World Business Forum at Bretton Woods
October 20, 2000
A report on the 2000 World Business Forum at Bretton Woods
By Ron Chepesiuk
The financial crisis in Asia in mid-1997 shook the region’s economies to the core, with a number of Asian countries experiencing sharp declines in currencies, stock markets and other asset prices. The crisis exposed the weakness in Asian financial systems, and to a lesser extent, their governance. It also led to volatility in international financial markets. Since then, however, progress has been made, but it’s been a long hard road to recovery, and many Asian countries still face challenges in moving from government-driven to market-driven economies. As affected Asian countries have been clawing their way back to stability, new business opportunities have been opening up in post-crisis Asia. To examine these and other issues, Tuck School of Business at Dartmouth College sponsored the 2000 World Business Forum at Bretton Woods on Sept 22 and 23. It was a historic setting for a global business forum. In 1944, delegates from 44 countries met at Bretton Woods to establish the World Bank and the International Monetary Fund, and in 1900, Tuck established the country’s first graduate business school. ASIA’S FALTERING ECONOMY At the forum’s first session, Asia’s economic reform measures were discussed. Panel moderator Joe Massey, director of Tuck’s Center for Asian and Emerging Economies, posed the question to the plenary: “Has there been real reform since 1997 to deal with the seeds of the Asian crisis or has there been a band aid approach, which means that the crisis will resurface sometime in the future?” Furthermore, has anything really been done to end the cozy relationship-based dealings between business and government, and what are the short-term and long-term implications for financial investors? Nicholas Lardy of the Brookings Institution examined China’s economy and pointed out that during the crisis it faced some of the same financial problems experienced by other Asian countries. That included excessive lending and a government-dependent corporate sector, two conditions that continue to leave the Korean economy vulnerable to a serious downturn in the future. China, however, “ has put a realistic reform plan in place to deal with its economic problems,” Lardy said. For example, China has passed banking laws, has made improvements in the way banks are supervised, and has allowed for increased foreign competition in China’s economy. But Lardy warned that execution of the plan has been less than successful. He concluded: “The economic situation [in China] is as bad as it was five years ago. In the future, China is going to face enormous fiscal pressure.” Moreover, there could be a total collapse of the Chinese banking system, the China expert warned. Edward J. Lincoln, also from the Brookings Institution, forecasted further doom and gloom in the Japanese economy, which he described as a “mirror image of China” since 1997. Japan has also implemented reforms similar to China’s. New banking laws, for instance, have been passed to fix its debt problems, and there has been an effort during the past seven years to deregulate the economy, such as in the area of domestic airline fares. But Lincoln added that, “Not a good deal has been accomplished to deal with the root cause of the country’s financial problems. The way the Japanese government views its relationship with the private sector hasn’t changed a bit.” Lincoln expressed further pessimism about Japan’s economic future, pointing out that the country is heavily in debt and faces a big demographic shift in 2006, when the population is expected to begin to fall. He further stated that analysts predict Japan’s annual economic growth rate will be just 1 percent over the next 10 years. Not every presenter had such dire forecasts, however. Aja Chapra, division chief of the Asian Pacific Department of the International Monetary Fund, used South Korea as an example to show that much had been done to change Asia’s financial systems. Most importantly, insolvent financial institutions have been closed, while others have been restructured or merged. Korea is expected to experience a 9.5 percent growth rate this year, Chapra said. However, Chapra also pointed out that in Korea public money—to date $100 billion, or 21 percent of the GDP—has been pumped into financial system, making the government a big part of the system. “Priorities need to be set for the future so that Korea could build on the progress made so far,” Chapra said. “For example, Korea needs to return the banks to the private sector. It’s important that the Korean government realize how costly it is to own banks.” Addressing participants at an evening event, Professor Paul Krugman, author of The Return of Depression Economics, noted that he had written an article published in 1994 in Foreign Affairs titled “The Myth of the Asian Miracle.” “It turned out to be prescient,” Krugman recalled. “I saw a supply-side problem and the crisis since then has been a demand-side problem. So I got a bogus but very useful reputation for pointing out that Asia was not bullet proof.” What caused the Asian crisis? “All financial crisis stories tell some kind of mismatch,” said Krugman. “In Asia’s case, there were two: a maturity mismatch [short-term money financing long-term payments] and a mismatch in currencies.” The professor added that good old-fashioned bank runs in Thailand and Indonesia were also a part of the problem. Moreover, he described the Asian economic crisis an unresolved issue, saying that Japan was “the only place [where] things cannot go on as they are…The clock is ticking as the debt grows.” His thoughts on China were almost equally discouraging. “I’m very nervous,” he said. “I do not understand it at all. All the economic statistics are science fiction.” INTERNET REVOLUTION Asia’s evolution of e-commerce opportunities compared with those in North America highlight how the economic climate offers both threats and opportunities for businesses in Asia. Speakers at a panel discussion noted that, during the late 1990s, media attention focused on Asia’s attempt to catch up to the West, which seemingly had a head start in Internet development. Asia, however, has now surpassed the United States in some areas, particularly wireless. Research shows that Asia is indeed experiencing dramatic Internet growth. Asia’s Internet users are conservatively projected to increase to 59 million by 2002. The compound annual rate of Internet usage by 2004 is expected to be 246 percent in India; 243 percent, China; and 145 percent in South Korea. At the moment, Japan, China and South Korea now have 20 percent of the global cellular market. Stephen M. Prytka, president and CEO of eChinaLink.com, an online marketplace for trade between China and the United States, said he felt “rational exuberance” about burgeoning business opportunities in China. Prytka pointed out, though, the “gold rush mentality… Many companies have unrealistic expectations about doing business there,” he said. “That’s not the way it’s going to be. There are lot of opportunities in China, but also a lot of problems.”
Business reporter Ron Chepesiuk is based in Rock Hill, S.C. He can be reached at 110423.2656@compuserve.com.
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