(FORTUNE Magazine) – There is tremendous change but also tremendous inertia." The words of a Western business consultant in Bangkok pretty much sum up the state of Asian business as the third anniversary of Asia's crash approaches. Asia bounced back quickly and vigorously from its stumble of 1997-98: Last year the region's economies grew on average by 6%, and they will probably better that this year. Foreigners and their money are pouring back in, exports are up, and the region's banks are vigorously wiping bad loans off their books. Some countries like Japan, South Korea, and Singapore are even benefiting from the new economy as the Internet catches fire.

Asia's stock markets have taken notice. The Bank Credit Analyst, a Montreal-based investment monthly, reckons that despite the recent surge in the market, Southeast Asian stocks are still hugely undervalued in relation to American ones. Since Asian companies also have better earnings prospects than their American cousins, the Bank Credit people believe that Southeast Asia's stocks now stand a good chance of outperforming America's for a full decade. And that is just Southeast Asia: Almost every professional investor is more bullish on Korea because of its stronger fundamentals, like education and corporate management.

But the debate goes on about whether Asia has really reformed many of the "crony capitalist" and other naughty practices that helped lay it low three years ago. If not, the pessimists reason, this is just a dead-tiger bounce, and Asia may end up with another crisis soon. Maybe so. If the U.S. slips into a recession over the next year or if its stock market falls another 25% or so, that could wreak havoc across the Pacific as Americans cut back on their purchases of Asian goods.

That said, the optimists' case for Asia is still stronger than that of the pessimists. For the most part, Asia's recovery is for real, and the progress made so far impressive. To judge the scale of change under way, some perspective is needed. America's savings-and-loan mess in the late 1980s took three or four years to clean up and involved dud assets worth less than 5% of GDP. The legacy of Asia's financial crisis was nonperforming loans equal on average to 30% or 40% of GDP and in some cases much more. That takes a while to dig out from under. Yet the digging has begun, even in Japan.

JAPAN

Japan spent most of the 1990s squandering its national wealth in a vain attempt to stave off badly needed financial and corporate reforms. The government is still wasting money on fiscal stimulus packages that have more to do with pleasing the ruling party's chums in the construction industry than with running the economy properly, and the result is the highest public-debt burden in the 29-member OECD--by some estimates as much as 200% of GDP. Yet even Japan's establishment cannot hold back the tides of change, which have, for example, reduced the number of big Japanese banks from 21 three years ago to eight now.

At the same time, a mergers-and-acquisitions boom is forcing Japanese corporations to change their cozy ways. M&A expanded enormously in 1999, when $78 billion of deals were done, nearly a quadrupling from the year before. For the first time ever, foreigners are taking a big role in Japan's takeover game. Foreign direct investment more than tripled in just a year, to $14 billion in 1999, and most of that new money was used for M&A.

The highest-profile foreign deal was Renault's $5.4 billion purchase last spring of a 37% stake in carmaker Nissan. The French company installed one of its managers, Brazilian-born Frenchman Carlos Ghosn, as Nissan's chief operating officer. Less than six months into the job, Ghosn announced a restructuring so radical that it seemed almost inconceivable to those who run Japan Inc. He proposed cutting costs by nearly 20%, or $10 billion, over three years through staff reductions of 21,000--some 14% of the work force. He also pledged to reduce capacity 30% by shutting five plants and to chop the number of Nissan's parts suppliers in half, requiring the survivors to cut their prices by 20%. Astonishingly for Japan, the lion's share of the cuts will come at home rather than overseas.

SOUTH KOREA

Korea has been Asia's star. After shrinking by 6% in 1998, the economy grew by almost 11% last year, and this year's expansion should be in the range of 8% to 10%. Much of the growth is being driven by an export boom abroad and an Internet explosion at home. The stock market is shifting large amounts of equity capital to fast-rising Internet companies, and the new economy is humming.

But corporate restructuring has also played a big role. A reform-minded President Kim Dae Jung has prodded Korea's conglomerates, or chaebol, and its banks to change their outmoded business practices. After any financial crisis there are two stages of recovery: (1) getting bad loans off banks' books, and (2) restructuring the companies that borrowed too much. Korea is well advanced on both fronts.

The government's Korean Asset Management Corp. is in charge of getting rid of the bad debt. It has already absorbed about half the estimated $120 billion worth of nonperforming loans in the system--equal to 25% of Korea's GDP--and has been disposing of them at 35% to 40% of face value. The London research firm Independent Strategy guesses that recapitalizing the banking system will cost about 30% of this year's GDP, most of which the government will absorb by increasing public debt. That's a lot, but with public debt expected to reach only about 40% of GDP (less than a third of Japan's level), certainly affordable.

