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Southeast Asian economies will rebound, UI economics professor says

IOWA CITY, Iowa -- Economies in southeast Asia could show signs of improvement in 1998, if political leaders in the affected countries are willing to undertake reforms spelled out by international regulators, says a University of Iowa expert on global economics.

William P. Albrecht, a professor of economics who served on the U.S. Commodity Futures Trading Commission from 1988 to 1993, says the coming year will be important for economic policymakers as well as for investors looking for potential emerging markets.

"By 1998 you should be able to see if the governments in Thailand, Indonesia and elsewhere are seriously attacking the problem by the way they respond to the stipulations of the International Monetary Fund (IMF)," Albrecht says. "All of the countries that have been affected by the crises in Southeast Asia are capable of rebounding, but they have some difficult political and regulatory issues to address."

U.S. investors, government policymakers and the financial media have been focused on Southeast Asia this fall as markets throughout the region nearly collapsed under record selloffs by traders. The selling sparked turmoil in other markets in Asia, the United States and Europe.

Thailand and Indonesia have asked IMF officials for help in restarting their economies. In late November leaders in South Korea also approached the IMF about a possible bailout under similar pressures.

Albrecht says that in exchange for monetary help from the IMF, the agency is likely to require several policy changes, including tighter restrictions on government spending and government-backed loans, tighter controls on the banks and brokerage firms, and more authority for domestic regulators to close troubled financial institutions.

The goal is not to model the economies of other countries on the United States, but to make sure that international financial standards are followed and that regulators have the authority to enforce the standards, Albrecht says.

"Regulators should be free from political pressure." Albrecht says. "Clearly they are not in many of these countries."

Albrecht says many of the countries in Southeast Asia have based their economies on strong ties between government and industry. While that allows some industries to thrive, it also puts domestic regulators in the awkward position of having to police the activities of businesses that government leaders want to succeed.

Albrecht says some signs investors can watch for in the coming year include:

-- Are banks and brokerage firms allowed to fail? Do financial institutions have to deal with the consequences of bad choices and policies? If institutions know they will be spared bankruptcy by the government, they are more likely to make bad loans and take unwise risks. Economists call this "moral hazard."

-- Do regulators have independence from political pressure? Regulators often don't have the authority to enforce financial guidelines or are pressured to look the other way. A high-profile investigation and successful action would signal that regulators have the necessary control.

-- Is the country allowing foreign competition? Many of the Southeast Asian financial markets were carefully protected from competition by brokerage firms and banks based in the U.S. and Europe.

Albrecht says nearly all the countries in Southeast Asia, as well as Korea, have the basis for strong economies. All have hard-working labor forces, relatively high savings rates, a history of entrepreneurial spirit, and fairly high education levels.

And, a successful Southeast Asia, as well as South Korea, helps the world's economy, he says.

"It is clearly in our interests to help these countries out, not only from a humanitarian standpoint, but also because U.S. companies export a lot to these countries," Albrecht says.