3. What Should Be Done in the Future
In the process of overcoming the turmoilin their currency and financial markets, the Asian countries willinevitably experience economic stagnation for a period of time.However, there has been no change in the outstanding growth potentialof this region which boasts such strategic advantages as a highsavings ratio and a diligent and high-quality work force. Nevertheless,the recent experiences indicate that there are numerous obstacleswhich must be cleared before the region can return to its previouspath of sustained economic growth.
As compared to the Mexican currency crisiswhich preceded it, the Asian currency crises affected a far largerarea of the global economy. Although there is some differenceof opinion regarding the sources of the contagion effect, thefact remains that the very existence of a contagion effect callsfor an international response to currency crises. In consideringwhat should be done in the future, it is important to rememberthe potential virulence of the contagion effect.
(1) Foreign Exchange Systems
The Asian currency crises exposed the risksof maintaining a virtual dollar-peg in disregard of developmentsin the economies of trading partners. On the other hand, the dollar-pegsystem had its advantages. For instance, ASEAN countries wereable to enjoy a relatively high level of intra-regional exchangerate stability. This factor can be said to have provided a foundationfor the development of intra-regional trade. Furthermore, deepeningeconomic linkage adds to the importance of intra-regional exchangerate stability. In this connection, the future economic developmentof the Asian region depends to an important degree on the successfulavoidance of competitive currency devaluation.
(Lesson)
In view of the economic conditions in the individual countriesof this region, a flexible exchange rate system must be formulatedwhich can respond effectively to changes in the global foreignexchange markets. On the other hand, in view of the importanceof intra-regional economic linkage, the system must provide anadequate level of stability to promote the development of intra-regionaltrade and investment.
(2) Reforming the Financial Sector
The Asian currency crises served to exposethe defects of the weak financial sectors of the affected countries.One obvious problem was that the financial system was allocatingfunds to real estate and other asset investments which were notnecessarily productive. What was left after the collapse of assetprices was the serious predicament of non-performing assets. Anotherproblem relates to the absence of adequate prudential controlin the form of regulations and supervision designed to maintainand protect the soundness of financial institutions. It has beenpointed out that, for relatively underdeveloped stage of the financialsectors of these countries, errors were made in the speed andsequence in which the liberalization of the financial and capitalmarkets had been implemented.
(Lesson)
The following types of efforts must be made to ensure that thefinancial system properly allocates its funds to areas of highproductivity: the functions of financial intermediation must beaugmented through the reform of banks and other financial institutions;the capital markets, including the stock and bond markets, mustbe properly developed; and, regional investors who are importantparticipants in these markets must be nurtured. Primary importancemust be attached to the challenge of developing domestic sourcesof capital and allocating these funds efficiently.
Rating institutions have a crucial role toplay in the development of the capital markets. As such, due attentionmust be paid to nurturing rating institutions which are capableof accurately portraying the realities of the Asian economies.
Due flexibility should be exercised in capitalliberalization and measures for attracting the inflows of overseascapital. Moreover, these measures should be implemented in theproper sequence as determined by the developmental stage and scaleof the domestic financial sector and the maturity of the supervisoryand regulatory systems. Due attention should be paid to thesetwo points in the ongoing discussion for the amendment of theIMF agreement on capital movement liberalization.
(3) Re-Evaluating Foreign Direct Investments
One of the central problems of the Asiancurrency crises was the over-dependence on short-term foreignborrowings. Consequently, it is recognized essential to ensureaccess to long-term capital when accepting capital from abroad.Foreign direct investments have obvious advantages in this respect,in addition to the fact that they are conducive to the transferof management know-how, technologies and other pertinent factorsof business which contribute to economic development. For thisreason, it is necessary to re-evaluate the role of foreign directinvestments.
(Lesson)
In the process of capital liberalization, it is desirable thatrestrictions on foreign direct investments be abolished as aggressivelyas possible, with due attention being paid to specific local conditions.
(4) Institutional Reform
The various systems and institutions whichpreviously were seen as contributing to accelerated economic growth(such as export-oriented strategic industrial policies, governmentintervention in the industrial and financial systems, and sharingof information between the private and public sectors), beganto appear in the course of the currency crises as leading candidatesfor reform. However, it would be an exaggeration to claim thatall of the systems and institutions which supported past developmentand growth must now be overhauled. Rather, it should be understoodthat different developmental stages require different institutionalframeworks. For instance, the Asian type of industrial policyfocusing on the long-term nurturing of manufacturing activitiesshould be positively appreciated.
