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Asia's economic dreams are becoming nightmares

When East Asians looked to the 21st century - the Pacific Century, they called it - no region of the world bubbled with more confidence and grandiose dreams.

Indonesia planned billions of dollars of power plants and toll roads. Malaysia said it would build a $4.6 billion hydro dam on Borneo that would be big enough to flood an area the size of Singapore. In Thailand, the mood was so bullish that, in the early 1990s, Mercedes-Benz sold more cars there than in any other market outside Germany.In one miserable summer, all that has changed. Asia's economic tiger cubs - the countries that thought affluence was just around the corner - have retreated to their dens and bedded down for a long painful winter. Real-estate and stock prices have crashed. Some of the region's currencies are at record lows.

So gloomy is the picture in Thailand that Swedish automaker Volvo told its Thai workers this month to stay home for 10 weeks. That very un-Asian concept, the layoff, had arrived. And people started to ask the question that two years ago was considered heretical: Is the Asian Miracle - those three decades of almost boundless growth - finished?

When the world's biggest bankers and aid donors met this past week in Hong Kong, the very cradle of the Asian dream, they tried to put the question to rest, with assurances that the region's setback is a temporary one. The current troubles, many optimistic economists argued, were part of a painful transition and will be mitigated by a strong global economy.

"The net result of the crisis may be positive," said the World Bank's chief economist, Joseph Stiglitz. "There will be stronger financial institutions, and with those stronger financial institutions will come stronger growth."

But with much of the region reeling from its worst financial crisis and economic slowdown in a generation, many others are not so sure. With the huge exceptions of China, Hong Kong and Singapore, Asia's economic boom seems finished for the decade. And unless serious reforms are made in banking systems, education systems and the very way governments do business, many investors fear the good times may not return soon after that.

In several countries, big government cutbacks may deepen the immediate pain. Indonesia announced plans last week to postpone 29 power plants and toll roads (although it has yet to indicate if it will pare its military budget or shelve plans to purchase the old East German fleet). Malaysia also shelved the Borneo dam and an airport megaproject.

Foreign investment, outside China, also appears to be on the wane after years of meteoric growth. According to a U.N. survey published this week, foreign direct investment stagnated last year in Thailand, Vietnam, the Philippines and Taiwan. About 80 percent of the increased investment in 1996 went to only three countries: China, Singapore and Indonesia.

"Basically all of Asia is overinvested," said Chris Wood, regional strategist for Peregrine Group, a Hong Kong securities firm.

Through the 1990s, East Asian banks loaned money aggressively using only rising real-estate and stock values as collateral, just as Japanese banks did in the 1980s before they hit a crisis. As a result, much of the region is overbuilt, and many of the loans cannot be repaid.

"Many of these countries are mini-Japans," Wood said, predicting South Korea would be the next one to face crisis.

Some of South Korea's biggest conglomerates, once considered engines of growth, appear ready for the scrap heap and may take some of the country's banks with them. The giant Jintro group, which owes $3 billion to creditors, has sought court protection.

Japan also is in the midst of one of its worst economic slowdowns in modern times and is expected to grow by only 1 percent or so this year and next. Faced with a serious budget deficit, the government raised consumer taxes in April and saw spending collapse. One of the country's biggest department store chain operators, Yoahan Japan Corp., said this month it could not repay $1.42 billion in debts and filed for court protection.

So concerned are the region's finance ministers that they spent much of last week at their Hong Kong meetings discussing a possible $100 billion bailout fund for Asia.

At the center of the economic typhoon is Thailand, which has stayed afloat thanks to a $17.2 billion international rescue package that followed a 40 percent drop in the value of its currency, the baht.

According to an average of private sector forecasts, the Thai economy is projected to grow by a scant 1.9 percent this year and 2.3 percent next year - one quarter the growth rate it recorded in the early 1990s. But even that may be optimistic if the country's reform package becomes unglued.

Some economists, led by American Paul Krugman, have argued that Asia's growth is no miracle but a function of huge capital flows combined with cheap labor. Now that capital is moving elsewhere and labor is not so cheap, they say the miracle has turned to myth.

The World Bank disagrees, citing Asia's ability to save - about one-third of the region's output goes to savings - and use those savings wisely. "I would still use the word miracle to describe how they got such a high savings rate and how they translated those savings into growth," Stiglitz said. Others such as Venezuela and Nigeria were not so thrifty or wise.

Asia also worked very hard to close its technology gap with the West in the 1970s and 1980s. South Korea trained engineers to copy foreign technologies. Malaysia required foreign-owned factories in the microchip business to hand over skills to local staff.

Many wise practices, however, were abandoned in the 1990s. In Thailand and Malaysia, massive savings were squandered on real-estate and property development. And almost nowhere did Asian governments chase the new information age with energy. One exception: Singapore, which soon will require every primary school student to be computer literate.

For the unprepared, problems emerged last year when the region's export engine sputtered and new competition for investments emerged from China, Latin America and Central Europe. Compounding problems for the tigers and tiger cubs was the Japanese yen, which over two years fell by 50 percent versus the U.S. dollar. For currencies such as the baht that were effectively tied to the dollar, the yen depreciation was a disaster for exports and investment.

If countries were pushed over the edge, however, it probably was by go-go banking sectors that financed consumer spending and real-estate booms. In Thailand, private borrowers amassed some $90 billion in foreign currency debts. Most of the debt was short term and went to financial companies, which in turn put it into real-estate development.

"These countries can either sweep things under the carpet or liquidate them," Wood said. But he warned: "A lot of Asians don't see liquidation as a solution."