The International Monetary Fund’s (IMF) 1997 meeting has a special place in the hearts of many journalists.
There we were in Hong Kong, Asia’s economies crashing around us, watching George Soros duke it out with Malaysia’s prime minister. The billionaire described Mahathir Mohamad as a “menace to his own economy”. Mahathir labelled Soros, one of the speculators blamed for attacking Malaysia, a “moron”.
That brawl comes to mind as another big story out of the event comes full-circle. It involves an Asia-only bailout fund, Lawrence Summers and Timothy Geithner. Its implications will travel far and wide in the fastest growing economic region.
The “Asian Monetary Fund”, so passionately derided by Summers and Geithner at the time, is back. There is little a crisis-plagued US can do to stop Asia’s $120 billion (Rs5.9 trillion) foreign exchange reserve pool. Its creation is the clearest sign yet that Asia is getting serious about combating the global crisis. Done right, it will bode well for the region’s outlook.
There is still a role for Soros and Mahathir in this story more than a decade later, and I’ll get back to them shortly.
In September 1997, Summers was deputy US treasury secretary and Geithner was just being sworn in as assistant secretary for international affairs. Today, they are director of the White House National Economic Council and treasury secretary, respectively. Back then, Summers, Geithner and their boss, Robert Rubin, objected to Asia having a bailout fund.
Their concern was that it would eclipse IMF in the region and, by extension, the US’ say in how Asia retooled economies. They feared doling out billions of dollars in aid with few policy-change strings attached would prove dangerous. And they got their way. That changed this week.
From 1997 to 1998, IMF arranged about $100 billion of loans to Indonesia, South Korea and Thailand as currencies collapsed. In return, governments had to cut spending, raise interest rates and sell state-owned companies. IMF’s policies needlessly deepened the turmoil.
During this global crisis, nations sought help from neighbours instead of borrowing from IMF. Indonesia raised $5.5 billion of standby loans from the Asian Development Bank (ADB), World Bank, Australia and Japan, and increased the size of its currency-swap arrangements with China and Japan to bolster access to foreign exchange.
Whole new level
Asia’s new fund takes things to another level. On 3 May, the Association of Southeast Asian Nations (Asean), together with Japan, China and South Korea, agreed on terms for the so-called Chiang Mai Initiative and to use the funds in times of trouble. The pool, to be ready by year-end, largely neuters IMF in Asia.
Granted, $120 billion seems paltry in today’s world of cascading markets and recession. American International Group Inc. alone received $183 billion worth of public bailouts. The size of the stockpile isn’t the issue. It can always get bigger. China and Japan boast almost $3 trillion of currency reserves. It’s the symbolism that really matters here.
Asia has been lacking in the cooperation department as the US credit crisis infected global markets. Meeting in Bali, Indonesia, this week, governments put their money where their vulnerabilities are, and it’s about time.
There are risks to consider, including moral hazard. Will having a pile of money to tap, with few conditions, encourage bad behaviour? Asian governments need to enforce a specific and clear set of guidelines and surveillance practices for nations accessing its new reserve pool. This money shouldn’t be used to encourage largess or complacency.
Not that Summers or Geithner are in a position to comment this time around. Asia sent financial contagion around the globe in the late 1990s. Now, the US is returning the favour, and then some. US President Barack Obama’s top economic officials lack the moral high ground or time to intervene in Asia’s plans.
Mahathir’s anti-free-market rhetoric won him a special animus in the hearts of investors a decade ago. That was before the US, with public bailouts, low rates and “buy American” provisions, began reading from a similar playbook. It’s not Malaysia that Soros criticizes these days, but the US.
Markets are getting ahead of themselves in betting that the worst global recession since World War II is over. ADB expects regional growth to accelerate to 6% next year from 3.4% in 2009. Analysts are pinning their hopes on stimulus packages, including China’s 4 trillion yuan (around Rs29 trillion) one. We have seen too many false bottoms in the last year to trust markets.
It’s worth noting that policymakers this week seemed less optimistic about the global economy than analysts and investors.
Job security may explain the disconnect. Wall Street needs to foster the view that things are improving to save the financial industry. Government officials know that nothing will boost Asia more than a rebound in the $14 trillion US economy. And US employment is still sliding. Summers and Geithner are busy trying to engineer that recovery. As Asia goes its own way, eschewing Washington’s advice, there’s little the US can do, besides keep quiet.
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