10 Years After Crisis

By Yuwa Hedrick-Wong, Knowledge Panel Chair & Economic Advisor at MasterCard Worldwide

A decade after the 1997 financial crisis, Asia-Pacific is wealthier and economically healthier and is playing a much bigger global role than ever before.

In the past five years, while the U.S. has accounted for about 13 percent of global real gross domestic product (GDP) growth on purchasing power parity terms, Asia has contributed over 50 percent.

From the point of view of the banking sector, literally the epicenter of the crisis, nonperforming loans as a percentage of the total have been successfully reduced after spiking in the immediate aftermath of the crisis. In Korea, one of the worst crisis-hit markets, non-performing loans dropped from 8.7 percent of the total in 2000 to 3.5 percent in 2006.

Democratic institutions are arguably stronger today, notably in Indonesia and Korea. Moreover, the level of transparency of central bank decision-making in Asia-Pacific has significantly improved in the post-crisis period, coinciding with the shift toward more flexible and market-driven foreign exchange rates.

Foreign exchange reserves have increased massively in all markets in Asia in the post-crisis period as well. Korea's foreign reserve, which was a modest $34 billion in 1996, expanded to close to $250 billion in March 2007. In fact, such massive foreign reserve holdings today are more a cause for concern than celebration.

Nonetheless, it is apparently a source of comfort to governments who remember the harrowing days when the central banks of Thailand, Korea and Indonesia were running out of foreign reserves trying to defend their currencies during the 1997 crisis.

One of the painful memories of the 1997 crisis was the plunging values of currencies in the crisis-hit markets. The exchange value of the Korean Won, for example, fell by half between August and December of 1997.

Since 1998, the real effective exchange rates of Indonesia, Korea and Thailand have all risen significantly. In the case of Korea, it has risen by 31.8 percent.

Given that exports have grown over the same time period, the competitiveness of these markets certainly has not suffered in spite of their rising real effective exchange rates.

Return of Hubris?

There is today, disturbingly, a similar sense of triumph, often expressed in terms of the Asia region having decoupled from the U.S. market. The reality, however, is that the case of decoupling is far from being conclusively established.

To begin with, domestic investment among the four crisis-hit markets _ Korea, Indonesia, Malaysia, and Thailand _ have yet to recover the heights reached in the pre-crisis period in terms of percentage of GDP.

Not only is domestic investment now lower relative to the size of the economy, most of it is also related to areas directly connected with the external sector.

In other words, investing in businesses that cater to domestic demand has been far less important than investing in trade-related businesses.

In 2006, growth in domestic demand was lower than overall GDP growth in Singapore, Hong Kong, Japan, Taiwan and Thailand. The exceptions are Korea and Malaysia where growth in domestic demand was higher than overall GDP growth.

Reflecting the relatively weak growth in domestic demand, the share of private consumption as a percentage of GDP has dropped in many markets in Asia in the post-crisis period.

Growth in Asia at present is still very much dependent on the U.S. as a locomotive. In order for Asia to truly decouple from the U.S., private consumption must increase significantly, meaning the domestic consumer markets of Asia will need to vastly expand, both in terms of spending power as well as sophistication.

In order to accomplish this, Asia has to progress from the globalization of trade to the globalization of services, especially financial services.

Future Challenges

With more sophisticated and secure financial markets and competitive financial institutions, credit creation for private households in Asia could be massively increased, leading to higher household consumption at unchanged income levels as well as the development of a new profit center for the financial institutions.

To get there, however, Asian markets will have to embrace the globalization of services. Instead of focusing on exporting to the global market, globalization of services means in the first instance opening the domestic market to global service providers.

Successful globalization of services needs an efficient and impartial legal system, strong private property rights, high-quality private property rights, corporate governance, reduce government intervention. It will in turn facilitate the strengthening of a number of key institutions that are the prerequisites for a robust, resilient and efficient financial sector.

For mid-income markets, such as Taiwan and Korea, and higher-income markets such as Singapore, it is time to ease away from a ``manufacturing only'' mindset and start to enjoy the good life of services.

Embracing the globalization of services will be the right step to take to secure a prosperous future.

The writer is Knowledge Panel chair & economic advisor at MasterCard Worldwide