to a rapid flight of external capital earlier too lightly lent and borrowed. (An acerbic comment noted with regret, as a perverse lesson in this situation, that losses had nevertheless fallen more on external industry than on external bankers.) Robust action ought to be taken fast in several countries to rectify the manifest flaws in banking systems; but we were surer that this was needed than that it would be done.
Did what had happened discredit “the Asian model” or “Asian values”? Some of us disliked these terms anyway, and we all knew that Western Schadenfreude would be foolish. But there was a feeling in our discussion that the crisis had shaken the “trust” basis which Asian-model proponents had been wont to proclaim; under stress, so this argument held, the “contract” model of business affairs – with disciplines such as bankruptcy or take-over to mark and penalise failure – was a more dependable foundation for market capitalism. The other side of this coin however, perhaps understandably, was a political tendency in some countries of the region to seek scapegoats for misfortune in Western interventions or prescriptions – whether by individual countries or internationally, as through the International Monetary Fund – now held to have been ill-suited to the region’s conditions. Intra-regional recriminations, we were relieved to note, had been muted; but stresses outside it might yet become severe. Intra-regional trade, once some forty percent of the region’s total volume, had fallen away drastically; pressures to export were correspondingly more acute, amid current-account surpluses; and the effect elsewhere – especially in the United States, with a massive current-account deficit – might generate political demands threatening the global open-trade régime. We earnestly hoped that protectionist impulses could be held off; but a counterpart to this might need to be a regional recognition that a rebuilding of domestic demand, not just reliance on export, would have to play a substantial part in recovery.
We heard varied views on the part played by the IMF, set up originally for different tasks. Had it pressed too hard too soon for the opening of immature capital markets? Had it contributed to the “moral hazard” problem, avoidably or not, by being seen as a fall-back lender readily at hand? Whatever the answer to these questions, so it was urged, the IMF found itself in roles which had to be filled by some international mechanism: to exert pressure (in some measure indeed to help share political blame) for uncomfortable but necessary structural change; to bring together creditors and debtors; and to disseminate good practice. That said, arguments remained that the IMF needed more clearly-defined functions and (despite evident political difficulty) a more open and candid style of working.
We asked ourselves anxiously whether all this turmoil had gravely exacerbated security strains within the region, or given new impetus to divisive ethnic or religion-based forces. On the whole, we managed to reassure ourselves in these respects. Even in Indonesia stresses with the Chinese community, though substantial, had fallen short of past episodes; and we doubted whether the distinctive character of Islam in the region could easily be appropriated in support of major political agitation. More broadly, the region enjoyed healthy habits of dialogue among most of its members, and a general freedom from ready sources of cross-border dispute to tempt attention-distracting demagogy. The crisis had good prospects of remaining no more than economic (though certainly more than just financial) in international character.
We could not attempt systematic review of every country; but Japan inescapably bulked large in our discussions. Its own problems were largely of longer standing and different character, and were certainly not the causes of the crisis; but it was hard to see the region recovering well if the economy which represented seventy per cent of the region’s resources continued to flounder. We heard both optimism and pessimism on that score. For the former, we noted major contributions to the IMF rescue effort, a massive new package of domestic measures which might, if all went well, restore growth by mid-1999, a perceived easing of banking problems and a wider opening of the financial sector – all these partnering still-powerful basic social cohesion and national resilience. For the latter, it was argued that the new package was essentially of a near-term character, with components largely at odds with the economy’s long-term needs; that, for all the continuing high savings rate, public under-confidence was still keeping resources out of investment and consumption; and that political-party structures still showed no clear sign, failing a really sharp shock, of bringing to power leaders with the capacity and will to drive needed reform robustly and swiftly.
Indonesia, most of us acknowledged, was the hardest-hit case, perhaps more on political than on economic grounds. Political change might well have distance yet to travel, but the Indonesian political scene was often opaque – President Habibie might not have the look of permanence, but his régime could nevertheless hold, especially if it retained the support of the conservatively-inclined armed forces. We were minded to dismiss, as lacking reasons for impetus, any threat of fragmentation, save conceivably in respect of East Timor. The social stresses given focus by the fact that the Chinese three per cent of the population owned seventy per cent of the wealth remained apparent, but oppression had not reached a pitch where China itself (reluctant enough anyway, given its domestic problems) felt bound to take a hand.
China herself exercised us in diverse ways. The resisting – perhaps on political-prestige more than strict economic grounds – of the temptation to devalue seemed welcome; if it could not be sustained, however, some feared that a full-blown second round of regional setback might be precipitated. Gloomy voices were heard about the combination of an over-valued currency, banking institutions with massive non-performing loans, still-widespread corruption, growth rates which might well be greatly below claimed levels, centre/periphery stresses and no clear economic strategy. But prediction about China had been wrong often enough. Either way, and even though by objective measures it was still not a vast economy, China might well be the balance-tipper between recovery and further loss of ground for the region as a whole.
Other countries attracted briefer comment. Both Thailand and Korea seemed among the more promising recoverers, though the latter was still marked by industrial over-concentration. Singapore had sound financial institutions and a political system legitimated by effective performance, but could not expect to escape economic contagion. Malaysia worried us more; could social and political calm be sustained if failing growth made it no longer possible tacitly to uphold Malay contentment from the dividends of Chinese-community economic success? And what would happen when the walls of the temporary economic sanctuary currently being attempted (for example by control of capital flows) had inescapably to come down?