Many observers worried that Korea's shaky mutual fund industry (made up of investment trust corporations, or ITCs) could jeopardize any financial restructuring. But this threat seemed to have been blunted. The main reason the ITCs have been considered fragile is that they own a boatload of bonds issued by Daewoo, one of the big five, which went bust last year with debts of $45 billion to $70 billion (your guess is as good as anyone's). That's equal to as much as 18% of Korea's GDP. But it looks as if the mess will get worked out. Daewoo's domestic creditors have already agreed to a restructuring plan, and by mid-June the chaebol's 200 or so foreign creditors will have decided whether to accept a deal that would give them on average 40 cents on the dollar. Some are grousing about the offer, but so what? If global bankers can't judge risk better than they did in Asia, their Marine-like haircuts are fully deserved. By 2003, says Independent Strategy, Korea will have disposed of all but $4 billion worth of its $120 billion of bad debt--only five years after the crisis broke.

The Daewoo collapse, as well as the recent management shakeup at Hyundai, shows just how far Korea Inc. has come on the second big front: corporate restructuring. Letting Daewoo go under and kicking out Hyundai's founder were dazzling signals that the market, not the bureaucrats, would now be calling the shots. As a top Korean official put it, if the banks aren't able to raise equity capital from the market, "we shall be pleased to help them out by organizing their funeral, not a bailout. They must learn that the market is now judge and jury. We are just the undertakers."

As in Japan, takeovers--especially those masterminded by foreigners--are speeding the change. Korean M&A in 1999 was $19 billion, almost three times the level of 1998, and Korea absorbed some $12 billion of FDI in 1999, in comparison with $3 billion in 1996. For a country that, pre-crisis, had spurned foreign involvement even more firmly than Japan, this is extraordinary.

More deals are likely to come. With rules against foreign stock-market investment in Korea pretty much abolished, Western fund managers are licking their chops. But don't get carried away. One of Korea's most thoughtful managers, who runs a chaebol subsidiary, said early this spring that "we've only finished the first of what will be five phases of reform." On the other hand, he also said it would take only five more years to finish the last phase, and for a turnaround this big that would be fast.

SINGAPORE

Singapore is changing in a different but still significant way. It is different because Singapore never came under Korea-like pressure during the Asian crisis. Even so, it arrived at the same sort of conclusions that Korea did. By the mid-1990s the senior Minister, Lee Kuan Yew, had decided that globalization meant Singapore's straitjacketed financial system had to be loosened and its government-owned businesses liberated, and that the tiny island-state needed to start attracting talent from all over the world. So far, Lee's strategy is paying dividends. Singapore's economy should grow 7% this year.

As part of Lee's reform program, the government, for instance, took the opportunity presented by the crisis to bring top foreign managers into the businesses it controls or onto their boards. By early this year two of the four biggest banks had foreign CEOs (the largest, DBS Bank, is run by John Olds, an American ex-J.P. Morgan man). NOL, a big shipping line, is now run by Flemming Jacobs, a Dane formerly with Maersk; and Singapore Airlines has put the first foreigner ever (an Australian banker) on its board.

All this is welcome, but Singapore has bigger hurdles to clear. In entrepreneurialism, Hong Kong still outstrips Singapore by light-years. Singaporean business has been dominated instead by multinationals and by government-controlled firms (known as government-linked corporations, or GLCs). The government realizes that to generate anything like the entrepreneurial fizz Hong Kong enjoys, it has to give the startup mentality much more encouragement, which means not only making risk taking more attractive financially (in part by changing various laws and regulations) but also loosening the bonds of a tightly run society and political system. But changing a deeply ingrained culture is going to take a long time. In the short run, what will be more interesting is the fate of the giant GLCs.

Temasek Holdings, the outfit that manages the government's investments in industries ranging from telecoms to shipping, has assets worth some $40 billion. It holds significant (usually controlling) positions in firms that represent a third of Singapore's market capitalization. Reforming the GLCs has become a top priority. It was a huge shock to Singapore when cash-rich but sluggish Singapore Telecom was thrashed in February by Richard Li's ten-month-old Hong Kong-based Internet startup, Pacific Century CyberWorks, in the bidding to take over Cable & Wireless Hong Kong Telecom. Insult was added to injury in May when SingTel's bid for a chunk of Malaysia's near-bankrupt Time Engineering was sunk, apparently because of Malaysian government objections to Singaporean involvement in a big and politically significant Malaysian company. Part of the plan for making the GLCs more competitive will be a faster pace of deregulation (telecoms were completely deregulated at a stroke on April 1, two years ahead of schedule). There will also be substantial sales of government stakes in the GLCs in an attempt to avoid the kind of political taint that sabotaged SingTel's bid to buy those Malaysian and Hong Kong companies.

Many GLCs are already changing their ways, and none illustrates this better than SembCorp Industries. Once known as Sembawang Group, this firm was a slow-moving and unfocused conglomerate with at least 150 companies in ten often amazingly unrelated lines of business (like supertanker ship maintenance and a fast-food chain). Wong Kwok Seng, SembCorp's wiry CEO, put in a stint at SingTel and then ran Nomura's Singapore operations before being handed the conglomerate to whip into shape. Luckily he had the government's cooperation. Singapore's officials had looked at the Asian crisis and the megamergers in Europe and America and realized that the old Asian conglomerate model, in which relationships mattered more than efficiency and transparency, would no longer work. Among other things, global giants will be coming into Asia more and more because it will remain the world's fastest-growing region. As Wong points out, "The old GLC model was okay when we were in a lagoon, but when you get linked to the ocean you have to deal with sharks."

