ASEAN +6: Meeting produces no major moves on crisis

Although the recent meeting of the Finance Ministers of ASEAN and six other countries produced some new initiatives, there were no major moves to resolve the on-going financial crisis.

by Martin Khor

KUALA LUMPUR: Finance Ministers of the Association of South- East Asian Nations (ASEAN) and six other countries ended their meeting here (1-3 December), with a few new initiatives, but nothing major in the way of resolving the region's on-going financial crisis.

The "ASEAN Plus Six" meeting followed an earlier one of ASEAN Finance Ministers meeting among themselves.

The Ministers of the "ASEAN Plus Six" endorsed a Hong Kong suggestion to develop a "market-based approach to mobilize private sector resources" to assist adjustment in the region, according to a statement issued at the end of the meeting.

Hong Kong is to convene a meeting of technical experts in two weeks to discuss details of the structure.

The meeting was attended by Finance Ministers of ASEAN countries as well as Ministers or officials of the US, Japan, Australia, China, South Korea and Hong Kong, as well as the IMF, World Bank and Asian Development Bank (ADB).

Regional foreign currency bond market

The Thai Finance Minister, Tarrin Nimmanahaeminda explained that the "market-based approach" referred to a regional foreign currency bond market. He was speaking at a panel discussion involving the ASEAN Ministers at a parallel private sector seminar on ASEAN Financial Initiatives.

Noting that there was a large quantity of surplus funds in the region, that were mainly invested in the Western countries, Tarrin said that the question arose as to why these funds should not instead be invested in the region. "If a market is available in quality papers in the region, we should invest the region's funds here."

Malaysia's Deputy Prime Minister and Finance Minister, Anwar Ibrahim told a press conference that the "fund" could pool medium and long-term private sector funds in the region to be kept in Asia and managed by Asians. The funds could be used for beneficial purposes such as buying currencies to prop them up, and not as a speculative tool.

"Now, sources in the region are buying large amounts of US bonds, and this large pool of funds, kept outside the region, are in turn used by speculators to attack currencies in the region," said Anwar.

Hong Kong officials said the market-based approach could for instance include a private debt instrument for extending the maturity of short-term loans. This was useful as the region's private sector had borrowed short-term funds to finance long-term investments, leading to a liquidity crisis when capital inflows reversed.

The Ministers' statement also agreed on the rapid implementation of the "Manila Framework" (a regional standby facility to supplement the IMF) and noted that Japan would convene a meeting of finance and central bank officials early next year on this.

In a paragraph on the WTO's financial services negotiations, the Ministers "welcomed ASEAN's firm commitment to the liberalization of financial services and to table offers before the deadline of the conclusion of the negotiations in the WTO. The Ministers agreed to work together towards a successful conclusion of the WTO negotiations in financial services. This liberalization process is expected to enhance the soundness of the financial system."

In a paragraph on the meeting with the IMF Managing Director, Michel Camdessus, the statement said that Camdessus expressed confidence that the South-East Asian economies would recover quickly if appropriate policies were taken, and that he reported on the progress of the study on the role of hedge funds in the recent crisis.

"Ministers welcomed the preliminary findings of the study, looked forward to receiving the full report and urged the IMF to extend the scope of the study to examine the structure of the global financial markets and short-term capital flows, including the impact of hedging activities on the banking sector as well as the impact and implications of technology on capital flows."

The Ministers also urged IMF members for early ratification of the New Arrangements to Borrow and the agreement to increase IMF quotas reached in Hong Kong during the World Bank/IMF meetings. They also urged the IMF to "work expeditiously toward the establishment of a new quick- disbursing short-term facility."

Thai Finance Minister, Mr. Tarrin told the seminar that this referred to a "new kind of IMF facility" involving quick disbursements of funds, which may be used for the first time in South Korea. He said there had been a basic change in thinking, that the affected economies are facing a problem of liquidity and not insolvency. "Quick disbursement of funds may therefore instil confidence in the market and it may be possible to rebuild the real economy."

A new direction for the IMF needed

He said a new direction had to be set in the IMF to address concerns of countries like Thailand.

"We have an austere programme under the IMF but we cannot deflate the economy forever without a deterioration of assets we have built up, and without sacrificing social development and threatening political stability."

He was replying to a seminar participant who commented that despite the Thai and Indonesian reforms under the IMF packages, the markets kept falling.

"It's said that going to the IMF is good as this gives the markets confidence," she said. "But in the Thai and Indonesian cases, the market has digested that going to the IMF means that the countries are going to sacrifice their growth. If the IMF conditions do not change, will confidence return?"

Also at the seminar, Filipino Secretary of Finance, Roberto de Ocampo gave a detailed explanation of how the original idea of a separate Asian Fund had been diluted to a "cooperative financial arrangement to supplement IMF resources."

He said during the World Bank/IMF meetings in Hong Kong, the idea of a regional fund with a specified amount and on a permanent basis with a secretariat had evolved, which would have amounted to "an Asian IMF."

Two concerns were subsequently raised, that of risk or "moral hazard" (that countries would use the fund to avoid taking hard decisions) and that a fund separate from the IMF could lead to "conflicting conditionalities."

Ocampo said that at the Manila meeting of financial officials, it was therefore decided instead to set up an Asian standby facility, "to be drawn upon on a when-needed basis. No institution will evolve for it."

