SUNS 4298 Friday 9 October 1998


FINANCE: ASIA TALKS BACK

Washington, Oct 8 (IPS/Abid Aslam) -- Asian finance officials have shed harsh light on talks among the 182 members of the World Bank and International Monetary Fund (IMF).

The Bretton Woods institutions' 53rd annual meeting has been held with the world economy on the brink of what U.S. President Bill Clinton termed a "financial precipice."

Yet, "the brute fact is that after five days of intense discussion and debate, we are still at a loss as to why contagion has continued to spread," said Indian Finance Minister Yashwant Sinha.

"Nor do we seem to have achieved clear, agreed and effective measures to contain the crisis - a crisis which has grown unrelentingly over 15 months," Sinha told fellow governors of the
Bank and IMF Wednesday.

The Indian official was among Asian financial leaders who assailed promoters of free capital markets for precipitating the troubles - and the IMF for mishandling the turmoil. The officials nevertheless called for a replenishment of the Fund's coffers.

"The experiences of the affected countries thus far clearly demonstrate that the traditional policy prescription has not produced results," said Dato' Mustapa Mohamed, Second Finance
Minister of Malaysia.

"Instead of reviving confidence, the IMF approach has inadvertently made a bad situation worse," Mohamed declared. The Fund's ministrations had led to severe shrinkage in domestic economies and "a vast overhang of bad debt," he argued. "The traditional prescriptions backfired because the severe economic contraction that was precipitated by massive capital outflows was exacerbated
by contractionary monetary and fiscal policies," according to the Malaysian official.
The IMF had downgraded its global growth forecasts four times since last December and so-called 'contagion effects' showed "no sign of abating", he noted. Consequently, "scepticism over the
effectiveness and appropriateness of traditional ideas" finally had begun to trickle West.

However, he added, this was not because of "concern over the plight of the impoverished millions in Asia as much as alarm over the increased risks of global contagion, deflation, and loss of markets."

The IMF and World Bank, taking their lead mainly from the U.S. Treasury, have blamed the Asian financial crisis on 'crony capitalism', a lack of transparency, and weaknesses in the crisis-stricken countries themselves. Only recently -- with market turmoil ravaging Russia and menacing Latin America -- have they begun to fault foreign investors, too.

That "failure to recognise that the crisis is in fact due to both external and internal factors has delayed efforts to deal comprehensively with all the issues that emerged from the crisis," Mohamed said.

Sinha said that "while the Fund and the Bank have responded with speed, the quality and content of the response need sober review." The IMF and World Bank must "find ways to better reflect the
political dimension of crisis management," he argued, "especially since the enduring economic and social consequences of crisis pose severe challenges" for governments having to take austerity
measures and restructure their economies in exchange for international bailouts.

Wealthy nations had overlooked the impact of "premature liberalisation on the economic security and social stability of the countries concerned," according to Dai Xianglong, governor of the People's Bank of China. That was because "they aim at achieving a superior position in the world capital markets for themselves," the Chinese official asserted.

Substantially, increased capital flows had benefited the world economy, Dai acknowledged. But these had become increasingly "dissociated from production and trade activities."

Volatility had increased because "speculators with huge sums of capital are able to take large leveraged positions to control and manipulate markets" for short-term gain, the Chinese official
explained.

That reality had sunk in on Wall Street, according to Mohamed. "The collapse of the mother of all hedge funds, Long Term Capital Management, is a strong indication that no country is spared from
the contagion effect of the present crisis," he said.

Long Term Capital Management is a New York-based 'hedge fund' that specialised in placing currency bets all over the world with billions of dollars in borrowed money. Last month, with the company clearly teetering, private sector players assembled a $3.5 billion bailout under tutelage from the U.S. Federal Reserve.

"Unbridled capital flows, including speculative capital, have wrought havoc on economies that have relatively under-developed and thin capital markets," said Mohamed, expressing a view that even
IMF Managing Director Michel Camdessus has come to voice in recent weeks.
Camdessus has argued that ongoing crisis highlighted the need for the IMF to bring order to capital market liberalisation by ensuring, first, that countries had strong regulatory foundations and, second, that they opened up to long-term foreign direct investment (FDI) - allowing foreigners to buy stakes in local assets - before inviting short-term overseas loans, the Achilles heel that brought Thailand and South Korea to their knees.

Such efforts, according to Dai, must recognise that "countries are entitled to determine measures to manage capital flows."

In China's experience, "this practice not only can sustain economic development but also protect foreign investors' interests by reducing financial risks," Dai said.

Mohamed, providing sought-after clarification of his country's recent decision to impose controls on capital outflows, said the "selective administrative controls" were intended to contain speculation on the Malaysian ringgit and provide "breathing space" but were "not a substitute for sound  macroeconomic and financial policies."

"These measures are by no means radical," he said, noting that it was not until "mid-1995 that all industrial countries removed exchange controls on both inflows ad outflows of capital."

The controls would not interfere with normal trade, FDI, external debt payments and investors' ability to repatriate interest, profits, dividends, and commissions, he emphasised.

They would remain in place "for as long as there is no (international) regulatory framework for financial flows", Mohamed announced. "In the absence of such a framework, it is unlikely that
financial stability will be restored."

India's cautious approach to market liberalisation had protected it from financial contagion because the country's exposure to short-term foreign capital was low, according to Sinha.

However, he added, "against the backdrop of anaemic world trade performance, our export growth has also suffered, in particular because East Asia accounts for about 20% of India's exports."