Lessons from currency crisis

By Jusuf Wanandi

JAKARTA (JP): As could be expected the currency crisis in Southeast Asia was the main topic of discussion at the World Economic Forum 1997 East Asian Summit in Hong Kong on Oct. 13-15, 1997.

The problem is in everybody's mind, and policies to overcome the problem are yet to emerge more clearly, while the financial market will assess Malaysia's state budget and the deal between Indonesia's government and the IMF which is being explored in Jakarta.

Naturally, the ASEAN leaders present gave their positive spin to the developments, while others were less sanguine and were more critical. They asked a lot of questions about the future development of the crisis, and how and when this is going to end.

Most participants present at the summit understand that the crisis is a consequence of being part of the world economy, especially the globalized financial field.

They continue to believe that the viable way for development and modernization is to become part of the world economy, as the alternative means being left behind and eventually marginalised as a nation. A critical part of this process is to become part of the global financial market, which could supplement for the need for funding of development projects in a very important way. But of course, there are consequences of being part of the international financial market.

The most important one is that one has to play by the rules. In the financial market, the rules are to adopt sound macro- economic policies and to implement them in a transparent fashion.

If the rules are followed, then the vagaries of the market will not hurt the economy, and one can get a substantial amount of funding for economic development. However, if they are not followed the market will eventually find out and attack the currency and the financial market. At the end they will show their lack of confidence by leaving. Here, the herd mentality among the financial investors can aggravate the crisis.

In the case of Southeast Asia, Thailand has already been watched closely during the last two years in regard to its weak fundamentals, and last July the currency traders decided to strike because they fail to see serious attempts made by the government to improve the situation. Since then the entire region has been scrutinized. They found out the lacuna in the fundamentals of the other ASEAN economies which led to the attack on the currencies.

This is of course a painful experience for the ASEAN economies and the impact could be felt for many years as has been the case of Mexico. It could even take longer if the necessary policies to overcome the crisis are not being taken.

Indeed it could be argued that to regulate trading in currencies, which today is so vast and much bigger than trading in goods and commodities, will be only limiting the funds and finances that are so much needed by the developing world itself. The only protection for the developing nations is to have their fundamental macro economic policies right and to make them transparent.

It is also obvious that the crisis is not merely a wake-up call for Southeast Asia, and that afterwards everything will be the same again. It should be seen as a correction and ASEAN really has to think through about the problems that have created the crisis in the first place, in order to prevent the crisis from coming back again.

They will have to lay down a much more balanced program for growth and development, where high rates of growth are not the important objective, but how inclusive and sustainable the growth is for the people.

lessons from Mexico is clear. Economic fundamentals are important, but what also has to be established by the ASEAN countries is good governance, because without this the economic fundamentals cannot be strengthened and the government and its policies will not be credible.

It has to be admitted that the rapid growth of the economy, especially in the last decade, has brought about new inequalities into the system in Southeast Asia. While in absolute terms the percentage of people below the poverty line has decreased dramatically to below 20 percent, but at the same time the rapid growth of the last decade has created new discrepancies, because small enterprises and traditional traders and businesses have been left behind in the globalization.

This means that the small people and small businesses are losing out. Less educated and qualified labor are being laid off, and without special attention and new training they are unable to get new jobs. This calls for targeted government policies to help and assist those that are being left out.

Since there is a time lag between efforts and results in achieving greater equality in the future, some flexibility in the political system is important to alleviate these new income discrepancies. Therefore, political development is an important part for securing sustainable economic growth.

This is a time for reflections and debate to strengthen the basis for the future development of the ASEAN countries. Rapid growth creates problems such as environmental degradation, urbanization pressures as well as changes in cultural values.

The challenges faced by the ASEAN countries are to maintain sustainable growth and enhance the quality of life. Since this is a time for new stock-taking, it should be used to plan for a better future.

Of course, there might be some set back in the next few years, that is growth might be reduced by 2 percent GDP, inflation pressures might be greater, unemployment has to be monitored closely. And above all, a series of new policies have to be taken.

The ASEAN countries have faced difficulties before and have been able to overcome them. Indonesia has had the debacle of Pertamina, the national oil company, in 1974 with an external debt of US$ 10 billion, which was overcome by biting the bullet and taking the necessary, although difficult, measures.

Indonesia and other ASEAN countries overcome the deep recession of the mid 1980s and the downfall of oil prices from $38 to $8 a barrel by liberalizing their economies and opening them up to international competition. These new policies provided the basis for the rapid economic growth in the last decade.

The challenge for the ASEAN countries today is more complex and encompasses all fields of national activities. It will not be easy to overcome it but with the experiences of dealing with the earlier crisis, it could be safely assumed that necessary policies, however difficult, will be taken, including by Indonesia.

A lot of efforts and sacrifices have gone into the process of development and modernization in East Asia in the last decades. Changes in policies had been made in response to disastrous developments, such as the turmoil in Indonesia in 1965, the Great Leap Forward and the Cultural Revolution in China, the Vietnam War in Indo China as well as the insurgencies in Malaysia and the Philippines.

With the recognition that we are now part of a globalised economy we will make the necessary corrections and changes. In the last instance, the drive to grow and to modernize remains so great due to the deprivatisation during the last centuries, and East Asians will continue to make the sacrifices in order to catch up with the world.

The writer is Chairman of Supervisory Board of the Center for Strategic and International Studies, Jakarta.