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Risk Mindset in Asia Could Thwart Growth Opportunities

Jeffrey Shafer, Vice Chairman for Salomon Smith Barney International and a member of the Council on Foreign Relations, predicts high growth potential for Southeast Asian nations. His presentation at the recent Asia Business Conference here at HBS began with a slide that compared growth rates between Asian nations before and after the financial crisis of 1997.

From 1998 to 2000, the areas with slowest growth were Indonesia, Thailand, China, Singapore, and Taiwan. The Philippines, Hong Kong, and Korea experienced the highest growth. Shafer dubbed this overall slow growth “a growth hangover” from the Asia financial crisis.
Shafer reassured the several hundred attendees at his morning plenary session in Burden Auditorium that the Asian economies are far less vulnerable to the kinds of economic shocks that caused the 1997 crisis. He cited lower fixed interest rates and a swing from current account deficits of 8% GDP to surpluses currently, most notably in Malaysia.
Shafer said “the key to signaling insulation from currency crises” is the “reserves to short term debt ratio,” which he contends is healthy throughout the region and suggests general insularity to shock, further noting that he sees inflation as a factor only in Indonesia. He also noted a rising trend of government borrowing, but claimed it is a positive indicator of growth.

“The most under recognized force from the Asia collapse,” said Shafer, “was the Japanese bank retrenchment it caused,” adding that collapses today are less likely to have the effects they did in 1997.
And while he projects a slowdown in the overall global economy in 2001, including Asian nations, Shafer also expects to see high growth rates in Indonesia, Thailand, China, the Philippines, and Korea. “There are no signs of the cascading weaknesses that we saw in 1997 and 1998,” he said, adding that the nations were “poised to recover along with the U.S. economic recovery, which we believe is underway.”

At the time of Shafer’s remarks, however, the city of Jakarta, Indonesia, with a population of 12 million (70% more than New York) was experiencing massive flooding that some estimated put 90% of the city underwater. Current death toll estimates are in the dozens; no assessments of the impacts on insurance and reinsurance companies in the area have been made. Indonesia and the Philippines are also a subject of the U.S. war against terrorism.

Shafer projects China’s 2001 growth rate as 7.1% in 2001 and 2002 but says, “Except for China, this is lower than what the other Asian economies should aspire to.” He noted strong savings in the region and high investment in human capital. He expects China to sustain its growth rate amidst its structural reforms while other countries increase their growth rates to meet and surpass that of China.

Shafer spoke at length about the challenges of reform facing China in the wake of its accession to the WTO community. He argued that the government must drive these reforms, which were begun after the 1997 financial collapse.

If government doesn’t drive these continued reforms, argued Shafer, “the incentives for managers is to sit back and take a ‘wait and see’ approach and wind up throwing bad money after good.” He added that some firms lend on a preferential basis and need to be pushed into a more open and transparent market. “Not a single economy in Asia is without significant restructuring to do yet,” said Shafer, “but also there is not one without significant accomplishments already.”

Shafer expressed serious concern about the state-owned “Big Four” banks of China and offered a number of proposals to make them more attractive to investors. The crux of Shafer’s plans are to spin off units to contain bad loans and fully privatize the Big Four, though some people question the tradeoffs that plan would entail. Shafer estimates that 25% of loans
on the books could be problem loans.

Investors, says Shafer, are very concerned about state owned enterprises fearing that they will be managed for social objectives and not shareholder value. This is why Shafer argues for privatization as a means to attain investor confidence.

Shafer is also concerned that the business community is currently too quick to recognize the risks inherent in Asian markets and not sensitive enough to the opportunities. “I’m not a businessperson; I never went to business school,” said Shafer, a Yale PhD macroeconomist, “but it strikes me that if the mindset in Asia continues to be one of fear rather than opportunity, the opportunities could be missed.”

February 11, 2002
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