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February/March 2002 Volume 4 Edition 1


In this issue:


(full-text Advisor below, or click on title for single article window)

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editor: Dr. Jonathan Lemco, Director and Sr. Consultant

Associate Editors: Robert Windorf, Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Barry Metzger, Jean-Marc F. Blanchard, Jonathan Hopfner, and Russell Smith

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Global Economy — Enronitis and "An Array of Factors"

By Scott B. MacDonald

The G-7 summit in early February proclaimed that the global economy is on track for recovery. According to the G-7 communique the U.S. is showing the first signs of recovery, Europe is soon to follow (indeed the UK is expected to sidestep a recession altogether), and Japan’s problems were treated with measured concern. On Wall Street there are still a handful of bulls, looking for a V-shaped recovery. Yes, a growing number of North American companies are talking about better returns in the second half of the year. Yes, it looks as though the U.S., the critical engine for the global economy, is in the trough and ready to start an upward move in the business cycle. Yes, geo-political concerns have swung in favor of the good guys.

Nevertheless, we maintain our view that the global economy is on a slow boat to recovery and that U.S. stock markets will remain on a roller coaster ride due to ongoing uncertainty about corporate performance, accounting issues and the state of the economy. This sober assessment of the US economy was caught by Fed Chairman Alan Greenspan who stated on February 27, 2002: "the U.S. economy is close to a turning point and should begin growing at a slower pace than in previous recessions." The Fed chairman also added: "An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery."

Part of that array of influences is "Enronitis", a nasty illness that hit U.S. securities markets in December and which refuses to entirely go away. It afflicts investors and makes them very suspicious of all companies that are not easy to understand or have any questionable issues regarding accounting, trading practices and partnerships. Part of the problem is that many of the accounting practices now under question were regarded as legitimate for much of the last decade. To put it mildly, the witch-hunt for companies with Enronitis has hit energy (Calpine), finance (Household International), telecom (Qwest and Worldcom) and tech companies hard. It has also made the corporate bond market volatile during the beginning of this year.

Despite the current negative feel to markets, we want to make four points. First and foremost, the witch-hunt for companies with Enronitis will eventually end. Not every company has the illness and even those tagged with it, like Tyco International, are showing that many of the concerns stirred by the press are not accurate. But it will take time to regain investor confidence.

Secondly, Enronitis is actually going to have a positive dimension — much better transparency and disclosure from companies and quick action once a questionable practice surfaces. Consider Nortel’s rapid action in firing their CFO in early February 2002 over certain trades he made in his personal account. Conference calls to support new bond issues are filled with assurances of standard accounting practices, the lack of partnership agreements, and a desire to hire solid accountants -- who are not also providing the same company with consulting services. In addition, a number of the companies hit by Enronitis are now conducting conference calls with equity and debt investors to address any issues that arise. Indeed, in one case the new transparency and disclosure went so far as to include the actual costs to print documents related to earlier acquisitions. There is a new atmosphere of transparency - it may be something that not everyone wants, but it’s now all there, hanging in the wind for all and sundry to see.

Thirdly, Enronitis is spreading. It is now in Europe. So far we have seen Elan, an Irish pharmaceutical company, and Cable & Wireless, a UK telecom company, catch Enronitis and their bonds and stock prices have suffered. We suspect that German companies will also come under pressure, especially after evidence of financial difficulties at the large Kirch media empire. Additionally, Enronitis is heading for Asia, where it will probably test new claims of improved transparency and disclosure.

Our fourth point is that Enronitis is hiding U.S. economic data that shows a gradual improvement and a possible end to the recession. Lost in all the headlines about Enron, Elan and Global Crossing (bankruptcy), is that US unemployment is probably nearing its peak, inventories are being cut, capital expenditures are way down, and a growing number of North American companies are talking about an upturn in demand, as well as in revenues and profits, for the second half of the year. While it is hardly news worth breaking open a bottle of champagne for, it does show evidence there will be a recovery in 2002, which is likely to gain in strength in 2003.

However, Enronitis is not over. It will remain one of the factors that will overshadow global economic recovery and provide an additional element to stock market volatility. It does underscore that the business cycle has not gone away. It is symptomatic that the cleansing process is now well advanced in the United States and Canada. It is heading toward Europe and eventually will reach Asian shores. Once Enronitis begins to diminish, it will signal the move back toward a more healthy global economy.

Can Restructuring Revive the Asian Locomotive?

By Keith W. Rabin


After the onset of the Asian financial crisis in 1997, there was considerable discussion about the need to revive the Asian and European "locomotive" to allow the U.S. economy to slow down. The U.S. economy began to weaken significantly last year. While this can be seen as a necessary consequence of the speculative dot.com era, the events of September 11th accentuated negative pressures, which are now further exacerbated by the fallout from the Enron debacle. As a result, Asia and the rest of the world sit nervously. They await the resurgence of U.S. demand, which they believe supports the health of their own economies. However, they are likely to be disappointed.

While many analysts predict a U.S. upturn in the near future — the Fed has less leverage to reduce interest rates, consumer debt is at exceedingly high levels, and corporations are under extreme pressure to maintain a conservative accounting posture. Their optimism therefore seems misguided, as there is little to support the sustained momentum required to drive a strong advance in U.S. equity markets.

Wall Street demands linear earnings growth quarter over quarter, and this will be a real challenge for U.S. firms moving forward. Much of the profit growth that underpinned the U.S. bull market of the 1980s and early '90s was based on widespread corporate restructuring and rationalization. U.S. firms, however, have been engaged in operational reorganization for almost two decades. While there are certainly pockets of efficiency to be gained moving forward, the easy gains have already been achieved. The incremental benefits of additional cost-based initiatives are unlikely to have anywhere near the impact on corporate profitability and efficiency as those of the past.

Put another way, if you weigh 300 pounds and drink and smoke heavily, you will show dramatic improvements if you change your behavior and begin to eat right and exercise regularly. Once, however, you achieve your optimal weight and become a marathon runner, there is little one can do to maintain the same degree of incremental improvement short of introducing steroids or other solutions that ultimately may do more harm than good.

Given their limited ability to increase profitability through cost-based initiatives, U.S. firms need to shift their focus toward alternative solutions that can deliver the top line revenue growth needed to justify the price/earnings multiple they desire. This generally entails either a growth through acquisition or expansion strategy or one that calls for innovation and the introduction of new products, services or business models.

Companies such as Citigroup, Tyco and GE have been highly successful employing a financially driven acquisition-oriented strategy, though this too is ultimately based upon the cost reductions that can be achieved through corporate integration. Additionally, the current move toward cleaner accounting and the difficulty these firms have had of late maintaining an attractive acquisition currency in the form of a high share price, call into question whether this will remain a viable strategy during the next stage of the business cycle. An alternative model calls for organic or international expansion. Firms such as McDonald’s and Walmart, financial service firms and many export oriented manufacturers have chosen this route, but in many ways this is dependent on the strength of the economies into which these firms seek to expand.

