Wed, Apr 14, 2010 - Page 8 News List

A strategy for ensuring a safe exit

By Lee Jong-wha

Developing Asia’s rebound from the global economic crisis has taken a firm hold. The Asian Development Bank predicts growth of 7.5 percent this year, up from 5.2 percent expected last year and exceeding growth in 2008. Such robust expansion suggests authorities will “exit” the accommodative policies adopted during the crisis earlier than the rest of the world. Indeed, monetary authorities in countries such as India and Malaysia have already pushed policy rates up a quarter point, while many governments plan to reduce fiscal deficit targets this year.

However, the important question is: Exit to where? As Asia exits this crisis it must ensure it is not entering another. Authorities around the world have so far failed to deal meaningfully with its underlying causes. Structural problems remain — such as inadequate financial market regulation and excessive liquidity — despite constructive proposals on global macro-policy coordination and financial regulatory reform. And in developing Asia, large current account surpluses and reserve accumulation will continue to exacerbate the global imbalances that underpinned the current global crisis. Current account surpluses in the region, particularly in the People’s Republic of China (PRC), declined only marginally during the crisis and are expected to reach even higher levels over the next few years.

The uneven pace of recovery between developing Asia and the advanced economies suggests that capital inflows to Asia will surge once more. Even disregarding any major disruptions here, the region will remain vulnerable to large and potentially volatile capital movements, which could fuel inflation and asset price bubbles. As the 1997-1998 Asian financial crisis demonstrated, rapid reversal of capital flows can have catastrophic economic effects. Excessive openness in international trade and financial transactions leave Asia more susceptible to global financial turmoil.

The 1997-1998 Asian crisis and the current global crisis exposed weaknesses in developing Asia’s financial and real sectors. To avert the next crisis — that is, to choose the right exit — policymakers must learn the right lessons and follow a more balanced and sustainable growth path.

That requires consistent adjustments on the demand and supply sides of the economy over the long term. It means a broader monetary policy framework, more flexible exchange rates, continued fiscal discipline, greater domestic and regional demand and better social protection.

First, implement a monetary policy framework that takes into account asset prices and financial market stability and adopt a judicious mix of policies, including regulatory and direct capital control measures to manage volatile capital flows effectively. This also involves strengthening surveillance and regulatory regimes, including establishing an institutional framework for macro and micro-prudential surveillance and regulation, ideally managed by a systemic stability regulator empowered with adequate enforcement tools and mandates.

Second, allow greater exchange-rate flexibility, and develop an institutional framework that accommodates a concerted appreciation of regional currencies, as well as increased intra-regional exchange rate stability. It is clear that developing Asian economies, especially the PRC, cannot keep exchange rates stable against the US dollar and continue to amass international reserves. Regional cooperation in foreign exchange reserve management — such as the multilateralized Chiang Mai Initiative (CMIM), a regional reserve pool of US$120 billion — should also be strengthened to defend against future financial crises.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top