Crisis, they say, should be seen as an opportunity. Again, at the end of the crisis situation, it is worthwhile not to miss the opportunity for looking back at the lessons learnt. Take, for instance, the East Asian financial crisis of the late 1990s, which highlighted how vulnerable a small, open (capital account) economy, can be to an adverse shift of capital flows.
The crisis also demonstrated how quickly investors’ confidence can erode and how their panic could spread contagion to neighbouring countries, Worapot Manupipatpong reminisces in one of the essays included in ‘ Curbing the Global Economic Downturn: Southeast Asian Macroeconomic Policy, ’ edited by Aekapol Chongvilaivan ( >www.iseas.edu.sg ).
Among the antidotes that evolved in the wake of that crisis was the ASEAN (Association of Southeast Asian Nations) Surveillance Process or ASP, as a mechanism for regional watch complementing the work of IMF (the International Monetary Fund).
Crisis forewarning
How effective is ASP, in forewarning and thus preventing a financial crisis? As an answer to this poser, there are studies showing that the shortcoming is not the poor quality of policy advice but rather the reluctance of the recipient government to implement the recommendations, particularly on exchange rate policy, which is a highly political issue.
One of the key aspects of the ASP is the peer review process, which recognises the potential benefits of peer pressure in encouraging a member government to implement politically difficult policy adjustments that are needed to address increasing vulnerability in its economy, the author notes.
He reminds, however, that the effectiveness of the peer review in this regard would depend on ‘the ability to detect early signs of emerging or increasing vulnerability that might lead to a crisis if not timely and properly addressed; the ability to identify appropriate policy responses; and the ability to engage officials concerned in a frank discussion on these policy issues.’
Monitoring prudential indicators
Of interest to students of finance should be the ‘how’ of spotting emerging vulnerabilities, by closely monitoring the development of prudential indicators in six key sectors, viz. real, monetary, fiscal, external, corporate, and social. The author rues that the quality of surveillance data submitted by member countries is uneven. While this mainly reflects the different stages of development in member countries’ data collection and reporting systems, it is sometimes caused by the authority’s reluctance to provide some data, he adds.
“Poor quality of data, particularly on the availability and timeliness of some key indicators in some countries, contributes to the inability to conduct cross-country analysis in some sectors, and it limits the ability to monitor closely developments in those sectors where only annual data are available (and sometimes with considerable lags).”
Yet, in Manupipatpong’s view, ASP has the potential to fill the gaps in ‘the current efforts to encourage countries to adopt internationally agreed standards and codes in order to enhance the effective operation of market forces and the resilience of financial systems.’ These standards and codes include the IMF code of good practices on transparency in monetary and financial policies, the IMF code of good practices on fiscal transparency, and the OECD principles of good governance, he explains.
Financial cooperation
The essay traces the move from regional surveillance to regional financing arrangement, through the ‘ASEAN Plus Three’ forum. The joint declaration by the leaders, in the context of monetary and financial cooperation, had spoken about strengthening ‘policy dialogue, coordination and collaboration on the financial and fiscal issues of common interest, focusing initially on issues related to macroeconomic risk management, enhancing corporate governance, monitoring regional capital flows, strengthening banking and financial systems, reforming the international financial architecture, and enhancing self-help and support mechanisms in East Asia…’
In a recent speech, Haruhiko Kuroda, the President of Asian Development Bank, emphasised that policy coordination is key. Lauding that the recent unprecedented real-time communication between policymakers across the globe did well to avert wholesale economic disaster, he observed that the core issue, however, is that we must work together now to avoid the next crisis. “We need to prevent crises. And, we need a workable, global mechanism that is fast-acting and sufficiently flexible to respond to the needs of a rapidly changing financial environment.”
‘Second best’ policies
On how policy advice from IMF can add value, Manupipatpong cites studies on how the surveillance team can benefit from more financial sector expertise, more policy-making experience, and a greater involvement of outside experts given its expanded coverage and past criticism of not paying due attention to the country’s current – including political – situation and differences among countries.
“Fund advice often focuses on identifying the first-best general policy. But when policy-makers, quite reasonably, respond that they live in a second-best world, staff are apparently not as good at suggesting how the first-best might actually be implemented in practice, or at developing and analysing alternative, specific, policies.” The author, therefore, recommends that the regional surveillance should identify the ‘second best’ policy measures which may be more appropriate for the crisis-affected countries in the region.
The editor’s intro to the book concedes that the quest for regional and global solutions to economic turmoil has been hampered critically by the complication of individual economies and the diverse levels of economic and cultural development. “After all, there is no one-size-fit-all panacea for economic ills. The answer to this question lies with the in-depth, region-specific research inquiries into how macroeconomic tools are at work in the Southeast Asian economies.”
Suggested study.
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