Potentially the most attractive option calls for growth through innovation. This requires "creative destruction" and a shift toward new business models, technologies and the products of tomorrow. While companies must engage in R&D and move rapidly to stay ahead of the curve, massive change is extremely hard to predict and implement. One has only to look at the large debts taken on by telecom firms who unsuccessfully sought to develop models that would deliver extraordinary growth within the mature industries in which they operate. One can also look at the graveyard of companies that promised to harness the Internet or Enron, Lucent, and Xerox to see how difficult it is to reinvent large multinational corporations.

Growth through innovation also requires capital spending. With the U.S. recession and corporate efforts to cut costs, capital spending has been slashed in almost every sector. Tech and telecom-related firms, the areas most likely to show dramatic innovation, have been hit particularly hard. Such capital expenditures bloodletting could become too severe, further aggravating the ability of the U.S. economy to achieve the growth now being forecast.

Corporations in Asia and other parts of the world, however, have by and large not participated in the wholesale move toward restructuring seen in the U.S. and the U.K. in the 1980-90s. While this has put them at a disadvantage, it also means these gains are before them. If these companies were able to move beyond the admittedly serious social, political and institutional obstacles needed to introduce these reforms, they could introduce enormous profitability growth in a relatively short period of time. This would result in a tremendous upward shift in valuations as investors began to shift their capital accordingly.

Viewed another way, in 1982, the year former U.S. Treasury Secretary William Simon initiated a leveraged buy-out of Gibson Greetings, which many view as the start of the U.S. restructuring craze, the Dow Jones index traded as low as 770. By the end of 1995, before the Internet and dot.com phase took off, we saw a rise of over 400% above 5,000. Most of this increase can be attributed to the productivity increases allowed by corporate reengineering and restructuring.

Therefore, while a sustained recovery of U.S. market growth appears dependent on unpredictable factors such as the success of broad-band penetration, advances in biotechnology or other applications that promise to be the "next big thing", Asian markets can deliver enormous gains through the tried and true methods of cost-based restructuring.

Of course, it should be recognized this is only a short-term solution. Once having achieved this advance, they will then be in the same boat as the U.S. and other economies that have engaged in cost-reduction strategies. This will require they successfully introduce the same kind of revenue-based solutions now needed in the U.S., or they will not be able to preserve the gains they will have achieved.

By that time, however, the U.S. locomotive should again be picking up steam, having had sufficient time to work its excesses out of its system. Countries and corporations who have engaged in serious efforts to rationalize and reorganize their macro- and micro-economies, however, will be better prepared to compete as a result.

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American Investors and the War against Terrorism

By Barry Metzger

President Bush, in making the point that America's war against terrorism will be a protracted war on military, diplomatic and economic fronts, has made clear that we will seek to foster economic development in Afghanistan and elsewhere to address poverty and isolation as factors which breed recruits to the terrorists' cause. American foreign aid and the multilateral institutions in which the United States has a voice - World Bank, Asian Development Bank, European Bank for Reconstruction and Development, and the United Nations -- will mobilize support for Afghanistan's reconstruction, Pakistan's economic rehabilitation and broader aid to other countries of South and Central Asia and, inevitably, the Middle East.

But America's policies of economic reconstruction and development elsewhere have been most effective when such efforts were not those of the public sector alone. Private sector investment and trade are the driving forces of economic development, and the economic war against terrorism requires the active participation by American businesses in the countries of South and Central Asia and among the broader Islamic world.

During the 1990s, as American businesses' investments in East and Southeast Asia grew dramatically, their investments in South and Central Asia, by comparison, were paltry. American private sector direct investment in these countries is scattered and totals less than $6 billion, a mere fraction (less than 4%) of American direct investment elsewhere in the Asia Pacific region. American private sector direct investment in the Middle East (other than investment in Israel) has been even less, approximately $5 billion.

Opportunities were more promising in East and Southeast Asia, and those parts of Asia were more familiar territory to most American businessmen. India, Pakistan, Bangladesh and Sri Lanka were slow to open their economies and further policy reforms are indeed necessary to further encourage American and other foreign investors. Most Central Asian countries were in the early stages of transition to market economies from their communist heritage as republics of the Soviet Union. Afghanistan was mired in civil war, and foreign investment was an unthinkable proposition in the Taliban's Afghanistan. More broadly, the Middle East was often politically hostile to American investment and was perceived as carrying high degrees of political risk for investors.

Much needs to be done by the American government and multilateral institutions to encourage further the countries of South and Central Asia and the Middle East to adopt policies and reform institutions to rapidly develop their private sectors and to attract the active involvement of American, European and other Asian investors.

In encouraging private sector development and the involvement of American businesses in South and Central Asia and the Middle East, the United States should drawn on its experiences elsewhere. With the collapse of communism in Eastern Europe and the Soviet Union, a decade ago, the United States acted decisively to encourage the private sectors of these countries and to attract American and other foreign investors. Among such initiatives was the creation of the American enterprise funds in a number of Eastern European countries, Russia and Central Asia.

During the first Bush Administration and the Clinton Administration, ten enterprise funds were created by the United States, with the mission of promoting democracy in post-communist states through a combination of public moneys and private management. With total capital of $1.3 billion, the funds dispersed businesses loans and equity investments in private sector businesses in the countries in which they operate, and also provide technical assistance to local enterprises. The enterprise funds capital was provided by Congressional approval through USAID, but each of the funds is privately managed by independent boards of directors which are accountable to Congress. While there have been disappointments at some funds, they have on balance made an important contribution to encourage economic development and attract American businesses and other foreign companies. Investments have been made in local enterprises and many co-investments have been made in partnership with American and European companies that establish local operations in these countries. John Birkelund, the Chairman of the Polish fund, estimates the funds have collectively created 150,000 jobs, and made more than 50,000 small business loans.

A similar $1 billion American Enterprise Fund for Asian Recovery and Growth should be established to operate in South and Central Asia, building in part upon the small Central Asian enterprise fund established in 1994. More boldly, Congress should consider establishing a larger and more comprehensive American Enterprise Fund for Islamic Development to operate in South and Central Asia and in the Middle East. Such funds would build bridges for investment by American and other investors, emphasizing co-investment in projects in partnership with such investors and local businesses and also supporting local businesses. Only through the encouragement of American businesses to invest in South and Central Asia and the Middle East will the resources required for these regions' economic rehabilitation and development be mobilized and a sound basis established for the pursuit of American strategic interests.

Mr. Metzger is a senior partner of the Coudert Brothers international law firm and previously served as General Counsel of the Asian Development Bank. His opinions do not necessarily reflect those of KWR International.

