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HR Magazine - November 2000: Asia Begins to Bounce Back

By Frank Jossi  11/1/2000
 
HR Magazine, 
July 2000 Vol. 45, No. 9

Three years after the financial crisis, Asian countries begin to recover at different speeds. How have HR policies been affected?

The Asian economic miracle became the Asian disaster in 1997 as the economies of several countries around the region fell like dominoes, leaving millions of workers unemployed and their savings wiped out by massive currency devaluations. Stock markets across the world took hits because many global corporations have investments in Asia, and the region had become a major customer of U.S. and European goods and services.

The crisis began when Thailand decided to let its currency, the baht, float freely on international markets, opening the door to traders who hammered the country’s money in record time. The move quickly caused the baht to lose 10 percent of its value, and that event, along with a wave of stock selling in other countries, triggered a torrentially fast downturn as currencies plunged and local stock exchanges saw record losses.

Asia’s remarkably fast plummet revealed a soft underbelly of questionable business practices, weak banking systems, high ratios of debt to equity, inadequate legal structures and an expectation that international banking institutions would cover poor business decisions, said U.S. Federal Reserve Chairman Alan Greenspan at the time.

The debate over what happened in Asia—and the resulting intervention by the International Monetary Fund and the World Bank—is, perhaps, best left to economists. The real story now is how the crisis has affected business in Asia and how those countries are recovering in a new world.

First, a note of caution. Although it was called the Asian crisis, not all countries suffered equally. Thailand, South Korea and Indonesia bore the brunt of the crisis, followed by the Philippines, Malaysia and Hong Kong, all of which suffered but not to the same extent, notes Ames Gross, president of Pacific Bridge Inc., a Washington, D.C.-based human resource consultant group specializing in Asia. The three countries hit the hardest saw their unemployment rates double and triple during the crisis. But they, and much of the region, seem to be making a nearly miraculous comeback.

“The region has recovered in a big way, but recovery means different things in different countries,” says Gross. “In Korea, the recovery has been very fast; the business confidence and consumer purchasing level is the same as it was pre-crisis. In Thailand, it’s about two-thirds of [the way].” In Indonesia, it’s “about one third back … from the bottom of the crisis” because of political chaos.

The recovery also has brought a wider acceptance of Western business practices—“a new thinking about previously accepted ways of doing business,” according to the World Bank’s Annual Report for 1999. “A new East Asia is being built: one with stronger financial institutions and corporations where openness applies not just to trade and finance but, increasingly, to information and even politics.”

HR managers in Asia should welcome that news. As Gross points out, Asia has presented several challenges, such as rising wages, introduction of pay-for-performance incentive packages and negotiations with strong unions. Again, how well companies will fare in each of these areas remains highly dependent on where they have operations.

Consider wages, for example. “The wages in Thailand, Indonesia and the Philippines and China are still pretty reasonable, pretty low,” says Gross. “But in Korea, which has bounced back quickly and had high wages before the crisis, the wages are back at pre-crisis levels; so, it’s more expensive.”

As for pay-for-performance schemes, each country has to be assessed individually, Gross says. “Pay-for-performance is becoming more prevalent, but Asians still respect age. So, when you get older you can make a little more. But with the new economy, young people can make as much as older people, just as in the United States now. Paying for seniority was a little more common than pay for performance, but now throughout the region, it’s becoming more performance-based.”

Although generalizations about the region’s health remain problematic—pay-for-performance plans, for example, are not widely practiced in Thailand—here’s a country-by-country breakdown of the state of human resources and the economy in the post-crisis age, beginning with those hit the hardest.

Thailand

Despite being the harbinger of the crisis, Thailand has begun a strong rebound after its economy contracted 10 percent in 1998. The World Bank reports the country’s gross domestic product (GDP) grew by 4.2 percent in 1999 and will jump another 4.5 percent this year. The bank suggests the country’s per capita income and consumption will return to pre-crisis levels by 2002.

The crisis forced companies to freeze salaries, lay off workers and suspend bonuses, says Suchada Sukhsvasti Na Ayudhya, president of the Personnel Management Associa-tion of Thailand in Bangkok. But now, a huge push is on to raise the minimum wage by 5 percent or 6 percent because it has not been increased for several years. Some wage earners, despite the crisis, still saw a 5 percent bounce over the past three years, she adds.

The crisis had little impact on job-hopping or pay-for-performance because neither issue affects the majority of Thai workers. Most workers remain loyal to employers, with job-hopping occurring only in technology and accounting fields, says Sukhsvasti Na Ayudhya, and pay-for-performance is not something she had heard of in Thai HR circles. “Pay-for-performance may be used in a very small group of employers, but it’s not known in the public,” she says.

While labor unions were strengthened in some countries during the crisis, they were weakened in Thailand. Because most labor leaders work in the public rather than private sector, their effect has been small on private corporations. Outside of a potentially higher minimum wage, unions have remained in the background of the crisis, Sukhsvasti Na Ayudhya reports.

