A S I A D E V E L 0 P M E N T F 0 R U M 93661 A DF DISPATCHES Ea s t A s i a Th e U n fi n s h e d A ge nd a Wednesday, March 11 DON'T REVERSE GLOBALIZATION, EXPERTS SAY, JUST WATCH THE RISKS lobalization- the term used to describe today 's increas G ingly open and interlinked markets- shouldn't be reversed in response to the financial crisis gripping Asia currently. That was the consensus among economists and analysts ad- dressing the ADF Tuesday. However, all agreed that the crisis has dramatically brought home the fact that globally linked, liberalized financial markets can be perilous if the necessary regulatory and institutional frameworks aren't in place. "Globalization is a double- edged sword," warned Peter Sullivan of the Asian Development Bank. "It rewards good policies but punishes weak policies and institutions." Robert Lawrence of Harvard University's Kennedy School, noted the outbreak of "globophobia" in the West - a recently coined term describing some U.S. fears that notwithstanding record em- ployment levels in the country, the global economy hurts American companies and workers. He said he doubted the trend would be- come dominant in the U.S. and assured Asian participants that the U.S. would continue to be a major market for Asian goods ~ Rather than retreat from the global economy, Asian nations should develop better strategies for managing risks inherent in an interlinked financial system, according to Chalongphon Sussangkam, presi- dent of the Thailand Development Research Institute. Because the QUOTE OF THE DAY government had pegged the currency to the U.S. dollar at a fixed rate, business ignored the exchange rate risk and borrowed heavily in U.S. dollars. The expectation that governments would protect private firms from bankruptcy similarly removed needed disci- "Capitalism is like democracy. It has pline from the system, he said. D lots offaults, but it is better than the alternatives. " REGIONAL TIES CALLED PRIORITY FOR ASIA Regional economic integration should be a top priority as - Mitsuhiro Fukao, Keio University. Asian countries navigate their way out of the current financial crisis, according to experts participating in ADF discussions Tuesday. They stressed the importance of opening up trade and investment opportunities within the region, a move many saw as (continued on page 2) MANILA, THE PHILIPPINES, MARCH 9-13, 1998 PAGE I HABITO SEES ASIAN CRISIS AS Asia's Environmental Bill is Coming Due 'PROBLEM OF PEOPLE' ''Asia has one or the most degraded and polluted environments on the globe. and it is continuing to deteri orate fast. T he teem ing and o ften uncontrolled growth or urban areas as well as the m ismanage- ielito Habito. secretary of Socio-Economic Plan C ning at the Philippines ' National Economic and Development Authority. urged ADF participants to view the Asian financial crisis not just in economic ment or rural and mari ne resources have all played their part in A sia's environmental decay. Further environmental neglect w ill not only seriousl y im pair the quality or li fe in A sia. it will risk slowing eco- nom ic growth. No longer can A sia afford to pollute now and clean up later." terms but as "a problem of people. of human lives and Andrew P. Sulli van, Vice-Pres ident, Asim1 Dcvclopmcntl3ank. families' well being." Looking at the cost the crisis is exacting, he pointed to REGIONAL TIES,continuedfrompage 1 a string of hardships: more important than pushing an export strategy aimed at countries outside the region. -On jobs: the Philippine government alone has re- Robert Lawrence, of Harvard University's ceived notices of layoffs or retrenchments affecting more Kennedy School, urged Asian nations to declare than 19,000 jobs, and unrecorded cases could double the immediately a hold on any new trade barriers within the figure. region, and to agree to a zero-tariff levels within -On prices: inflation rates are rising after the devalu- ASEAN countries. He warned that Asian nations should compete for foreign investment on the basis of ations, with to 8.9% in Thailand to 32% in Indonesia. fundamentals, not through subsidies and tax breaks. -Budget cuts: spending constraints will affect health budgets, subject to increases of 40% in the costs of phar- These sentiments were echoed by Ponciano maceuticals and rugs. In tal, president of the Philippines Institute for Develop- -Education cuts: budget pressures will hit schools, ment Studies, who argued against "the centrality of teacher training, and special education programs. Accord- exports as a development strategy." He said the future ing to anecdotal evidence, students are dropping out be- "lies in deepening further the integration in the region cause of breadwinner parents losing a job. and with the rest of the world." He added that for the region to pick up economically, "we will need a more robust and open Japan.'' D Mr. Habito also cited a number of environmental prob- lems that stand to worsen as a result of the crisis. There will be more pressure to chop local forests to generate Short-Term Debt Ratios export earnings. Laid-off workers will turn to fishing for (%) a livelihood, adding to overfishing pressures in coastal waters. Anti-pollution equipment is becoming more ex- pensive to import. Mr. Habito said that solutions to both the social and the environmental strains will demand involvement outside government. He called for "a creed of caring" where those who might benefit from the turmoil- certain ex- porters and expatriates, for example- work "to alleviate c "' ~ ::>, iii .N 0 u the plight of the losers." D 0 '0 c 0 ~ "' cti ::2: :.c 0.. .!:: 1- ~ Ill ·;;: Q) ::2: PAGE 2 AS IA D EVE L O PM EN T FOR U M INTERVIEW: Ronald I. McKinnon have not built up short term foreign currency debts. Even through China also has a banking crisis with bad loans, its ED! interviewed Ronald Mc Kinnon, a Professor o f quite strict co ntrols on the capital acco unt prevented th at Economi cs at Standford Uni versity, on Fe bruary 27 . o n from beco ming a currency crisis. the issues surroundin g the Asian fin ancial cri sis . Financial liberali zati on is still the ri ght way to go be- cause the economy is not going to grow satisfactorily Q: What is your view of the Asian crisis? without it. But, there is an order of financial liberalization. There are number of things to be done before you risk Prof. Mcki nnon: There are two crises in Asia: the opening the capital account. longstanding slump in Japan and the current twin crises (of banking and currency) in other small Asian countries. Q: Asian currency values