Asia is recovering from nearly two years of financial crisis but major risks loom and deeper reforms are needed, Pacific Rim finance ministers said on May 16, 1999. Ministers from the 21-member Asia-Pacific Economic Cooperation (APEC) forum meeting on the tropical Malaysian island of Langkawi pledged not to abandon financial and corporate reforms despite the anticipated return of economic health. They also called for urgent action to control the threat of volatile capital flows, blamed by host Malaysia for triggering Asia's financial crisis which erupted in mid-1997.
"While we recognise that efforts to reform the international financial architecture will take time, we see the need for the momentum to be maintained notwithstanding the recent return of stability to financial markets," they said. But in a sign of a continuing rift between the United States and Malaysia, they failed to agree on whether speculators should be reined in.
The joint statement issued at the end of the two-day APEC meeting balanced the views of the developing economies, keen to see steps to prevent a recurrence of the crisis, and those of the industrialised members which want deeper reforms in Asia. What the compromise lacked in concrete measures may have been made up for by a spirit of congeniality which ministers said dominated the discussions.
"The progress made when I report back on this meeting will emphasise the very good spirit of friendship and collegiality," U.S. Treasury Secretary-designate Lawrence Summers told a news conference at the end of the meeting. "While there are nuances and differences of view, I do sense some increased convergence."
Summers, nominated to replace Robert Rubin when he steps down in July, took advantage of the diplomatic stage to quash any speculation he would diverge from Rubin's strong-dollar policy.
"As Secretary Rubin and I have both said many times, a strong dollar is very much in American's national interests," he said. The joint statement underscored progress since the ministers met in 1998 in Canada in the crisis-hit economies of Indonesia, South Korea, Malaysia, the Philippines and Thailand.
"The financial crisis in the region has abated and there are signs of a return in investor confidence. As a result, the economic outlook for the region has improved," it said. "There are, however, significant risks to the outlook. Moreover, serious challenges remain, particularly in restructuring the financial and corporate sectors, and in dealing with the effects of the crisis on the poor and the vulnerable."
Malaysian Second Finance Minister Mustapa Mohamed said Washington had shifted its position on highly leveraged institutions such as hedge funds, aligning itself more closely with Kuala Lumpur which wants controls on such institutions.
"If last time they (U.S.) disagreed on rules and controls or to monitor highly leveraged institutions, now they are very supportive of this idea."
The ministers recognised "the need for appropriate transparency by market participants, including HLI's," or highly leverage institutions, the joint statement said. But he said the United States continued to resist Malaysia's call for controls on currency speculation.
"The U.S. is of the opinion that currency speculation is stabilising. Our view is that short-term capital is destabilising. This is one issue where we are poles apart between the U.S. and Malaysian opinion," Mustapa said.
The ministers called on the United States to pursue policies directed at sustainable non-inflationary growth, and urged Japan to ease deflationary pressures and revive private demand.
APEC Calls for New Rich-Poor Dialogue on Financial System
Pacific Rim finance ministers suggested on May 16 the establishment of an international body to study ways of improving the global financial system while reducing the risks associated with volatile short-term capital flows. Ministers from the 21-member Asia-Pacific Economic Cooperation forum called on their deputies to study whether some rules could be imposed on currency traders and hedge fund operators. They were to present their findings to heads of state at their annual summit in New Zealand in September. The 16-page statement fell short of calling for the regulation of capital markets, as demanded by host Malaysia.
"While we recognize that efforts to reform the international financial architecture will take time, we see the need for the momentum to be maintained, notwithstanding the recent return of stability to financial markets," the communique read.
"There is now greater consensus that these issues need to be addressed," Malaysia's junior finance minister, Mustapa Mohamed, said at a news conference closing the two-day meeting. U.S. Treasury Secretary-designate Lawrence Summers said the communique reflected several issues the United States considered important, including more transparency and the need for a dialogue between rich and poor countries.
"I am encouraged by the recognition of the importance of this kind of dialogue between emerging markets and developed economies," Summers said.
Since May 15, the finance ministers had discussed strategies to prevent the kind of crisis that crippled many Asian economies in the past two years. Ministers believe that the worst may be over for many of their economies, while recognizing that serious challenges lie ahead. A senior U.S. Treasury official, who spoke on condition of anonymity, said ministers focused on both the reassuring economic picture and upon aspects of the global financial system, ranging from currency regimes to capital controls. Malaysia in 1998 imposed curbs on short-term capital flight and a pegged exchange rate, ending offshore trading of its currency, the ringgit.
On May 15, Malaysian Finance Minister Daim Zainuddin called on APEC to take up the challenge of drafting international standards and regulations for hedge-fund operators and currency traders, whom Malaysia blames for much of the Asian economic crisis. The Group of Seven industrialized nations, through the Switzerland-based Bank for International Settlements, in 1998 agreed to study the possible regulation of currency speculators.
The United States opposes restrictions on the free flow of capital between markets, believing curbs increase the chances of future crises. But more recently, it has become acutely aware of the dangers of unchecked hedge-fund operations because of the near-collapse of prominent hedge-fund Long Term Capital Management.
APEC comprises Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, the United States and Vietnam.