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Asia not out of the woods yet -UNCTAD economist

BANGKOK: One of the first economists to flag Asia's financial crisis, punctured euphoria over the region's recovery on Thursday with a warning that rebounding growth had failed to bring rising wages and employment.

Yilmaz Akyuz, the chief economist of the U.N. trade and development agency, also said international policy-makers had so far failed to make changes to the architecture of the global financial system that might avert a repeat of the Asian crisis.

"The danger is complacency. economies are recovering, but people aren't," Akyuz told a symposium on the Asian economy organised as part of a week-long summit.

Drew attention in 1996 to Asia's financial vulnerabilities and said it could not rely on continuing high rates of export-led growth.

The following year a flight of foreign capital and speculative attacks on regional currencies left companies drowning in a sea of high-cost foreign-currency debt. A deep recession quickly enveloped most of Asia.

Output has since rebounded smartly across Asia, luring foreign investors back into the region. But Akyuz said believed the health of a country's economy should not be judged by the buoyancy of its stock market or its currency's strength.

In Asia's case, overall per capita income might be returning to pre-crisis levels, but many poor people found themselves even poorer than before, he said.

"Boom-bust and recovery cycles appear to be very regressive in terms of income distribution...so I don't think the recovery in a development sense is with us, and until we see the level of employment restored we'll continue to be very concerned," he said.

LIMITS TO GOVERNMENT ACTION

South Korea is leading Asia's rebound, with growth this year expected to match last year's blistering 10 percent pace.

But Jun Kwang Hoo, a special adviser to Korean Finance Minister Lee Hun-jai, acknowledged that the recovery had caused pain. The income gap between rich and poor had widened and unemployment was still almost double the pre-crisis rate.

In a paper prepared for the conference, Jun said Korea's recovery had been led by the government, which had increased its deficit dramatically to support growth and had embarked on far-reaching corporate and financial restructuring.

"Korea's next task, therefore, is to extend the government-driven reforms to self-generating reforms by the private sector, thereby transforming Korea's economic system and business culture," he said.

Thailand's deputy finance minister, Pisit Leeahtam, also pointed to the limits of government pump-priming.

"Although we can pursue our budget-deficit policy over the next few years, government spending cannot be a strong engine of long-term sustainable growth. Sustainable growth has to be private-sector led, and will have to be based on the principle of competitiveness," he said in prepared remarks.

Production for domestic consumption and export was bouncing back, but because of excess capacity Pisit acknowledged that demand for large private investment projects would take some time to recover.

EXTRAORDINARY CHALLENGES

Myoung-Ho Shin, vice-president of the Asian Development Bank, said Asia was on the verge of achieving economic stability but still faced extraordinary challenges, particularly in the area of financial and corporate restructuring.

The cost of repairing the balance sheets of Asia's battered banks, for instance, will range from 20 percent to 65 percent of national output. "This, comes at a time when social needs are mounting, unemployment pressures continue and real incomes remain depressed," he said.

As well as requiring profound economic and social changes, the ADB official said huge deficit-spending to get over the crisis and bail out banks would affect public spending choices for a long time to come and constrain government options.

"But the reforms to strengthen financial systems and ensure credit flow again to stronger borrowers are profoundly necessary. Coupled with sound macroeconomic management which is Asia's forte and assuming no surprises in the external environment, these reforms will pay dividends in economic recovery. In fact they already have," Shin said. -Reuters