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| Horace Greeley's famous recommendation, "Go West, young man," might well be replaced these days with, "Go West. . . or East, North, or South." With governments throughout the world deregulating industries and with information technology facilitating expansion, U.S. companies are rushing to expand beyond their domestic roots and enter new markets—seemingly anywhere, anyhow. The problem is that funny things can happen in markets you don't know well. Mexico's economy just about sank following a devaluation in late 1994 and briefly threatened to take much of Latin American down with it. Now, Asia's high-growth economies have blown up. So, it's crucial to understand where the risks are. With some colleagues, I've spent years developing sophisticated models to gauge global risk. The models use objective data, yielding numeric results through statistical estimation. They are grounded in strong, universal theories of politics, thereby allowing comparison between countries. They are based on analyses of the fundamental drivers of political-economic performance, not just day-to-day news events. Most importantly, the models work. Among other examples, they helped predict that the government of Thailand would collapse. Although each of the three indices that we use to measure risk involve too many data points to be covered adequately in this space, I'll provide a flavor by laying out our analysis of Asia. With even "miracle" South Korea captive to an IMF reform program, every business person and investor has to wonder just where this unraveling will end. Here is a look at four crucial countries: THAILAND: As the fall of the Chavalit government indicated, the pressing problem for the country is the instability of its leadership. Our models indicate that, in the short term, the number and the size of political parties in a country's parliament predict instability quite accurately—more and smaller parties produce less stable governments. This instability slows growth. The reason is that leadership changes severely hamper a government's ability to make predictable, consistent policy. Such a situation frightens investors, making them nervous about long-term financial commitments. While Thailand's king remains an immensely popular and powerful figure, he has refused to play a public role, preferring to work behind the scenes to restore stability. The result is likely to be continuing leadership instability and a significant delay in the country's economic recovery. INDONESIA: Since President Suharto stepped down from power in May, Indonesia's political stability has dropped considerably. The threat of a coup or a revolution is significant. Indonesia remains a poor and socially threatened country. Real GDP per capita has not yet reached US$1,000. Social investment is abysmal. Investment in primary education is still low. Poverty, poor sanitation, and a lack of access to clean water ensure that infants die at an alarming rate. Indonesia tends to lavish government spending on its rich, not the poor who need the state's help. These facts point to institutional weaknesses that will hinder long-term development. The technocratic excellence that has fostered a stable macroeconomy is not backed up by a competent bureaucracy independent of politics. Moreover, the country is corrupt—as shown by the president's propensity to ensure that his children participate as equity partners in every major project. The corruption, together with the extraordinary level of income inequality, delegitimizes the state and serves as the basis for future instability. Absent strong growth-promoting institutions, the removal of President Suharto's steady hand—which appears ever more likely—will devastate Indonesia. MALAYSIA: Our models show that Malaysia's strong political institutions can drive growth even if the ruling politicians change. Regulators exercise firm control over the economy. Social investment is relatively high and well-targeted. The poor receive adequate nutrition, sanitation, and education. Despite his rhetoric, Prime Minister Mahathir is no fool. His threat to imprison foreign currency speculators and his not-so-veiled anti- Semitic references play well among the Malay Muslim population. He has created an "enemy" against whom he can defend the people of Malaysia. Brilliant politician that he is, the prime minister has even managed to bolster his legitimacy without significantly scaring off foreign investors. The question of the day remains whether the prime minister believes his own criticisms of the speculators. The country seems to be in deep denial, avoiding the hard structural reforms that, in the end, will be needed to restore growth and contribute to new capital flows. This denial is especially dangerous because the country faces significant proximity risks from deteriorating situations in Indonesia and Japan. SOUTH KOREA: Korea has grown rapidly but failed to enforce impartial regulation. As the vast bank accounts of its former presidents reveal, years of state-directed lending have bred staggering, high-level corruption—and a huge stock of bad loans. With many of the beneficiaries of those bribery-based loans now in crisis or even bankruptcy, Korea's chaebol system needs deep reform if the country's growth is to resume. Korea's greatest challenge will be overcoming the lessons of history. When the oil shocks of the 1970s all but destroyed the financial system, Korea froze interest payments on outstanding loans, essentially putting the system into suspended animation. The approach worked—but only because the global economy recovered. This time, the problems are of Korea's own making. President Kim seems to recognize this truth. However, he is battling powerful vested interests—and that battle will become more difficult as the urgency of the liquidity crisis passes. To summarize: Asia's recent problems have been much compared to Mexico's in 1994 and 1995, but our quantitative models indicate that the two incidents may have little in common. Mexico had a short-term problem with capital flight. But Asia has serious structural problems stemming from years of regulatory mismanagement. Asia might more usefully be compared to Latin America after the debt crisis of 1982. Then, Latin America managed to merge the legacy of mismanagement with a lack of reformist political will. As a result, the 1980s were a "lost decade" for economic growth. Not a pretty thought for Asia's outlook.
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