Hartmut Fischer
(415) 422-6453
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Robert Bruce
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Asian Financial Crisis calls for Reform by Hartmut Fischer
The Asian financial crisis provides an opportunity to consider a new international currency system. The current model isnπt working. Countries in Asia which once thought to be financial powerhouses are now in need of huge financial assistance from the International Monetary Fund.
These Asian ≥miracle≤ economies have done many things right, but now we have belatedly discovered a dark side to their success. The cooperation between business, banks and the government has hidden many problems, especially in their financial system.
Now, economic laws have reasserted themselves with a vengeance and affect other economies such as Hong Kong, which has kept its financial house in order.
The crisis has also a negative effect on the United States. Currency devaluation in Asian countries makes U.S. exports more expensive, and our imports from them less expensive. Also, their economic decline makes them less inclined to buy our products and more determined to sell to us their exports. This will increase our balance of payments deficit.
Should the International Monetary Fund come to the rescue? It has and it is preparing for still larger bailouts by asking its members to increase its standby reserves. Before rushing to a decision it may be important to recall why the IMF was created in the first place.
The IMF was put together by people who remember the lessons of the Great Depression Ã’ when countries tried to solve their economic problems through competitive currency devaluations. In effect, this is what is happening today in Asia, although not done on purpose. It is the result of the financial crisis which brought about huge changes in currency values.
With a currency devaluation a country in crisis can gain a temporary advantage. A devaluation lowers the price of the countryÃŒs exports and increases the price of its imports. The burden of the crisis is thus shifted in part to other countries who have not devalued their currencies. These other countries may in turn be forced to respond with countermeasures, which puts into motion a process in which all global trading system participants are likely to lose.
The IMF was created to prevent this destructive process from taking place and to oversee a system of fixed exchange rates. This system worked until 1993, when it broke down because of dollar weakness.
Now the IMF is doing the opposite of its original purpose. It helps countries with weak financial systems after they have severely devalued their currencies and thus gained an advantage in the global market. It also bails out the creditors to these countries who should have been aware of the risks which they were taking. The IMF thus encourages irresponsible behavior. Rather than strengthening the global financial system there is the clear danger that it is being weakened.
May be it is time to rethink the purpose of the IMF and to consider some strong medicine: returning the IMF to its original purpose, taking into consideration new economic realities.
After World War II the U.S. dollar was the dominant currency and provided the anchor for a fixed-rate system. Now Europe is in the process of adopting a common currency, the euro. Thus, there will be three major currencies Ã’ the dollar, the euro and the Japanese yen. All three, or a combination of the three could serve as the anchor of a new fixed Ã’rate system.
In a fixed-rate system members of the IMF would peg their currency values to one of the three anchor currencies. The IMF would act as it did in its original design and stand by with loans to help countries in temporary balance of payments difficulties. In addition member countries of the IMF would commit themselves to a set of sound financial principles and practices.
As it stands now, the IMF assists the worst violators of sound financial practices and bails out the creditors to these countries. In turn it penalizes countries which have their financial house in order. How many more crises do we need before we take drastic action.
Hartmut Fischer is a professor of economics at the University of San Francisco. He worked the past three years in Kazakstan as an educator and advisor on financial reform.
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