Us, Japan Hold Key To End Asian Currency Turmoil

The East Asian crisis emerged as one of the dominant themes and concerns at the annual meeting of the World Economic Forum, with several sessions planned on the subject over the coming week. Concern over the crisis engulfed everyone from the WEF president Klaus Schwab, who referred to it at the opening session as one of the three most important developments in the world over the past year, to several speakers at other sessions, who forecast a spreading of the crisis, a quick bouncing back by the Asian economies and also confidence that the situation was already coming under control.

One view that emerged was that a solution lay not just in those economies but in China, Japan and the US.

Speaking to a full house, a panel of speakers said among other things that the US would have to be politically willing and economically able to run a global Keynesian programme of up to $300 billion; that Japan would have to be willing to create more domestic demand and also let the yen appreciate because the East Asian economies needed outlets for their goods and services; and there should be no devaluation in China. This apart, it was argued that the region also needed a general currency stabilisation scheme.

Domingo Felipe Cavallo, publisher of Forbes Global USA and President of Fundacion Mediterranea in Argentine, argued that if these steps did not materialise, the crisis would spread to Japan and Europe because of disruptions in the international capital market. Cavallo also argued that the massive devaluations in East Asia need not result in an export boom because there had also been supply side disruption.

David Hale, global chief economist of the Zurich Insurance Group, USA, said he expected the Asian crisis to result in deterioration in the US trade deficit by up to $50 billion in 1998 and perhaps $100 billion in 1999. Hale argued that the crisis was global, not Asian, because it had already affected global stock prices in all continents.

Kenneth Courtis, chief economist and strategist for Deutsche Bank Group Asia, saw some positive signs in recent days. He listed the agreement between South Korea and the international banks on the rolling over of $24 billion short term debt and its conversion into three-year debt; Japans willingness to pump $225 billion into its banks; confidence building visits to the region by high-ranking American officials; the evidence that Indonesias rupiah was stabilising; and the emergence of a large current account surplus in Thailand.

Courtis added that the East Asian economies had killed domestic demand and become producers for exports - which meant the need for demand for these goods and services in Japan and the US.

Hale argued that Indonesia would be the worst affected economy, and that 90 per cent of the companies on the Indonesian stock markets were insolvent. Also, because Indonesia had declared a debt moratorium its companies may find it difficult to get even normal trade credit. He felt China was slowing down but that the Chinese authorities were aware of the need for a strong currency just now in order to provide stimulus for the rest of East Asia.

Manu Bhaskaran, the Singapore-based director of Soegen-Crosby Securities, argued that serious corporate restructuring has begun in the Asian economies; and Lal Jayawardena, economic adviser to the president of Sri Lanka, said the crisis was unlikely to have much impact on South Asia because there was no excessive credit expansion and no uncontrolled growth in external short-term private debt. But he felt the South Asian economies needed to look at their banking structures.

Haruo Shimada, professor of economics at Keoi university in Japan, put the situation in perspective by saying that Japan accounts for 65 per cent of the GDP in Asia, including China and India. Another speaker pointed out that the Thai GDP accounted for no more than 121 points on the Dow Jones index. Horst Siebert, president of the Kiel Institute of World Economics in Germany, in turn pointed out that the five Asian economies which had been engulfed by the crisis accounted for no more than 3 per cent of world GDP and 7 per cent of world trade.

But another speaker presented a different perspective when he said that East Asia has since 1991 accounted for half the worlds growth in GDP and two-thirds of its capital investment.

One view put forward was that the East Asian economies would in fact bounce back with greater strength after the changes that had been initiated.