Guest Column

The spectacular Asian growth was fuelled by the availability of global finance. It almost became the right of the region to be treated as a prima donna when finance was to be allocated amongst nations. The downslide was triggered by huge capital outflows in 1997 but to call it the cause would be like blaming a gunshot for an avalanche. The crisis was caused by persistently lower return on capital employed ROCE in large sections of the economy compounded by a highly leveraged situation which included unhedged foreign currency debt.

The entire region led by Japan and aped by South Korea and others was on a growth binge for over a decade. The simple assumption was that as long as the product is good and manufacturing process is efficient,size is the key to success. Size was acquired by capturing market share. Target price is the mantra to get market share which many assumed in turn would result in economies of scale that will enable costs to ultimately fall below the price. It is now known that some companies had an elaborate network of entities in which losses were parked temporarily only to be returned to the loss originator at the appropriate time when the latter was in a position to carry the can. This system can work as long as the financial bubble does not burst. The bubble did burst in many cases.

The market share mania is not unique to Japan. The South Korean chaebols believed in it too. China, with whom very few find fault, suffers from exactly the same syndrome, only the bubble is yet to burst. Countries like Thailand and Indonesia imported this malaise from Japan. Malaysia, Thailand and Indonesia had growth ambitions far in excess of their own market sizes and their exports largely to USA and Japan supported the productioncapacities.

The political alignment with USA and the special relationship with Japan, the dominant investor in and exporter to the region, helped to support the export growth. But few took notice of the fact that the ROCE in most of the industrial and real estate investments fell short of the economic cost of capital and that sustenance was predicated on continuous growth and cross subsidy. Moreover, these countries were heavily foreign exchange leveraged without a hedge cover.

Investors across the world were being goaded to participate in funds earmarked for the region by analysts and advisors. IMF would like the governments to allow sick companies to die quickly, but governments are unwilling to bear the political consequences of the social problems that bankruptcies will create. Economists and analysts reckon that in order to bring demand and supply in line, the countries may have to slash manufacturing capacities by almost half a little more in Indonesia and South Korea, lesser in Malaysia andThailand. Given that the real medicine is as unpalatable as the pain caused by the problem, the governments are more than likely to dilly-dally in the hope that softer solutions will see them through the next few years.

The Asian crisis is thus far from over. The real problems of the economy have not been tackled. The economies of the crisis-hit nations will continue to shrink during 1999. South Korea could see a significant improvement towards the end of the year. There will be rallies in the currency values and stock indices in these countries, but these would be reaction to sentiments and new hope created by isolated events. Sunrise is still a while away.

The author is Chairman of Business Consulting Group