Keeping the Bad News at Bay.(Asian economies)(Brief Article)

Economies all across Asia are limping badly, hobbled by the slowdown in demand from the United States. In the first half of 2001, Japan fell into recession, and preliminary numbers suggest that Taiwan and Singapore also contracted. Yet as in 1997, when a spreading financial crisis knocked out tiger after Asian tiger, one country continues to operate on its own cycle: China notched a typically robust growth rate of 7.9 percent in the first six months of the year.

Why the difference? The short answer is reform. In today's Asia, he who reforms grows.

Asian economies share common problems. For two generations, China, South Korea and Japan funneled their financial resources into favored firms, mainly in heavy industry, and coddled those companies through cartels and protectionism. The 1997 crisis laid bare the results of this system--overcapacity, wasted money, insolvent firms, troubled banks and lack of funding for new, innovative firms. Growth could be restored only by reform and consolidation of banks, bankrupting insolvent firms, accepting the resulting layoffs and economic slowdown, and then trying to revive the economy through exports and renewed consumer confidence.

Instead, a booming United States carried the export-driven economies of the region along in its wake, allowing recalcitrant governments to avoid real reform. Japan and Taiwan actively sought to buttress the old system. They propped up their banks and helped them hide their bad loans, carried insolvent companies rather than bankrupting them, spent government funds to prop up stock markets, and in Taiwan's case also supported the currency and suppressed publication of consumer- confidence and leading-indicator numbers. The result has been economic stagnation to a degree unimaginable a few years ago.

South Korea and China, on the other hand, followed through with drastic reform. South Korea closed two thirds of its merchant banks and forced a vast consolidation of its commercial banks, in the process laying off 38 percent of bank employees. It closed 14 of the 30 big chaebol and imposed drastic (although still incomplete) reforms on the rest. But if South Korea was a hero of reform, China has been the superhero. Beijing has laid off 46 million people from its state and collective sector. It is in the process of cutting the government in half from 8 million employees to 4 million. It ordered the military to get out of business, largely accomplished within a single year. These reforms imposed so much pain that one had to ask whether any economy, any polity, could recover from them.

Last ...