By SIMON COLLINS in Seoul
American economists of both left and right have agreed at South Korea's World Knowledge Forum on the need to manage volatile world exchange rates.
Professor Joe Stiglitz, a former chairman of Bill Clinton's Council of Economic Advisers, and Dr Fred Bergsten, a former under-secretary in Ronald Reagan's Administration, told the forum that gyrating exchange rates needed to be curbed.
Both backed proposals for an Asian Monetary Fund that could raise financial problems with Asian governments before they developed into panics such as the Asian crisis of 1997-98.
Both also supported short-term capital controls when required, such as Chile's law forcing short-term foreign investors to put 30 per cent of their funds into reserve deposits to reduce financial speculation. Chile repealed the provision in late 1998.
"There is a widespread recognition, as a result of the East Asian crisis, that there is something wrong with the global financial system," Stiglitz said.
"When money comes out in a rush, as in Thailand in 1997, it's not only the borrowers and lenders who are affected. It's everybody else.
"Because there is a massive amount of economic havoc, it's appropriate and proper for governments to try to intervene and try to stabilise those capital flows."
Stiglitz, who watched the US dollar drop from 106 to 80 and then soar again to more than 120 while he worked for Clinton, said markets were clearly prone to irrational exuberance and irrational depression.
This natural instability had been accentuated by abolition of capital controls and the swing away from progressive taxes and strong welfare systems, which used to provide built-in stabilisers by automatically lowering tax revenue and raising welfare spending when incomes fell and unemployment rose.
International capital adequacy ratios, adopted for banks in most countries in the past 20 years, had created built-in destabilisers, forcing banks to call in good loans to make up for losses on bad loans and so forcing good borrowers into bankruptcy.
Stiglitz said the US was willing to intervene by lending money to Mexico when it faced a currency crisis a few years ago, but was not willing to help Thailand in 1997 "because it was considered unimportant to us".
He said an Asian Monetary Fund could have lent money to Thailand without trying to impose the American model as the International Monetary Fund did when the crisis spread to Malaysia, Indonesia and South Korea.
Bergsten said the world's big seven economies should agree on flexible target bands within which their currencies could fluctuate, pressuring each other to act whenever any country's currency went too high or too low, creating destabilising trade deficits or surpluses.
For example, he said the world should have protested at recent moves by Japan to talk down the yen at a time when Japan is already in surplus and the US is piling up unsustainable deficits, borrowing 6 per cent of the world's available savings to finance its excess spending.
However, the two economists differed on the outlook for the US economy. While Bergsten said continuing productivity growth meant US output would keep growing at 3.5 to 4 per cent a year, Stiglitz said the huge trade deficit, corporate scandals and the threat of war in Iraq were all weakening the economy.
He said there was still an overhang of excess investment incurred during the boom in the late 1990s. For example, only 2 to 3 per cent of the capacity of the fibre-optic cable laid in the US in the boom years was being used so far. "That means there is an enormous excess capacity which will take five years or more to work itself out."
Stiglitz agreed that strong productivity growth meant the US growth potential was good in the long term and that achieving that potential would require better management and regulation.
Need for stable exchange rates
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