FINANCIAL CATACLYSM
The world needs to take concerted action - before it is too late
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ANY DOUBT THAT ASIA is entering desperate times was dispelled by a host of dire economic figures just out. The statistics for Malaysia show GDP shrinking by 7% in the second quarter. That pattern is being repeated across the region. The latest figures for Thailand and South Korea have the recession closing in on double-digit contraction. Indonesia is, of course, in a class by itself. By comparison, the 4% annual decline projected for Hong Kong looked positively healthy. Moreover, in that case the downbeat news seemed drowned out by the engrossing saga of the government's intervention in the stock market to curb speculation in the local currency.
Unfortunately, the doom and gloom doesn't end there. In Japan the Nikkei stock index plunged below 14,000, hitting a 12-year low. The market was responding in part to the political stalemate over bills to reform the country's battered banks. But like other bourses, it was also influenced by unmistakable signs that the Asian financial crisis is spreading across the globe. The prime example was the instability in the world's largest economic basket case with nukes. The debacle in Russia was fueled partly by falling oil prices, which also fanned Venezuela's problems, presaging more trouble in Latin America. Even that citadel of prosperity, the United States, shows signs of slowing down, suffering steep stock-market falls.
Desperate times spawn desperate measures. There was certainly a backs-to-the-wall feeling to Hong Kong's price-keeping operation in the stock market. For governments to use public money to shore up share values is not new in Asia. Japan and South Korea, for example, are old hands at it. But for such a move to take place in Hong Kong, the paradigm free-market economy, shows how much the world is entering extraordinary times. Taiwan followed suit with high-profile statements that it was illegal to deal with funds linked to the international financier, George Soros. That may prompt similar restrictions by other Asian countries that believe their economies have been savaged by untrammeled speculation.
Another sign of desperation is the renewed interest in currency controls. On a theoretical level, they have been broached by influential economist Paul Krugman of the Massachusetts Institute of Technology. But the sudden resignation of Malaysian central bank governor Ahmad Mohamed Don and the announcement of foreign-exchange controls on Sept. 1 meant that the subject has moved from hypothesis to reality. Prime Minister Mahathir Mohamad is intent on battling his country's recession by boosting government spending and lowering interest rates. Exchange curbs may allow him to do the latter without collapsing the ringgit.
That such measures are gaining credence is further evidence that the region's leaders are fast running out of solutions. The drawbacks of forex restrictions have long been clear. Such controls distort risk and thus disrupt markets. They also open the door to corruption among bureaucrats with the power to sanction the sale of foreign exchange, perhaps feeding the kind of crony capitalism that helped land Asia in its current fix. The proponents of these measures, including Krugman, readily concede the flaws. They simply argue that the alternative - the virulent recession afflicting Asia's economies - is even worse.
Governments have been trying a range of ad hoc measures to tame the inchoate financial forces wrecking their economies. It is too early to tell if Hong Kong's stock market intervention will ultimately be regarded as a landmark victory over speculators or the first step down a slippery slope leading to the abyss. But at this critical time, Asia needs fewer quick fixes and more substantive measures to restore confidence.
The first priority must be the banks. Confidence cannot return if people are worried that their banks will fail. That may be one reason opposition to Tokyo's decision to bail out the Long Term Credit Bank with up to $3.5 billion in taxpayer money seems muted, even though it goes against the prevailing wisdom of letting troubled banks go. The government and opposition must temper their differences and come up with a plan to fix other beleaguered banks. Tokyo's scheme may not be perfect but at least it is a move in the right direction. Stabilization of Japan's financial sector is a key to shoring up Asian markets. The region's creditors must also be prepared to take their share of the pain for misjudged lending by writing off debt that cannot realistically be repaid. That would help alleviate the debt burden that is crushing some Asian economies.
Beyond that, work must start on a new financial architecture before the deepening woes of developing countries spread to America and Europe, triggering a worldwide depression. What is urgently needed is a global economic summit, spearheaded by the U.S. and attended by G7 nations as well as key emerging economies. The participants should show their resolve to tackle the financial crisis by announcing quick measures - such as special bonds or a fund to facilitate banking reform - even while they mull longer-term changes to make international systems more stable. To restore confidence, it is time to move beyond piecemeal measures born of desperation to concerted action on a global scale.
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