Imagine Future Calm --Not Future Shock

Imagine if this were a year from now and we could look back on the current turmoil in Asia and U.S stock markets. What would we see?

We’d see that the threatened crash and calamity were really a turning point toward healthier economic times.

We would see that the government-supported business systems of Asia, even of major economies in South Korea and Japan, began to change toward more open market systems in 1997 and ‘98--because they had to.

We would understand that Japan’s economy was in better shape than worried Japanese government officials believed and that deregulation of Japan’s financial system got underway in earnest in 1998.

We might see a long-term benefit to U.S. business in all that, but in 1998 we’d see a slowdown in U.S. economic growth, as exports to South Korea and other Asian countries declined. For the U.S. economy, this was a year of adjusting to new realities abroad and changing attitudes toward foreign trade and investment at home.

But change in Asia also caused an increase in the already sizable flow of Japanese and other Asian investments in U.S. Treasury bonds and stocks--helping 1998 surpass the record of $260 billion in foreign purchases of Treasury bonds and more than $50 billion net in foreign stock purchases of 1997. That’s why U.S. interest rates remained low and stocks did reasonably well.

OK, fantasy over! Obviously, we can’t know what the world will be like a year from now. But reasonable assumptions based on facts can calm our nerves and help us make good judgments in business and investments.

So, taking the major anxieties one at a time, we begin with South Korea, where big companies went bankrupt in 1997 and even the giant conglomerates--Hyundai, Daewoo, Samsung--recognized they would have to restructure operations.

For decades, Korea’s companies expanded at home and abroad with the assistance and protection of the Seoul government. But in 1997 Korea’s domestic economy stalled, and the big companies couldn’t earn a sufficient profit to keep up with payments on enormous debts, many denominated in dollars.

As the Korean currency--the won--depreciated to 1,000 to the U.S. dollar from 600, the companies had to lay off employees and contemplate downsizing to more efficient units.

However, the real story in Korea was one familiar to Americans who remember the 1980s. As the big companies struggled, entrepreneurial companies sprang up.

“College graduates in Korea don’t want the big companies anymore. They want to start their own businesses. Entrepreneurial companies that are much more profitable than the big conglomerates,” says John Lee, a Korea and U.S.-trained accountant who manages the Korea Fund, a New York-based closed-end investment company with a license from the Seoul government to invest in small companies and Korean government bonds.

Lee has invested in Mirae Corp., a maker of semiconductor testing devices, Daou Technology, a software developer, and Daeduck Electronics, a wireless telephone company, among other small firms.

John Bai, vice president for Asian equities at Credit Lyonnais’s New York office, notes that some big companies have better management than others.

“Samsung Electronics is well managed, Pohang Steel and Korean Mobile Telecommunications are also well managed,” Bai says.

It’s important for U.S. business that restructuring will open up the Korean economy to freer trade and more opportunity to invest in its companies. The U.S. has insisted on such openness for decades.

Now global financial markets, making decisions every day about Korean currency and interest rates, are delivering that openness--at a time when it is imperative that U.S. companies find growth opportunities overseas.

In Japan, fears of another recession sent stock prices reeling. But chief economist Takashi Kiuchi of the Long Term Credit Bank predicts 1% growth for Japan in 1998 as consumers resume spending.

The big story in Japan is deregulation of the financial system in 1998, in which banks will have to formally recognize more than $200 billion in bad loans that they have carried on their books at artificial values for years.

Japanese pension funds--$4 trillion in assets--are underfunded and incapable of meeting future obligations to pensioners because they have been earning only 1.65%-a-year average returns on assets. They will have to alter investment policies.

One long-term result of that deregulation process will be to strengthen Japan’s economy. Dealing with bad loans and other remains of the 1980s bubble period in Japan, when government-protected credit led to unwise investments in real estate and industrial plants, will free up frozen capital. The economy will be able to move forward on a sound basis.

Again, it’s a lesson familiar to Americans, from the late 1980s when U.S. banks wrote off bad loans to developing countries.

The search for higher returns by Japan’s pension funds will send billions in investments to U.S. markets, says Harald Malmgren of Washington’s Malmgren Group, a longtime counselor on trade and international finance.

But there will be negative effects from Asia’s transformation. Reduced exports could help cut U.S. growth to just more than 2%--meaning the economy would generate $75 billion less in goods and services than it’s doing in 1997. That can spell a lot of jobs.

Currency movements may be severe, says John Mueller of Lehrman Bell Mueller Cannon, an Alexandria, Va., research firm.

It will be a year when U.S. business finds markets in Latin America and Europe, even as a yen falling in value brings a surge of Japanese exports to the United States.

The U.S. approach to trade is already shifting, from a vision of broad trade agreements to a focus on specific industries and issues. At next month’s Asia Pacific summit in Vancouver, President Clinton will argue for more open trade in information technology, medical equipment, environmental and energy services and insurance, says Steve Clemons, of Washington’s Economic Strategy Institute.

U.S. policy will reflect the need of this country to earn its way in the world and its need for other countries to use capital rationally, not as a device to rig markets or confer government favors.

If we could project ourselves to the early years of the 21st century, we could look back on 1997 and see that for all their turmoil, these times reveal a pattern of rationalizing financial systems and opening markets

Meanwhile, there’s no need to panic, even though stock markets seem to do so every other day.

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James Flanigan may be reached at (213) 237-7167 or by e-mail at jim.flanigan@latimes.com