Kim Dae-jung, the former president of South Korea, once told me a story that perfectly captures the spirit of reform that followed the 1997 Asian financial crisis. He was on an official trip to Vietnam when a panicked visitor from Seoul sought an audience. It was Kim Woo-choong, the flamboyant founder of Daewoo Group, then Korea’s second-largest business house. Over breakfast in Hanoi, the businessman said his companies were spiraling toward financial ruin and begged the president for help.

In the past, such an appeal probably would have worked. Korean presidents had routinely supported the country’s sprawling conglomerates, called chaebol, as the engines of rapid economic growth. But their shady business practices -- which led to debt, excess capacity and graft -- were also a key cause of the crisis. President Kim realized a new approach had become imperative, no matter how painful. He sent Daewoo’s chief back home with nothing more than a lecture: Fix your own problems. Daewoo fell apart shortly thereafter.

It was a gutsy decision -- but just one of countless tough choices made by officials around the region to rescue their economies from crisis. Twenty years ago, starting in July, some of Asia’s best-performing economies -- Korea, Indonesia, Thailand and Malaysia -- fell into severe debt crises that saw investors flee, currencies collapse, companies fail and growth contract.

I was a correspondent in Seoul at the time, and it seemed practically every week brought new reforms. Banks were shuttered, companies restructured, conglomerates dismantled and markets opened. Indonesia transformed from an autocracy to a democracy. In some cases, policymakers were dragged kicking and screaming toward reform, and many people suffered. Jakarta smoldered from vicious communal riots. Salarymen in Seoul, too embarrassed to tell their families they had gotten laid off, donned their usual dark suits each morning and loitered in local parks. But Asia emerged stronger from the crisis because, for the most part, presidents, ministers and technocrats didn’t shirk difficult responsibilities.

Unfortunately, that spirit of ‘97 has largely been lost. Asia in more recent years has been marked instead by the slow pace of reform, even in the face of rising risks and worsening distortions. Faced with these new threats, its governments have to recapture some of the sense of urgency that propelled change two decades ago.

Look, for instance, at the last decade in Seoul. Kim Dae-jung pulled the plug on Daewoo, but his recent successors have been more inclined to pardon chaebol chiefs accused of various crimes than to continue weakening their power and improving governance. The consequences became clear over the past year, as yet another chaebol-fueled corruption scandal toppled the last president.

Inertia among policy makers has also hurt economic growth. Indonesia should be one of the world’s premier emerging economies, but thanks to excessive regulation and poor infrastructure, growth is meandering along at only 5 percent. China’s President Xi Jinping and India’s Prime Minister Narendra Modi have talked big about reform but generally acted small.

China, in fact, is falling into the same debt trap that foiled the old Asian Tigers, while seeming to ignore the warning signs, just as they did. Its debt relative to gross domestic product reached 257 percent at the end of 2016, according to the Bank for International Settlements. Indeed, debt has been rising across Asia. Although not at crisis levels, it is impeding growth in countries such as Korea and Malaysia.

Perhaps, though, another wave of change is afoot. Moon Jae-in, South Korea’s new president, has signaled that he intends to rein in the chaebol and the families who control them, thereby leveling the playing field for smaller companies. Indonesia’s president, Joko Widodo, has pushed through an ambitious tax amnesty while numerous sectors have been opened wider to foreign investment. Now hopefully he’ll tackle some knottier problems, such as an overly regulated labor market that scares off the factories Indonesia needs to diversify its economy.

Reform is always easier when a crisis leaves policymakers no other options. But without further change, Asia will continue to rely too much on debt instead of productivity gains for growth. In poorer nations, improvements in household welfare will lag. As in the years before 1997, economic irregularities could build up to the point where the region faces another crisis. Will the next Kim Dae-jungs be there when you need them?


By Michael Schuman

Michael Schuman is a journalist based in Beijing. -- Ed.


(Bloomberg)