At a recent high-level regional consultative meeting to prepare for a UN event on Financing for Development in 2001, the Indonesian President stressed the importance of finding an Asian identity. The UNCTAD Secretary-General, meanwhile, called for regional cooperation and collaboration to forsee, prevent and control future financial crises in a timely and efficient manner.

by Martin Khor

Jakarta, 2 Aug 2000 -- Indonesian President Abdurrahman Wahid stressed the importance of finding and articulating an Asian identity to face future challenges, while UNCTAD Secretary-General Rubens Ricupero called for regional cooperation to prevent and control future financial crises.

Wahid and Ricupero were speaking at a high-level regional consultative meeting to prepare for the United Nations “event” on Financing for Development scheduled to be held in 2001.

The President of the UN Economic and Social Council (ECOSOC), Dr Makarim Wibisono, who is the Indonesian Ambassador to the UN in New York, called for reforms in the Bretton Woods institutions.

Wahid, who opened the high-level regional consultative meeting and spoke off-the-cuff without notes, said the Asian region was beset with the need to establish justice as well as raise living standards.  Compounding the problem of finding enough funds for development was the fact that in many parts of Asia there were different crises of finance, economy and identity.

The Jakarta meeting, the first of a series of regional preparatory meetings, is organised by ESCAP, UN Conference on Trade and Development and the Asian Development Bank (AsDB). It is attended by 152 delegates from 37 countries, NGOs, financial institutions and UN agencies.

In his brief address, Wahid said the importance of finding an Asian identity was very important. “From the start of my Presidency, in setting the outline of future development, I had stressed the need of finding the identity,” said Wahid, making references to various leaders and personalities of the region with which he had exchanged views.

He added that he had followed up on his idea that Indonesia had to work together with other developing countries in the region, such as India, and a major developed country had expressed concern that it might be left out.  But he had responded that establishing an Asian identity was very important.

“There is proof that a new Asian identity is beginning to emerge and this question of identity will catapult us to the new Millennium, with the emergence of Asia as a middle force on the world scene.”

At a later session, UNCTAD Secretary-General Rubens Ricupero, said the affected Asian countries have staged a dramatic return to growth and stability after undergoing many painful changes and adjustments.

The severity of the Asian crisis in terms of reduced output, jobs and wealth surpassed those of the 1930s and of a magnitude thought impossible within the financial framework set up after World War II.

Ricupero said collaboration on monetary and financial issues should be an important and perhaps inevitable aspect of economic integration among Asia-Pacific countries. Regional trade integration also found expression in the expansion of intra-regional financial flows; in particular, investment flows from Japan played an important role in regional trade integration.

However, the sharp fluctuations in the yen-dollar exchange rate made these flows highly volatile, while interest rate differentials between the world’s major economies and the region’s economies also became more volatile, contributing to the rise in short-term bank lending to the region.

Ricupero added that an important lesson from the experience in regional integration and the globalisation of production was that “these processes produced both positive and negative influences on financial stability and growth within the region.”

“Whilst regional integration seems to be part of the process of globalisation, the manner in which such integration was organised appears to have been a major factor in making the financial crisis more severe, as well as in increasing the strength, duration and contagion of the crisis.”

Ricupero said the question is how regional integration can be made an instrument of financial stability and supportive of high growth. Had there been effective regional collaboration and support mechanisms in place, the crisis could have been anticipated and confronted earlier and the costs reduced.

Strong national systems of financial regulation and surveillance, though essential, were not enough. These national systems should be “linked by appropriate regional cooperation and collaboration to foresee, prevent and control the outbreak and spread of financial crisis in a timely, efficient and equitable manner.”

Ricupero said the volatility of the yen-dollar exchange rate has made it increasingly difficult to identify an optimal exchange rate policy for the region’s countries. Asian developing countries have traditionally linked their currencies to the dollar, but the increasingly integrated regional financial and goods market suggests there could be more effective and beneficial regional complements.

Faced with a similar problem in the 1970s, the European countries formed an Exchange Rate Mechanism. Regional possibilities in this regard should thus be investigated while ensuring complementarity with global arrangements, the UNCTAD head suggested.

“Promoting efficiency, complementarity, stability and appropriate burden sharing in financial arrangements at all levels should be an important objective of future reform efforts in the area of money and finance,” said Ricupero. Discussions on reforming the international financial system is of particular relevance whilst regional cooperation to prevent and manage financial crises have been part of the discussions.

“It would be useful for countries of the region to explore appropriate means of integrating their efforts toward greater regional collaboration and cooperation, into global mechanisms of financial stability, so that their interests are adequately reflected. These efforts should also take into account the need for greater coherence and complementarity among different policy areas, such as trade, money, finance and development.”

