Much has been written on the east Asian financial crisis. In yet another article on the subject, Martin Wolf writing in the London "Financial Times" says that one important lesson from the east Asian crisis is that international capital flows can threaten economic stability.
At the outset Wolf observes referring to Thailand that "few could have imagined the enormity of what would follow the devaluation by a medium sized developing country".
He says that the financial crisis is not yet the most serious since World War II but that is "if the Asian crisis halts here." At the same time he says the current crisis is worrying for at least two reasons.
Frist, the countries of east Asia had been uniquely successful in securing a "broadly shared rise in living standards" .Second, the disaster cannot be explained by fiscal or monetary profligacy. And then he says that what had been an outstandingly successful private-sector route to economic development now seems blocked.
The lesson to be learnt he says, could be that east Asia should become as western as possible, as quickly as possible and he observes that "this is the philosophy underlying the programmes of the International Monetary Fund".
Yet, he says the cardinal east Asian mistake could well be not that they liberalised too little, but liberalised too much and above all, imprudently.
It now appears, says the writer, that what has erupted is a dire mixture of currency corporate and banking crises.
Wolf refers to two unpublished papers by Frank Veneroso, a financial consultant and Robert Wade a university professor. They argue, he says, that "Asia's high-debt model of economic development is not an insanity, but a logical consequence of the structure of their economies and theaspirations for rapid economic growth.
Wolf observes that there are high rates of savings in the countries in question, savings which find their way to businesses through banks acting as intermediaries. The result is high levels of leverage compared with countries where slower growing companies are better able to finance investment out of retained earnings.
Although the system generated high rates of economic growth over a long period yet the financial structure it has produced with high ratios of bank liabilities to GDP and of debt to corporate equity is "inherently risky".
Wolf says that to manage these risks there are three safety mechanisms: the longterm relations between companies and banks which turn debt into quasi-equity, constraints on the ability of depositors to take their money out of the domestic banking system and the power of fiscally prudent governments to tax.
Wolf adds that in another paper Paul Krugman of the Massachusettes Institute of Technology argues that, if a bank's owners know they will obtain gains from a successful investment, but can walk away from losses, they have an incentive to choose the investment that will give the highest return possible.
A mistake east Asians have made, says Krugman is to tolerate a shift in lending from manufacturing which is exposed to international discipline towards property development where "the bank-driven asset prices bubble."
With hindsight, says Wolf, it is clear that east Asian governments made big errors. They permitted, even encouraged short-term foreign borrowing and exacerbated the calamity by fixing exchange rates and tolerating runaway property lending.
Wolf asks how these countries can hope to escape from their predicament. He acknowledges that the challenge is huge, partly because of the heavy debt overhangs both domestic and foreign, under which their economies labour.
He points out that they have, at present no effective institutional means to turn debt into equity on the required scale or to transfer future savings from the household sector to the companies, other than through banks.
The more general question, says Wolf, is what to do about capital account liberalisation which the IMF is strongly promoting in all its programmes. It is true , he says, that this will create openings for inward equity investment or long-term borrowing, but east Asians do not need large scale inward transfers of foreign savings.
Indeed they do need to halt the current outflow of capital and any "substantial net draft on foreign savings creates huge risks . For countries, with savings rates as high as those of east Asians such risks hardly seem worth running. The big difficulty has to do with short term borrowing, says Wolf. The east Asian crisis shows that governments will not allow financial systems to implode. Bank borrowing if big and general enough, becomes sovereign borrowing. And if it becomes big enough to cause a threat to the currency it threatens economic stability.
The writer says prudential control over short-term foreign currency
borrowing by institutions underpinned by the state is inescapable. The
crisis shows that banks fall into this category. And Wolf concludes by
saying that "if banks are not to be reformed they must be more securelycaged."
The Asian Development Bank (ADB) is finalising details of a $1.0-billion, five-year syndicated loan to help Thailand boost its exports by March, Thai finance ministry officials said on Friday. A ministry official working on the loan said the export financing facility, to be guaranteed by the ADB during the first three years, would bear preferential interest rates below normal commercial borrowing.
The official said Japanese, U.S., European and Singapore banks keen to participate in the syndication include the Industrial Bank of Japan Ltd (IBJ), Bank of Tokyo-Mitsubishi Ltd, Citicorp, ABN AMRO, Development Bank of Singapore (DBS), and Barclays Plc. He said ADB is expected to provide up
to $50 million of its own funds to the syndicated loan which would be channelled to cash-strapped Thai exporters through Thailand's state-run Export-Import (Exim) Bank. Thai exporters have faced a severe funding squeeze in the past several months as Thai commercial banks sharply tightenloans in order to set aside more financial resources to cope with anyunpredictable public withdrawals of deposits.
