In Asia, Rethinking Free Markets 
International Herald Tribune
September 17, 1998
Thomas Crampton

As economic pain mounts in the world's developing nations, political leaders are retreating in growing numbers from their commitment to free-market trade and currency policies, economists and analysts warn.

Increasingly, emerging economies in Asia and around the world are reconsidering their openness to global markets and wondering whether to take measures similar to those taken in Malaysia and Hong Kong in recent weeks, they say.

"Political reasons will oblige governments with economic problems to step back a little bit to placate their constituents," said Supachai Panitchpakdi, Thailand's commerce minister, in an interview. "The danger is that once you start the ball rolling backwards or stalling liberalization, then others will follow suit. It becomes something like competitive devaluation."

Mr. Supachai said he supported the widely criticized currency controls recently imposed by Prime Minister Mahathir bin Mohamad in Malaysia, calling them "reasonable" and "understandable."

He added: "There is some truth to what Mahathir is saying, that sometimes there has been excessive speculative movement, not based on the weaknesses of our economies. I see it as a temporary measure."

Mr. Supachai is a highly respected economist in Asia and the West and is a contender to head the World Trade Organization, the Geneva-based free-trade body. His voice adds weight and credibility to the support expressed in the region for the capital curbs put in place by Malaysia.

But Mr. Supachai's is just one voice in a rising chorus.

"One must sympathize with Kuala Lumpur's effort to defend itself from what it sees as a kind of global laissez-faire capitalism which is going out of control," said Fidel Ramos, former president of the Philippines, in a speech early this week.

China offered praise Wednesday for Malaysia's tactics even as it vowed to stamp out speculation on its own currency. "We believe that it is understandable and permissible under international covenants for a nation to return to exchange controls briefly to reverse a serious worsening of the balance of payments," the spokesman for the State Administration of Foreign Exchange said, according to the People's Daily.

Capital controls also received a nod of approval in the annual United Nations Trade and Development report that was released Wednesday.

"Controls will remain an indispensable part of developing countries' armory of measures for the purpose of protection against international financial instability," the report said.

The major industrial countries continue to oppose capital controls.

Gordon Brown, Britain's chancellor of the Exchequer, said Wednesday that developing countries taking unilateral actions toward financial markets as a substitute for reform would "damage the prospects for their own economies and the world system," a thinly veiled criticism of Malaysia.

But Mr. Brown, who was speaking to bankers in Tokyo, acknowledged that short-term capital flows could be "destabilizing." He urged developing countries to be more open in the conduct of their economic policy to enable foreign investors to better assess the risk of lending. He also said developing countries should exercise caution in liberalizing their economies and ensure that banking and financial systems were sound before opening up to the free flow of foreign capital.

A major international agency lent support to the idea of capital controls Wednesday, however. The United Nations Conference on Trade and Development said in its annual report that sound economic policies and prudent banking regulation and corporate governance had taken years to establish and could not insulate countries from speculative attacks, which are often triggered by external events such as rises in U.S. interest rates.

The agency said capital controls "will remain an indispensable part of developing countries' armory" against financial instability. It also urged the International Monetary Fund to sanction debt standstill agreements for developing countries in crisis, similar to Chapter 11 of the U.S. Bankruptcy Code, which gives debtors a chance to reorganize their finances.

These views sharply contrast comments made by such champions of globalization as the United States and the International Monetary Fund.

Michel Camdessus, managing director of the IMF, said Malaysia's exchange controls were "dangerous and indeed harmful." He added: "I hope these measures will be soon altered and hopefully removed." During a visit to the Philippines, David Aaron, the U.S. undersecretary for international trade, said Asian nations must not follow Malaysia's lead, but adhere to open market principles.

"The supposed alternatives — exchange controls, import substitution and state management — do not work," Mr. Aaron said. "The failed nostrums of the past are not the answer."

However, many commentators, including Mr. Supachai, warned that further market turmoil would inspire other countries to clamp down on their currency and erect trade barriers.

"When they look at China, India and Malaysia they might think that if you can control your capital account things might work out better," Mr. Supachai said, adding that Thailand had no need or intention to use capital controls.

The danger is that the depth of the ongoing emerging market crisis will drive otherwise reasonable leaders to adopt desperate measures, said Bill Kaye, managing partner of the Pacific Group's Asian Hedge Fund.

"These countries are entering the nuclear winter of global investment," he said. "The International Monetary Fund programs haven't achieved their desired result, and things just aren't getting better. Now there is a real risk we will have bad policy contagion."

In addition to Malaysia's currency controls, Mr. Kaye cited Hong Kong's recent billion-dollar stock-market intervention and Taiwan banning hedge funds as examples of the start of a regionwide pullback from free-market economics.

"If countries find they are being more hurt than helped by the external environment, they may think it better to shut down the capital account," said Guonan Ma, head of Asia-Pacific economic research at Salomon Smith Barney. "Other countries might be tempted to limit the speed of capital flows."

Tom Buerkle contributed to this report from London.

Copyright © 2006 the International Herald Tribune