G-7 countries leave Asia to look after itself
September 26, 2000
the Asian crisis hit the global financial markets in 1997 after the devaluation
of the baht, G-7 countries stood idly by.
attitude at the time was that the problems in Asia were not necessarily US or
European problems. Moreover, the United States and Europe viewed the Asian
situation as largely an accumulation of years of financial sin and crony
capitalism that should be punished.
a way it served them right because the Asian crisis did not have any significant
impact on economic growth in the US or Europe.
Japan, a member of the exclusive G-7 club, cried out for help - to no avail -
for a global effort to help calm the regional turmoil. Eventually, the
International Monetary Fund was reluctantly summoned to try to put out the fire
in an ad-hoc way.
absence of an international lender of last resort to protect emerging countries
from the financial crisis prompted Japan to propose a US$100-billion (Bt4.28
trillion) Asian monetary fund.
the US shot down the proposal for fear that it would undermine its global
influence and undercut the role of the IMF.
in the wake of the ailing euro, which has lost more than 25 per cent since its
debut last year, G-7 nations have displayed a more interventionist mentality,
realising it is in their interest to do so. It has stood firm behind last
Friday's intervention by the European Central Bank, the Bank of Japan, the US
Federal Reserve and the Bank of Canada to prop up the euro, which fell to a
intervention was estimated to have cost between $2.5 to $7 billion. With this
support, the euro is trading at around $0.88. The problem with the euro is that
money managers still prefer to move their capital in US dollars.
episode clearly demonstrates flaws in the international financial system. When
things go wrong in other parts of the world, G-7 will only take action if they
feel the situation will have an adverse affect on their interests.
the problem is that, unlike G-7, emerging countries do not have the resources to
defend themselves against an onslaught on their currency. In short, there is no
global last-resort financial provider for smaller nations.
thing Asian countries have learnt is that when another crisis hits they will
only have themselves to rely on. For this reason, they have agreed on the
"Chiang Mai Initiative", under which member countries can borrow
reserves from each other to defend their currencies.
the case of the ailing euro, it is clear the G-7 showed its selfishness by
defending its own interests. This is not only a case of a "digital
divide" that is increasing the income gap between rich and the poor
nations, it is also a case of a "financial divide".
experience has also shown that both the IMF and the World Bank do not have
adequate resources to come to the aid of countries as a last resort to protect
countries moving to embrace a floating foreign exchange regime and the
volatility trend in the global financial markets, it is only a matter of time
before another financial storm hits.