Asian crisis shows need for better capital controls

Asian crisis shows need for better capital controls

BANGKOK (Agencies): South East Asia's economic crisis demonstrates a need for better control of destabilizing speculative global capital flows, the United Nations Economic and Social Commission for Asia and the Pacific said here yesterday.

"Some rules need to be set up to guide these capital flows, what we refer to as global governance, and global governance of private capital flows," United Nations Under Secretary General Adrianus Mooy told reporters.

The issue would be further discussed at a high level meeting of officials from the Asian Development Bank, the United Nations, the World Bank and the International Monetary Fund in June, he said when releasing the ESCAP's latest Economic Survey of Asia and the Pacific.

Forecasts for the period of 1998-2000 in the southeast Asian region are intimately bound up with how soon the current financial turmoil comes to an end and what long-term repercussions it produces for the real economy,' said the report.

'The full effects of the turmoil are expected to have a significant impact on the level of economic activity over much of 1998. There remains uncertainty about the depth and the length of the turmoil, which has lasted longer than had been expected, and its precise effects on the real economy in the medium term,' it said.

'The question of how soon growth will resume and how robust it might be remains difficult to answer,' it said.

The following table shows the GDP and the inflation data of the countries surveyed by the U.N.:

Country Gross Domestic Product Inflation

1998 1999 1998 1999

Indonesia -1.5% 3.5% 22.5% 21.5%

Malaysia 4.5% 4.8% 3.5% 3.0%

Myanmar 6.5% 6.6% 25.7% 24.0%

Philippines 4.0% 5.5% 8.4% 7.3%

Singapore 4.5% 6.3% 2.5% 2.5%

Thailand -3.5% 1.8% 11.6% 6.0%

Vietnam 8.7% 8.8% 5.0% 7.0%

China 8.0% 8.7% 7.8% 8.5%

Hong Kong 4.0% 4.4% 4.6% 4.2%

Korea 2.0% 5.2% 9.0% 5.3%

Taiwan 5.5% 5.8% 3.5% 3.3%

It is very likely that GDP growth will decline significantly in Thailand, Malaysia, Indonesia and the Philippines,' said the report. While effects on the Singapore and Vietnamese economies are less likely to be severe, growth is expected to decline in these economies too,' said the report.

Indonesia and Malaysia to a smaller extent are expected to suffer on account of the adverse effects of the 'El Nino' phenomenon on agricultural production, said the report.

'Overall, even the most optimistic forecasts don't see southeast Asian economies regaining the dynamism achieved in the first half of the 1990s until after 1999,' said the report.

IMF program

The report also raised concerns about "the appropriateness of the prescribed medicine" mandated by the IMF to ailing economies such as South Korea, Indonesia and Thailand, questioning in particular IMF requirements for reduced government spending, higher domestic interest rates, and closing wobbly banks.

Instead, the survey advised Southeast Asia's economic planners to use fiscal rather than monetary policies to stabilize their economies, and to avoid the "impossible trinity" of a stable exchange rate, financial openness, and monetary independence.

In diagnosing the causes of the currency turbulence which has battered the region for the last six months, the report highlighted the drop in private-sector capital flows into the region in 1996-1997, accompanied by a slowdown in world trade, which revealed "certain fundamental weaknesses" in Southeast Asian economies.

One such weakness lay in widening current account deficits. Because many economies yoked their currency to the U.S. dollar, the greenback's steady appreciation since 1995 hobbled export competitiveness even as it spurred imports.

The resulting current account deficits were funded by short- term borrowing, much of which was invested in speculative property development.

The bubble burst when over-supply in the property sector sent property values spiraling downwards, kicking off a chain reaction where banks were saddled with bad loans, triggering collapsing stock markets and a crisis of confidence.

To restore confidence, the report suggested that regional governments improve financial regulation and strengthen disclosure requirements in the financial sector.

Without such requirements, "any business or company evaluation and analysis rest on poor financial data and become either biased or meaningless", the report said. "In effect, decisions regarding financing rely heavily on investor 'confidence', which can be very fragile and volatile."