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Alphabet Soup, Asian Style: The Prospects for East Asian Economic Cooperation

By Jean-Marc F. Blanchard, Ph.D

In August 1997, Japan astounded the international policy community when it announced a proposal to create a $100 billion Asian Monetary Fund (AMF) to stabilize exchange rates in the region. Although the AMF proposal died as a result of pressure from the United States, China, and the IMF, the idea of Asian monetary cooperation persists. For example, in May 2000, at the Asian Development Bank (ADB) meeting in Chiang Mai, Thailand, Finance Ministers from the Association for Southeast Asian Nations (ASEAN) and China, Japan, and South Korea (ASEAN+3) decided to create a network of regional currency swap arrangements and associated surveillance and monitoring mechanisms. These agreements began to take concrete form last year when multiple countries signed swap arrangements, some with ceilings as high as $3 billion. These eye-catching initiatives parallel plans by China and Southeast Asian countries to form a Free Trade Area, ongoing subregional economic development projects such as the Tumen River Area Development Programme (TRADP), and ASEAN+3 efforts to regularize meetings among finance and trade officials, improve cooperation in investment, and so on.

The success or failure of these initiatives is of great relevance to investors, currency traders, lenders, and other economic stakeholders in the region. First, if these arrangements reduce trade barriers and promote growth, then they can create new opportunities for companies exporting to the region and for foreign direct investment. Second, any effort to further standardize procedures, improve transparency, and eliminate red tape will be welcomed by those hoping to reduce the costs and risks of investing, holding local currencies, and lending to parties in the area. Third, if these ventures help to stabilize the political situation in the region, then they foster an overall climate more positive to business. Despite this, it needs to be recognized that successful East Asian regional economic integration may be sour as well as sweet for outsiders if such arrangements protect any lingering discriminatory structures, sustain bad governmental policies, or give East Asian states the political wherewithal to oppose new global economic cooperation initiatives.

What are the prospects for the aforementioned economic cooperation ventures as well as other initiatives like the Asia-Pacific Economic Cooperation (APEC) Forum, the ASEAN Free Trade Area (AFTA), and Northeast Asia Development Bank? In the near-term, it is difficult to conclude that they are anything but dismal. The record of East Asian regional economic cooperation–littered with failures like Japan’s 1967 Pacific Free Trade proposal and the 1997 APEC’s Early Voluntary Sector Liberalization initiative–certainly does not give cause for optimism. Nevertheless, the past need not be prologue. Indeed, in the longer run, absent a conflict in the region or the collapse of a state like North Korea, the prospects for growth and deepening of regional economic arrangements in the region are positive.

In the near-term, the prospects for meaningful progress in regional economic cooperation are low for five reasons, some relating to "demand" factors and others pertaining to "supply" factors. First, there is an absence of a pressing threat, either political or economic, that might create an imperative for cooperation in the realm of economic affairs and/or generate the political will to make concessions. Second, global economic institutions such as the WTO, IMF, and World Bank have attempted to reform themselves so they are more responsive to East Asian needs. Third, the economic situation of many East Asian actors (e.g., Hong Kong, Japan, and South Korea) limits the amount they can contribute to multilateral cooperative projects. Fourth, certain national elites and politically powerful domestic actors continue to oppose deeper regional economic cooperation because it might prove intrusive (e.g., to government officials in China and Malaysia) or impose economic costs (e.g., on agricultural groups in Japan). Fifth, contemporary domestic political instabilities continue to consume the attention of policymakers in countries such as Indonesia and the Philippines.

In contrast to other analysts, I do not view an absence of a dominant state or dominant leading coalition of states as a central cause of East Asia’s inauspicious regional integration prospects. Historically, dominant states have harmed as well as hurt regional economic cooperation ventures. In addition, there is no definitive evidence to support the claim that they play an irreplaceable role in the process of regional economic integration–i.e., problem identification, the rejection of old methods of dealing with problems, the specification of policy options, and the ratification of agreements. I also do not accept the view that political, economic, cultural, religious, ethnic, and other regional divergences present insurmountable hurdles to East Asian regional integration. After all, putative "differences" often disappear in the face of international and domestic politico-economic exigencies. Moreover, a variety of factors–e.g., a general, albeit in varying degrees, acceptance of Western liberal economic policies–suggest the number of potential cleavages in the region is diminishing, etc.

Over the longer term, the prospects for deeper regional economic cooperation are brighter, although successful integration is hardly preordained. For example, the continuing need for new sources of economic growth and increasing East Asian economic interdependence should generate support for deeper regional economic arrangements. Furthermore, the ongoing development of civil society and regional non-governmental organizations in the area should create new sources of pressure for regional economic integration as well as entities that can highlight the need for and value of regional economic arrangements. Finally, although the value of particular East Asian institutions (e.g., ASEAN) obviously ebbs and flows, East Asian foreign policy elites appear to have learned that multilateral institutions are an essential part of statecraft in the region, which limit the potential for backtracking.

Undoubtedly, the Korean peninsula tinderbox, uncertainties in East Asia’s maritime scene, and frictions among China, Japan, and the US inter alia all have the potential to obstruct the development of East Asian regional economic integration. Nevertheless, these strategic concerns remain in the background at present. Hence, it behooves us to pay greater attention to the aforementioned factors and the ways in which they may heat or cool the alphabet soup of economic institutions in this important area of the world.

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Emerging Markets

A Region with an Image Problem? Charting the Next Year for ASEAN

By Jonathan Hopfner

In 2002, the nations of ASEAN will face some of their greatest challenges yet — not only shoring up their recoveries from a lingering economic downturn, but proving to the international community that the pledges they made years ago to form a potent, unified market force can be put into practice.

While the moribund economies of the region’s two largest export markets, the United States and Japan, has forced most Southeast Asian countries to downgrade their growth forecasts for the year, the relative political stability that they are currently enjoying presents a welcome chance for economic consolidation and development. Despite the concerns of some international observers, Cambodia’s recent local elections cemented strongman Hun Sen’s grip on power and were largely free of the violence that marred earlier polls. In Myanmar, the military junta’s tentative efforts to engage in dialogue with Aung San Suu Kyi’s National League for Democracy has led many to surmise that the country stands on the cusp of positive change. Thailand, under Prime Minister Thaksin Shinawatra, is increasingly moving in the direction of Malaysia and Singapore, with a series of mergers effectively eliminating political opposition forces and paving the way for de facto one-party rule. The Philippines and Indonesia, despite occasional street-level outbursts of anti-American sentiment, have yet to undergo the mass radicalization feared by more pessimistic Southeast Asia watchers. Their respective leaders continue to command the support of the people and — crucially — the armed forces.

