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."