Ocampo added that the fund would be operated only when a country came under an IMF programme. It would impose its own conditions, but neither would it be part of the IMF organizational make-up and thus its operation would not need a process that moved through to the IMF Board. "This is not the easiest point to grasp but that's the reality," concluded Ocampo.

[Other reports show that the US, which virtually controls the IMF, though only a single largest member with veto on some IMF Board decisions, and ensuring that the IMF pursues policies of benefit to the US, applied pressure to ensure that the IMF primacy is maintained.]

[A report in the Financial Times on 3 December, about the "bruising battle" in the Korea-IMF talks, said among other reasons, some observers in Seoul blamed IMF negotiators, led by Hubert Neiss, the IMF Asia-Pacific director, for the confusion as they apparently agree to terms that are then rejected by Mr. Camdessus, who is under pressure from the US to strike a tough bargain with Seoul.]

[Another report in the Wall Street Journal said that Micron Technology Inc., one of the US manufacturers of memory chips is lobbying US government officials and members of Congress to express concern that US tax payer's dollars (through a US contribution to the IMF package) would effectively reward South Korea's chip manufacturers, who have produced too many chips and triggered a price plunge that has hurt Micron. However, Micron's efforts have not received much support from other US semi-conductor makers, who see the need to prop up the global economy and the demand for chips.]

[The WSJ report said that on behalf of Micron, two US senators (Senators Dirk Kempthorne of Idaho and Orrin Hatch of Utah) have written to the US Treasury Secretary to stipulate that the (IMF-Korea) agreement should not support practices that hurt US producers. The report also quoted an analyst at market researcher, Dataquest Inc., that the IMF will place restrictions on use of the funds to bailout Korea's chip, steel and auto-industries.]

[Other capital market observers in Europe note that the pattern emerging from the IMF in the Asian region is of conditionalities leading to closure or bankruptcies of local finance and industrial enterprises, IMF demands for reducing capacity in automobiles, computer chips and other production facilities, and forcing policies on countries that enable foreigners to buy up such enterprises on the cheap. One observer said that this may or may not be a return of imperialism to Asia, as the outspoken Malaysian Prime Minister, Dr Mahathir Mohammad has said in one of his speeches, but it is coming close to the use of the IMF to block the rise of competition from Asia and the industrialization of the developing world. If all this results in a new wave of anti-West nationalism, the West and the institutions controlled by them - IMF, World Bank and the WTO - have to blame themselves.]

Structure of standby facility

Ocampo's explanation came in the wake of confusion and controversy as to the degree of independence such a regional facility would have from the IMF and how it would operate. His remarks made it clear that the facility would not be independent in policy from the IMF.

However, there are still no details about how much money the facility would have or how it would operate. One official said that Japan, which some months ago had mentioned a contribution of US$50 billion to an Asian Fund, had come under pressure from the US to drop the idea, and now it had not pledged anything even for the much watered-down "standby facility."

At the seminar, Singapore Finance Minister, Richard Hu explained the rationale for his country's loans to Indonesia. He noted that the region's problem was one of contagion and a collapse of confidence, and a new problem involving the capital account which the IMF and the region had not faced before.

"Singapore recognized that this is a special situation," Hu said. "The Indonesian economy was sound. We contributed US$5 billion to the IMF facility and we also agreed with Japan to intervene as and when appropriate in the rupiah which had fallen below its fundamental level."

Hu stressed that Singapore would not necessarily do the same in other cases. "When we decide it is appropriate we may intervene again in future."

Indonesian Finance Minister, Mar'ie Muhamad presented a summary of a background paper on the causes of the regional crisis which the meeting had discussed.

He said the roots of the South-East Asian crisis were different from the earlier crises of Brazil and Mexico.

"The South-East Asian crisis lies in private sector activities, not in public sector debt," he said, adding that governments in the region had budget surpluses or minimal deficits, whilst there was a build up of private sector foreign debt.

The affected Asian countries suffered from a misallocation of investments and not over-consumption. Too much investment was misallocated to real estate.

Problem of confidence

Mar'ie stressed that the most important problem is that of confidence, and not macro-economic fundamentals.

The currency crisis emanated from several factors occurring together: macro-economic imbalances (current account deficits and a slowdown in exports); a build up of short-term debt to finance long-term investment; a lowering in the quality of investment; and hedge funds amplifying market pressures given the small size of the region's market.

Following this explanation, Thai Finance Minister, Mr. Tarrin emphasized that "even though the root cause is private sector based, we in the government sector are determined to solve the crisis. The buck stops here."

A participant asked the Ministers whether they thought that the region's crisis came from an over-rapid pace of financial liberalization, since the region's knowledge on the market's operations and effects, and its regulatory and supervisory framework, had been inadequate to ensure the productive use of the inflow of foreign funds.

Filipino Minister, de Ocampo replied that liberalization per se was not seen as the problem. The difficulty was in the financial institutions' loose handling of credit and the mismatches that took place - short-term credits being used for long-term investment. He added that the Manila Framework had asked for technical assistance to improve regulations.

However, the Indonesian Minister, Mar'ie said that what was important was to have policies that create soundness in the financial system. "Liberalization itself is not the goal. Our goal is to enhance the soundness of the financial system as a whole." (Third World Economics No.175, 16-31 December 1997)

Martin Khor is the Director of Third World Network.