Addressing currency swings<\/p>\n
The APEC finance ministers' concern over the yen-dollar rate
\nvolatility since March is fully understandable. The wild currency
\nswings have been hurting APEC's developing members in Asia in
\nparticular due to their intensive linkages with the Japanese
\neconomy. Furthermore, Japan, besides being one of the world's
\nlargest economies, is now the world's single largest exporter of
\ncapital.<\/p>\n
No matter whether the current movements are signs of short-
\nterm volatility, or longer-term misalignment, their impact is
\nequally damaging. What makes the matter more frustrating is the
\nfact that even countries, such as Indonesia, which has pursued
\nprudent macro-economic policies, fall victim to the currency
\nswings.<\/p>\n
The exchange rate is one of an economy's most important
\nrelative prices, which determines the division of output between
\ntradeables and non-tradeables and, consequently, the level of
\noutput and employment, as well as the strength of inflationary
\npressures.<\/p>\n
A major deviation from a sustainable path in any exchange rate
\ncauses not only a wasteful shift of resources but also price
\nuncertainty.<\/p>\n
Fundamentally, the equilibrium exchange rate is influenced by
\na host of structural factors ranging from changes in the terms of
\ntrade, to changes in savings and investment propensities.
\nHowever, with the increased mobility of capital and the
\nintertwining of financial markets around the world, exchange rate
\nmovements are often dominated by expectations of future
\ninflation, interest rates, the credibility of government
\npolicies, and political events.<\/p>\n
The irony, though, is that the exchange rate volatility, which
\nis often the spillover effect of the industrial countries'
\npolicies, is more damaging to the developing countries than to
\nthe developed ones. Because the financial markets in the emerging
\neconomies are not yet well developed, their importers and
\nexporters are more exposed to foreign exchange risks. Further
\ndown the line, the volatility also raises reserves needs and
\ncomplicates the task of economic management in the developing
\ncountries.<\/p>\n
The problems for the developing countries are often
\nexacerbated by the fact that while the financial markets
\nthroughout the world have increasingly become intertwined with
\neach other, industrial countries often choose their macro-
\neconomic policies independently, without serious consideration of
\ntheir impact on the world economy as a whole. Policy makers in
\nthe industrial countries often ignore the fact that the level and
\ngrowth of demand in their own markets have direct implications
\nfor the developing countries.<\/p>\n
True, when most countries decided to adopt the floating-rate
\nsystem in the early 1970s, they believed that the system would
\nenable them to achieve a viable balance of payments adjustment
\nwithout undue constraints upon their domestic policies and would
\nprovide them with greater autonomy and independence in the
\nformulation of macro-economic policies.<\/p>\n
But such a belief turned out to be a fallacy. The market
\nreality and studies by various multilateral agencies, such as the
\nInternational Monetary Fund, showed as early as 1983 that a high-
\ndegree of coordination of macro-economic policies among the
\nindustrial countries is a precondition to a more stable floating
\nrate system.<\/p>\n
But we think such coordination will be difficult to achieve as
\nlong as the economic powerhouses, especially Japan and the U.S.,
\ncontinue to have divergent views about appropriate domestic
\npolicies and continue to adopt different attitudes toward the
\nimplications of their policies on the exchange rates and the
\ninternational monetary system in general.<\/p>\n
Japan's Finance Minister Masayoshi Takemura and U.S.
\nSecretary of the Treasury Robert E. Rubin reaffirmed at a
\nseparate meeting in Bali on Sunday their commitment to continuing
\nconsultation and cooperation on exchange market issues. But as
\nlong as their commitment is not regarded as credible by the
\nmarket, the yen and dollar exchange rate movements will continue
\nto deviate from their economic fundamentals.<\/p>\n
The exchange rate gyrations also are raising questions about
\nthe IMF tasks which, under the charter of its foundation, include
\nthe promotion of exchange stability and maintenance of orderly
\nexchange arrangements among members. Our impression so far is
\nthat while the IMF has been able to influence the policies of the
\ncountries (mostly developing ones), which use its funds, it is
\nrather ineffective in influencing the policies of those
\nindustrial nations, which do not require its resources.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/addressing-currency-swings-1447893297",
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"sponsor": "Okusi Associates",
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