Jun 2, 1998

ASIA: NO EASY WAY OUT BY EXPORTS

 

Geneva, 2 June (Chakravarthi Raghavan) -- The ability of East and South-East Asian countries hit by the currency crisis of 1997, despite the devaluation of currencies and heavy export orientation, may be able to reap benefits and export their way out, according to the Bank of International Settlements.  

In its just published report on banking and financial market developments, the BIS says that the Asian crisis has highlighted the fragility of the international financial system, setting off an intense debate on the lessons to be drawn and the means to strengthen the "architecture" of the system.  

In this regard, the BIS falls back on the well-worn (IMF-G7 ideas) and talks about the wide agreement on need to enhance transparency through broader and speedier dissemination of financial information and improving the soundness of the national financial systems. 

The BIS also notes the "consensus" on the need for buttressing the global financial infrastructure and reducing reliance on short-term capital through a prudent sequencing of market opening.  

The BIS advice about 'prudent sequencing' of market opening (financial liberalization) for capital flows is in sharp contrast to the 'conditionalities' of the IMF in its loans to these countries, and the drive of the WTO, to push faster financial services liberalization on the Asian and other developing countries.  

On 28 May, at an UNCTAD meeting of experts on portfolio flows, Mr. Charles Freeland of the Basle Committee on Banking Supervision, in explaining the need for strengthening prudential regulations on the lines of the Basle Committee recommendations, had stressed that this should atleast accompany if not precede financial sector liberalization.

And in explaining the Basle Committee principles and guidelines, Freeland underlined that it was not something that could be implemented overnight or miracles (of prudential regulation and management) achieved overnight.  

It requires, he said, a legal culture -- in terms of bankruptcy laws, administration, management etc -- a credit culture on the part of banks and lending institutions, a culture of prudential regulation and administration of regulations by central bank or banking supervisory authorities, and experience on their part.  

Prudential regulators can't be trained by sending them to Basle for a fortnight's seminar or course at the BIS, he commented.  

At the same meeting, Prof. Gerald Helleiner of the Toronto University, and coordinator of the G-24 Technical support programme, stressed in this regard the prudential regulatory problems that even countries like Chile and Colombia, that had successfully managed short-term capital inflows, had faced.  

Helleiner also underlined the inter-linkages and similar effects of the moves for a Multilateral Agreement on Investment, the WTO's financial services agreement, and the IMF efforts to bring about capital account convertibility in developing countries.  

He supported the BIS view of the need for prudential regulations, and said its sensible views about need for careful balancing and sequencing was in contrast with the views pushed on developing countries by the International Financial Institutions, official and non-official, as well as by the WTO.  

Helleiner also underlined the need for a better means of assessing the balance-of-payments situations of countries, in conditions of highly mobile capital as now, other than the IMF practice and views that mix all kinds of inflows of foreign capital and reserves, and calculating adequacy on the basis of reserves for six months of goods imports.

The BIS also draws attention to suggestions made for lessening the moral hazard problems by giving the private sector greater responsibility in sharing the costs of crisis resolution. But much remains to be done in this area, it adds.  

It notes that in Jan 1998, the ongoing political uncertainty and policy slippage caused the exchange rates of many South-East Asian countries and Korea to collapse. With interest rate tightening failing to stop currency depreciation, there was a further epreciation in the credibility of policy-makers and no viable macro-economic programme could be established or implemented - in contrast with the experience of other emerging economies. Analysing the experience of South Korea, Thailand and Indonesia, the BIS says that these three countries (as also Malaysia and Philippines) still need to face the actual economic, financial and social costs of adjustment.  

"While international rating agencies have incorporated the related uncertainty into their ratings, most recent forecasts suggest that, despite their heavy export orientation, the ability of these countries to reap the benefits of currency depreciation might be limited."  

"Firstly, the response of export to sizeable competitive gains is partly neutralised by the importance of intra-regional trade (including with Japan), the dependence on imported inputs, difficulty in obtaining trade financing and, in view of exchange rate uncertainty and inflationary prospects, the lack of willing counterparties for the hedging of liabilities.  

"Secondly, the financial weakness of the corporate and financial sectors has forced a sharp downward adjustment in borrowing and spending, with the tightening of monetary policy acting to exacerbate the liquidity squeeze. Recent projections of the level of activity in Indonesia, Korea and Thailand, as well as Malaysia, show an absolute contraction of GDP, atleast in the short run."