Three lessons for Greece from Asia's 1997 crisis

Asian leaders could be excused a degree of exasperation over the ongoing Greek mess. China's slowdown and stock market chaos are worry enough; the last thing the export-dependent region needs is a Europe in chaos. Worse, European leaders seem intent on misreading or ignoring lessons from Asia's own brush with collapse.

Of course, the circumstances in 1997 were different. Where Greece is insolvent, Asia then was illiquid. As capital fled, Thailand, Indonesia and South Korea suddenly couldn't pay foreign currency debts, much of it short-term. Still, there are at least three lessons officials in Athens and Brussels can learn from Asia's post-crisis repairs.

ONE: THE DEBATE OVER AUSTERITY IS A DISTRACTION

Pundits quarrelling over Greek Prime Minister Alexis Tsipras' motivations, or whether German Chancellor Angela Merkel has a heart, are missing the real issue: structural reform.

Asian countries are "watching the Greek crisis unfold with a mixture of envy and schadenfreude", Korea University economist Lee Jong Wha wrote in a recent opinion piece.

For all the differences between their economies, Greece shares many similarities with 1997 Korea: endemic corruption, widespread tax avoidance, rigid labour movements, huge underground economies and oligarchs hoarding national wealth. 

"When they experienced their own financial crisis, they received far less aid, with far harsher conditions. But they also recovered much more strongly."

They did so not because of the harsh conditions imposed by the International Monetary Fund (IMF), which caused great pain among citizens, but despite them.

For all the differences between their economies, Greece shares many similarities with 1997 Korea: endemic corruption, widespread tax avoidance, rigid labour movements, huge underground economies and oligarchs hoarding national wealth. 

Korea recovered by admitting the magnitude of its public and private debts and the amount of cash available in state coffers. Weak corporate links and politically connected banks were allowed to fail. Efforts were made to introduce greater transparency to the family-owned groups known as chaebol, whose profligacy helped topple the economy.

Tax collection became a national obsession, as did sacrifice: Millions of Koreans donated their heirlooms, wedding rings, gold bars and artworks to help replenish the treasury. In April, German international broadcaster Deutsche Welle ran a piece headlined Koreans' Gold Donations - a Model for Greeks?

TWO: SMALLER ECONOMIES ARE COLLATERAL DAMAGE

As political scientist Ian Bremmer predicted correctly in 2012 with his book Every Nation For Itself: Winners And Losers In A G-Zero World, the biggest players get their way. The US borrows, spends and exports its profligacy around the globe. Tokyo's 35 per cent devaluation has turned Japan's yen into Asia's answer to the peso, neighbours be damned. Predatory trade practices mean China will long export infinitely more than it imports. Germany calls all the shots in Europe. That's why, like Thailand, Indonesia and Korea, Greece's only choice is to modernise its economy.

Malaysia presents a cautionary tale. The country managed to avoid an IMF bailout by imposing Greece-like capital controls.

But 18 years later, the perceptions of cronyism, dysfunction and opacity that prompted capital to flee persist in many quarters. The growing scandal surrounding state investment company 1Malaysia Development Bhd (1MDB) seems to underscore the lack of reform in a resource-rich nation with as much potential as any in Asia.

Even if Prime Minister Najib Razak is innocent - as he insists - of charges that nearly US$700 million (S$956 million) in 1MDB funds flowed into his personal accounts, the government's handling of the crisis suggests Malaysia is stuck in the 1990s.

Greece can leave the euro, or stick it out. What it can't do is defend the status quo and hope to remain competitive or relevant.

THREE: BITE THE BULLET NOW, NOT LATER

In 1998, Korea's real gross domestic product plunged 6.7 per cent. In 1999, it surged 9.5 per cent. Money returned because investors saw Seoul acting boldly to build a more open and sustainable economy. The reforms didn't go far enough; the chaebol are still too dominant and stymie innovation. Yet by 2003, as Korea University's Professor Lee points out, the government had shuttered some 776 financial institutions.

Five years into its crisis, how much has the Greek government done to purge its excesses?

The rest of Europe can go ahead and write more cheques to Greece, demand that Athens cut this and slash that. But things will end badly for the euro zone if Greece doesn't address its underlying problems. Asia's experience is proof that denial and ill-timed austerity fix nothing.

BLOOMBERG VIEW

A version of this article appeared in the print edition of The Straits Times on July 22, 2015, with the headline 'Three lessons for Greece from Asia's 1997 crisis'. Print Edition | Subscribe