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International money games intensify

HONG KONG A mixture of entertainment in the Soros-Mahathir debate and seriousness over the financial upheavals in Southeast Asia characterised this year's World Bank/IMF meeting in Hong Kong.

Yet topping this economic policy-makers event was the emerging controversial issue of how modern money games should be designed to fit into the new international financial order.

Last Sunday, George Soros, dubbed ''The Man Who Broke the Bank of England" after his successful onslaught against the pound sterling, took on Malaysian Prime Minister Mahathir Mohamad by calling him ''a menace to his own country".

Mahathir earlier threatened to ban currency trading and blamed currency speculators for creating turmoil in Malaysia and regional markets. He made it clear that Soros and other ''unscrupulous" currency speculators were at the centre of Southeast Asia's troubles.

Soros returned the charge by saying, ''He is using me as a scapegoat for his own failings. He is playing to a domestic audience and he couldn't get away with it if he and his ideas were subject to the discipline of independent media inside Malaysia."

Soros also went further to warn Mahathir that ''interfering with the convertibility of capital at a time like this is a recipe for disaster". Soros, now dubbed by some as ''The man who broke the Bank of Thailand" after his US$3-billion gamble on the baht devaluation, set the tone for the debate over how capital flows would be managed in the future. Much to the country's shame, Thailand had been singled out as an example of a bad system which failed miserably, if not irresponsibly, to handle capital flow that largely went into real estate and other unviable investment projects. The lack of political decisiveness, prudent policies, openness, transparency and accountability to address macro-economic problems has given rise to a financial system crisis that has spread like the plague into regional markets.

Reacting against the regional financial turmoil, the G-7 stressed the importance of avoiding excessive depreciation of currencies where this could lead to the re-emergence of large external imbalances. It also welcomed the IMF's and international assistance efforts to stabilise the Thai economy and expected Thailand to vigorously implement the IMF programme, as a condition of the country's US$17.2-billion rescue package.

The G-24 also praised the timely response of the IMF to the currency crisis in Thailand through its emergency financing mechanism.

In spite of Thailand's systemic failures, there was an uneasy feeling among Southeast and East Asian countries that the money game had gone too far. Although they were privately unhappy with Thailand's mishandling of its macro-economic problems, the Southeast and East Asian countries were appalled by the threat of the modern money game, ruthlessly practised by the unregulated international hedging funds or banks from the West in the borderless world.

Soros might conveniently argue in favour of the virtue of his and other international hedge funds, which are ready to shower rewards on a sound economic system but do not hesitate to punish an unsound one. Yet Asian market players have had little leverage in this money game.

Around the corridors of the World Bank/IMF meeting, there were discussions about the possibility of Asia creating a regional crisis fund, with a gigantic reserve of US$100 billion. It signalled the start of confrontation between the West and the East a symptom of the lack of trust in the present structure of the international financial markets.

The regional fund would be a defensive mechanism, designed to help the member countries fend off future speculative currency attacks. The notion took shape at the Bangkok meeting of the United States and the IMF. The US suspected that the regional fund could evolve into a body that would leave it out in the cold and certainly outside the Asia-Pacific Economic Cooperation framework. There were reports of Japan trying to woo China and South Korea into this scheme, apart from the Association of Southeast Asian Nations (Asean).

The IMF, which looks after the stability of the international financial and foreign exchange system, was also afraid that such a regional fund would undercut its position as the supreme global governing body, although publicly it said that it has never hesitated to promote any regional monetary cooperation.

Japan clearly played the leading role in pushing for the proposal, sensing its stake and well-being depended on the prosperity and stability in this region. If Thailand is to collapse, it will bring down the entire region, dragging Japan's gigantic investment stake in its wake.

At Sunday's meeting of G-7 finance ministers, Japan tried to push for acceptance of the regional support fund. Thai Finance Minister Thanong Bidaya joined the pack of Southeast Asian finance ministers to reaffirm his support for the regional fund. He said the concept was complementary to the IMF in that it could rehabilitate the health of the region's financial sector. On Tuesday, Robert Rubin, the US Treasary secretary, and Alan Greenspan, the US Federal Reserve Board chairman, met Asean finance ministers to discuss the proposed regional fund. They parted on an open-ended note, saying only that future discussions would be useful.

Theo Waigel, the German Finance minister, warned that a regional fund would be a mistake as it could make the crisis larger rather than smaller.

Philippine Finance Secretary Roberto de Ocompo tried to play down the G-7 concern over the regional fund, saying, ''We have not arrived at any amount, nor were we talking about an institution to rival the IMF. So, to that extent I think there has been a little bit of misunderstanding in the G-7's reaction to this so-called proposal."

Upon his return to Tokyo, Hiroshi Mitsuzuka revealed that a planned Asian monetary fund would be supplementary to the IMF and other international institutions and not a competitor. He said Asian countries intended to stabilise their financial markets ''voluntarily" and that the Japanese government was ready to explain their position to the US and Europe.

