Info Service on WTO and Trade Issues (Sept08/02)
South should prepare to counter effects of global finance crisis
1 Sep (Martin Khor) -- The global financial turmoil has yet to affect
Asian developing countries severely, but it is best to anticipate adverse
effects and examine policy options to counter them before the crisis
hits. This was the conclusion of a workshop last week held in Penang
Several experts from international agencies warned that Asian countries face vulnerabilities, especially to the vagaries of capital flows. Though the region is better prepared than during the financial crisis a decade ago, some countries have weaknesses which in ways are different from the old ones but can nevertheless cause problems.
The workshop on the Global Financial Turmoil, Capital Flows and Policy Responses was attended by 50 policy makers, researchers and civil society representatives.
routes by which the global crisis may affect
He added that Asian countries are even more integrated to the global financial system than a decade ago, making them more vulnerable to shocks. In some countries, there have also been massive increases in the outflows of capital by residents, who press their governments to enable them to diversify their investments abroad.
If the global crisis leads to less inflows (or a high outflow) of foreign funds, the government may want the local funds to return, but it is not easy to achieve this, warned Akyuz.
This refers to the sale of bonds by the Central Banks to banks to mop up excess liquidity caused by capital inflows. The governments incur a loss since they usually have to pay higher interest for the loans they obtain than the interest they earn on their foreign reserves.
Akyuz estimated that Asian developing countries together lose US$50 billion a year from the cost of holding foreign reserves that are "borrowed." He used the term "borrowed reserves" to refer to that part of foreign reserves built up by a country that results from inflow of capital, as contrasted to "earned reserves" which result from surpluses from the trade or current accounts.
other speakers, including Indian economist C. P. Chandrasekhar and Yu
Yongding of the
the inflow of capital is reversed,
Yongding gave a comprehensive presentation on
With the large capital inflows, there was a dramatic increase in foreign reserves. The "sterilisation" measures were not sustainable due to its negative impact on commercial banks and its high and increasing costs.
He argued against liberalizing the capital account now, saying that such liberalization should be a matter of long-term reform and not short-term expedience. Both inflows and outflows should be well managed, said Yu, who also suggested several measures to tighten control over the capital flows.
Lim of the Ateneo de Manila University said that financial and capital
account liberalization in the
Although there was high growth in 2003 to 2007, this is deceptive as the growth was jobless and it was accompanied by a fiscal crisis (both of which were linked to liberalization), while the poverty rate increased from 30% in 2003 to 33% in 2006.
Razali Ramli, former Coordinating Minister of the Economy of Indonesia,
traced the adverse effects of IMF policies on
more hot money flows into
Dian Ediana Rae, deputy director of Bank of Indonesia's international
directorate, said that
Datuk Seri Andrew Sheng, former deputy head of the Hong Kong Monetary Authority and former Chairman of its Securities Commission, said that it was now even clearer that reform of the global financial system is needed, as recent events showed that the central countries can also face financial crisis and thus the world requires the changes.
However, the international financial institutions are not designed to cope with crisis occurring in the central countries. Asian developing countries should get their act together for regional cooperation to increase their global voice, but it may take a new threat through a global financial crisis to lead them to a common view and approach.
Flassbeck, director of UNCTAD's Division on Globalisation and Development
Strategies, said that GDP growth is slowing down across the world. There
is a downturn in developed economies resulting from effects of the
There is a gloomy outlook for the world economy as well as risks for the developing world, added Flassbeck. Firstly, there is uncertainty and instability in international financial, currency and commodity markets, with speculation being a major destabilisation factor. Secondly, there are doubts about the direction of monetary policy in some major developed countries.
situation may become more difficult if currencies of countries with
huge current-account deficits come under pressure to devalue, for example,
Flassbeck also warned that the commodity prices boom could come to a halt due to cyclical factors. Developing countries remain highly vulnerable to commodity price fluctuations, and diversification and industrial development are the best long-term strategy.
He proposed that developing countries emphasise the financing of investment in new productive capacity, with the financing increasingly coming from domestic sources. Self-financing of enterprises from retained profits is the most important and reliable source, with bank credit being of second importance, especially for new businesses and SMEs. He warned that policies of high interest rates are counterproductive.
There should also be a stronger role for governments in influencing the direction of credit to strategic sectors. These include credit provided by public financial institutions, interest subsidies for selected investment projects, stricter control of lending for consumption or speculative purposes, and government guarantees for promising investment projects.
Moreno, Head of Emerging Market Issues in the Bank for International
Settlements, explaining the crisis, said there had been high leverage
in advanced financial systems, reflecting reliance on securitization
to finance mortgages. Losses on debt securities linked to the
the workshop's final session, the prospects of Asian regional financial
cooperation were discussed. Flassbeck spoke on how
will was key, there were strong leaders who pushed this forward,"
he said, adding that
said regional cooperation was needed in three areas - to prevent financial
crises, to manage them if they occur, and to provide financing for growth,
as was being attempted by the Bank in the South in
President of the Philippine Institute for Development Studies, Josef Yap, said there has to be an overhaul of the uni-polar global financial system. The democratic deficit in IMF voting rights has to be addressed.
advocated regional integration and cooperation, including capital market
Participants of the workshop concluded that attempts towards regional monetary cooperation must be accelerated, in view of the need to counter the impending effects of the global crisis. +