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Q

By LARRY KANTER

Senior Reporter

For more than a decade as chief economist at Merrill Lynch & Co., Donald H. Straszheim’s pronouncements moved markets. Now, as president of the Milken Institute, the Santa Monica-based public policy think tank founded by financier Michael Milken, Straszheim can speak without concern of the Wall Street fallout.

Following a recent visit to Asia, where he met with top government officials and economic researchers in South Korea, China and Hong Kong, he shared some of his impressions on the so-called Asian contagion with Business Journal editors and reporters. It had been two years since his previous visit to Korea and more than a year since visiting China. Eleven months into the region’s fiscal and economic crisis, the Asia he saw bore scant resemblance to the one he used to visit on a regular basis as the top economic voice at Merrill Lynch.

Question: Let’s start with Korea. What do you make of the situation there?

Answer: I was struck at the slowdown in Korea. I started counting the number of construction sites, where you’ve got five- or 10- or 20-story metal superstructures up and big construction cranes, and absolutely nobody working there. I stopped counting when I got to 100. There is not a single construction site in Seoul that I saw that was under operation.

Q: What does that mean for the near future in Korea?

A: The chaebol (the large conglomerates) haven’t really started to lay off people yet. I wouldn’t be surprised if we see 500,000 to a million laid off in the next year. I think the damage is going to be intense. I don’t know if the equity markets or the currency have hit bottom yet. But I am confident that the economic statistics have a long way down to go. The industrial output numbers and the employment numbers you will see those numbers in the red for the next couple of years.

Q: You’re really looking at an utter restructuring of the economy there. How is that going to unfold?

A: I think there is potential for a lot of unrest. The chaebol dominate the economy. They produce everything, but the disclosure of information is weak. They don’t really know what they own. And they can’t tell you how much they make. In that sense, they can’t really tell which operations to shut down. It is a total tangle. But the decisions have been made in Korea to split these things (the chaebol operations) apart. It is going to be a very convoluted and difficult process.

Q: After dominating the economy for so long, are the chaebol really willing to dismantle themselves?

A: I think it’s fairly well understood that there aren’t that many other choices. I think Korea understands better than the other Asian countries what the realities of global competition are. If I were to rank the turnaround prospects (excluding China and Japan), I would put Korea on the top, Indonesia on the bottom, Thailand two and Malaysia probably three. All four of these economies suffer from the same general problem a lack of openness and business decisions that are made by connections, not by competence or prospects.

Q: Japan in many ways faces the same problems of having to radically restructure its economy. What do you see happening there?

A: My own view is that Japan is going to be the last economy in the world to accept the realities of global competition. It is the most closed economy in the world. There is enormous cultural inertia that has to be overcome. And Japan is extraordinarily reluctant.

Q: It seems ironic that a decade or so ago, everyone was talking about the Japanese model of running companies. How did it get from being a model of success to being a model for failure?

A: It was a model, but it was a false model even then. Japan is not a particularly entrepreneurial place. They ran their businesses in some ways quite analogous to Korea. They worshipped market share and growth and size. The banking problems they’re facing now are the problems of a decade ago. The banks have not been profitable enterprises.

Q: Are things there going to get a lot worse before they get better?

A: My own view is that Japan is an economy of the past, not an economy of the future. Japan has real problems. There is a great quote from the chairman of Mitsubishi Heavy Industries. He was being interviewed about something or another, and he said, “We don’t give a hoot about return on equity.” That was a very clear statement about the Japanese perspective. That has not been important to them. What has been important is lifetime employment for their workers and the size of the organization, so they just did not pay attention to market returns. But those days are over.

Q: What impact is this going to have on U.S. companies with heavy exports to Asia?

A: It’s very clear that U.S. exporters to Asia are going to get hurt. It depends on how much you export there, as opposed to Latin America or Europe. When it comes to California, if you look at the exports of the entire U.S. and then you look at the exports from California, what you notice is that California is an extraordinarily high tech-exporting state. There’s no comparison. California is extraordinarily skewed to high tech. So to the extent that those Asian economies are hit, it will be the high-tech sector that feels it.

Q: What about China?

A: Right now, I would argue that Shanghai looks a lot more capitalist than Tokyo. I hadn’t been to Shanghai for four years. And I was struck by the amount of progress they had made. The infrastructure has improved dramatically. I went with my host to a neighborhood supermarket. There were four or five different kinds of toothpaste, four or five different kinds of paper towels. You could get Oreo cookies and chocolate chip cookies.

Q: How about a salad bar?

A: I can’t recall if they had a salad bar or not. But they had those roasted chickens, the ones that always look so great until you get them home. It’s only been five years since they began selling those in the States.

There are also a lot of Chinese two-earner households, and convenience, time-saving is becoming something which is more important. There are extraordinary business opportunities in China. They are a very entrepreneurial people and they have been for a long time.

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