IMF `may have contributed' to Asian crisis

Asia will soon be a favourite of the markets, according to a study by the World Economic Forum in collaboration with the Harvard Institute for International Development.

Presenting the findings at the Forum's annual meeting here, Prof Jeffrey Sachs, director of the Harvard Institute, said the International Monetary Fund actually contributed to the financial panic that helped to bring down the Asian economies.

Presenting the Asian Competitiveness Report 1999, Prof Sachs said IMF funds should not be used to defend undervalued exchange rates, as was done (unsuccessfully) in Russia and Brazil.

One of the authors of the report, Mr John Clarkeson, chairman of the Boston Consulting Group, said the study shows that a large number of warning signs were identifiable before the collapse.

The group used the concept of total shareholder return, more familiar in developed economies than in newly industrialised states whose stock markets are not fully developed. "In advance of the crisis it was possible in all the sectors to see warning signs that one would experience in more advanced capital markets. Value was being created only by growth."

The report proposes external supervision of the IMF, reform to give a voice to a larger number of developing countries and generalised floating of exchange rates. "The new monetary system should establish regional monetary bodies and an international bankruptcy court to speed up international debt restructuring," Prof Sachs said.

Some of these proposals are likely to be acted on at the next meeting of the G7 in Bonn later this month, according to the French Economy Minister, Mr Dominique Strauss-Kahn.

In addition, international rescue packages should include debt relief, debt standstills and priority payments for new loans to "bail in" foreign creditors rather than bail them out, according to the report.

It also called for an international UN meeting on liberalisation of long-term foreign direct investments and restrictions on short-term capital inflows.

It also speaks of a "serious mismatch" in the Asia Pacific, particularly most of South-East Asia, between investment in physical hardware - factories and machinery - and investment in "social software" such as scientific research centres, administrative and judiciary systems and growth of civil society.

"The long-term competitiveness of Asia rests as much on `getting the institutions right' as on `getting the prices right'," the report states.

Prof Sachs also insisted that the recent crisis greatly overstated the weakness of Asia. "The collapse is not really justified by any fundamental weakness." However, just as the collapse was faster than expected, he predicted that recovery would be faster than expected. Thailand and Korea had already tackled the structural problems that exacerbated the effect of short-term capital outflows.

Moreover, Japanese officials are also optimistic. Mr Tsugio Ide, Vice-Minister for International Economic Affairs, noted that his country still had "massive financial assets", competitive manufacturing industries, a strong work ethic and high investment in research and development. This could help it weather its current stagnation.

Mr George Yeo Yong Boon, Singapore's Minister for Information and the Arts, pointed out that all large Asian countries faced unprecedented urbanisation pressures and institutional structures that favoured rural areas, leading to massive unrest in their cities.

At the same time, the military that had been used to enforce stability no longer enjoy moral authority. In South Korea and Taipei, the governments kept them in the barracks and avoided clashes. Much the same thing happened in Thailand, but in Indonesia, use of the military led to severe clashes.