The labor market, in fact, is tightening a bit—a sure sign of the crisis abating. The unemployment rate, officially at 3 percent but considered to be in the 4.5 percent range this year, has declined from almost 6 percent last year, according to the Asian Development Bank (ADB). The Thai Ministry of Labour and Social Welfare has helped the unemployed gain new skills through retraining efforts. And a private effort by the Kenan Institute Asia in Bangkok has aimed to do the same thing for white-collar workers.

Thailand still has a way to go to restore the economy to its former glory, but recent developments are mainly positive. “I’m sure there will not be a second crisis, but this one may be lagging longer,” says Sukhsvasti Na Ayudhya. “New workers are still struggling to find jobs and major businesses still lay off staff. The choices [for jobs] are good only in limited sectors—export and automotive.”

South Korea

Of all the countries slammed by the crisis, South Korea has emerged as the “Lance Armstrong” of Asia, a deathbed patient on the road to an incredible recovery.

The country’s economy grew a whopping 10.7 percent in 1999 after a 6.7 percent contraction in 1998, according to ADB statistics, just as unemployment dropped to 4.8 percent this year after peaking at 8.6 percent in early 1999. Wages increased 10.8 percent due to special bonuses, one-time allowances and collective bargaining agreements, says Dong-eung Lee, director of the labor relations department of the Korea Employers Federation in Seoul.

Bonuses have kept employees from jumping ship in a country where such a practice was endemic prior to the crisis. Less than 3 percent of workers change jobs annually today, down from 18.6 percent in 1997, Lee says. Unlike the Thai labor market, Koreans are familiar with pay-for-performance programs, and the crisis weakened their opposition, even among union leaders who once saw the programs as anathema, according to Lee.

On the other hand, the crisis strengthened labor. “Workers support labor unions in their demands for job security against employment adjustment and declining working conditions that were the inevitable outcomes of the economic crisis,” Lee says.

Korean President Kim Dae Jung crafted several pro-labor policies to overcome the crisis, says Lee, but, recently, tensions have flared and nationwide strikes have resulted from the government’s plan for structural reforms in the public and private sectors. U.S. and other foreign companies report in a Korea Labor Institute study that they are experiencing more difficulties since the country introduced new labor policies, he adds, including requirements on working conditions, higher wages and prior approval from the government for company layoffs. Some of the reforms have helped businesses; they once had to justify merger and acquisition activity, for instance. Lee says businesses want more flexibility and deregulation.

The government has dealt with the crisis by retraining laid-off workers and establishing a “Tripartite Commission” to reform the labor market and the labor policies involving layoffs and temporary help services. While those signs are encouraging, Lee says, many foreign companies “still consider that more flexibility and deregulation should be introduced to the labor market to promote their business activities.”

Hong Kong and China

Hong Kong, now a Chinese province, and mainland China experienced the crisis in entirely different ways. While the crisis hardly dented China’s spectacular growth curve, Hong Kong felt it keenly. Hong Kong’s economy contracted 5.1 percent in 1998, while unemployment doubled to 6 percent, according to ADB statistics. Last year, the Hong Kong economy grew by just 2.9 percent, far below the dramatic growth of the past two decades.

Robin Wong, director of the Management Development Center in Hong Kong, says the government and private industry froze wages for the past two years, but he expects some increase this year for workers. Yet, managers continue to make Western-sized salaries in the region, he says, and the perks are Western-style, too, especially for high-tech workers who find good salaries along with stock options now par for the course. Among elite managers, pay-for-performance schemes have been widely accepted for a number of years in Hong Kong, especially among younger workers.

Like the United States, Hong Kong has seen much entrepreneurial zeal in the new economy. The result is a trend toward a two-track economy, with many workers too poorly educated to compete in high-tech fields. Government employment, meanwhile, has been scaled back and re-training programs limited for unemployed workers, Wong says.

While Hong Kong remains a vital business center, Wong confesses that doing business there “is becoming more expensive” as employers incur more expenses, such as increased social costs associated with the region’s aging population, a larger safety net and health care. Eddie Ng, head of human resources for Jardine Fleming Holdings Ltd., one of the largest investment banks in the region, also says high-tech workers, like their U.S. counterparts, have come to expect stock options. The bank is feeling the competition for managers from the region’s booming Internet economy, which is home to 1,500 dot-com companies that were started in just the past six months.

The economy in the People’s Republic of China, much less wealthy and sophisticated than Hong Kong, seems to have largely avoided catching the fever during the crisis. Officially, the country’s GDP is around 7 percent this year—about half the rate of 1998. The World Bank suggests this number is related to lower internal consumption, a slower level of investment and a troubled agricultural sector. The government reports urban unemployment of just 3 percent, but the figure does not include laid-off workers, migrant workers who come to the city and others. The real number, says Gross, is more likely 11 percent of the urban workforce.

Paula DeLisle, managing consultant with Watson Wyatt Worldwide in Hong Kong, says finding the “best and the brightest” remains difficult in China, and the lure of stock options, housing loans and high salaries that increase as much as 15 percent annually are required to attract them. Although job-hopping was a problem formerly among the Chinese managerial class, in the past few years many have been happy to stay with their employers, perhaps fearful of what would happen if the Asian crisis hit the country. Now, with the economy at a steady hum, DeLisle believes, more employees will leave their jobs this year than in years past.

