The financial crisis is a lesson for Asian countries

The financial crisis is a lesson for Asian countries

The current financial crisis affecting most of Asia would not
have come about if there was some kind of mechanism to regulate
excessive foreign capital flows, argues Sri Lankan economist
Gamani Corea in this Inter Press Service commentary.

COLOMBO: The explanation frequently cited in the international
media for the Asian financial crisis poor economic "fundamentals"
simply is not convincing.

It is implausible that the Asian tigers could have sustained
rates of expansion so high and for so long, nearly transforming
their economies, while all the time the so called "fundamentals"
were not right. Certainly there were weaknesses and excesses, but
these were not so common as to cause a re-enactment of this
crisis in country after country.

If anything was wrong, it was the fact that the nations
exposed themselves excessively to footloose speculative movements
of capital, and to short term capital flows, with no regulations
or control mechanisms set up in advance. This was partly because
of the prevailing philosophy of openness to all kinds of
financial flows.

For many years this produced positive results and people
applauded. But the immediate causes of the current crisis has not
been an over investment in real estate, or the corruption and
crony capitalism, that we read about which are to be found in
all the economies in the world, not only in East Asia.

The central fact is that Asia became very dependent on foreign
investors, whose concern was not whether a country had its
fundamentals in order, but what other speculators were thinking.
This created a very volatile situation and ultimately a chain
reaction of crises.

One of the major lessons to be drawn from the present
situation is that there is an appalling absence of any kind of
mechanism to moderate and regulate these developments once they
appear to get out of hand.

There is no ex ante preventive system internationally to
monitor the situation, anticipate possible weaknesses and take
action. Instead there is an ad hoc and ex post response.

Unfortunately any kind of preventive regulations by
governments, or even by international organizations, is
considered contrary to the prevailing liberalization philosophy.
The result is a very large exposed and vulnerable economic area.

If there is to be an international legacy from this crisis it
should be the establishment of mechanisms to monitor and react in
time. This should top the list of the agenda for the evolution of
the international financial system.

There are other issues. One of the casualties of the great
euphoria about globalization and liberalization has been the
debate on international development cooperation: there have been
no serious negotiations on a North-South basis for the last 15
years.

All the changes which the South has been pushing tariff
preferences for developing countries, concessional aid targets,
commodity stabilization arrangements, codes for the transfer of
technology and restrictive business practices have been put
aside. As a result, the whole burden of action, and virtually the
whole focus of attention, is now being placed on the internal
domestic policies of developing countries.

Developing countries are told that now there is an express
train called "globalization and liberalization". If they get
aboard, they will be carried on a great distance but, if they
fail to do so, they will be left behind and marginalized.

The secret of boarding is in their own policies: if they
liberalize, deregulate, privatize, balance their budgets, and so
on they would be beneficiaries of the process.

The North South dialogue thus has been replaced by a sort of
"do it yourself kit" for developing countries who are told that
they don't need big discussions and conferences on international
cooperation, aid flows, the terms of trade and so on.

Nevertheless, it remains as true as ever that developing
countries need a global economic environment that is supportive
of the development process and stability in the world economy.
This will not come about through the country by country
implementation of internal structural adjustment policies
alone.

There are major issues that can only be addressed through
multilateral actions, and a revival of discussions and
negotiations on these is clearly needed. One of these is the
international financial system and the way it should evolve. This
must be the subject of inter governmental actions rather than of
national policies alone.

There also are other issues: trade, capital needs, debt
relief, regionalism and global environmental concerns that
involve an inter-dependent world and effect both developing and
developed countries.

The present situation presents developing countries with a
challenge: they must reshape their platform to reflect the
changing world scene. They need also to harness their numerical
strength and cohesiveness in multilateral fora.

Otherwise they will lack an agenda of their own, and their
responses to world trends and events, at best, will be reactive.

-- IPS