Ways to earn from capital flow
APART from strengthening the Bretton Woods system, one of the key topics on the new international financial architecture to be discussed by the G-22 countries in Washington DC next month is how countries could benefit from capital flows without experiencing disruptions to their economies, said Alan Larson, the US assistant secretary of state for economic and business affairs.
Although Larson hesitated to outline the US proposal to the G-22 meeting, which will take place in the corridor of the World Bank/International Monetary Fund (IMF) annual meeting, he hinted that the existing system of open trade and open international economics tied to free capital flows had created more prosperity in the world over the past 50 years than any other economic system the world had embraced.
''It's important for us to recognise how we are going to benefit from that system, not to lose faith in the free institutions that support democracy. This is not to say that everything is perfect. The US will come forward with ideas, which then will be discussed and go to the leaders,'' he said.
Larson has visited Seoul, Beijing, Hong Kong and Bangkok as part of his whirlwind tour to monitor the financial crisis and the latest economic developments in the region. His next stop is Jakarta.
Thai Finance Minister Tarrin Nimmanahaeminda will represent Thailand at the G-22 meeting, where he is expected to air Thailand's view on what the developing countries would like to see in a new make-up of the international financial system since free capital flows are double-edged, helping countries to prosper when they flow into their economies but destroying their wealth almost overnight when the flows are reversed.
Dr Thanong Bidaya, a former finance minister, expressed his support for restricted capital flows at the World Bank/IMF meeting in Hong Kong last year. Apart from saying that the Bretton Woods system, on which the IMF and World Bank are founded, will need to be modified, Tarrin has not made clear his views on capital flows.
For now, in practice, Thai regulators have been monitoring capital flows very closely, deliberately drying up the baht offshore and making it expensive to borrow as a measure to prevent the speculative attacks on the Thai currency. In the onshore baht market, any baht transactions without underlying trade or services are limited at Bt50 million. The measures so far have helped stabilise the baht without Thailand's having to go all the way and impose draconian capital controls as Malaysia has done.
Writing in The Washington Post, Michel Camdessus, the IMF's managing director, has said governments should not tamper with capital flows. ''The present crisis has prompted some calls to turn back the clock and rebuild a system based on controls,'' he said. ''This is not desirable, or even feasible, in today's globalised economy.''
Although open markets are the catalyst of the world's economic prosperity, Larson said, there are tendencies for protectionism in various countries, even in the United States. He said the US, which will host the World Trade Organisation meeting next year to enhance open-market policy, would continue to support the IMF to make sure that it had adequate financing to prevent crisis-hit countries from suffering from free fall.
Larson praised South Korea and Thailand -- unlike Russia -- for using the IMF resources effectively to undertake the strong and necessary measures to stabilise their currencies and rebuild foreign-exchange reserves. He said both countries were leaving the stabilisation stage on the path to reform and recovery.
''I think it would be a big mistake to draw from the example of Russia that the IMF has mishandled the situation,'' he said. ''The IMF might be an imperfect institution, but it is the best institution we have right now.''
Asked about last week's proposal by the Asean foreign ministers to revive the Asian support fund to help bail out troubled economies in the region, Larson said he had not seen the proposal, though it would have to be examined with the role of the IMF, the World Bank and other regional organisations and address conditions of reform and corporate restructuring.
Last year Japan spearheaded efforts to establish a US$100-billion bail-out fund, but it was shot down by the US over fears that it might rival the IMF and isolate the region from the existing international financial system.
BY THANONG KHANTHONG