collapsed during this crisis. These two crises have been somewhat mutually reinforc- Which would be the best exchange rate system fo r these ing though their origins are different. Asian countries in crisis? The slump in Japan affected this crisis mainly in the sense that its economy remains very weak. Also, I think, Prof. Mckinnon: I'm an unusual economist in that I think Japan's world-lowest interest rates compounded the moral the exchange rate systems were more or less correct be- hazard problem in the other Asian countries, contributing fore the crisis. These countries, to some degree, all pegged to their excessive borrowing. to the dollar and formed a zone of monetary stability among themselves. But you need much more stringent regula- Q: Let's focus on the financial crisis in "small" Asian tion on risk-taking by insured financial intermediaries. countries. What are its main causes? Q: Do you see any structural problems in the inter- Prof. Mckinnon: This crisis is different from the Latin national financial system ? American crisis in that there wasn't a clear case of macro- mismanagement. So, we have to look for another expla- Prof.Mckinnon: Moral hazard is a two-sided problem. nation, that is, the moral hazard problem in Asian finan- Countries receiving foreign capital are too eager to bor- cial institutions. People in these countries took the view row and big international banks engage in overlending. that the government would come to rescue banks and, They are, in fact, also insured by their national govern- thus, their deposits were safe. This is like a blanket de- ments. There is a doctrine in money and banking called posit insurance. This means that there was potential moral "too big to fail." hazard with bank management because they could un- The further issue is compounded by having volatile ex- dertake risky lending strategies. change rates among the big industrial countries. The And I think this premature liberalization of the capital swings of the yen and dollar exchange rate make it diffi- market which enabled the banks to take very risky forms cult for small countries to set their exchange rates cor- of finance, that is, financing in dollars and yen rather than rectly. What we need is more exchange rate stability in domestic currency, compounded the riskiness. the world system. However, the precise trigger of the crisis was just an accident. Political breakdown in Thailand exposed bad Q: What is the proper role of multilateral institutions loan problems and speculators began to look around other in solving this crisis? Asian countries. Prof. Mckinnon: The IMF has done better than most Q: Asians are increasingly skeptical offinancial liber- people think it has done in this crisis. But the limitation alization because of this crisis. Liberalizers are in cri- on the IMF is that it must deal with each country -- one sis while China is not. What is your analysis? on one. In a regional crisis with contagion, what you need is regional stabilization fund which takes positions Prof. Mckinnon: China has not liberalized its capital ac- in different currencies, mostly undervalued, and at- count, thus, it was much less vulnerable. Chinese banks tempts to prevent their multiple devaluations.O ASIA DEVELOPMENT FOR U M PAGEJ MEDIA EXAMINES ITS ROLE VIEWS FROM ADF PARTICIPANTS IN CRISIS AND RECOVERY D What do we keep and what do we change? A sian journalists explored the crucial role that the media played in the on-going financial crisis in "We shall keep the solid macroeconomic fundamentals Asia and discussed ways that they might cover and reform microeconomic practices." economic problems and solutions in the future. Meeting Manuel Montes, Senior Fellow, Institute of in a workshop entitled "Economic Journalism in a Chang- Southeast Asian Studies, Singapore ing World," journalists from Philippines, Vietnam, China, Laos, Indonesia, Papua New Guinea, Cambodia and Thai- "The high savings rate, abundant human capital and abil- land examined journalistic practices across Asia and some ity to export should be maintained. In the short run, of the lessons that had been learned during the financial there is the need to regain credibility and confidence in and economic turmoil of recent months. the economy." Fukuma ri Kimura, Associate Professor of Among the topics discussed during the first day of the Economics, Keio University workshop were whether government or self-imposed censorship had prevented a frank and open discussion of "The low inflation registered during the decades of eco- the issues and whether so-caled "crony capitalism" was nomic growth is the main element of the success. What • matched by an equally harmful "crony journalism". needs to be done is to break up the inefficient way of interaction between the government, and corporate and financial sectors." While journalists in some countries such as Thailand Nora Lustig, Brookings Institution, U.S.A. and the Philippines had very early begun exposing some of the hurtful practices in banking and financial manage- "The flow of foreign capital and the opening of the mar- ment that contributed to the crisis, other j ournalists said kets have been the key elements (of East Asian miracle). they were caught unawares. What needs to be changed is the high import-depen- dence." Other practices such as deeply-held traditions of do- Imam Ahmed, Indonesia ing business through networks of friends and family still are ingrained. The attitude about such practices, one Ma- "The government's protection of strategic industries con- laysian journalist said, is "why criticize something that tributed to the rapid industrialization, but, now, that needs works?" But in the end, the crisis may effect not only the to be changed because too much protection of domestic ways Asia does business, but also the ways journalists industries can undermine competitiveness of the coun- write about this important subject for development. D tries." J un Tian, Deputy Director General, State Acknowledgements Planning Commission, China In hosting this meeting of the first Asia Devel- "Substantial investments on health and education sig- opment Forum, the World Bank and the Asian nificantly contributed to economic success in the region. Development Bank greatly benefited from the as- Now, skills to meet new demands." sistance of the National Economic and Devel- Anita Viitanen, ma nager, Social opment Authority of the Government of the Phil- Development, Asian Development Bank ippines and from the Philippines Institute of De- velopment Studies. PA GE 4 ASIA DEVELOPMENT FORUM