As we sought to come to overview, we recalled the region’s many strengths. The positive human factors, genuinely powerful, which had largely given birth to tigerdom had not all evaporated, and the crisis itself had already, albeit unevenly, impelled beneficial change. Excessive pessimism could become self-fulfilling, for example by preventing the return of the capital supply needed to rectify the over-reactive credit shortage which now impeded recovery. But we continued to worry whether political adaptation had yet generally gone far enough to be capable of implementing the radical structural changes still needed, especially amid strains exacerbated by the poor quality and coverage of social-security safety-nets.
What could actors from outside do to help? There could of course be no universal prescription amid such diversity. But the region’s financial institutions and practices still mostly needed greater transparency, more accountability, surer (though not stifling) regulation, and more dependable company and bankruptcy law. In such areas Western countries had skills and experience to offer (preferably, for political acceptability, through private-sector channels). But the bruising experience of the past year had often damaged local receptivity, and sensitive and patient management – including genuine involvement and consultation, not just G.7-or-similar imposition – would be needed if new standards were to take root. And both the capability and credibility of Western countries in exerting constructive influence would be affected also by their success or failure in sustaining their own growth.
The world economic system had received a salutary lesson, not least in the degree to which ripple-effects could spread from even the smaller economies. The repercussions were by no means at an end; we conjectured apprehensively that there might yet be resultant pain to come for primary-producer countries, and we were conscious of having found too little time to discuss already-evident consequences in Latin America and – very vividly – Russia, even if the Russian Far East itself was of little economic consequence. Might the Year-2000 challenge, or acute environmental problems, make the waves rise higher still? - we scarcely wished to know. We found no agreed overall prognosis, though we were sure that a return to high growth was not in the stars, whatever the surprising vigour of world stock markets might appear to envisage; the options were a long slow-growth haul, or some further decline. Politics – both leaderships and systems – as much as economics might prove to be the key determinant.
This report reflects the Director’s personal impressions of the conference. No participant is in any way committed to its content or expression.
Chairman: HE Ambassador Koji Watanabe
Special Adviser to President Shoichiro Toyoda, Japan Federation of Economic Organizations, Keidanren
PARTICIPANTS
AUSTRALIA
Mr Michael Cook AO
Formerly Ambassador to the USA
HE Mr Philip Flood AO
High Commissioner to the United Kingdom
Dr Bruce Mackintosh
Director, International Centre, The University of Western Australia
CANADA
Mr John W Crow
Partner, J & R Crow Inc
Professor Victor C Falkenheim
Professor of Political Science and East Asian Studies, Department of Political Science, University of Toronto
Mr Paul Jenkins
Deputy Governor, Bank of Canada
FINLAND
Professor Pekka Sutela
Helsinki University; Head of Institute for Economics in Transition (BOFIT), Bank of Finland
GERMANY
Ambassador Dr Hans-Dieter Scheel
Director for Asian Affairs, Auswärtiges Am
HONG KONG
Mr John C Tsang
Director General, Hong Kong Economic and Trade Office, London
ITALY
Dr Giuseppe Schlitzer
Head of Unit on Emerging Market Economics, Research Department, Banca d’Italia
JAPAN
HE Mr Kazuo Nukazawa
Ambassador to Hungary
MEXICO
Dr Jaime Zabludowsky Kuper
Deputy Secretary for International Trade Negotiations, Ministry of Trade and Industry
NEW ZEALAND
HE Dr Richard Grant
High Commissioner to the United Kingdom
UNITED KINGDOM
Mr Roger Bootle
Economics consultant
Lord Burns GCB
Lately Permanent Secretary, HM Treasury
Mr Robert Cooper CMG MVO
Director, Asia-Pacific, Foreign and Commonwealth Office
Mr Bill Emmott
Editor, The Economist
Lord Gillmore of Thamesfield GCMG
Chairman of the Council of Management, Ditchley Foundation; formerly Head of the Diplomatic Service
Mr Tom Harris CMG
Director-General Export Promotion, Department of Trade and Industry
Mr Anthony C Hutton CB
Director-General, Trade Policy, Department of Trade and Industry
Professor Michael Leifer
Director, Asia Research Centre, London School of Economics and Political Science
Sir Peter Middleton GCB
Director, Barclays Bank plc; formerly Permanent Secretary, HM Treasury
Mr David Peretz CB
Lately Deputy Secretary, International Finance, HM Treasury
Mr Richard Rawlinson
Director, Monitor Company (global business advisory and private equity investment group)
Mrs Rosemary Righter
Chief leader writer, The Times
Mr Jeremy Seddon
Chief Executive, British Invisibles
Mr John Shepherd CMG
Deputy Under Secretary of State, Foreign and Commonwealth Office
Sir Andrew Turnbull KCB CVO
Permanent Secretary, HM Treasury
Professor David Wall
Head, Asia-Pacific Programme, Royal Institute of International Affairs
Mr David Willetts MP
Conservative Party spokesman on education and employment
Lord Wright of Richmond GCMG
Formerly Permanent Under-Secretary of State, Foreign and Commonwealth Office
UNITED STATES OF AMERICA
Mr Timothy A Chorba
Lawyer, Patton Boggs
Mr Francis Finlay
President, Chief Executive Officer & Co-Chairman, Clay Finlay Inc. (global investment management firm)
Dr Harry Harding
Dean and Professor, International Affairs and Political Science, Elliott School of International Affairs, George Washington University
Mr Herbert Levin
Executive Director, America-China Society
Dr Glenn Pitman
Dean, School of Management, Binghamton University, State University of New York
Ms Claudia A Rosett
The Wall Street Journal
Dr Steven A Sherlock
President, Aid to South-East Asia Inc