The region may have yet to produce a thriving democracy in the Western sense, and in some countries — Thailand, for example — the current trend is to move toward a more authoritarian style of government. But recent economic figures would seem to suggest that, in the eyes of many investors, a heavy-handed — and therefore stable -- leadership may not be a bad thing. Despite concerns about Thaksin’s business dealings and the gradual chipping away of press freedom, the Stock Exchange of Thailand was has been one of the darlings of Asia over the last year, soaring by over 20 percent, while investor standbys like Singapore have seen significant drops. A Merrill Lynch analyst recently called Thailand and Indonesia two of the "best performers of the region," adding that "valuations in these markets have got very, very cheap."

Other forecasters seem to share this optimism. In a January Economist poll showing that most predicted growth rates of about two to three percent throughout the ASEAN area in 2002 -- even for Malaysia and Singapore, which, heavily dependent on technological exports, saw their respective GDPs remain unchanged and plummet in 2001. The IMF is even more hopeful, projecting growth rates of four to six percent.

Most of these estimates, of course, are based on the assumption that a recovery will take place later this year in the US, and, to a lesser extent, Japan, where a weak yen has threatened ASEAN exports. ASEAN nations are also expected to capitalize on the gradual opening of China’s billion-strong market, with the recent agreement to establish a China-ASEAN free trade area over the next 10 years further testifying to the strong economic ties between the two sides.

Why, then, despite the generally upbeat views of market watchers, are recent developments within ASEAN being largely ignored? Compared to the fanfare that greeted China’s entry into the WTO last year, the emergence of the ASEAN Free Trade Area (AFTA) has been greeted with a resounding silence by the media and investors alike. As of December 31, 2001, the "older" ASEAN members — Brunei, Thailand, Malaysia, Singapore, Indonesia and the Philippines — were slated to lower tariffs for products moving among their borders to 0-5%, creating a significant trading bloc that local leaders hope will be able to compete with China as an investment destination. But analysts like Tobias Nischalke of the World Markets Research Center have judged the introduction of AFTA not as a "giant step in regional cooperation, but . . . a modest restart."

Much of the indifference towards ASEAN’s latest move toward integration is simply the result of lackluster marketing. ASEAN countries have shown a tendency recently to court their Asian neighbours at the expense of the world at large. Thai Prime Minister Thaksin Shinawatra, for example, has traveled to India on multiple occasions in recent months to seal satellite and IT deals, but his brief trip to Washington last year failed to convince US investors that Thailand remained committed to opening its markets. Singapore, meanwhile, has been busy courting a free trade agreement with Japan, inked on Japanese Prime Minister Junichiro Koizumi’s whirlwind ASEAN tour in mid-January. And all ASEAN leaders’ eyes, it seems, are on China, where their exports have quadrupled over the past seven years.

In addition, many global investors will wait on the sidelines until AFTA proves over the the next few months that it exists as a genuine trading bloc and not only on paper. A host of lingering disputes among members continue to undermine any beliefs that ASEAN is capable of functioning as a coherent unit. Despite Thailand’s recent gestures of rapprochement toward Myanmar’s ruling military junta, the drug trade and disputed border areas remain sources of tension between the two nations, and often flare into small-scale armed conflicts. Cambodia, Laos and Vietnam also frequently find themselves at odds with Thailand, particularly over the issue of exile groups using Thai soil as a base to launch attacks against the governments of all three countries.

But perhaps no issue better characterizes inter-ASEAN discord than Malaysia’s stubborn refusal to liberalize its domestic auto market as stipulated in the AFTA agreement. While the accord has been in effect to varying degrees for years, Kuala Lumpur has yet to indicate when it will open its gates to automobiles manufactured in Thailand and Indonesia, the major production bases for the region, effectively reneging on the free trade pact. The Malaysian government’s hesitance to hand out — or even discuss -- compensation for the losses other nations incur from its auto tariffs have deeply angered political and corporate forces in Jakarta and Bangkok. Veerawat Karnchanadul, the outspoken senior executive vice-president of Thailand’s Charoen Pokphand Group, went so far as to call the government’s faith in AFTA "stupid," adding, "for Thailand, if AFTA fails, we shouldn't think too much. What's important is that we move forward the best we can.''

Singapore has also indicated, to the displeasure of other ASEAN members, that it’s not prepared to put all of its eggs in the AFTA basket. The city-state recently sealed separate free trade agreements with New Zealand and Japan, and is pushing through similar pacts with the United States, Canada, Iceland, Australia, Norway, Switzerland and Liechtenstein. Although leader Goh Chok Tong pledged last year on a trip to Thailand that Singapore’s bilateral accords would not "open the back door for non-ASEAN members to benefit from AFTA's low tariffs," many of his regional counterparts are skeptical.

Other problems detracting from ASEAN’s appeal are more fundamental — non-performing loans remain a massive burden on most countries and much progress needs to be made in the realm of privatization. Thailand, for example, suffered a major blow in February when the National Telecommunications Commission, established to supervise the selling off of state-backed telecom monopolies, was disbanded due to concerns of corruption in the process of selecting its members.

Yet, while 2002 presents challenges for the region, like any new year, it also represents significant opportunities. If the governments of ASEAN can keep their free trade agreement on track and make further advances in liberalization and governance, investors will stand up and take notice.

Philippines - Turning the Corner?

By Scott MacDonald

The Philippines is turning the corner with its economy picking up momentum and the political situation becoming more stable. For Southeast Asia, mired with the problems of religious strife in Indonesia, a hardline military regime in Myanmar, and a tough recession in Singapore, a little good news out of the Philippines is welcome.

During the 1980s and early 1990s when neighboring countries Indonesia, Malaysia and Thailand enjoyed dynamic growth and were the darlings of the international financial community, the Philippines struggled with slower economic growth rates and the consolidation of democratic government following the ouster the Marcos regime. Just when it appeared that the Philippines was gearing up to join the march to the Asian century, the 1997-98 Asian financial crisis rocked the region. Indonesia plunged into political and economic decline following the fall of the Suharto regime, while Malaysia and Thailand struggled to restructure their economies. The Philippines weathered the storm relatively well. However, the potential of this Southeast Asian nation was not to be realized as the government of President Estrada detoured the country into corruption scandals, squandering many of the gains made by the Ramos administration. In 2000, after months of political instability, Estrada was forced to resign and Gloria Macapagal Arroyo, the Vice President, became the new head of state.

Although pro-Estrada forces sought to destabilize the new government, Arroyo moved quickly to bring in a well-respected and qualified cabinet. The Arroyo administration is providing badly needed political stability to the Philippines. A key factor is the shift of the economy to a stronger mode of growth in the medium term. At the same time, tough challenges lie ahead, which will require political will to resolve.