Pay-for-performance plans are still a new idea in China. Western firms “are trying to introduce it, but it’s a constant educational process,” she says. “It’s just in its infancy as a compensation tool. It’s going to take a while.”

Indonesia, Malaysia, The Philippines

The contrast between the recoveries in Indonesia and Malaysia is stark. Indonesia has had three presidents since the crisis, while Malaysia, led by a stable government, has bounced back strongly, recording a 5.4 percent jump in GDP after its economy contracted by 7.5 percent in 1998.

Via the government, Malaysia introduced a pay-for-performance system linking salary to productivity increases rather than to seniority, Gross says. Employers wanted a fairer system that would enable them to make rapid adjustments in a time of crisis, he explains. Alias Masod, managing director of the Center for the Development of Human Resources in Selangor, says the concept has gone over well with most employees, especially younger ones who like the idea of being rewarded at a higher level for better performance.

On the labor front, unions have agreed to stop asking for higher wages until the recovery is complete, although recently, the Malaysian Grade Union Congress, a labor group, asked the government to impose a minimum wage, according to Masod. No final decision has been made.

With the economy already largely in recovery, job-hopping has returned, particularly among information technology (IT) and telecommunications workers—two sectors with plenty of foreign investment, he notes. That is not true of the banking and finance sectors—both hit hard by the crisis and beset by layoffs—where workers are happy to have a job.

The government has shown great leadership during the crisis, opening up markets and encouraging Malay businesses to expand abroad in Asia, Africa and the former Soviet Union, according to Masod. Internally, the government has worked to create a Malay version of Silicon Valley near the capital, Kuala Lampur, by offering incentives not only to startups but to foreign nationals who left to work abroad and who may consider repatriation, adds Masod.

The actual state of Indonesia’s economy, at least in regard to HR management, is harder to determine. The country’s economy suffered a free-fall in 1998, contracting 13.2 percent before recording a faint 0.2 percent growth last year. Wages have fallen 20 percent to 25 percent since the crisis and have not recovered. Political turmoil still afflicts the country, although some of those issues may be abating as the government reaches accords with internal dissidents. Restructuring the economy has been slow due to political problems, according to an ADB analysis, but a decentralization agenda could turn things around.

In fact, the economy has begun to look brighter. The ADB suggests a 4 percent bump in growth this year, and Gross reports that the government has intensified efforts to develop workers through classes at educational and training institutions. Although he believes the country remains behind other Asian neighbors in terms of recovery, he notes that it may turn the corner in the next two or three years.

The Philippines seems closer to Indonesia than Malaysia in terms of recovery. After slightly contracting in 1998, the Philippine economy grew 3.2 percent in 1999. El Nino was as much of a problem as the Asian crisis, wreaking havoc with the country’s economy in 1998 through a drought. Since 1998, the government has attempted several reform measures in the finance and capital markets, but these have been delayed, according to an ADB report. The report says the country’s unemployment rate of 14 percent remains higher than in pre-crisis times.

Gerardo Plana, executive director of the Personnel Management Association of the Philippines (PMAP) in Mandaluyong City, says the crisis led to shorter work weeks, wage freezes and layoffs that remain in effect even now. Despite the glum news, the government has not had an organized re-training effort, leaving PMAP and other organizations to help members find jobs, says Plana.

Western business practices still have a way to go in the country. Pay-for-performance plans remain rare, while rewarding seniority comes more naturally, he says. Plana believes this will change over time as more companies are “changing their ways” in regard to compensation and incentives based on productivity. Meanwhile, the government has relaxed labor laws to allow for alternative employment arrangements and flextime positions, he says.

Plana does not see labor unrest as an issue, but Bernardo F. Ople, secretary general of the Asian Regional Training and Development Organization in Manila, disagrees. “Unions are agitating for wage increases,” Ople says. “Prices of oil and other petroleum products have risen abruptly. Rallies and demonstrations protesting this price increase are a common spectacle.”

Although slower to recover than other Asian countries, the Philippines has a bright spot in its emerging technology sector. Plana sees the country as full of top-shelf IT workers and several interesting new startups. Remember the “Love Bug” virus? It was a product of someone based in the Philippines.

Summary

Asian economies are recovering quickly from the jolt that nearly destroyed them just over three years ago—a clear sign of their resiliency and strength. The countries with the strongest pre-crisis economies are returning to prosperity at a much faster rate. In part, analysts say, this is due to the freer market-style business practices already in place, a strong political establishment and the ability to absorb shocks before moving on and changing their systems.

While wages in the region may be lower than pre-crisis levels, they will not remain low forever. As economies improve, pressure will come to hike wages. Job-hopping may become an issue again as economies continue to recover, which makes it incumbent upon foreign firms to study ways to improve retention. The crisis has been a blessing in disguise by revealing flaws in the Asian economy and business practices and by forcing these countries to transform their systems in a way that will make them much stronger—and their citizens richer—in the future.

Frank Jossi is a freelance writer in St. Paul, Minn., specializing in technology, HR and business.

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