World financial crisis with Asian coloring

[img_assist|nid=10955|title=|desc=|link=none|align=left|width=74|height=100]The financial turbulence which emanated from the United States had been simmering since the subprime mortgage problem, and should not have surprised anyone when the pot boiled over this year. It would be nice if it had only remained where it began, but alas, the hot water has overflowed, scalding just about everyone. Asia, which had been doing well since it faced its own financial crisis in 1997-99, unfortunately may suffer anywhere from first- to third-degree burns. 

I would like to go back to the time of the Asian financial crisis. At the time, the contagion spread to all of ASEAN, and almost all of the East Asian countries, as well as to some other countries in the Western Hemisphere, with the exception I think, of the high and mighty USA. 

Of course, the IMF and most other infallible international/multilateral organizations have always had the prescriptions and indulgences available to the poor if not misguided LDCs, which always counted on being bailed out by IMF if things went wrong — of course, at the cost of sometimes pretty punishing conditionalities. 

Some people have wondered if the IMF (the biggest quota holder being the United States) was a cure or a curse, or whether IMF policy diagnoses and prescriptions had been badly misdirected, especially in light of the wrong predictions it made about Asia. Remember how Asia basked in its praise of "good fundamentals" in early 1997, thereafter decried a few months later? Remember the heady praise for the "Asian miracle" and the subsequent tsk-tsking about "Asian values?" 

Predictably, the IMF diagnosis emphasized that the root of the Asian problem was internal: failure to control large balance-of-payments deficits; the explosion in property and financial markets; mismanaged exchange-rate regimes, rapidly expanding financial systems that were poorly regulated; and an unwillingness to act decisively once confidence was lost. 

Oh my! Shouldn’t this "medical analysis" apply to the humongous problem that has been unleashed and threatens to affect a trusting Asia that has scrambled out of its own painful crisis some years ago? 

IMF promoted unfettered global capital flows, which had such a damaging impact on several Asian economies in 1998. Economic and financial leaders at the time discussed means by which a "new financial architecture" should be designed, especially to serve as an "essential building block for a vibrant private sector and successful financial markets." 

I don’t know if the promotion of "vibrant private sector and successful financial markets" eventually led to the derivatives orgy in Wall Street and its cousins in the UK and Europe. Certainly, Stiglitz’ pithy comment about "corporate welfarism under the guise of a free-market economy" seems to apply as the US girds to protect itself from the consequences of those excesses. 

The 1997-99 Asian financial crisis in fact indicated that turbulence in financial markets is but a symptom of the more "profound deficiencies in the international economic system." (Speth, UNDP, 1999) According to Devesh Kapur of Harvard University, the proposal was only one of "a long series of ad hoc solutions on an increasingly dilapidated system of global governance." 

And now, at the Beijing meeting of Asian and European leaders, it is reported that a broad consensus of ASEM on how to deal with the global financial meltdown is to give the IMF a "leading role in aiding crisis-stricken economies?" 

Let me hark back to how Asia decided to face its crisis, notwithstanding that it has often been said that Asians are not necessarily a homogenous group. They came up with an action plan called the Manila Framework which had been crafted by their finance ministers. The Manila Framework went beyond solving the financial market problems and encouraging financial market development, but focused equally on structural reforms with a view to strengthening the development of the real sectors of the beleaguered Asian markets — in short, it was about real economic development. The Asian financial crisis also made the region’s leaders acutely aware of the need to promote regional financial cooperation to prevent a resurgence of a crisis and to attain stable economic growth, as well as it recognized the rapid increase in economic interdependency in East Asia. 

This recognition eventually led to the Chiang Mai Initiative (CMI), which basically affirmed the need to enhance self-help and support mechanisms in the region. CMI aimed to create a network of bilateral swap arrangements (BSAs) among ASEAN + 3 countries to address short-term liquidity difficulties in the region and to supplement the existing international financial arrangements. A total amount of US$83 billion was agreed upon, and BSAs were concluded among eight countries: China, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, and Thailand. 

At their 2007 meeting, the ASEAN+3 finance ministers agreed in principle that a self-managed reserve pooling arrangement governed by a single contractual agreement is an appropriate form of CMI multilateralization, via a step-by-step approach. The key elements of such multilateralization of the CMI should include surveillance, reserve eligibility, size of commitment, borrowing quota, and activation mechanism. 

While Asia still is positive, albeit at a slower growth, it may be that due to the urgency of the situation — Nobel laureate Joseph Stiglitz (formerly of the World Bank) has warned that a major global slowdown could have "disastrous consequences" for developing countries — Asian leaders have decided to fight the economic storm by creating an $80-billion "Asian monetary fund." They have agreed to create this $80-billion multilateral reserve pooling mechanism by the end of June next year. An independent regional financial surveillance organization is also envisioned. 

Of course, a lot of tweaking still has to be done. Transforming the present bilateral system to a multilateral system will not be easy, considering the problems that relate to which country bears the greatest burden, the mechanisms to be employed, which for now, apparently is still rather tied to the apron strings of the powerful multilateral institution in Washington. Whether the World Bank or the IMF will come on board or not, Asian leaders have shown that ASEAN is resolute and is prepared to weather the crisis. My own take, naive as it may be, is that it is time for Asia to grow up, and to fulfill the promise that this century will be an Asian century. And that the Asian leaders must now provide the "unequivocal signal to increase investor confidence" in the region.