If the regional fund is intended to be supplementary to the IMF, it clearly suggests that the IMF's role at present is inadequate in the eyes of Asia. Stanley Fischer, the deputy managing director of the IMF, sought to shoot down the Asian regional fund concept, expressing his concern that it might undercut the IMF's influence.

He warned it would be a mistake if the regional fund was to be set up without strict conditions attached over assets for bail-out loans. ''We would be concerned about the establishment of an international body that would undercut the IMF's conditionality," Fischer said. ''Surveillance among the Asian members through peer pressure would be sufficient to prevent future crises."

He noted it might not be in the tradition of the Asian countries to warn each other when a member is pursuing unsound macro-economic policy. The IMF's regional office in Tokyo would try to augment its role in this area, he added.

The US$17.2-billion bail-out fund for Thailand, brokered by the IMF, has been given on the condition that Thailand pursues a painful adjustment programme to bring its macro-economic problems under control. Last Monday, the South China Morning Post, citing a well-informed source, reported that IMF officials were dismayed about the dilatory and weak manner in which Thai officials have dealt with the country's economic crisis.

The realisation may not have sunk in that the IMF really does play hardball and will walk out if the Thai authorities fail to adhere to the programme, the paper added.

In Bangkok during a bilateral Thailand-Japan meeting, Thanong did assure Mitsuzuka that he would implement the IMF-backed economic restructuring programme in good faith, despite the pain, and that on Oct 15 a comprehensive financial restructuring package would be completed and should improve confidence. He and Chaiyawat Wibulswasdi, the Bank of Thailand governor, headed to Hong Kong after winning Cabinet approval for drastic budget cuts aimed at keeping the budget in surplus, equivalent to one per cent of the gross domestic product. Any further revenue shortfall would be matched by deepening cuts and a tax increase. This tough decision led Michel Camdessus, the IMF's managing director, to have more kind words for Thailand. On Sept 18, he tried to allay the concern that Thailand might flunk the IMF iron test by saying that he was satisfied with macro-economic reforms, although the country might face a potentially serious financial sector weakness.

Thanong and Chaiyawat put on an impressive show to win back confidence by promising to stick tightly to the IMF programme and tackle the ailing financial system decisively. The financial restructuring package would be drafted by a team of World Bank and IMF officials to eliminate any slight doubts about the legal or regulatory conditions surrounding the rehabilitation of the Thai financial institutions.

Talks about the money game shifted from the financial crisis in the region and the IMF package for Thailand to liberalisation of the capital account, which covers capital flows. Thailand has liberalised its current account, which covers trade and services, in accordance with Article 8 of the IMF, and had been maintaining a relatively free capital account which led to the creation of the bubble economy.

Sensing that countries might backtrack from further liberalising their financial markets through capital control, the US has been leading a drive to call for free capital flows. Rubin staunchly defended the free flow of international capital, even in the face of recent financial unrest in Southeast Asia.

He told the IMF Interim Committee that the turbulence in Southeast Asia should not cause a reversal of the trend to closer financial market integration.

He also called for increased transparency and enhanced surveillance of markets, notably through the exchange of information and data and the strengthening of the IMF's role.

What Rubin did not say was that US banks and financial institutions, owing to their technical experience and resources, would stand to gain most from global financial services liberalisation. The US has pushed hard for a global pact on financial services liberalisation in the World Trade Organisation and for capital account liberalisation in the IMF.

In April, the interim committee of the IMF agreed to add a new chapter to the Bretton Woods agreement by moving to amend its articles to give it jurisdiction over capital account liberalisation among more than 150 member countries. About 140 have agreed to Article 8 of the IMF, to adhere to current account liberalisation. The IMF economists see a ''logical step" towards capital account liberalisation after countries adopt current account liberalisation. The statement of the interim committee makes clear the importance it sees in the liberalisation of capital movements if the world is to strengthen the globalisation process.

''Private capital flows have become much more important to the international monetary system and an increasingly open and liberal system has proved to be highly beneficial to the world economy. By facilitating the flow of savings to their most productive uses, capital movements increase investment, growth and prosperity," it said.

In his address, Thanong, however, expressed Thailand's cautiousness over unrestricted flows of capital. Thailand is still slightly dizzy with the hangover from the capital flow. Thanong said any capital flow liberalisation must be ''cautious" and ''gradual".

Anwar Ibrahim, the Malaysian finance minister, also noted that measures or mechanisms must be worked out to protect countries from disruption when they liberalise their financial sectors.

He made his point, but unfortunately Malaysia has been too controversial to be taken seriously.

Fischer would argue forcefully the role of the IMF and capital account liberalisation. Three benefits would stand out:

First, the benefits of liberalising the capital account outweigh the potential costs.

Second, countries need to prepare well for capital account liberalisation because economic policies and institutions, particularly the financial system, need to be adapted to operate in a world of liberalised capital markets.

Third, an amendment to the IMF's articles of agreement is the best way of ensuring that capital account liberalisation is carried out in an orderly, non-disruptive way that minimises the risks premature liberalisation could pose for an economy and its policy makers.





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