Sovereign funds are weighing the benefits of co-operating more widely with multinational institutions such as the International Monetary Fund and World Bank to encourage cross-border capital flows and foster sustainable growth, particularly in emerging markets.
These suggestions for increasing the reliability of cross-border sources of finance and adding to international and regional ‘safety nets’ could encourage emerging market economies to speed up and maintain relatively open systems for capital flows. They would be in the interest of sovereign funds by contributing to open capital markets and raising investment returns – and would be beneficial by reinforcing market resilience in the face of worldwide political uncertainties.
Ideas for greater concertation between long-term suppliers of funds to emerging market economies are gaining ground in Asia to overcome the threat of ‘sudden stops’ in international finance, which marked the 1997-98 Asian financial crisis, and upsets in the euro area. President Donald Trump’s ‘America first’ attitude is likely to promote further such considerations.
The perceived vulnerability of emerging economies to crises would fall if concerns abated that ‘foreign investors come in good times and go in bad times’ – as one major sovereign fund put it.
These themes form part of the precepts for making emerging market economies, especially in Asia, less dependent on purely bilateral ties to the US and the Bretton Woods institutions, and more open to multilateral flows. Some of these tenets were circulating at a seminar in Tokyo on 22 March organised by the Asian Development Bank and OMFIF on developing capital markets to support financial stability and growth in emerging economies.
Such moves could widen the international scope of large investment institutions in Asia and the Middle East. These are highly important institutional investors in foreign markets, including among their neighbours.
A campaign of Asian ‘self-reliance’ has been driven partly by lingering resentment over what the region considers heavy-handed solutions to the Asia crisis 20 years ago. Desire for increased Asian weight reflects, too, the relative resilience of Asian economic growth during the past decade of problems for the West, as well as the rapid build-up of official assets held in the continent’s central banks and sovereign funds.
The 1997-98 Asian upheavals accompanied a series of currency devaluations in southeast Asia. Rescue measures orchestrated by the IMF and US government led to intense criticism – both for exacerbating the crisis and for not being followed by the West when the US and Europe faced comparable problems during the transatlantic financial upsets 10 years later.
The hard-line IMF treatment of southeast Asia included an insistence on free market principles such as complete exchange rate flexibility, prohibition of capital controls, large-scale budgetary cuts and acquiescence in bank failures. Rancour came from countries such as Indonesia, Thailand and South Korea, which more or less acquiesced, and Malaysia, which successfully resisted IMF strictures and incurred Washington’s wrath by, for example, introducing capital controls.
The lingering effects in Asia include both local reluctance to raise funds from the IMF at times of need, a move to accumulate foreign exchange reserves to boost self-insurance against crises, and desire for regional rather than global solutions to emerging-market challenges.
The latter includes the so-called Chiang Mai initiative for regional reserve pooling and crisis mitigation, though it has never been used in practice. The list of measures extends to the China-led creation of the Asian Infrastructure Investment Bank and the New Development Bank that challenge the primary position of the IMF and World Bank on the global stage.
David Marsh is Managing Director of OMFIF.