IV. Academic Reading: (12/150)
Asian Economies Not as Vulnerable as Before
A. Central bank governors from the Asia-Pacific region, at a recent meeting warned that the global trade environment is much tougher for their countries now than during the Asian crisis of four years ago. Singapore is in recession, and South Korea, Malaysia, Thailand, Indonesia, Taiwan and t

he Philippines have sharply slowing growth. The only bright spot is China, which has maintained brisk output growth because stronger investment and household spending have more than offset the regional export slowdown.
B. However, a new financial crisis does not seem to be looming for the region, as some remarkable changes have taken place over the past four years. These changes mean that the region's economies are likely to experience slower but still positive growth this year, and stronger growth next year. The first change is that the economies of Korea, Thailand the Indonesia can no longer be broken by a stampede of foreign bank lenders. The hot money has already gone. According to the most recent International Monetary Fund statistics, net international bank claims in East Asia have fallen by US$354 billion over the last four years. Loans have been repaid by stronger flows of foreign direct investment, by lending from international institutions and by the reemergence of a bond market in the first half of last year, as well as through large trade surpluses resulting from imports growing more slowly than exports. In the four years from 1997 to 2000, these economies accumulated current account surpluses of US$239 billion, compared to a cumulative deficit of US$88 billion during the five years from 1992.
C. Large current account surpluses have seen not only foreign debt reduced, but also big reserves accumulated. These reserves are seen as a cushion against future financial shocks. The reserves in Southeast Asia have increased by US$214 billion in recent years. The central banks of China, Hong Kong and Taiwan hold most of this sum. Moreover, the central banks of the region have agreed on swap arrangements, which could allow the reserves for one currency to be used in the defense of another in case of the threat of another Asian financial crisis. As noted by a report prepared by the regional central banks, intervention is most effective when coordinated.
D. These changes defend against a stampede and contagion, but do not, in themselves, encourage growth. That depends on the regional shift toward more flexible exchange rates. Although far form floating freely, most regional exchange rates are no longer hostage to unhedged US dollar bank debt or to entrenched convictions that exchange rate stability is essential. Managed floats have been adopted in most regional economies. Responding to the stronger US dollar, falling exports and slowing imports, these exchange rates have been depreciating. For example, the Singapore dollar recently reached a ten-year low, while the Taiwan dollar reached a 15-year slow.
E Foreign direct investment is slowing, and exports are tumbling, but with room to expand domestic demand there are good reasons to think that the region will get through the most serious global downturn in a decade. Foreign investment flows and domestic reconstruction will maintain China's growth. Even South Korea, Singapore and Taiwan—all highly dependent on technology exports to the US—are now buttressed by trade surpluses, huge reserves and flexible exchange rates. All these factors are favorable for expanding domestic demand.
F The perennial problems of the Philippines apart, the economies at the greatest risk are those of Thailand and Malaysia, because they are attempting to sustain pegged exchange rates, and this weakens their ability to respond to sudden strains on their currencies. Although Thailand has sharply reduced its foreign debt, it has pegged its US dollar exchange rate at about 45 baht. Without strong capital controls, the informal peg limits Thailand's freedom to ease interest rates. As for Malaysia, its peg depends on its reserves, which have fallen by US$ billion during the past year as the country has defended an exchange rate appreciating against those of its neighbors.