The Philippines has the following advantages:

  • Fiscal performance is improving: The government gained creditability in 2001 by staying close to its budget target of P145 billion. The government’s new budget entails greater fiscal control and expects higher revenues, though its growth projections of 4.0-4.5% appear a little too high.
  • Improving external liquidity: Foreign exchange reserves rose to $15.7 billion in December 2001 from $14.5 billion in September 2001, largely due to foreign borrowing and an IMF loan program draw down of $175 million.
  • Resilient GDP Growth: Despite difficult economic conditions in the global economy, the Philippines has been able to maintain relatively strong growth, especially when compared to other Asian countries. The Philippines benefits from stronger than expected agricultural production and domestic demand. The eventual US economic recovery is expected to boost exports and foreign direct investment.
  • Low inflation: Inflation slowed considerably through 2001 and is expected to remain under control through 2002 due to soft oil and other commodity prices and restrained demand-pull factors. Low inflation has allowed the Central Bank room to cut interest rates and reduce reserve requirements.
  • U.S. aid in fighting Muslim insurgents: The U.S. is sending a limited number of troops to help the government deal with Muslim insurgents, in particular, the Abu Sayyaf, which is reportedly linked with the Al Qaeda terrorist network. At the same time, the peace process with the Moro Islamic Liberation Front is ongoing and indicates that the 5% of the population that is Muslim is not likely to represent a threat to the country’s political stability.
  • Good relations with the IMF and World Bank: Relations between the government and the major multilateral lending agencies are positive, with the Philippines being largely on track with its programs.

While the Philippines has a number of positive trends, it faces some challenges that could contain the pace of recovery. First and foremost, the credit quality of the banking system is challenged by the continued increase of non-performing loans (NPLs). NPLs rose from 15.3% in December 2000 to 18.8% in November 2001 and are expected to peak in 3Qo2 at around 21%. The government is aware of the issue and is seeking to pass legislation to establish special purpose vehicles for the banks to offload NPLs and convert them into work-outs.

Another potentially worrisome trend is that external debt ratios are rising. Total external debt of the Philippines is around $54 billion, of which $22 billion is sovereign, the rest being owed by corporations. That debt level is equal to 78% of GDP. The debt service ratio is gradually increasing: in 2000 it was 15% and 18% at year-end 2001, with an expected peak in 2002 at 22.2%, with a gradual decline scheduled for 2003 (21.4%) and 2004 (18.8%). At this stage this should not present any problems, but if the trend continues it could complicate the country’s access to international credit markets. To counter the build up in external debt, the Philippines continues to have access to international capital markets, has built up adequate foreign exchange reserves and has a good working relationship with its multilateral banks.

Another concern on the economic front is that the track record for privatization has been slow and full of political complications. The upcoming privatization of Napocor is important because of the possible $4-5 billion in revenues that are expected to be generated by the sale of electrical assets. It is important to maintain momentum as there is regional competition for the privatization of generation assets from Korea and Singapore.

The Philippines must also contend with a high crime level. The country’s widespread poverty has helped maintain the option of criminal activity as a means of income supplement. One damper for foreign investment has been the highly publicized kidnappings of foreign executives.

The last point of concern is political. President Estrada did not leave office because he wanted to. Rather he was forced out by widespread public disgust with his involvement in high level corruption and poor economic management. Arroyo fulfilled the role as the constitutional successor, but her coalition faces the risk of factionalism, requiring continued political compromises to keep crucial allies in place. While Arroyo’s popularity has slipped slightly, the military, business community, judiciary and the major church institutions remain behind her. However, the political run-up to the presidential election in 2004, in which Arroyo is eligible to run, will mean a greater emphasis on competing political interests.

The Philippines faces a challenging time ahead on both the political and economic fronts. However, the trends are largely favorable. While some of the reforms have already been implemented, the Arroyo government appears set to embark upon a new round of structural changes, including reducing the fiscal deficit in absolute terms. What is really needed to deal with the challenges of the banking system, the Islamic rebels in the south, rising external debt levels and pro-Estrada forces is strong leadership and a consensus within the government’s coalition. President Arroyo may be small in physical stature, but she is certainly setting out to remake her country and this bodes well for the future.


P.T. Indosat - Operating with Some Promise

By Scott B. MacDonald

Despite ongoing concerns about the political and economic situation in Indonesia, not everything is gloom and doom. Indeed, Indonesia’s long distance telephone company, P.T. Indosat (Indonesian Satellite) reported 2001 earnings that were better than expected.

Indosat (IIT ticker for New York Stock Exchange ADRs) connects Indonesia to the rest of the world and is majority-owned by the state. With a market capitalization of $1 billion, IIT is Indonesia's primary carrier of international telecommunications, including voice circuits, data, and leased lines. Close to 80% of the traffic is carried by undersea cable, with the rest handled by satellite. The company also is Indonesia's official link to the Inmarsat and INTELSAT satellite networks and offers such services as Internet access, satellite telephony, and satellite relay of TV programming. IIT owns interests in several undersea cables and stakes in a host of affiliates, including operations in Cambodia, Malaysia, Singapore, and the US. 

Results for 2001 reflects an 11% fall in net profit to IDR1,465m, which was due to a swing of IDR0.9t in one-off and non-cash items. The strength of the results was obvious from the 23% jump in operating profit. Q4 cellular growth was strong, with 0.4m users added. It appeared that pent up cellular demand in the market remains high, which could provide further upside in 2002. At the same time, international minutes registered fell 8% to 683m due to illegal competition. IIT is seeking to counter this development by launching a number of countermeasures.

IIT’s ADR has recently been on the rise, indicating that it is becoming attractive to international investors. It traded in the past at over $24 a share (1999) and as low as a little under $7 in March 2001. Recently the stock has climbed up into the $9-10 range. Considering the improvement in the company’s performance, the growing need for telecom and other related services in Indonesia, and the gradual shift towards political stability in the country, IIT stock should continue to rise back toward the $14-16 range over the next six months.


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Off-Center: Where Does Japan Fit in Current U.S. Economic Policy and Politics?

By Russell L. Smith, Willkie Farr & Gallagher

Nine years ago this month, the newly installed Clinton Administration launched an all-out offensive to "open" the allegedly "closed" Japanese auto and auto parts markets. For the next two years, Japan was a key focus of an aggressive and confrontational Clinton trade policy. This did not end with the signing of the 1995 U.S.-Japan Auto Agreement. On its heels, the U.S. took up Eastman Kodak’s claims about restricted market access in Japan. While the tone and content might have been new, the basic approach and political importance of these disputes was not. For the better part of two decades, the U.S.-Japan trade and economic relationship had been at the center of U.S. international economic policy, and therefore inevitably at the center of U.S. trade politics.

As Japan enters its second decade of economic difficulty, the view of many long-time analysts of the bilateral relationship is that the situation has changed, and possibly dramatically. This change has taken place gradually, but the results are both clear and potentially very meaningful. At its core, this view concludes that while Japan remains a major global economic actor, it represents neither a rival nor an economic "anchor" for the United States. The fact is that U.S.-Japan trade rivalries no longer dominate U.S. trade activity. Moreover, U.S. economic policymakers, while concerned about Japan’s economic situation, have also all but conceded they have little ability to change it. In short, there seems to be dwindling confidence in the effectiveness of gaiatsu, and therefore little interest in exerting strong external pressure for substantial changes in the Japanese economy.

