High-Profile Call for Lower Yuan
Prominent Economist Says China Should Let Currency Fall
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By Philip Segal International Herald Tribune
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HONG KONG - The international economist Jeffrey Sachs, in a rare public duel with the International Monetary Fund, recommended Wednesday that China gradually devalue its currency, the yuan.
The yuan is ''in danger of being on the slippery slope of unchangeability'' and should be devalued by ''a few percentage points,'' said Mr. Sachs, a professor at Harvard University and director of the Harvard International Institute for Development.
Though many analysts have said any devaluation of the yuan would cause renewed panic in the financial markets of Asia and beyond, Mr. Sachs insisted that ''if it's gradual, it isn't dangerous.''
His comments followed a debate with a senior member of the International Monetary Fund, Hubert Neiss, the organization's Asia-Pacific director.
In the exchange of remarks at a conference sponsored by the investment bank Credit Suisse First Boston, Mr. Sachs and Mr. Neiss differed over whether the IMF helped to limit or to exacerbate the panic in financial markets in Asia in late 1997.
Mr. Sachs contended that the IMF had learned little from flawed management of the Asian financial crisis and that similar mismanagement was leading Latin America ''off a cliff.''
In Asia, ''we're probably on the recovery side of this financial crisis,'' said Mr. Sachs. ''But the news from Latin America is very, very bad.''
Mr. Sachs has consistently differed with the IMF, including its policies of preserving exchange rates at great cost to economic growth, and on Wednesday Mr. Neiss rejected Mr. Sachs's idea that a devaluation of the yuan was advisable now.
China ''should, and they will and they can'' hold the yuan at its current level, since floating an exchange rate in times of economic uncertainty is counterproductive, Mr. Neiss said. China is not a formal client of the IMF.
In the past year, fears of a possible yuan devaluation have shaken markets across Asia. Interest rates have shot up on the assumption that Hong Kong would be hard-pressed to defend its currency's link to the U.S. dollar if the yuan weakened considerably. But Mr. Sachs argued that a ''weaker yuan is actually good for Hong Kong'' because the territory is a service center for China rather than a competitor with China's exports.
Mr. Sachs has long held that delaying currency devaluations only causes more panic when they eventually occur and that it is best to accede to market exchange rates as early as possible. Yet, he said that Hong Kong was probably unable to escape its pegged currency, an arrangement in place since 1983, because ''it's a financial center, based on the peg.''
Mr. Sachs says he has no direct financial interest in advising governments, but the Harvard International Institute for Development does advise many governments around the world with policy suggestions that in some cases clash with the prescriptions of the IMF.
Mr. Sachs said the IMF had undertaken a futile attempt to support an overvalued currency in Brazil and had essentially wasted the $41.5 billion it pledged to the country in December.
The high interest rates that were needed to support the currency have caused ''one of the world's most unnecessary recessions,'' he argued.
He contended that it might have made more sense to disperse the aid package after the currency settled at its market rate.
Mr. Sachs said the IMF also erred in its dealings with the banking sector in Ecuador. Last week, the second-largest bank in Ecuador was closed, the eighth to be shuttered since August.
The IMF, he said, committed similar mistakes in Indonesia in 1997, when 16 banks were quickly closed in a move that even Mr. Neiss conceded could have been executed more smoothly.
Despite overnight interest rates of more than 23 percent, the Ecuadoran currency has fallen by 60 percent in the past year. But Mr. Sachs conceded that the kind of panic he associates with IMF policies had not yet taken hold in Latin America, despite the fact that the currency of its largest country, Brazil, has plunged 35 percent since January.
''There's an informal agreement with the commercial banks to maintain lines of credit,'' he said, ''but how firm that is, is still an open question.''
He contrasted this arrangement with what happened in Asia, when commercial banks declined to roll over tens of billions of dollars in short term loans, prompting a liquidity crisis that prevented even solvent companies from receiving trade financing.
Mr. Sachs also blamed the IMF for exacerbating conditions in Asia after Thailand ignited the crisis in July 1997 by devaluing its long-defended currency, the baht.
In a polite but firm response, Mr. Neiss said that the IMF had recommended to Thailand that it devalue its currency as early as January, 1997 but that Thailand had not taken this advice.
''We also convinced the Philippines to stop pegging its currency,'' he added, referring to the longtime IMF client which has been comparatively lightly hit by the crisis.
More Indonesia Aid
Mark Lander of The New York Times reported from Hong Kong:
Mr. Neiss said he expected the IMF to approve more financial aid to Indonesia in a board meeting in Washington on Thursday.
''The IMF will propose that the existing commitments be increased,'' Mr. Neiss said. He said the board must approve an increase but added, ''I would expect that the board will agree.''
Indonesia's chief economic official, Ginandjar Kartasasmita, asked for an extra $1 billion in aid in a meeting in February with the IMF managing director, Michel Camdessus.
Mr. Neiss would not say how large the increase would be. But last year, the IMF approved an additional $1 billion in aid to Indonesia, raising its total commitment to $11.2 billion. In all, Jakarta is receiving a $43 billion rescue package from the IMF and other multilateral organizations.
The Fund has already disbursed $8.8 billion, and analysts said the Indonesian government was worried that unless it agreed to pledge more, the country may have trouble soliciting aid from other sources.
The Fund's move to release more aid is both an acknowledgment of the recent steps Indonesia has taken to overhaul its shattered economy - and a sign of how far it must still go to join the ranks of the recovering in Asia.
Mr. Neiss said Indonesia needed the extra help because, unlike South Korea or Thailand, it is still not attracting private capital.
Analysts said foreign investors were generally steering clear of Indonesia, as it makes a trouble-prone transition from the Suharto era to a more democratic system.
Still, Mr. Neiss praised Indonesia for taking steps to clean up its ruined banking system. On March 13, the government of President B.J. Habibie closed 38 banks, took over seven and indicated it would bail out nine others.
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