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Economists debate lessons of the Asian financial crisis
Divisions within the economics profession about how to handle the financial crisis in Asia emerged at a campus forum sponsored by the Hoover Institution on Feb. 19.
The economists involved in the public discussion generally agreed that national economic development had been outstanding in the countries whose currencies were hit by speculative attacks last summer. They also agreed that the crisis in Thailand, Malaysia, Indonesia, Korea and the Philippines was prompted by too much short-term borrowing in dollars, yen or marks by companies and banks that took risky positions because of implicit understandings that their national governments would bail them out of tight spots.
The economists did not agree, however, on a short-term recipe for fixing the problems. The sharpest split came over Indonesia, where President Suharto has been considering a currency board to stabilize and raise the value of the country's currency, the rupiah.
Nobel economist Gary Becker, a senior fellow at Hoover, said a currency board may be the only short-term solution for Indonesia, while Gerald Meier of the Graduate School of Business and Hoover said it was too risky. Stephen Parker, chief economist for the Asia Foundation of San Francisco, said that only major political reform could make Indonesia credible with the international financial community again. The International Monetary Fund "has no solution because it hasn't focused on political reform," Parker said. "The cost of slow political development is difficulty getting political legitimacy for economic policy makers."
Becker's point, however, was that political reform is usually a slow process. "One of the advantages of a currency board is that it can force some of this political change," he said. "If you can give me a superior alternative, I'll buy it. . . . I haven't heard anything better."
Meier said that currency boards can prompt a country's reserves to flow out quickly. "It's like repeating what the United States did to Britain after the war. It's a very risky thing."
Under a currency board system for fixing exchange rates, a national government promises to keep enough foreign currency on hand to pay off everyone who holds the country's currency, in hopes the promise will convince them to hang onto it and banks to extend loans denominated in other currencies. All other monetary goals such as those on interest rates and unemployment are subordinated, reducing the role of a country's central bank to a clerical one. Hong Kong and Argentina successfully used currency boards to stabilize the value of their currencies, but both experienced a sharp increase in interest rates and declines in employment and stock market values in the process.
The Asian currency crisis has pointed up two failings of his profession, Meier said. Development economists have assumed that "where enterprise leads, finance follows . . . but it didn't happen in these countries. They have been living with distorted financial systems." He and Parker said that the countries failed to attract long-term lenders. Short-term international borrowing also was encouraged by the Asian countries' own tight monetary policies, which led to high interest rates for domestic loans.
Economists also assumed that democratic political reforms automatically would follow economic development, Meier said. "That has not happened in Indonesia and is questionable in Korea. We need to switch our emphasis to political development" in those countries.
Meier advocated a "stronger IMF" while Becker said he worried about the "moral hazard" of an international bailout system that allows international investors to pass their risk onto international taxpayers. Meier said an international "public sector" was needed partly because global markets have not yet figured out how to allocate risk, as they do in domestic markets.
Korean economist Duck-soo Lee, who formerly headed the World Bank's loan department and more recently has been advising the Korean corporation Hyundai, said, "Koreans, including myself, got somewhat carried away with our achievement." Suddenly, he said, his $500,000 home is worth $250,000, a situation he likened to the U.S. Depression, when gross national product was cut in half. He said he is hopeful Korea can recover faster than the United States did, partly because the IMF has imposed political reforms that will make worker layoffs and corporate bankruptcies possible. "Without the IMF conditions, I would say [bankruptcies] were impossible. There would be social revolution in Korea."
One positive impact of the Korean crisis may be better relations between North and South Korea, said Chung-in Moon, a professor of political science at Korea's Yonsei University. "I think they know if they fight each other, they will both lose."
By Kathleen O'Toole