SE Asian woes more serious

SE Asian woes more serious

HONG KONG (AFP): Southeast Asia's economic problems are far more troubling for the rest of the world than the Mexican peso crisis of 1994-95, a leading U.S. academic said in a paper released here yesterday.

In the paper released at the start of the East Asia Economic Summit here, Steve Hanke said deflationary forces in the region would depress the Dow Jones stock index and "send shock waves through the global capital markets."

Hanke, a professor of applied economics at Johns Hopkins University and a former adviser to Argentina's government, said Asian economies account for almost a quarter of world exports of goods and services, compared to just over 4 percent for Latin America.

Asian economies "are in the grip of a massive deflation, with Japan leading the pack," he added.

Currency devaluations in Southeast Asia have pricked speculative real estate bubbles, exposed the balance sheets of many financial and non-financial enterprises and led to a rapid rise in bankruptcies.

"With dampened domestic demand, devalued currencies, excess productive capacity and large unsold inventories in most of Southeast Asia, the rest of the world can anticipate to be hit by a surge in imports and fierce competition from Asia," Hanke wrote in the paper.

"In consequence, enterprises in the rest of the world will see what little pricing power they have wither away. Add to this the slow but steady increase in their costs and you have a squeeze on profit margins...given the deflationary forces at work in Southeast Asia, there is only one way for the Dow to break and that is down."

Hanke, currently an adviser to the Bulgarian government, described foreign exchange rates pegged to the U.S. dollar as the "Achilles heel" of the Southeast Asian tiger economies. The dollar's prolonged rise starting in the mid-1990s hit their exports, forcing them to import capital to finance the gap between waning exports and booming imports.

Hanke said pegged rates required a central bank simultaneously to manage the exchange rate, domestic liquidity and the current account, while absolutely fixed rates in a currency board system automatically determine monetary policy.

He said Southeast Asian nations should follow Hong Kong's lead and install currency boards. The Hong Kong dollar can move in only a very narrow fixed range against the greenback.

"Absolutely fixed exchange rates are their only practical route to stability," he added.

In Japan's case, Hanke said the U.S. should stop practicing "mercantilist policies" towards Tokyo, allowing the central bank to set its own monetary policies.

"Then the yen could float freely down and Japan could break deflation's grip."