Crisis drives East Asia to unite

Crisis drives East Asia to unite

By Eiichi Furukawa

TOKYO (JP): When an international conference for the rescue of
the Thai currency was held in Tokyo on Aug. 12, three noteworthy
points emerged.

First, US$17.2 billion in total was raised for the rescue
fund, exceeding the original target of $16 billion.

Second, apart from the IMF, the World Bank and the Asian
Development Bank, all individual contributors were East Asian
countries.

Apart from Japan, which was the largest contributor with $4
billion, the list included even China, Indonesia and others who
do not usually participate in such rescue efforts.

Third, noticeably absent in the group were the U.S. and
European countries.

There has been a sharp divergence between the views of the
United States and the European Union on one hand, and those of
Japan and other Asian countries on the other.

The former considers the currency crisis in Thailand and other
ASEAN countries to have been caused by the failure of the
economic fundamentals of the countries concerned, while Prime
Minister Mahathir Mohamad of Malaysia, President Soeharto of
Indonesia and Philippine Finance Minister de Ocampo say that the
economic fundamentals of their countries are sound, and that the
currency crisis was caused by the speculative activities of
international investors.

Japanese Finance Minister Mitsuzuka declared in his speech at
the IMF-World Bank annual meeting held in Hong Kong late
September that "depending on short-term capital is dangerous",
and that "without having appropriate macroeconomic policies and
foreign exchange policies it is dangerous."

"Without sound economic management, short-term capital flows
can fluctuate both abruptly and on a large scale in response to
changes in economic circumstances or speculative pressures,
causing a currency crisis. Once a currency crisis occurs in one
market it may have an immediate and contagious effect on other
markets."

As stated above, short-term capital movement has at least
three problems. First, it magnifies the effect of the problems of
macroeconomic policies and management of a country.

Second, the currency crisis spreads to neighboring countries
and others in the region even when the fundamentals of those
economies are generally sound. In case of the Thai crisis, the
affected countries were Malaysia, Indonesia and the Philippines.

Furthermore, the major operators of short-term capital these
days are largely institutional or individual investors rather
than major international banks and other financial institutions
which care about long-term interest and social responsibility.

Short-term investors transfer their capital quickly from one
country to another in answer to small changes in interest rates
or in the economic situation. The economies of major countries
may be able to ride out such fluctuations. However, the small
ships of the economies of the Southeast Asian countries will be
overturned by such high waves.

In the beginning, the United States and European countries
were generally apathetic about the hardships of Southeast Asia,
thinking that their economies would not be directly affected by
the crisis.

The capital withdrawn from Southeast Asia was diverted to the
U.S. capital market and others. The U.S. made a profit rather
than a loss.

Second, while U.S. business and investment in Southeast Asia
is substantial, they do not consider the market as of vital
interest, unlike that of Mexico. Treasury Secretary Robert Rubin
is reported to have said that the Southeast Asian countries
should have recognized that speculation was part of normal
activities in the capital market.

For Japan the Southeast Asian market is of a vital interest.
Japan is also sympathetic about the plight of Southeast Asian
countries suffering from the rampage of the movement of short-
term capital.

When the Thai currency crisis was officially announced on July
2, the Japanese government immediately offered its help. An
international conference for the rescue of Thailand was
officially convened by IMF, but it was held in Tokyo, and Japan's
finance ministry worked hard behind the scenes for the success of
the conference.

In view of the Thai currency crisis and the rescue effort, the
East Asian countries learned that apart from the IMF facilities.
a regional fund should be created since the U.S. contributions
which were made at the time of Mexico's peso crisis in 1995 were
not available for the Thai crisis.

On Sept. 17, at the ASEAN finance ministers meeting held in
Bangkok prior to the IMF-World Bank meeting in Hong Kong, the
idea of creating an Asian Monetary Fund (AMF) was put forward.

Then only two days later, on Sept. 19 minister Mitsuzuka
announced that Japan strongly backed the idea, then he took the
trouble to explain the idea at the G-7 meeting of finance
ministers and central bank governors.

IMF authorities and the U.S. government immediately reacted
negatively to the idea. They argued that the function of the AMF
would duplicate that of the IMF, and if the AMF applied a looser
lending policy than that of the IMF, international financial
order would be jeopardized.

However, the Asian financial market has somewhat different
characteristics from those of western markets. The East Asian
countries now feel that they should develop a sort of regional
solidarity in handling monetary, financial and economic issues.

One of the most successful institutions created in Asia in the
past three decades is the Asian Development Bank. It has been
managed in an Asian way and has followed somewhat different
lending policies from that of the World Bank.

As previously stated, a different approach from that of
western markets should be taken with the issue of short-term
capital and speculation in Asia.

American and European financial analysts have high regard for
the Asian Development Bank.

One important change which took place in the recent crisis was
the departure of Thailand and others from the dollar peg system
to the floating exchange rate system. The Asian countries now,
therefore, should manage their exchange rate systems
independently. This requires international consultation and
management. The Asian monetary fund will provide forums for
policy consultations and coordination.

ASEAN is hosting an East Asia Summit meeting on Dec. 15 and
Dec. 16 in Kuala Lumpur. It will be participated in by nine ASEAN
member countries plus China, Japan and the Republic of Korea.

The participating countries are also prospective members of
the East Asia Economic Caucus (EAEC) which was first proposed by
Malaysian Prime Minister Mahathir in December 1990, and supported
and promoted by ASEAN ever since.

EAEC was originally conceived to establish the bargaining
power of East Asian countries at the Uruguay round of trade
negotiations. However, now it is considered that its purpose is
to establish a framework for consultations and cooperation in
general among the East Asian countries.

The Southeast Asian currency crisis is leading to the creation
of an East Asian conference of consultations and cooperation this
year. The forthcoming East Asia summit meeting is going to be
held at the right time for that purpose.

The writer is Director of Japan Center for International
Strategies.