From a political perspective, the diminished trade and economic focus on Japan has been a mixed blessing. Despite the tensions in the relationship, during the long period of Japanese economic growth at home and abroad, Japan commanded increasing respect in Washington political circles. Though politicians complained about Japanese market access, they also held up Japan’s industrial policies, manufacturing systems, government-industry cooperation, savings rate, productivity, and stability as traits to be emulated in the United States. Now both the complaints and the praise are faint.

These shifts in U.S. focus on Japan have complicated origins. In the U.S., Japan is perceived as suffering from a continuing, debilitating, and systemic economic weakness caused by a combination of over-regulation and lax financial oversight. Commentators offer the opinion that Japan’s post-war model of close government-industry cooperation, lifetime employment, equity cross-ownership, and industrial policy no longer works. They cite globalization, market opening, the Asian financial crisis, and, of course, over-borrowing and speculation grounded in an unrealistic real estate-led "bubble" as factors that rendered that model obsolete.

That condition has resulted in the current prolonged recession. However, the key to the current U.S. political perception of Japan is neither the recession itself nor the causes of it. Japan is no longer seen as a rival, a model, or a threat in many Washington circles because it has been unable to emerge from this condition. Thus, while there is always an underlying concern about economic "meltdown" in Japan, that concern is offset by an implicit consensus (at least in Washington) that the United States and other major economic powers will not allow Japan’s financial markets to collapse. Beyond that question, U.S. opinion leaders and decisionmakers see Japan as mired in its long-term problems--problems which only Japan can address.

If these key U.S. groups believe there is little or nothing that outside forces can do to change the situation, they will move on to other areas of concern. In the international economic and trade area, many have already done so. The key U.S. trade focus is now on disputes and opportunities in Europe and Latin America, and more particularly in China. Both the media and U.S. officials are devoting increasing attention to all aspects of the U.S.-China relationship. They are concerned about U.S.-China trade issues, China’s economic leadership, and potential dominance, in Asia, and the many ramifications of China’s membership in the World Trade Organization. China, they believe, presents problems and opportunities that can be strongly influenced by U.S. policy and political initiatives.

Is Washington entering a true era of "Japan passing?" Some would say this has already happened, and that it will be many years before either the positive or negative attention and deference Japan received in the past returns. Others would say the future prominence of Japan in U.S. economic and political policy has not been decided--that Japan’s strategic importance, the presence of major, "world-class" corporations, an emerging entrepreneurial class, and growing internal pressures for change all belie the notion of that Japan is not responding to its challenges. If, hopefully, the latter view better matches reality in Japan, the current shift in U.S. focus will be both momentary and immaterial.

Asia's Quest for a New International Order:
Low-Hanging Fruit in the Clash of Civilizations?

By Scott B. MacDonald

Asia is in the process of fitting into a new and, as-of-yet, not entirely defined international order. What is clear is that while economic concerns remain core to national agendas from Kabul to Seoul, political issues are assuming greater importance. Two major external factors are shaping Asia’s place in the new international system. On one side is the rejection of globalization and a push down the path of ethnic-religious conflict along the lines of Samuel P. Huntington’s "Clash of Civilizations" and reflected by the violence of al-Qaeda and its affiliates. On the other side is the United States, seeking to create a new world order based on the "War on Terrorism" against al-Qaeda and the "Axis of Evil." Asia is caught between these two powerful forces. Complicating matters, the region is drifting between the growing might of China, the gradual awakening of Japan’s new nationalism, and an India seeking to maintain its regional dominance in South Asia, while beset by its own domestic terrorist problems. What once appeared to be a strong momentum toward greater economic unity in Southeast Asia under the auspices of the Association of Southeast Asian Nations, has given way to growing mutual mistrust.

The view from Washington is that international terrorist organizations, namely al- Qaeda and its affiliates, represent a clear and present danger to U.S. security, both at home and abroad. The nature of this threat is such that it must be rooted out around the planet and (according to Baroness Margaret Thatcher in an editorial in The New York Times) as if they were Bolsheviks. The Bolsheviks in their early revolutionary phase established cells to overthrow or disrupt capitalist governments. They also had an international organization (the Comintern), making use of the Soviet Union as a base. The West fought long and hard to eradicate these cells and in the period following the end of the First World War were largely successful in containing the problem. Along these lines, al-Qaeda must be treated in the same rigorous fashion and be eliminated.

What is being digested in Asia, especially after the successful destruction of the Taliban regime in Afghanistan and reemphasized during President Bush’s February 2002 Asian tour, is that the United States has the military power to tackle the al-Qaeda threat and is willing to use it. Washington is even willing to take the struggle against terrorism to the next step — dealing with the "Axis of Evil" countries (Iran, Iraq, and North Korea) that, in its view, help provide intelligence and weapons of mass destruction to al-Qaeda and its affiliates. In addition, the Bush administration is making it clear that any support for al-Qaeda, even a refusal to supply information and possibly neutrality, could put a country on the new bad guy list. The U.S. is signaling that even without approval of the local government it will intervene to eradicate the al-Qaeda threat. If the local military resists it runs the risk of becoming a target.

For Asian nations already seeking to derive meaning from the U.S. victory in Afghanistan, Washington has outlined two policy tracks from which it will operate. First and foremost, there are the big targets, led front and center by Saddam Hussein’s Iraq, and followed by Iran and North Korea. Iraq is clearly more of a target, especially considering the odious nature of the regime, existence of a local opposition and the nature of unfinished business from the early 1990s when the Bush senior administration opted not topple the Saddam regime. Going after the big targets is potentially more difficult and, most likely in the cases of Iran and North Korea, would end up with a high body count. Certainly an outbreak of war on the Korean Peninsula would lead to considerable damage in South Korea, especially in Seoul, which is close to the border and within reach of heavily massed Northern artillery. A North Korea under severe military stress could also strike out against Japan.

While the big targets carry a plethora of foreign policy issues (such as causing a major row with key U.S. allies in Europe), the second policy track — going after the low-hanging fruit — is the path of least resistance and is already in full swing. The low-hanging fruit are countries where Al-Qaeda or its affiliates are active. This includes Asia as well as Africa, the Middle East, Latin America and Europe. European governments already are active in seeking out terrorist networks as made evident by the Italian arrests of four Moroccans allegedly seeking to bomb or gas the U.S. embassy in Rome. Recent intelligence reports indicate that a number of Al-Qaeda operatives got out of Afghanistan before the U.S. and its Northern Alliance allies defeated the Taliban. It is suspected that many went to Pakistan or Iran. It has also been revealed that there could be around 4,000 Al-Qaeda terrorists in Europe (including new recruits), waiting to strike. While the U.S. can count on the support of its European allies, going after Al-Qaeda supporters in Yemen, Somalia and Sudan could be altogether more difficult.

