Close Window

Wednesday, December 02, 2009

Add to Clippings

Print Story

An Asian monetary fund?

Dr Ashfaque H Khan Asia has emerged as a powerful growth pole of the world economy. Its gross domestic product (GDP) is already equal to those of Europe and North America, and its influence on the world continues to rise. After growing strongly for a decade, the Asian economies were hit hard by events for which they were not responsible. They are paying a heavy price in terms of loss of incomes and human sufferings for the misgovernance of others. The world economy has witnessed the worst financial crisis since the Great Depression (1930s). What appeared first as a sub-prime mortgage crisis in the United States during the summer of 2007 began to unravel a deeper fissure across the global financial institutions, triggering a fullblown economic crisis around the world by September 2008. Asian economies with a track record of strong economic performance, owing to their outward-orientation, were hit hard. The major economies of Asia like Hong Kong, Malaysia, Korea, Singapore, Taiwan and Thailand are projected to witness negative growth in 2009. The crisis has not only hit Asia directly through its impact on incomes and jobs but it has now threatened to roll back the development gains of the last decade, especially with respect to progress towards achievement of the Millennium Development Goals (MGD). More than 26 million people could lose jobs in the region, with many millions more becoming unemployed. The crisis has diminished the hopes of 65 million people to move out of poverty in Asia. Millions who took decades to work their way out of poverty have slipped back in it within months of the crisis as their personal savings dried up. Experience from the 1997-98 financial crisis shows that the lag between the economic and labour market recovery can be as long as 4-5 years. Therefore, it may take five more years to make up for the lost ground in the struggle against poverty. The economies of Asia may recover soon but the human suffering will persist for sometime. To address the multi-dimensional challenges of the economic crisis, most governments of the region quickly enacted a large fiscal stimulus package, the size of which depended upon the fiscal space available prior to the crisis. As a result of supportive policies, the region is emerging from the global economic crisis. Recent data suggests that signs of a tentative recovery across much of the region are visible. However, the rebound remains fragile and dependant on the government's continued supportive measures as well as rapid economic recovery in developed countries. Asia is at a critical juncture. How governments manage the challenges of economic meltdown in coming months will determine the maturity, speed and sustainability of the recovery process for many years to come. The current crisis has provided food for thought to the governments of the region. Asia has paid the price of misgovernance of the United States. There are many lessons to be learnt to avoid such crises in future. One such lesson centers on the need for promotion of new sources of growth that will compensate for weak demand from the developed world. This requires a rebalancing of the region's economies in favour of domestic consumption and exploiting regional demand. Such rebalancing would require regional economic and financial cooperation to share each others dynamism and generate additional aggregate demand. With over four trillion dollars of foreign exchange reserves, the region now has the ability to foster a major programme of investing in itself.

There is another lesson that can be learnt from the current economic crisis. The need for regional financial cooperation has never been so great. Over the past decade, many countries in Asia have accumulated large foreign exchange reserves, providing some self- insurance against external shocks. The tendency to accumulate large reserves has its roots in more fundamental deficiencies of the international monetary and reserve system. This can be reduced with a more effective mechanism for liquidity provisioning, and reserve management at regional and international levels. The IMF facilities should be significantly simplified and include more automatic and quicker disbursements proportionate to the scale of the external shocks. While the IMF has taken action in the recent years through its exogenous shocks facility, the total resources remained limited and much more is needed to supplement the IMF efforts through a regional approach. The dynamism of Asian economies requires that the region should devise comprehensive regional financial cooperation arrangements. The recent crisis highlighted the lack of financial tools at the regional level, over and above of those in the hands of national governments. While some countries have built up sufficient reserves to protect themselves, others were impacted as they had no recourse to regional resources for assistance. A regional financial architecture, performing the role of lender of first recourse, for effective prevention of systemic crisis is the need of the hour. The region now has a window of opportunity to press forward with truly effective regional, financial institution to foster monetary and financial cooperation in the region. Let this institution be known as the Asian Monetary Fund (AMF). The Asian Development Bank is working side by side with the World Bank and supplementing its effort as development partners. The AMF can work side by side with the IMF in promoting regional and global financial stability. Let the Economic and Social Commission for Asia and the Pacific (ESCAP), as a regional arm of the United Nations, undertake detailed work on potential, scope and modalities for establishing the AMF. It may like to set up an expert group to initiate work on the subject. I would urge the Government of Pakistan to fully support this initiative. Many countries in Asia are also supporting the establishment of the AMF.

The writer is dean and professor at NUST Business School, Islamabad. Email: ahkhan@nims.edu.pk

Copyright 2006 TheNews, All rights reserved. Privacy Policy

Feedback