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.