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."