Asian safety net

Asian safety net

It is encouraging that developed countries, notably the
American economic powerhouse, have not outrightly opposed to the
proposal for setting up an Asian crisis fund that could serve as
a buffer against a regional financial crisis. Initial reactions
were very negative when Japan sold the idea last week to the
meeting of the Group of Seven (G-7) leading industrial countries
in Hong Kong.

The United States seemed to see some merits in further fine
tuning a concept for the fund after Secretary of the Treasury
Robert Rubin received a briefing on Tuesday morning from finance
ministers and central bank governors from Asian countries.

After the currency turmoil hit Thailand in early July, and its
spillover rampaged discriminately to Indonesia, Malaysia and the
Philippines, some Southeast Asia leaders came to doubt the
surveillance capability of the International Monetary Fund (IMF),
supposedly the guardian of exchange rate stability. After all,
the crisis in that region came quickly (less than three years)
after a more brutal financial turmoil in Mexico, and after the
IMF claimed to have put in place a better surveillance mechanism.

Southeast Asia, notably the four hardest-hit countries,
should, in varying degrees, have felt rather depressed and
downhearted by the sudden crisis. For more than a decade, they
have been praised internationally as among the best-performing
economies, beacons of inspiration and hope to other Asian least-
developed nations.

But suddenly, turbulence struck, deeply hurting their
confidence. This is not to say that the Southeast Asian economic
outlook has turned into a dire situation. Their economies,
supported by strong fundamentals, will still expand, but at a
lower pace within the next one or two years. It is, rather, the
apprehension that such a brutal cycle of currency crisis might
become shorter and shorter.

True, as most studies have shown, part of the crisis has been
their own doing, but in so far as some countries suffering from
the contagion effects are concerned, the punishment imposed by
the markets seemed excessively unreasonable. Some of them with
strong economic fundamentals actually did not deserve such heavy
penalties.

Set against these developments, it is understandable that some
leaders, such as Indonesia's President Soeharto, came up with an
idea early last month of some form of regional safety net to cope
with unexpected regional financial crisis, to help countries
which were unjustifiably hit by indiscriminate fallout. Soeharto
originally proposed only an ASEAN safety net because the crisis
hit ASEAN member countries. But as it turned out, most other
Asian leaders took the idea as quite sensible and viable.

Japan, understandably, is the first developed country to
support the idea because in economic terms, its role in Asia is
quite similar to the United States economic link with Mexico. No
wonder, while the U.S. was the leader of the "fire-extinguishing
team" in Mexico in early 1995, it did almost nothing about the
crisis in Southeast Asia. Hence, Asian countries could not be
blamed for turning to their own region.

It would take some time to work out the mechanism of the
proposed Asian monetary fund -- whatever its name in its final
design may be -- to define the terms, set out the contribution
and other technical details. But whatever would likely come out
of that concept, the region should realize that it would serve
only as a fire-extinguishing engine. Such an emergency fund
should not be a substitute for their homework. Or as IMF Managing
Director Michel Camdessus said in his opening speech on Tuesday:
"to put your house in order."

The basic homework, as the recent crisis has taught, is
maintaining a macroeconomic balance to strengthen economic
fundamentals, and basing policies on the international market
discipline. Under the era of capital liberalization, which all
countries now realize can no longer be reversed, high market
discipline has become most imperative. Asian countries have
benefited greatly from international capital flows even though
the capital, notably portfolio funds, often fly in and out like a
hurricane. But the financial system which acts as a pipeline for
the capital streams should be sound and strong, and so should the
economic fundamentals.

There is another idea circulating in the IMF-World Bank
meeting in Hong Kong that deserves serious thought by Asian
leaders, notably the nine-member ASEAN, that could serve as a
preventive and early warning mechanism. The idea calls for some
form of regional surveillance whereby neighboring countries
periodically sit together to discuss common problems and to bring
peer pressure on individual countries to deal early on with
emerging problems, before they become serious and engulf the
whole region.

ASEAN countries are surely in a better position to start such
a regional surveillance. Peer pressure may be more acceptable
than impositions, or "bossy advice" from far away developed
countries, to keep each country on its toes regarding
macroeconomic management. True, a country could still be hit by
contagion effects despite all these efforts, but such effects
will not last long, as Singapore has shown during the Southeast
Asian financial turbulence.