Clearly the low hanging fruit policy has implications for Asia. The U.S. is already providing training and support for the Philippine government in its struggle against the Abu Sayyaf guerrillas and has worked with the governments of Singapore and Malaysia in their investigations of Jemaah Islamiya. It is also watching Indonesia closely, as there has been speculation that local Islamic radicals are linked to al-Qaeda. Intelligence reports noted that Jemaah Islamiya militants from Indonesia were allegedly involved in the plot to plan truck bombings of U.S., U.K., Australian and Israeli embassies in Singapore. Moreover, Jemaah Islamiya leader Ridvan Hambali apparently escaped to Indonesia.

Although most of Asia is not directly involved in al-Qaeda’s jihad against the United States and those Arab governments which it supports, leaders in Japan, Korea, China, Indonesia, and the Philippines are being called upon by the United States to pick a side. That demand is being leveled against longstanding allies as well as rogue states such as North Korea. Washington is aware that the struggle against radical Islamic terrorism is a matter of military strength and determination as well as economic development. However, Washington is clearly spelling out that economic development is a long- term issue; the military threat is here and now. For Asia, the choices on the menu are stark — sign up for the war on terrorism (which is certainly to the advantage of a handful of governments like India and the Philippines with their own terrorist issues) or run the risk of becoming an enemy. While the merits of U.S. policy are questionable to many (including European allies), they reflect a determination to assert what the Bush administration regards as U.S. national interests.

The imposition of a U.S.-dominated foreign policy agenda is not necessarily a key priority for many governments, who wrestle with such issues as stimulating economic growth, corporate sector and banking reform, and poverty reduction. China must contend with its entry into the WTO, Japan with its deeply troubled banking sector, and India with stagnating economic reforms and large fiscal deficits. The game now afoot in Afghanistan is one of nation-building, which means the development of resilient institutions, the promotion of economic development and external support for maintaining law and order. Developing a civic society is a major blow against the forces that destroyed the World Trade Center. Dealing with the economic ills that ail Asian economies is a sound foreign policy objective for much of Asia.

At the same time, becoming part of al-Qaeda’s chessboard by a lack of action is dangerous, especially in countries where political tensions often are close to religious-ethnic explosions. Tensions already run high in a region in which the Indian and Pakistani armies are exchanging fire on an almost daily basis; central authority remains weak in Afghanistan and more heated conflicts lurk just beneath the surface; and dissident groups foment violence in the Philippines, Indonesia, and Malaysia.

What Asian governments need to address is a mixture of strategic concerns that deal with the immediate risks posed by cross-border terrorist organizations, while pushing for a better dialogue within the region on long-term economic development issues. The 2002 Tokyo summit on Afghanistan should not be the exception, but the rule in Asian countries coming together, taking the lead in problems germane to the region, and setting out objectives. None of this is easy, but the alternative is that much of Asia becomes someone else’s low-hanging fruit and not a partner in the creation of a more peaceful international order.

Emerging Market Briefs

By Scott B. MacDonald

Brazil — Positive Ratings News: With the demise of Argentina in international capital markets, the rest of Latin America, including the region’s largest economy held its breath. So many other crises in one country have resulted in the entire region being hit by a wind-chill of investor fear. This time, thus far, the default of one Latin economy has not had a daisy-chain effect. Evidence of this comes from Brazil, which benefited from an outlook change from Moody’s Investor Service from stable to positive for the country’s B1 foreign currency rating. The rating agency stated that Brazil has demonstrated "resilience" to neighboring Argentina’s debt default and currency devaluation. Over the past month, the largest Latin American economy cut interest rates for the first time in a year and ended nine months of power rationing. For Brazil to get an upgrade it will have to maintain a sizeable primary surplus (it now stands at about 3.7% of GDP) to reduce the country’s net debt, which stood at 55% of GDP in January, its highest level since 1991. Another factor is the looming presidential election scheduled for October 2002. Should the center-left candidate, Ignacio de Silva, take a commanding lead, we would suspect that any upgrade would have to wait until early 2003. If a center-right candidate takes a commanding lead in the poll, chances for an earlier upgrade are that much higher.

Korea on Track for Moody’s Upgrade: Korea is gradually climbing back to being a single A credit. On February 28, it was announced by Moody’s that Korea’s Baa2 rating would probably be upgraded to Baa1 within two months. The key points in helping push Korea back up the ratings ladder are shrinking external debt, rising foreign currency reserves (around $100 billion), and balanced economic growth. What could derail the upgrade is ongoing weakness in the financial and corporate sectors. As Tom Byrne, the Moody’s analyst stated: "Weakness in the financial and corporate sectors can still present vulnerability. High-profile restructuring cases are stalled, and there’s a good chance they’ll be stalled until elections are over." In particular, the analyst was referring to the fact that the Korean government has missed 10 deadlines in three years to sell SeoulBank and the slow pace of the sale of Daewoo Motor Company to General Motors.

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Macao Set for Stronger Growth
: Macao's economic performance is expected to grow at a faster pace in 2002, following weak growth in 2001. Real GDP expanded by less than 1 percent in 2001, compared to a more dynamic 4.6% pace in 2000. Macao is expected to benefit from a further opening of the gaming industry, in which the tourism and related industries will get a boost. In addition, Macao expects to benefit from the fast growth of China's interior expected in the wake of its entry into the World Trade Organization if Macao business people take advantage of the emerging opportunities.

Malaysia — Escaping 2001 with Growth: It now looks likely that Malaysia escaped 2001 with a tiny amount of economic growth (0.4%), but well under the government’s 1-2% target. What helped the country maintain itself on the positive side of the growth ledger was positive real GDP growth rates of 3.1% and 0.5% growth in the first and second quarters respectively. The second half of the year was hurt by weakening global demand for electronic products, a situation only worsened following the Sept. 11 terrorist attacks on the United States. Gross domestic product shrank 1.2% and 0.5% in the third and fourth quarters, respectively, on an annual basis. The manufacturing sector, the major driving force behind the three-year economic recovery since the 1997 financial crisis, fell 5.1% in 2001 after growing 13.5% and 21.0% in 1999 and 2000, respectively. Although manufacturing fell, other sectors, with less share of the GDP did better. In particular, the construction sector, aided by the 7.3 billion ringgit (about $1.9 billion) stimulus package unveiled by the government last year to help cushion the effects of the global slowdown, registered growth of 2.3%. Agriculture grew at a pace of 2.5%, while the mining and services sectors expended 0.2% and 4.9%, respectively. Reflecting weak international markets and the impact of the slowdown at home, exports declined 7.6% while imports fell 8.6% in the year. Looking to 2002, we expect that real GDP growth will be in the range of 2%-3%, depending on the pace of recovery in the United States and Japan, Malaysia’s major trade partners. We also expect that government spending, which rose in 2001 to counter the downturn with stimulus measures, will be reined in during the second half of 2002 as growth becomes more pronounced.

