SUNS  4313 Friday 30 October 1998


ASIA: NEIGHBOURS GIVE CAUTIOUS NOD TO MAHATHIR'S ECONOMICS

Singapore, Oct 29 (IPS/Kalinga Seneviratne) -- Malaysian Prime Minister Mahathir Mohamad may be receiving brickbats for quelling political dissent at home, but his economic policies are getting some support from his country's free-market neighbours.

In the last two weeks, Mahathir's calls for global action to rein in speculative hedge funds and even his currency controls have been gathering cautious backing from supposedly unthinkable quarters.

Recently, Singapore's Senior Minister Lee Kuan Yew, Finance Minister Dr Richard Hu and Japan's Vice Finance Minister Eisuke Sakakibara, known as "Mr Yen" for his sway over currency markets, have made public comments that appear to endorse or sympathise with some of Mahathir's economic ideas.
In comments which came very close to endorsing Malaysia's currency controls, Lee argued in speeches in New York and Houston this month that liberalisation of capital accounts has left Asian economies badly exposed.

"Capital account liberalisation should have been more carefully calibrated according to the level of soundness and sophistication of each country's financial system," Lee said in a speech at the James Baker Institute at Rice University, Houston last weekend.

"Countries that are not ready for the risks should have installed circuit breakers -- controls to cope with any sudden inflow or outflow of funds," he added.

Lee's remarks are even more significant given Singapore-Malaysia friction in recent months over issues stemming from the Asian crisis.

In Houston, he called for a system to monitor, check and control the flow of short-term speculative funds, similar to what Mahathir had been seeking since last year.

In hindsight, Lee said, Asian economies should have fended off and controlled massive capital inflows, since their own domestic savings were high enough to finance most investment needs anyway.

Thailand, Malaysia and South Korea had savings rates of more than 30 percent of their Gross Domestic Product (GDP) in the 1990s, levels that are among the world's highest.

According to the 'Straits Times' newspaper, Lee recounted to a closed-door session of the 200-member US Council on Foreign Relations in New York last week how East Asian economies began opening up financial systems on advice of multilateral agencies.

This happened during the boom years of the 1990s, following the counsel of agencies such as the World Trade Organisation (WTO), the International Monetary Fund (IMF) and the World Bank, plus the Group of Seven industrialised countries.

Thus, Thailand liberalised foreign exchange controls in 1990 and set up the Bangkok International Banking Facility. Indonesian firms and banks began tapping international capital markets in the 1990s without a system to monitor short-term foreign debt.

South Korea liberalised its capital account upon joining the Organisation for Economic Cooperation and Development (OECD) in 1996.

These constituted too hasty opening of capital markets by East Asia's economies, Lee said, without sufficiently developing a banking supervisory system to cope with such inflows.

He outlined two options to address this today: the IMF prescription followed by Thailand and South Korea or the Malaysian model of closing off the capital account, at least temporarily.

If currency controls succeed instead of the IMF prescription, this  would mean fundamental changes in the world monetary system, Lee observed.

For his part, Singapore Finance Minister Hu wants the global community to regulate hedge funds via bankers by imposing conditions on lenders as a way of controlling the leverage of these funds.
The mainly U.S.-based hedge funds, widely blamed for causing havoc to developing economies with its push-of-a-button movement of capital, may be difficult to control directly. But the leverage of their operations could be regulated through intermediaries like banks, argues Hu.

"In other words, you regulate them by imposing conditions on the banks which lend them the money," he told the 'Straits Times'.

Hu says Singapore would like to suggest to the IMF the introduction of rules imposing requirements on banks to first identify the entities or hedge funds to which they lend, and then to aggregate the information.

If regulators know the extent to which banks they supervise are exposed to these hedge funds, then it would be possible to impose a cap on their leverage based on their capital, he says.

Singapore is also pushing for the newly formed Group of 22 bloc of rich and emerging nations to play a leading role in moves to regulate the capital flows and boost their transparency.

Singapore's ambassador-at-large Tommy Koh says that the G-7 seems unequal to the task of leading Asia and the world out of a global economic crunch. So a broader group which includes developing nations should fill the vacuum, Koh told the East Asia Economic Summit here last week.

Meanwhile, Japan's Sakakibara, who shared a platform with Mahathir last week at a Tokyo debate on the Asian crisis, says said that Malaysia's currency controls were no longer a bad idea while the world is facing an economic downturn.

Many economists had branded as heretical currency controls -- which included a fixed exchange rate and an end to the ringgit's external convertibility -- that Mahathir unveiled in September.

"Being a heretic is better than (being) colonised," Mahathir said in Tokyo. Sakakibara responded: "I think the world situation has changed lately and what the prime minister has said is no longer heretical."

Even Indonesia has included capital monitoring in its latest letter of intent to the IMF this month. This has been confirmed by IMF Asia-Pacific director Hubert Neiss.

Some analysts say the more understanding views of Mahathir's policies may be due not just to how Asia's crisis has played out, but to the fact that the risks of speculation were proven in the near collapse of the huge American hedge fund Long-Term Capital Management in September.

The fund, which controlled derivatives and assets worth $200 billion dollars or more than 40 times its $4.6 billion capital, was rescued by a U.S. Federal Reserve-organised multi-billion dollar bail-out.

The case also jarred many analysts because it hit closer to home -- since most of the big funds are in the U.S.

Hu grants that it is tough to implement rules to control hedge funds because there is no standard definition for a hedge fund. But "fortunately, because of the Long Term Capital fiasco, the U.S.
authorities in the end must be the ones who have to support it because most of the big funds are U.S.-located".