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Asian recovery is fleeting: Krugman


PROFESSOR Paul Krugman, the world famous economist who wrote in 1994 about the myth of Asian growth and last year advocated capital controls for crisis-hit Asian countries, will be confronting Thai audiences today in two consecutive sessions.

It will be interesting to see whether Krugman this time will be a prophet of hope or a prophet of doom.

With his latest book The Return of Depression Economics (1999) ensconced in his briefcase, Krugman will expound on his stimulating ideas and dare his listeners to challenge him in an intellectual debate. First, from 2-4 pm, he'll address a by-invitation-only audience at Bangkok Bank's headquarters on ''The Future of the Asian and World Economies''. Then he'll be chauffeured to the Grand Ballroom of the Grand Hyatt Erawan Hotel where the Capital Market Development Fund Foundation and the Association of Securities Companies will play host between 7.00-9.45 pm. Krugman will speak on ''The Great Recession and the Recovery''.

Over the past two years the Asian crisis, for all of its damaging ramifications, has heightened Krugman's stature, for he stands at the centre of academic debate on the causes of and responses to the implosion of the ''Asian Miracle''. In his book, Krugman argues that the economic policies that governments adopted in the face of financial turbulence and economic weakness in the '90s were seriously misguided, as they were in the 1930s when the same actions that governments and central banks undertook helped precipitate the Great Depression. From the Mexican and Asian to the Brazilian crises, governments repeated the same mistake by raising interest rates and thus dealing a further blow to already maimed economies.

Japan, which had been the locomotive of Asian growth, did not get it right in trying to escape from the recession that struck in 1990, Krugman said. He recommended that Japan should opt for printing money as the way to bootstrap itself out of the depths of stagnation. It was widely recognised that if Japan could not put its economic house in order, it would not be able to tow the whole region out of the crisis.

He also called for emerging-market governments to resort to capital controls to protect themselves from the volatility of the global capital markets. Shortly before Dr Mahathir Mohamad, the Malaysian prime minister, introduced capital controls in September 1998, including making offshore ringgit unconvertible, Krugman wrote an article in Fortune magazine advocating capital controls. He cited China as a case study of a country that was able to avoid the crisis by enforcing capital controls.

When Mahathir did actually impose capital controls to nail speculation against the ringgit which was thriving to the tune of US$30 billion in Singapore's foreign currency market, Krugman's reputation was enhanced further, although the International Monetary Fund and most other economists raised their eyebrows at such a controversial decision. Later on Joseph Stiglitz, the World Bank's chief economist, said Malaysia did the right thing in imposing capital controls to fend off runs on the currency due to international volatility.

Krugman wrote Return of Depression Economics last year when there still were no signs of an Asian recovery. He came to the bold conclusion that the policy mistakes made by crisis-hit countries were similar to those seen in the 1930s, hence a return to depression economics. Still, he also blamed international monetary managers -who followed a herd instinct and acted on scarce information -- for aggravating the crisis by yanking their funds out of the region all at once. Governments also disseminated inadequate information, thereby confusing investors and lenders.

Even on June 21, 1999, when some recovery signs were appearing in Asia, Krugman wrote a cover story for Time newsmagazine questioning whether the economic recovery was for real. The title of his provocative article was ''Here we go again: Why Asia's Economic Recovery Isn't What It Seems.''

In the article, Krugman came up with the striking proposition that neither the IMF regime that Thailand, South Korea and Indonesia was strictly adhering to nor Mahathir's unilateral slapping on of capital controls deserved credit for the surprisingly healthy economic recovery. Up to then there had been serious debate as to whose prescriptions were right. Krugman wrote:

''The truth is that an observer without any axe to grind would probably conclude that none of the policies adopted either on or in defiance of the IMF's advice made much difference either way. Budget policies, interest rate policies, banking reform -- whatever countries tried, just about all the capital that could flee, did. And when there was no more money to run, the natural recuperative powers of the economies began to prevail. At best, the money doctors who purported to offer cures provided a helpful bedside manner; at worst, they were like medieval physicians who prescribed bleeding as a remedy for all ills.''

He went on to say that Asia's recovery did not look sustainable because first, entrepreneurs in Asia -- the backbone of many of the emerging economies -- had been wiped out by the collapse of the region's economies and financial intermediaries. Corporations were in fact family-owned enterprises whose growth depended on the personal wealth of their owners and their ability to leverage that wealth through bank loans. It would take a long time before these entrepreneurs could get back on their feet again, given the depth of the financial crisis and the loss of confidence in the region.

Second, he argued that even before the crisis Asian investment was already running out of steam due to diminishing returns-rapid growth was being propped up by greater infusions of foreign funds rather than by increases in productivity. This is reminiscent of his notorious article ''The Myth of Asia's Miracle'' (Foreign Affairs, 1994) that upset Asian policymakers and economists. In that article, he said Asian growth was derived from perspiration rather than inspiration, implying that a correction was imminent. Based on Krugman's article, hedge fund managers started scanning Asia for vulnerability before focusing in on Thailand. Prior to the late 1996 attack on the baht, Thailand was already being tagged as the country with the ''Mexican disease''. In a way, Krugman was right.

Third, Japan has failed to jump-start its economy because it had fallen into a liquidity trap. If Japan cannot haul itself out of trouble, it would not be able to pull Asia along out of the recession.

Now that Asia is on a recovery course, it will be interesting to hear what Krugman has to say. Is the recovery sustainable? What more does Asia need to do to ensure future prosperity? Can Asia ever compete against the West? How can Asia learn to live with volatility? These are some of the questions that Krugman is likely to be well prepared to answer.




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