Wong has three strategies for swimming with sharks. One is to clean up the group's organization, selling most of its companies and reducing its focus to three core businesses: infrastructure (mainly construction, engineering, and logistics), marine engineering, and information technology. Another is to form strategic alliances with Western firms that will allow SembCorp to come up to global standards. A third is to drive the business-to-business advantages of the Internet throughout the group's operations--including, most interestingly, its ship-repair business (it has the world's biggest supertanker-repair operation). Wong wants to eliminate dockyard downtime by linking every supertanker owner in the world to SembCorp's scheduling and pricing system via the Internet. To make sure his managers get the point, Wong has made a fetish of financial targets like return on equity (last year 14%, up from minus 6% in 1998): Bonuses are even going to be tied to yearly or maybe half-yearly performance on economic-value-added measures. Expect much more of the same from the rest of Singapore Inc.

THAILAND

Such crispness does not come naturally to the oblique Thais, but they too are changing their ways. Their companies are getting more competitive, and their economy, which is expected to grow 5% this year, up from 4.2% last, is starting to sputter ahead. Part of the reason is an often unwelcome influx of foreign capital and managers into Thailand's nationalistic and extremely obdurate business culture. So far the foreigners have been somewhat successful at forcing change. GE Capital and Goldman Sachs have bought more than $1 billion of distressed loans; four banks have already been taken over by foreign banks (two from Europe, two from Singapore), and by the end of the year, half the banks will probably be owned by foreigners. The outsider swinging the biggest stick, however, is Ferrier Hodgson, an Australian work-out firm that has 15 Thai takeovers on its agenda.

What put Ferrier on the map was its management takeover in April of Thai Petrochemical Industry, the country's biggest defaulter (on $3.5 billion of debt), led by its recalcitrant chief executive, Prachai Leophairatana. Ousting the TPI management took the firm's creditors more than two years and innumerable meetings and visits to bankruptcy court, and even now, despite the court order, Leophairatana, whose family owns 60% of the company, is balking at giving management control to Ferrier.

Tony Norman, a no-nonsense Australian who runs the firm's business in Thailand, says he has the managerial talent he needs lined up to run TPI, and has offered existing TPI management the chance to stay on and help--though he doesn't look wildly enthusiastic when he says this. No wonder. To see Norman in his bustling Bangkok headquarters you must pass through discreet but rigorous security, including black-clad, polite, and apparently unarmed guards who you nonetheless sense don't need weapons to take care of you. No expat in Bangkok forgets that in 1999 an Australian bankruptcy specialist for Deloitte Touche Tohmatsu was murdered in broad daylight on an open road in the countryside near Bangkok, shot eight times by a gunman on a motorcycle. The assassination was allegedly arranged by three quickly arrested and charged executives at a nearby sugar mill, where the consultant had uncovered a lot of corruption. So much for gentle, smiling Buddhism.

Yet the struggle in Thailand, as elsewhere in Asia, is not really between outsiders and Thais: it is between new and old. TPI's biggest creditor, for instance, was not some wicked foreigner but Thailand's own blue-blooded Bangkok Bank, which consistently pushed for the owner-family's ouster from management.

Meanwhile, the turbulence of the past three years has broken open many markets. In beer, for example, Singha's market share fell in a few months from 90% to 50% when licensing deregulation led Surathip Group, Thailand's largest whiskey maker, to enter the beer market and compete with Singha. Thailand now has one of the most competitive retail and consumer markets in the world, with European firms like Carrefour, Tesco, and Marks & Spencer in strong positions.

Even so, Thailand seems hobbled in many ways. The figures for debt restructuring do not yet look good overall. Supavud Saicheua, the astute head of research at Merrill Lynch Phatra Securities, points out that whereas the big companies are in reasonable financial shape, the small and medium-size enterprises, of which there are nearly 200,000, have reformed little and are starved for credit. Supavud's calculations show more than half the total debt of listed companies is still nonperforming. Much of that will be repaid, but Supavud still guesses that the total loss for the financial system at the end of the day will be $40 billion--maybe 30% of GDP, a figure less absorbable in Bangkok than in Seoul.

So is Asia's reform glass half-empty or half-full? Half-full is the better guess, even in Thailand, where the question is more debatable than in Korea or Singapore or even Japan. Yes, big problems remain, but think how easily America's or Europe's pampered society would have coped with a 10% to 15% fall in income in a year. Or how they would have dealt with foreigners coming in to take over their businesses at three or four times the rate in the past. Not easily at all. No society can change on a dime, but it looks as if Asia's are changing seriously for the better. Happy third birthday, crisis.