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.