Message-ID: <Pine.SOL.3.90.980722141525.2275A-100000@ns1> Date: Wed, 22 Jul 1998 15:51:23 -0800 From: CHRIS KWAN <mailto:h1kwan@NS1.UMCSD.UM.EDU.MY> Subject: Re: Kuttner: WHAT SANK ASIA? MONEY SLOSHING AROUND THE WORLD To: mailto:DEVEL-L@AMERICAN.EDU
>
> Business Week 980727
>
> WHAT SANK ASIA? MONEY SLOSHING AROUND THE WORLD
>
> ROBERT KUTTNER
>
> We are learning once again the fundamental difference between free commerce
> in ordinary goods and free commerce in money. The former is broadly
> efficient--it subjects business to bracing competition and allows products
> to find markets anywhere in the world. The latter is destabilizing and
> deflationary--it holds the real economy hostage to the whims of financial
> speculation, which is vulnerable to herd instincts, manias, and panics. In
> ordinary commerce, prices adjust and markets equilibrate. In global money
> markets, erratic and damaging overshooting is the norm.
As for erratic l firmly agree but damaging, l am not so sure. "Correction" in FX at international level or interest rates at local levels are critical to ensure that markets can rectify 'mistakes' made at local levels. It may be damaging in the short term, many people were made poorer but then the same people would have made rich for shuffling paper or by producing nothing. The correction provides proof that we need to shift economic development to productive areas and serves as a good early warning system. As to speculation etc, it is a reflection of human behaviour, irrational as it seems since human beings are more careless and will take greater risk in frenzy times than in less volatile times. The problem is really with information and how information is being feed into the system because at any point in time, there will be someone out there with more information than the rest of us since he is the one originating the information.
>
> Exhibit A is, of course, the Asian crisis. The Asian collapse is widely
> blamed on structural problems--too much state interference in economies,
> ''crony capitalism,'' and thinly capitalized banks. But that system, while
> in need of overhaul, did produce exceptional growth for two decades. The
> more important cause of the Asian crisis is the sudden exposure of these
> nations to the speculative whims of unregulated financial capital. It is
> impossible to run an efficient economy when your currency swings by 100% in
> just a few months.
>
l am not sure about other Asian countries, but in Malaysia, the 'problem' is not a new one and even the Central Bank in Malaysia has highlighted the issue before the crash. Banks were taking advantage of the low borrowing cost (short term rates) and channeling them to development projects with long term returns (mostly mega projects with single exposure limits being stretched) or into shares speculation. The mismatch is profitable in the short run and l believe not in their wildest dream could they imagine the spread could be so wide after the devaluation which was unforseenable at that time. They were lending money to practically anyone who applied and not realising the consequences. In constrast now, they are so reluctant to lend that the Government has to intervene. The Government is already committed to helping (not rescuing) the big boys but the Banks should help the small players or at least take a more positive approach at the very least. Crony Capitalism is a rather strong word but perhaps with some equivalent in the West as well. The Government welcomes projects that are well-financed and productive for the country. In fact many of the mega-projects in this country have foreign counterparts involvement, particular from the technical aspects. As for local partners and hence where 'cronies' come into play, it is a matter of personal relationships. While it will be cheaper to hand it over to the foreign parties to do it singlely, it does not help much to increase the expertise of the locals. The extra cost allow the locals an opportunity to tag along and hopefully learn something, so it is like a social cost and frequently subject to abuse too if l may add. When the Government advocate certain party known to them there is indeed an element of cronism especially when the local party know next to nothing about the project. Malaysia is not at the stage where we can do it by ourselves, we do not have people like Goldman Sach or ABB or Citicorp yet. But even on Wall Street, most deals are done by more or less the same bunch of people. And they are selected because they can do the job but then perhaps there are many as well who can do as well but they are not known to those making the decision. They are not in the circle of influence so to speak. So crony capitalism exist everywhere where an elite group of people has the ears and minds of the decision makers. The question is really how much bad effect of cronism has in the recent crash? The answer is as much as cronism has expanded within the same period. With so many cronies, more projects need to be proportioned so that overall everyone get something. For example, a single project may have at least 6 cronies dividing the work and earning at least that much which drives up cost, increasing internal fighting and eventually be passed on to the public. These are the weaknesses of cronism, just imagine, the more favourites you have the less the older favourites will have. The bad times now will see only the very loyal ones staying behind, which in a way is positive. They may not be the brightest ones around but then in politics, one should be street smart rather than too bright. As to playing no favourites well, that may goes against the nature of relationships, although ideal, it may not be practical..at least at this time. The decision maker is also human and while in the past, the British and Imperial China have a way of selecting candidates based on merits, it worked well but eventually fell because that is the way of the world. Just consider those who belong to the old boys network and one can understand the reality of things.
>
> Ad hoc damage control coupled with self-defeating austerity is the wrong
> approach. Better to act systemically, with a ''Tobin Tax'' on short-term
> currency transactions, as well as a more managed system of capital flows and
> exchange rates. It remains to be seen whether today's statesmen can rise to
The Tobin Tax will force up transaction cost which will eventually passed on to the public. It is also very hard to define what is short term currency transaction (many genuine trade transactions are short terms) and regulation to manage it will drive the cost even higher. It will also slow down the flow of capital flow as it creates uncertainty. Furthermore as most of our money is tie up with fund managers who are looking for quick bucks for their clients, we should therefore look at the workings of these fund managers instead since they are the one who drives the money around. They are more critical since they need to park their idle money somewhere which falls into the category of speculative. There are not more than 500,000 of them around the world. A systematic study of their compensatory package should be carried out and reward them differently. Secondly, a study on how banks undertake their FX operation should also be carried out since so much money is concentrated in their hands which makes them dangerous where their internal checking system fails. Perhaps more FX centers should be opened dealing especially for trade transactions dealing with smaller amounts and at low transaction costs. They will have direct access to the market with a World clearing house run by centrals banks around the world. Banks will have to deal even with small amounts with their spread fixed. It is my opinion that the failure is due to the current adminstration with little code of ethics uniformly for all the banks around the world. There is also a lack of transparency among banks particular those in third world countries with substandard accounting practices. Banks crashing is the last thing any economy wants not because they don't deserve it but it often follows lost of confidence in the economy and the public having to bear the cost. A quick study of their problems often reveal mismanagement and so on rather than the adequacy of the general financial system. These are great starting points since dismantling the system now will cause much mayhem and if there is a critical need perhaps one should overhaul the system entirely and look at 'common currency' approach or a modified one.
> the occasion or whether they are still prisoners, as Keynes once put it, of
> the ideas of defunct economists.
>
> BY ROBERT KUTTNER
>
Chris Kwan
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