Friday, July 06, 2007

Additional Lessons From 97 Implosion

a) You need not subscribe to IMF's prescription to survive well. Malaysia's strategy using capital controls worked well. However, Malaysia may have held onto the capital controls strategy for a wee bit too long - should have been better to remove it in early 2005. That would have hasten recovery and solidify the global competitiveness of value driven industries, instead of subsidising local natural resource / plantations companies.

b) Most of the affected Asian nations owe a huge huge debt to Japan. It is not Japan's style to demand bouquets or attention, but the mutual congratulations and backslapping going on in many Asian countries now that good economic times are back appear to be showing a lack of humility in many of Asian political leaders. Japan's Ministry of Finance provided US$42 billion in emergency funding to bail the affected Asian nations to ensure short term liquidity for the affected countries. The EU chipped in US$7bn while the US threw in US$12bn. We also should remember that at that time Japan was still in the midst of its 13 year prolonged bear market. We don't hear of the gratitude ... we hear of how each country did it his/her way ...

c) Broader understanding of FDIs. Some foreign direct investments are to stay, build industries and create jobs. Some came for a joyride.

d) An unspoken lesson learned by all Asian central bankers is how helpless US and EU central banks, the IMF and World Bank, collectively were in tackling critical global capital flow issues. Maybe they cannot help that much because its beyond their ability, or maybe the gravity of the problems were not high on their priority list. The 97 implosion quietly brought Asia closer together, of how interconnected their economies are, and the need to work together more to better withstand the cruel opportunistic financial players. The coincidental rise and rise of China as the outsourcing capital for the developed world actually "saved" a number of the affected Asian countries. The rise of China did not kill off the smaller developing Asian economies as some may have previously predicted. In fact, the indirect lessons were the importance of the reassuring quiet hand of Japan and robust economic engine of China, and how they brought Asia up swifter and closer together at the same time. Its not spoken much as it is regarded as politically-incorrect, but we all know better.


lsblmllms said...

Mr Roubini's diagnosis of Asia does apply to China.(Roubini Global Economics)

Risk a comment on Roubini

My comments: its not that simplistic on China. Economics is a matrices of human psychology and the Communist psyche is not the norm of the Capitalists. Look at 1997, in the U S attempts to damaged China, all the peripheral economies were decimated, China emerged unscratched. Look at the attack on HK in 1997 how resolute China stood behind HK. China war chest is larger today, with a different psyche, we cannot attempt to analyze it with the norms.
China had stood alone for over 40 years and survives under great hardships. Look at Japan when the bubble bust in 86, the country basically did nothing and just hanged on till today. U S and the other countries with continuous monetary and physical policies are also moving along in its natural gyrations.

Salvatore_Dali said...

true, china has not been down this road before but there are a few things we know cannot be good, the excessive foreign reserves and largely in usd, the lack of outlets for the liquidity in the system ... china is entering a global economy, u cannot accumulate liquidity, higher per capita without liberalising the economy... the china story is very diff from the past, to me china is a 100 year story unfolding, a lot like america taking over the industrialised world 80 odd years ago ... there still are a lot of "bad stuff" in china's economy but nobody seems to want to talk about ... the amount of bad loans by banks and financial institutions to state firms ... the amount of industries being subsidised, there are a lot of tax breaks available for many industries... steps are in place to reduce or eliminate them altogether ... if china opens up too soon there could be massive unravelling at all levels, they sell bank stakes to foreign banks in the hope that better financial mgmt will help reduce or write off gradually the state firms' loans ... the surplus achieved is not a reflection of china's might but from fdi, more than 70% of the surpluses are from foreign firms operating in China and reexporting the products from china, hence a lot of the real productivity and benefits do not accrue to the system , china needs to take the opportunity to move up the value chain and not just be a sock shop for the rest of the world, its financial system is still immature, esp the brokerages and banks, they need to open and learn from hk companies, which they are doing,
accounting rules, legal framework and patent rules are the critical areas they need to be up to speed with global best practices in order to step up further ... still china is already changing the world and will be the number economy in the world within 10 years, now its growing pains

lsblmllms said...

The biggest drawback at the moment for China is the minuscule returns on its reserve, parked mainly in U S instruments. It should be earning better than that.