G-7 countries leave Asia to look after itself 

September 26, 2000

WHEN the Asian crisis hit the global financial markets in 1997 after the devaluation of the baht, G-7 countries stood idly by.

Their 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.

In a way it served them right because the Asian crisis did not have any significant impact on economic growth in the US or Europe.

Only 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.

The 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.

But the US shot down the proposal for fear that it would undermine its global influence and undercut the role of the IMF.

Now, 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 $0.84 low.

The 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.

This 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.

But 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.

One 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.

In 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".

The 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 their interests.

With 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.

BY THANONG KHANTHONG