Peru — Back on the Growth Track: For many investors Peru appeared to have fallen off the map in the 1999-2001 period as President Fujimori was forced out of office after a fraudulent election and revelations of high-ranking corruption. New elections were held and Alejandro Toledo assumed the presidency. The incoming government was immediately confronted with a domestic economy in disarray, political uncertainty and a global economy heading into a downturn. For many Peruvians expecting happier days, the Toledo administration represents broken election promises, lack of employment opportunities, tentative leadership and a painfully slow economic recovery. Real GDP growth in 2001 was a meager and disappointing 0.2%. In all fairness to President Toledo, public expectations were too high and considering the panorama of domestic and international conditions, the government has done relatively well. Things are beginning to look up for 2002. The government has already accessed international capital markets for the first time in decades with a $500 million bond issue done in January 2002 and further efforts are being made to improve financial flexibility. Real GDP growth is expected to be the 3.0-3.5% range for 2002 on the back of an improved performance from mining and construction, enhanced tax revenues, and the commencement of production at Antamina, one of the world’s largest copper companies. Even the raring agencies are looking more favorably on Peru, with Moody’s changing its outlook back to "stable" earlier this year for the Ba2 rating. As the ratings agency stated: "The orderly completion of the political transition during 2001 revealed the ability of Peru's institutions to continue to operate under conditions of severe strain. While confronting a belligerent congress, President Toledo has been able to forge the support required to assure approval of top items in his legislative agenda." Challenges still remain, but one can be cautiously positive about Peru’s prospects for 2002.

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Philippines — Moving on Money Laundering Laws: Since 9/11 the hunt for al-Qaeda and its money has resulted in a major international effort to tighten laws pertaining to money laundering. In late February 2002, the Philippine Central Bank announced that moneychangers will be under their supervision. Moreover, moneychangers operating in the Philippines will be required to apply for licenses. The measures are in compliance with new guidelines established by the Financial Action Task Force (FATF), the Paris-based transnational organization entrusted with the coordination of money laundering rules and regulations in all members nations, including all the major economies in North America, Europe and Asia. The FATF had earlier mentioned the Philippines as one of 19 countries where money laundering prospered due to weak banking laws. The central bank is still refining the rules and determining the actual number of moneychangers that operate in the country.

Singapore - Recovery In the Wind?: 2001 was one of the worst years in decades for Singapore's economy. Real GDP for the year contracted by 2.2%, the worst number since 1965. The main cause was the huge decline in electronics exports, which account for 60% of the city-state's manufacturing. The government is now forecasting that the economy will grow 1-3% in 2002, due to a restocking of inventories for semiconductors and other electronic components. This, in turn, will help to reduce unemployment, which was at 4.7% at year-end 2001. Unemployment is still expected to peak at 5% before coming down.

Turkey - Guess Who's Coming to Dinner?: The IMF is sending a mission to Turkey on 5 March to review the stand-by arrangement. It was announced that an IMF mission would be going to Turkey for the first review of Turkey's performance under its IMF program. The mission is expected to remain in Turkey for fifteen days and concentrate on issues related to fiscal and monetary policies, banking sector reform and privatization. The next loan tranche (of US$ 1.15bn) is expected to be disbursed upon approval of the IMF board following the completion of the review (possibly in April). The government has to meet certain conditions before the board meeting takes place. Essential conditions to watch are the creation of an independent public procurement board and parliamentary approval of the Public Debt Management Law. A parliamentary sub-committee is working on the draft Public Debt Management Law. Furthermore, some administrative bodies must fulfill certain conditions. This includes the completion by the Privatization Administration of the public offering of POAS (oil distribution company) and appointment by the Banking Regulation and Supervision Agency of audit firms for thorough assessment of the banks' balance sheets to determine the need for capital increases. Considering where Turkey was last year at this time, there has been considerable progress in moving ahead with politically difficult measures. However, Turkey still has a substantial amount of work to do before victory can be proclaimed, especially in the areas of privatization, bringing inflation down, and attracting foreign investment.

Russia - External Debt Falling: There is good news from Russia - the Eastern European country's external debt burden is on the decline. The government announced that external debt payments in 2003 will be considerably lower than previously expected, in the range of $16.2bn, but possibly as low as US$ 15bn. The government reported a sharp fall in public external debt, which fell from $143 billion at year-end 2000 to US$ 130.1bn at end-2001. If the economy continues to grow and debt management targets remain on track, the Putin administration hopes to reduce external debt to $121-122bn by end-2002. The drop in external debt is due to active debt management, including debt restructuring and interest rates and/or exchange rates developments.

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Book Reviews

Richard Sims, Japanese Political History Since the Meiji Renovation 1868-2000
(London: Hurst & Company, 2001). 395 pages. 395 pages. $59.95.

Reviewed by Scott B. MacDonald



Click here to purchase "Japanese Political History Since the Mejii Renovation" directly from Amazon.com

Richard L. Sims is one of the UK’s foremost academic experts on Japan and has taught Japanese history at the University of London’s School of Oriental and African Studies since 1965. His years of dedication to the study of Japan has resulted in what can only be described as one of the most thorough and well-written books on Japanese political history in a long time. Sims begins with the Meiji Restoration in 1868, a year which "…marks a turning-point in Japanese history comparable with 1789 in France and or 1917 in Russia." He makes an important distinction that what transpired was more than a dynastic restoration. Rather, it was a sweeping political change that provided the foundations for modern Japanese politics.

One of the major points of Japanese Political History Since the Meiji Renovation is that most foreigners are largely unaware of the full dimensions of Japanese politics, including that the country is a constitutional monarchy. It is also not understood that alongside an authoritarian tradition (most evident in the 1868-1945 period) there is a strong anti-Establishment strand, and that localism remains an ongoing factor in today’s electoral system. Sims also notes that Japan’s political system based on the "politics of compromise", despite many faults, has also provided considerable political stability, which stands in sharp contrast to the political experiences of many other Asian nations. Along these lines, he states: "A willingness to accommodate different interests and to exercise restraint in the pursuit of power may have played a key role in the evolution of a viable political system which, for all its faults, allowed an increasing measure of popular participation while remaining basically stable. In this respect, at least, Japanese politics may offer a useful lesson."

Sims provides a well-rounded historical coverage of the modern era of Japanese politics, with the chapters pertaining to the development of constitutional government and its early failure leading up to the Second War being particularly strong. The 1990s receive a little less attention than other periods, but even here Sims makes a valuable contribution in providing the play of political forces in a clearcut fashion. We highly recommend Sims’ Japanese Political History Since the Meiji Renovation for all readers.

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