The Global Crisis: Asia - On the road back: Recovery at risk from social pain

EIGHTEEN MONTHS into the Asian economic crisis, there are two contradictory points of view about the region's prospects, and the best way of understanding them is to imagine a skyscraper in an Asian capital city. It might be the Petronas Twin Towers in Kuala Lumpur; the Urbannet building in Tokyo, or any of the corporate megaliths along the Hong Kong waterfront. Near the top is an international investment bank, or securities house, where economists produce reports advising clients worldwide. At the bottom is a park, a department store and a clutter of shops, bars and nightclubs.

On the ground level, things are bleak. In the department store, business is down drastically and many of the staff suspect they may not have jobs in a year's time. Instead of going out drinking after work, they go quietly home and save their money - as a result, several of the bars in the area have closed after the local banks refused to extend their loans.

Most of the jobless still have homes but, for a few of the most vulnerable, the loss of livelihoods has been catastrophic: every day, a few more huddled figures appear in the park, sheltering from the rain in cardboard boxes. But to the chief economist of the investment bank, surveying the city from the window of office, a very different picture presents itself.

According to the data analysis and computer projections of his team of specialists, the worst is over - or will be very soon. After plunging during 1997, the local currency has stabilised. Share prices appear to be cautiously recovering, and the credit-rating agencies are beginning to revise their investment ratings upwards. After decades of being propped up by corruption and over-regulation, the bad banks and inefficient companies are going bust, leaving room for healthy ones to emerge. If anything the homeless are an encouraging sign of necessary pain.

Whatever the economists say about the prospects for recovery in Asia, you do not have to look far to be see that the suffering of ordinary people still has a long way to run. This is the bind that the region's government's find themselves in: having brought under control the rampaging forces that ruined their economies, they are faced with a host of social and political problems - largely created by the economic sickness and, if left untended, with the potential to wreck recovery.

All over Asia, in the first few weeks of 1999, there have been small but encouraging signs of recovery. The significance of these green shoots is relative - they are important not so much in themselves, but as an indication that even if Asia is not yet on the up, the downward plummet has been arrested.

Taichi Sakaiya, a novelist and the head of Japan's Economic Planning Agency, said in the its January report: "Although the Japanese economy is in critical condition, the first foetal stirrings of a turnaround can be detected." Paul Schulte, a strategist at ING Barings in Hong Kong, agreed: "The Asian crisis may now be over", calling today's situation "a move from crisis to convalescence".

In South Korea, the beneficiary of the International Monetary Fund's biggest rescue package (nearly $60m), investors appear to be cautiously returning, such as Intel Corpora- tion and the hedge fund manager, George Soros. The New York rating agency, Standard & Poor's, has upgraded the country's sovereign credit rating from junk bond status, and the IMF is predicting positive in 1999 after a decline of 7.8 per cent in 1998. In Thailand and Indonesia, the IMF's other patients, there have been many bankruptcies, but the firms that survive look healthier than they have done for years.

In Japan, after months of procrastination, the government has finally set about the task of dealing with its stricken banks, crushed by the weight of bad loans. There is still a long way to go, but last month's decision forcibly to merge a number of trust banks is building confidence that the problem will eventually be overcome. "Make no mistake," says Mr Schulte, "There is more pain to come. What is left standing ... however, is stronger and more viable than it was three or even six months ago."

But in some countries the social pain itself may jeopardise the recovery. The most extreme example is Indonesia: democratic elections, the first for 40 years, are scheduled for June. In any circumstances, these would have been tumultuous, but Indonesia's economic collapse has driven more than half its people into poverty, prompting demonstrations and riots. If this were to escalate into civil war, or if a military strongman was to take the opportunity to seize power, all bets about the economy would be off.

In South Korea a popular and confident president, Kim Dae Jung, has implemented painful reforms that should eventually lead to a recovery. But in Japan, the same thing is being attempted by a weaker government that is having to purge the very industries providing its financing and support.