Asia 'still paying for poor investments'


Australian foreign minister Alexander Downer has launched a new report on corporate change in Asia

By CNN's Geoff Hiscock
Asia business editor

SYDNEY, Australia (CNN) -- Asia is still paying for poor investment decisions made during an era when close business relationships were paramount, according to a new report released by the Australian government.

It says poor decisions in the 1990s led to high levels of non-performing loans and widespread insolvency during the Asian financial crisis of 1997-98.

The crisis, which began in Thailand in July 1997, saw massive corporate collapses across East Asia and led to International Monetary Fund intervention in the shape of rescue packages for South Korea, Indonesia and Thailand.

While considerable restructuring took place in Asia, there were still bailouts for corporate cronies in some countries.

In the aftermath of the crisis, Asian economies, particularly Indonesia, came in for heavy criticism over the close links between family-owned corporations, banks and governments.

Transition underway

Many of those links remain, but the new report suggests there is a transition underway in East Asia as economies re-evaluate whether past business approaches will win new investment and growth.

The report notes that in Korea, Hong Kong, Taiwan and most Southeast Asian economies, family-owned and run companies dominate the corporate sector and stock market listings.

It urges a move away from Asia's traditional relationship-based model of doing business, to one based on rules that protect market participants, including minority shareholders, creditors and consumers.

The report, Changing Corporate Asia, was launched in Sydney Thursday by Australian foreign minister Alexander Downer. It was prepared by the Economic Analytical Unit, part of Downer's department of foreign affairs and trade.

Downer said there had been little previous analysis, consideration or debate of the changes taking place in Asia's corporate sector, and the EAU report was a "valuable contribution."

Not lecturing

He rejected a suggestion that Australia's recent record of corporate collapses -- such as insurer HIH, telco One.Tel and carrier Ansett Airlines -- might make him uncomfortable with a government report that lectured Asia on corporate governance.

"We don't lecture," he told CNN. "This report is an analysis."

Downer said company collapses in capitalism were inevitable. While these collapses were "tragic," new companies would emerge in a transparent corporate regime.

"We have bankruptcy laws," Downer said. "In parts of Asia, in contrast, they (companies) just get bailed out and the bad loans just build up."

Downer said that for many decades the old relationship-based business model worked well in Asia. In those economies where there were ineffective commercial laws, it was sometimes the only way to do business.

But poor investment decisions ahead of the Asian financial crisis led to bad loans and insolvencies that continued to hamper recovery in East Asia.

Rules needed

"A rules-based business environment is essential for market economies to develop and grow," Downer said.

"Shareholders, creditors, investors, input suppliers and consumers need to feel safe doing business with people they don't know."

Downer said better rules should encourage international investors to return to the crisis-affected East Asian economies.

The EAU report analyses the corporate structure and commercial laws of 12 economies: China, Japan, Korea, Taiwan, Hong Kong, Indonesia, the Philippines, Thailand, Malaysia, Singapore, Vietnam and Australia.