A challenge for the regional club
by Niels Thygesen
In The Tides of Capital, Julia Leung raises three important themes. Have the challenges in international economic policy-making become financial more than economic in origin? What lessons did Asia learn from its crisis in the late 1990s – and were they remembered in the recent more global crisis? And finally, did Asia receive counterproductive advice from the IMF and other orthodox sources two decades ago?
All three are vividly presented in the book, based on the author’s extensive experience and interviews with policy-makers.
The events triggering international crises do appear to have become increasingly financial, in the form of sudden reversals of capital flows into a country. If these are largely inspired by events in the countries from which capital flows originate, rather than by policy mistakes in the receiving countries, that has obvious implications for international policy. The west must be tolerant of efforts to stem ‘excessive’ inflows, and provide compensating financing of the sudden reversal of flows. Tighter domestic policies and structural reforms have lower priority.
Many Asian countries faced massive ingoing and outgoing tides of capital in 1997, and more recently after actual or perceived changes in US monetary policy since 2010. The Asians have learned to be more selfreliant, illustrated by their accumulation of international reserves. They have downplayed policies of pegging their currencies to the dollar, and built up national bond markets in their own currencies, reducing exposure to currency mismatches. And they have gained confidence in using policy instruments, out of favour or simply unused in industrial countries, such as capital controls – or ‘management’, in the current terminology. In this sense Julia Leung’s claim in the subtitle that ‘Asia [has] surmounted financial crisis and is guiding world recovery’ is well justified. The high tide in her text is her sense of vindication, understandable for an official subjected to strictures from international colleagues when Hong Kong intervened in its stock market in 1997. The Asians showed a capacity to innovate at such moments, and a talent for crisis prevention which served them well when the global crisis hit in 2008.
A major theme of the book – the allegedly poor quality of policy advice during the Asian crisis – seems to me questionable. The economic policies of the countries most affected were unsustainable. Thailand, Indonesia and Korea all needed major reductions of their current account deficits, justifying, at least initially, international policy recommendations of fiscal and monetary contraction with structural reforms. The IMF quickly relaxed the fiscal targets as recession developed, allowing automatic stabilisers to operate, but interest rates had to remain high longer to avoid excessive depreciation. Some structural reforms may only have been weakly related to rapid adjustment of imbalances, but seem, in retrospect, well justified.
Disaffection with the IMF persists, particularly among those who believe that international policy advice has been applied less harshly in industrial than in developing countries. There was, indeed, more emphasis on monetary accommodation and recapitalisation of banks in the 2008 crisis, particularly in the US.
A closer recent parallel to the handling of the Asian crisis is that of Europe after 2010 when financing of imbalances after a massive reversal of capital flows from stronger to weaker economies was not enough. Major fiscal consolidation and structural reforms in labour and product markets were required.
The results are so far incomplete – and the medicine has proved as unpopular as it was in Asia. Emphasis on adjustment is usually inescapable, and remains on the IMF agenda.
Leung’s account raises further questions. If Asians are so unhappy with the IMF, could they have done more to provide an alternative? The reality seems to be that, when the going gets tough, a regional club is too narrow and mutually friendly. This makes a neutral outside arbiter advisable – assuming that it does not base recommendations on questionable empirical evidence, as may have been the case with IMF advice on capital flows. My belief is that the IMF was never as categorical, almost ideological, as Leung claims. The Fund has become considerably more pragmatic in recent years.
■ Asia may not have all the answers, but the west can learn A challenge for the regional club Niels Thygesen, Advisory Board Niels Thygesen is Emeritus Professor of Economics at Copenhagen University Back