Newspaper article The Christian Science Monitor

'Your Brakes Are Fine, but the Engine ...'

Newspaper article The Christian Science Monitor

'Your Brakes Are Fine, but the Engine ...'

Article excerpt

The Asian financial crisis won't go away soon.

Until last July, Asia was an engine of growth for the world economy. No more.

"It's in the repair shop - for three years," says Harald Malmgren, a Washington economic consultant. "This engine is going to pull nothing. This will be a prolonged, painful restoration." Three to five years before it's over, estimates Tim O'Neill, chief economist at Harris Bank/Bank of Montreal in Toronto. For the United States and Canada, the Asian crisis is in one way "good news," Mr. O'Neill says. By knocking about half a percentage point off economic growth, it should restrain the inflation-sensitive Federal Reserve from raising interest rates. The crisis will have its worst and most extended consequences in South Korea, Indonesia, and Thailand. O'Neill expects their economies to decline this year and only then slowly revive. "This is no Mexico," says Mr. Malmgren, referring to Mexico's rapid recovery from the 1995 peso crisis - a comeback not enjoyed fully by many working Mexicans. And it could get worse. Malmgren reports rumors in the region that Indonesia's military is getting restless. "There could be a coup," he says. Observers also worry about the potential for riots against the ethnic Chinese minority, the backbone of Indonesia's business community. Many Chinese are reportedly fleeing or planning to do so. O'Neill sees three "uncertainties" that could worsen the crisis: * Korea could fail to satisfy the reforms required by the International Monetary Fund (IMF), bringing financial chaos. * China could devalue its currency, the renminbi, this summer. Huge currency devaluations by its neighbors put Chinese exports at a competitive disadvantage. * Japan's economy may weaken further. More trouble in the world's second-largest economy hurts both Asian and Western countries. Aware of the risks in the Asian crisis, Federal Reserve Chairman Alan Greenspan has encouraged Congress to give more money to the IMF. On Friday, he told the House Banking Committee that if the US fails to help refund East Asia, the consequences could be severe in the US. President Clinton wants another $18 billion for the IMF. Congress turned down a similar request last year, and the administration places such a high priority on the issue that it sent not just Mr. Greenspan but also Treasury Secretary Robert Rubin and Defense Secretary William Cohen to plead the cause. Malmgren suspects Congress will provide an initial $3.5 billion this spring but may hold back on the other $14.5 billion - the US share of an increase for the IMF. Some members of Congress want to let American banks and those of other industrial countries do the work of negotiating deals with Asian banks, companies, and governments that need more repayment time or some relief for their debts. …

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