Dr Makarim Wibisono said many Ministers took part in the special high-level meeting between ECOSOC and the Bretton Woods institutions for the third time this year and stressed that the high-level event on Financing for Development would be a momentous opportunity to deal with global financial issues.

“They expect the meeting to address a broad range of issues, including the international financial system, sustained flows for development, a comprehensive debt strategy, and poverty eradication. They also underlined the importance of addressing burden sharing between creditors and debtors, coherence between international trade, financial and monetary system; governance of the international financial system and responsiveness to the challenges of development.”

Wibisono said several speakers also stressed the need for the international financial system to be more responsive to developing countries so they could benefit from globalisation.

Addressing what he considered some of the key issues, Wibisono stressed the following points:

*        Domestic financial institutions must function properly, i.e. they must ensure that allocative decisions are taken on the basis of economic merit, otherwise the viability of the financial sector itself could be endangered and financial inflows could quickly turn into rapid outflows, thus crippling the economy.

*        The banking system and equity markets must be adequately supervised; deregulation of the banking sector and capital markets should never be taken to mean absence of regulation.

*        The international financial community must make available timely data on the risk-adjusted spread between yields on emerging market securities and international bench-mark security.  Where change reflects unwarranted euphoria rather than underlying fundamentals, governments can take steps against an unjustified level of capital inflows that leave a country vulnerable to subsequent rapid capital outflows.

Wibisono also called for changes to the Bretton Woods institutions (BWIs), their decision-making system and policies.

He said that with the advent of globalisation and unprecedented financial flows, the adequacy of the BWIs to manage the world economy has come increasingly into question.

Despite the wake-up call of the Mexican crisis, the institutions had not responded by the time of the Asian crisis and it is “therefore urgent that we review the capabilities and modalities of these institutions to respond to financial crises induced by large capital movements,” he said.

“We must be mindful that the decision-making structures of the BWIs also need to be reviewed and made more inclusive and democratic.  Broadening the decision-making process would help foster stability in the system."

“One of the most persistent problems and dilemmas pervading the current financial and monetary system is that of painful adjustments. Many countries continue to be weighted down by inordinate debt overhangs.  These imbalances should be fully addressed.”

He reiterated that the Fund’s decision-making structures lack a democratic approach and this should be addressed through expanded participation.

Wibisono also called on the IFIs to approach capital account liberalisation in an orderly and flexible manner so that member countries can tailor it to their respective circumstances. He also called for establishing surveillance and regulations on short term capital flows and trade in currencies.

Calling for regional financial and monetary cooperation, Wibisono said many regional financial institutions are small but an investment in their development would pay off. Thus, the design of a new financial architecture should introduce special incentives to develop such institutions.

“Indeed in the long run the IMF could be visualised as part of a network of regional reserve funds and its operations could then concentrate on relations with these reserve funds rather than on support to countries in difficulties.”

Dr Wibisono also called for international measures to prevent recurrence of crises, through prevention of excessive fund inflows.  There is an urgent need for comprehensive reporting on private capital flows, especially private debt, including very short-term debt instruments (commercial paper and promissory notes), short- and medium-term debt.

“It is these instruments (of very short-term debt) that escape almost all reporting systems, yet these types of borrowings sharply increase a country’s exposure and shortens the maturity structure of its debt.  In Indonesia we learned much to our regret that our corporate sector had engaged in substantial amounts of such short-term borrowing which, when the exchange rate depreciated, led to a serious repayment problem.”

Nitin Desai, UN Under-Secretary General, said although developing countries had for a long time called for a major meeting on finance, there was agreement only recently to hold one when there was a change of perception caused by the 1997 Asian crisis and by the growing public anxiety about globalisation.

The Financing for Development process, he stressed, was a political rather than a technical process, as it aimed to draw in all stakeholders and have credibility with governments and NGOs. It also included interaction between the UN, the BWIs and WTO at secretariat, as well as intergovernmental levels.

The value of having a UN-based process on finance was that:  (i) it could have a broader framework than the one within which Finance Ministries usually worked in (and thus included issues like prospects for development, mobilising savings, investment efficiency);  (ii) in the UN, the concerns of all countries including LDCs can be covered; (iii) the concession elements such as Official Development Assistance (ODA) and debt relief can also be covered.

The newly appointed ESCAP executive secretary, Kim Hak-Su, a Korean national, said the region appears firmly poised for recovery but formidable constraints persist. The ESCAP region is important as the experience of the region has often led to paradigm shifts in development philosophy.

Till recently, the shift signified a greater role for the market and closer integration with the international economy. Following the crisis, there is an increasing emphasis on enhanced role of governments in many areas, including the rule of law, eliminating corruption, sound corporate and financial governance.-SUNS4721

Martin Khor is the Director of Third World Network.

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