Asia’s 1997 financial crisis was the most severe of its kind to hit any region of the world since the Latin American debt crisis of the early 1980s. It brought to a crashing end a miracle that had taken but a single generation: the transformation of the pre-industrial Asian "tigers" into some of the most dynamic economies on Earth. Earlier, a similar transformation had turned Japan into the world’s second-largest economy, but it has been mired in an almost decade-long recession, which the crisis could only lengthen.
During the former times of prosperity, the economies of Japan and the tigers were characterized by strong government direction of selected industries, to which bank-dominated financial systems channeled the savings of thrifty households. But the 30 percent shrinkage of the total gross domestic product of Indonesia, Malaysia, the Philippines, South Korea, and Thailand in one year forced a basic rethinking of the respective roles of government, industry, and the market. The rise of the Internet has only hastened the rethinking.
Over the past two years, nearly all of the region’s countries have launched—some more wholeheartedly and successfully than others—a range of financial, corporate, and governmental reforms to get back into the game. This special Asian edition of The McKinsey Quarterly reappraises this part of the world, taking into account its proven energies, its concealed weaknesses, and its mixed attitude toward change.
The conventional view of Japan is that it is a once great economic power gone mysteriously wrong. "Reviving Japan’s economy," based on a year-long research project by the McKinsey Global Institute and the Firm’s Tokyo office, contends that there are really two Japanese economies, operating side by side through boom and bust. One is defined by the unparalleled productivity of Japan’s automobile and electronics companies; the other, and by far the larger, is predominantly an affair of mom-and-pop stores, inadequate health care, and expensive housing. One economy enthusiastically competes on the world stage; the other fights to keep the world at bay. Until Japan permits the values and standards of the export sector to infuse its domestic counterpart, snail-like growth will continue to afflict the economy as a whole.
Even so, countries that undertook reform programs have been among the worst hit by the economic crises of the past three years. These countries had begun to deregulate, privatize, and open their markets to foreign competition and investment, but the condition of their banking sector remained opaque. By failing to complete the reform process, they left themselves more vulnerable to violent reversals of global capital flows.
What is a would-be but wary investor to do? "Valuation in emerging markets" provides a mechanism for valuing individual companies more authoritatively than do the capital markets, which chronically ignore the risk posed by the nations where these companies, however well run in themselves, operate. But capital markets have an additional function, suggests "Surviving an economic crisis": that of diminishing this sort of background risk by replacing poorly run banks as the main source of an economy’s capital. Governments have a key role to play in engineering the transformation of national financial sectors, not through protectionism or heavy-handed intervention, but by establishing a liquid market in sovereign debt instruments—a market that would allow corporations to price their own issues correctly. "A case for Asian bond markets" explains how this can be done.
If companies in emerging markets develop the right capital structure, and the parent nations put their own houses in order, will our wary investor be satisfied? Not yet. According to a McKinsey survey cited in "Building Asian boards," global institutional investors care at least as much about the quality of a corporation’s governance as about financial issues. Already, there is recognition in Asia of the value of an independent board of directors that exercises vigorous oversight—one of the hallmarks of modern capitalism in the West. Long-ignored minority shareholders now demand accountability and transparency.
Accompanying all these changes is a subtle shift in social values. While Asia’s historical emphasis on cooperation, consensus, and the collective good is unshaken, more value is being placed on kindling the entrepreneurial spirit and serving the consumer. The Internet is reinforcing these tendencies.
This is a historic time for Asia. Much as the region transformed itself after World War II into an industrial presence, today it is replacing its legacy of state intervention with a market-based mode of decision making. Those markets are revaluing Asia. So too should the rest of us.
Dominic Barton
Director, Seoul office 