The official said the export financing facility is on top of other economic and social adjustment loans being extended by ADB, the World Bank and other multilateral agencies under a $17.2-billion bail-out package for Thailand. A Thai Exim bank official said her bank is working out loan terms for exporters seeking to borrow from the ADB-guaranteed facility. Meanwhile, the ADB on Friday confirmed that it was in the process of finalising a five-year syndicated loan to help Thai exporters and said it would guarantee repayments for the first three years.
"A partial credit guarantee covers principle repayments and interest
payments in the first three years," said an ADB spokesman in Manila.
He also confirmed that of the loan, $50 million will come from the ADB
and the rest from commercial banks. "We are talking to nine or 10
commercial banks in Japan, the United States, Canada and Europe,"
the spokesman said, but would not elaborate. "We are in the process
of finalising the pricing arrangements." (Reuters)
Bank Indonesia, the Indonesian central bank, is involved in discussions aimed at setting up a currency board system in the country, an official at the bank said last week.
Some in financial markets have been speculating that the central bank would be marginalised if a currency board system was adopted. A managing director of the bank, Miranda Goeltom, told Reuters that it was still unclear what the central bank's role would be under a new system, but that it had been and was involved in discussions.
"I don't know where we will stand at this stage," she said. "Professor (Steve) Hanke came and gave a presentation to us...we are involved in preparing the amendment."
Professor Hanke, who has been appointed as President Suharto's special adviser, is in Jakarta this week to discuss the plan. Suharto and Hanke were due to meet on Friday but officials said their talks had been postponed. They did not give any reasons or any new time for the meeting.
Hanke told Reuters earlier this week he reckoned he could have a currency board system up and running within three weeks and talked about a pegged rate of about 5,000 rupiah to the U.S. dollar. It is now around 9,100/9,500.
Goeltom said: "The management of the central bank law is still being prepared. I don't know how the final result will be and, of course, I am not in a position to say anything about the final result. I don't think it is proper for me even to give my own personal opinion."
She added: "It would be better for me and the central bank to wait and see what role the central bank will play in the whole banking system." She noted that currency board systems differ widely. "The Hong Kong CBS (Currency Board System) is basically a central bank.
They have liquidity credit, they have standby loans and they have a
discount window, whereas other countries have a total currency board system,
so there is a huge range," she said. Goeltom was attending the 33rd
annual SEACEN conference in Bali. (Reuters)
Malaysia is intent on keeping funds available for its fledgling multimedia zone, Prime Minister Mahathir Mohamad said last week.
Acknowledging that Asia's economic downturn, which has seen the ringgit currency lose more than 30 percent of its value over the last seven months, had made investment funds more scarce, he said Malaysia would "prioritise our expenditure" to favour industries of the future, including the Multimedia Super Corridor (MSC).
Malaysia has pledged to invest in $10 billion worth of infrastructure for the corridor, including a high-speed telecommunications backbone. "Some critics have labelled the MSC as an 'ambitious, grandiose mega
project'. I will admit that it is an ambitious project, but it is not for us Malaysians to implement alone," he said in a speech at a conference on electronic communities.
"We will participate actively, of course, but the MSC is the for whole world," he added. The MSC is intended to provide an environment in which hi-tech firms can flourish by giving them facilities such as high-speed data links and incentives such as tax-breaks.
Malaysia hopes the corridor will become an Asian Silicon Valley, a centre not just of high technology manufacturing, but also of electronic service industries. The testbed for multimedia products and services has drawn investment commitments from several high-technology and telecommunications multinationals including Motorola Inc, Lucent Technologies Inc, Siemens AG and NTT. Located in a 15-by-50 km (nine-by-30 mile) zone south of Malaysia's capital Kuala Lumpur, the MSC is expected to be operational in earnest later this year.
"The devaluation has eroded some of our capacity, but we can still carry on," Mahathir told an audience that included members of the MSC's advisory panel who were gathered for an annual meeting.
"So the MSC will go on," Mahathir said, adding that Malaysia could not "afford to starve it (the project) of funds". But the premier said he recognised the project faced challenges, including getting enough skilled information technology workers.
He said that based on all the applications to set up in the MSC received so far — some 180 — "knowledge worker requirement by the fifth year of operations stands in excess of 23,000".
Malaysia, with a population of about 20 million, already has some two million foreign workers but has faced a chronic skilled labour shortage. To help meet that need, he said Malaysia has recently permitted MSC status accreditation — which entitles firms to unrestricted access to foreign labour among other things — to educational institutions "as one of the measures to help fulfil the companies' human resource needs".
Some 110 companies have so far been given the status, of which 78 are already in operation. Malaysia expects the combined revenue of the companies that have applied for MSC status to be around 13 billion ringgit ($3.25 billion) by the fifth year of operations.
The prime minister is wrapping up two days of meetings with the MSC's International Advisory Panel (IAP) on Friday.
He defended Malaysia against a charge raised at the IAP closed-door
session on Thursday that Malaysia is seen as restricting access to information.
"I must admit that we are rather guarded about too easy dissemination
of news that may result in destabilising the nation...we have a multiracial
population," he said. (Reuters)
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