Having appreciated the good elements of theirpast, the Asian economies should then involve themselves in reformingtheir financial sectors and other aspects of their industrialstructures which the currency crises exposed as being problematic.A particularly serious problem common to both the financial andcorporate sectors is the lack of transparency in business management.Reforms pertaining to this issue must be actively pursued.
(Lesson)
It should be emphasized that the most important prerequisite inpursuing effective institutional reform in the Asian economiesconsists of raising awareness in the government and the publicon whose shoulders the success of reform rests. Having said this,the next requirement is for the World Bank, the Asian DevelopmentBank and other multilateral development banks who have been deeplyinvolved in reforming the systems of these countries to acceptthat their past policy objectives were not always clear, or thatthe procedures for implementing these policies were not alwayswell thought out. Future directions and policies should be reconsideredon this basis.
When approaching the issue of institutionalreform, it should be borne in mind that the lack of transparencyin the accounting and bookkeeping systems of both the financialand corporate sectors has played an important part in multiplyingthe anxieties of foreign investors. This realization points tothe crucial need to modernize corporate management (better corporategovernance). Additionally, there is a pressing need to improveand streamline the procedures for the disposal of failed financialinstitutions and corporations (better bankruptcy laws).
(5) Achieving Higher Levels of IndustrialStructure
It has been pointed out that one of the factorscontributing to the Asian currency crises is the failure of theaffected countries to achieve more sophisticated levels of industrialstructure in response to their accelerated economic growth andrising labor costs. Combined with the underdevelopment of capitalgoods industries, this factor saddled these countries with currentaccount deficits from which they could not easily extricate themselves.
(Lesson)
In the future, it will be very important for the Asian economiesto transform and upgrade their industrial structures to matchtheir pace of economic growth and the requirements of the industrialsectors in which they enjoy international advantages. It is hopedthat cooperation and assistance provided by international financialorganizations and the leading nations will play an important rolein promoting the development of human resources and other factorswhich will be needed to ensure success in this process of industrialtransformation.
(6) Improvement of Social Infrastructure(Including private infrastructure development)
The Asian economies, in particular the countriesof Southeast Asia, have made steady progress in the improvementof their social infrastructures in the process of acceleratedeconomic growth. However, if they are to overcome the effectsof the currency crises and to lay the foundation for a new chapterof economic growth, these countries must now strive to achievefurther improvements in their social infrastructure. On the otherhand, it is realized that these countries are coming up againstmore stringent fiscal and ODA limitations. Therefore, it willbe of critical importance to promote private infrastructure developmentand to achieve higher levels of efficiency in infrastructure developmentand reliability in the provision of related services.
With regard to private infrastructure development,the currency crises have driven home the importance of makingproper provisions for foreign exchange risks.
In the case of private infrastructure developmentwith involvement of MDB or Yen Loan Assistance, there are guidelinesregarding women, the environment and eviction. However, it hasbeen pointed out that insufficient attention is paid to thesethree issues in the case that there is no such involvement.
(Lesson)
In addition to the mobilization of domestic sources of capital,the following sources will continue to play an important rolein supporting the infrastructure development of the countriesof this region: MDBs, yen-loans of the Japanese Government, andExport-Import Bank trade credits and other forms of governmentfinancing. In making steady progress toward attaining higher infrastructurelevels, efforts must be made to differentiate properly betweenthe roles of government and private sectors, and between publicand private financing.
It is hoped that MDBs and trade financingorganizations will be able to promote the mobilization of privatecapital through the active provision of loan guarantee facilities.Additionally, sound macroeconomic management and a system of policiesand regulations enabling lenders to undertake proper risk managementare becoming increasingly important.
It would be desirable that attention equivalentto that given in MDB and other guidelines regarding women, theenvironment, and eviction be paid in the case of private infrastructuredevelopment without any involvement of MDB or Yen Loan Assistance.
(7) Coping with Environmental Issues
Even prior to the currency crises, the Asianregion was being watched for environmental deterioration causedby excess logging and other economic activities. It is fearedthat the economic turmoil following the currency crises will acceleratethis deterioration by reducing environmental budgets and instigatingexport drives of raw materials.
(Lesson)
Assistance provided by international development financing organizations,as well as by Japan and other suppliers of bilateral aid, mustnow contain provisions for paying more attention than in the pastto environmental issues and concerns.