Pradumna B Rana is a Nepali economist who is Director of the Asian Development Bank's Regional Economic Monitoring Unit (REMU) which was established in the aftermath of the Asian financial crisis in 1999 to help Asian countries harness the benefits of global financial integration and international capital flows. Rana spoke to Nepali Times in Manila about the new Asian crisis, prospects for SAARC cooperation and prospects for Nepal.
Pradumna Rana: Sharp economic slowdown in East Asia: Yes. But a recurrence of the crisis: No. These are the key messages of our December 2001 Asia Economic Monitor report. In 1997-1998, when we experienced a severe crisis in East Asia, it was mainly the countries with open capital accounts such as Indonesia, Korea, and Malaysia, Philippines and Thailand that were affected the most. This time around all countries are affected depending on their openness to trade. All Asian countries are experiencing a common external shock namely a synchronised slowdown in the major export markets in US, Japan, and Europe.
Is it true that the less developed parts of Asia, like Nepal, are cushioned by the fact they are not as closely linked to the globalised economy, as say, Thailand, Malaysia or Singapore?
That is correct. Countries that have been less open to trade and capital flows and, therefore, relatively less linked to the global economy have been relatively less affected than those that are open. This, of course, does not mean that countries should control trade and capital flows. The East Asian experience shows that openness to trade and capital flows brings in immense amounts of benefits in terms of growth and poverty reduction. But globalization has to be managed effectively. Reforms have to be designed and sequenced properly.
From your vantage point, what kind of policies have worked in turning around the economies of Asian countries?
The rapid growth in the US economy during 1999 and 2000 had helped the region to recover quickly from the crisis. But policies also mattered. The Asian crisis of 1997-1998 was a capital account crisis. This means that investors panicked and fled when they saw weaknesses in the banking and corporate sectors leading to currency devaluations and banking crisis in the region. The initial responses which comprised contradictory monetary and fiscal policies were not appropriate in such a situation. Subsequently, however, the stance of these policies were altered and they contributed to the recovery of the region. Efforts to resolve banking sector and corporate sector problems have also played an important role, although a lot more remains to be done.
As a Nepali, what kind of lessons do you see in this for Nepal?
Globalization is for real. It cannot be wished away. Hence the major lesson for Nepal, or for that matter other South Asian countries that are fairly closed, is that countries should prepare for globalisation and manage capital flows effectively. This requires actions at the individual country and sub-regional level because financial contagion tends to be very virulent. Countries need to strengthen banks and recapitalize them so that they can intermediate effectively between entities. Countries also need to develop well-functioning capital markets to reduce the risks of potential instability in an integrated world. Most importantly, capital account liberalisation should be sequenced properly. It is not advisable for countries to open up their capital account too hastily and in full force. Prudence in capital account, however, does not mean being complacent and freezing the reform process because the benefits of globalization are large. It means adopting a pace of liberalization consistent with the state of development of the financial sector and the soundness of macroeconomic management.
At the sub-regional level, South Asian countries need to further enhance cooperation in monetary and financial areas. The establishment of the SAARC Finance group, under which Finance Secretaries and central bank governors meet to discuss issues of common interest, is a good beginning. They should also participate in the on-going efforts to promote monetary cooperation is East Asia.
How far are we from setting up an IMF type monetary fund for Asian economies?
The Asian Monetary Fund was proposed soon after the Asian crisis began in 1997 but the idea was shot down very quickly. In its stead, the ASEAN and ASEAN+3 Surveillance Process was established. Under this Process, the Finance Ministers of the East Asian region get together twice a year for peer review of economic policies and exchanging information on recent developments of mutual interest. In March 2001, in the sidelines of the ADB's annual meeting, the Ministers also announced the Chiang Mai Initiative under which a network of bilateral swap arrangements are being arranged among the countries. Efforts are being made to further enhance monetary and financial cooperation in East Asia including developing some collaborative exchange rate arrangements and establishing an early warning system. The ADB is supporting these efforts. Such experiences could be useful for South Asia as well in order to prevent and, if not, to manage a crisis.
As for the Asian Monetary Fund, although it was shot down earlier as I already said, it has not been completely forgotten and keeps being revived every now and then under different names.
