SPECIAL REPORT	FEBRUARY 2, 1998 VOL. 151 NO. 5
	Global Best Practices The magnitude of the Asian crisis invites a search for all-encompassing solutions, but governments might be better off adopting measures that are unspectacular but effective By RICHARD HORNIK /LONDON henever financial tremors shake the world economy to its foundation, bureaucrats, financiers, economists and pundits of all stripes rush to draw cosmic lessons and to draft global solutions. Before the autumn of 1997, the last rash of sensible--and not so sensible--prescriptions for reordering international finance followed Mexico's meltdown in 1995. Think tanks and governments issued dire warnings of the consequences of failing to address the gaps in global financial regulation. These exercises are not as pointless as they sometimes appear. After all, the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (now the World Trade Organization) owe their existence to a concerted intellectual effort to regularize global commerce and finance in the aftermath of World War II. Perhaps the Asian financial collapse of 1997-98 will, against expectations, produce concrete initiatives to help the world deal with the rapidly changing conditions which leave everyone vulnerable to the vagaries of shifting financial fads. Possible, but not likely. Still, the difficulty in finding a universal cure should not obscure the fact that over the past decade or so individual countries have developed some important national measures for improving the governance of their economies in crucial areas like supervision and regulation of financial institutions, regularizing foreign capital flows, and creating a stable foreign exchange system. Instead of focusing on a global silver bullet to make the world safe for rapid but sustainable economic growth, we would do well to take a page out of the book of management consultants and study some "best practices" already in use: APPLYING THE BRAKES The speculative "hot money" that poured into Southeast Asia in the 1990s and geysered out again late last year played an important role in the financial crisis now plaguing that region. Most economists insist that the unfettered movement of capital across borders is essential for robust economic growth. True. Unfortunately, global investors are as prone to fads as teenagers. When waves of investors buy Bangkok real estate, that drives prices up rapidly and lures others to follow suit. Such speculative bubbles are bad enough when driven by domestic capital--witness what happened to real estate in Houston in the 1980s. But when foreign investors are involved, not only does their exit burst the speculative bubble, it can also lead to devaluation of the currency. Worse still, says Dani Rodrik, professor of international political economy at Harvard's John F. Kennedy School of Government, with the IMF acting as a global cheerleader for complete currency convertibility and full deregulation of capital flows, it is ill-placed to intervene to slow such movements: "Currently any country risks being branded as being on the wrong path if it does anything to restrict those movements. We need to change the psychology of the international economy." Sound impossible? Rodrik says it's not that hard. "Chile has been doing it for a long time," he says, "yet because it has other policies that promote international trade, it doesn't risk being branded as a bad economic actor." In 1991, the Chilean government introduced its policy of encaje, or reserve. If a foreigner wants to invest $1 million in Chile, $300,000 must be deposited in the Central Bank for a year at zero interest. That keeps speculators at bay but has not deterred serious investors. In the first nine months of 1997, $6.2 billion in foreign capital flowed into Chile. That equals 7.7% of the country's GDP and represents a 40% increase over the same period in 1996. HONEST BROKERING Free marketeers insist that the rigors of the marketplace will eventually weed out corrupt operators. Perhaps, but the cost in Asia has been far too great. During the 1990s investors seemed willing to buy the stocks and bonds of firms about which they knew next to nothing--except that everybody else was investing in them. Calls for global regulation of major financial institutions strike a responsive chord, but the odds on implementing such ambitious proposals are slim. Improving financial regulation in individual countries, however, would be far simpler, and new, more comprehensive programs are being developed. The British government, for example, has scrapped its old system and is building a new one. For each financial service firm the Financial Services Authority will appoint a regulatory supervisor, who will coordinate the oversight of specific financial activities, like insurance, banking and investment management. Says FSA chairman Howard Davies: "In the way that markets are now developing, the old style of functional or institution-based regulation is going to become out of date. These big institutions no longer respect the old regulatory boundaries." With banks owning insurance companies and dealing in securities markets, with securities businesses owning banks, says Davies, "everybody is taking in everybody else's washing." The confusion cuts across national borders as well. Says Davies, "The reason we are doing this is rooted in the Barings problem, where what looked otherwise like a small bit of Barings in Singapore actually brought the bank down." This new body will be the world's first consolidated regulator with the power to coordinate the oversight of all the activities of the firms under its jurisdiction. If the world is to avoid future financial meltdowns, it should not be the last. TRANSPARENT BUDGETING Unlike the Mexican crisis of 1995, budget imbalances have not played a major role in the Asian meltdown. That said, investor confidence in Southeast Asian economies has been damaged by the cavalier attitudes of many governments towards public spending and their propensity to invest in mega-projects involving more vanity than value. In the U.S., conservative politicians have long urged a constitutional amendment requiring a balanced federal budget each year. In 1994, New Zealand's politicians came up with a different approach. The Fiscal Responsibility Act relies on making the budget as transparent as possible. In simple terms, the government must run the country in a fashion similar to a public company, releasing semi-annual financial reports and explaining how today's spending will affect tomorrow's bottom line. New Zealand is also the first and so far only nation to use generally accepted accounting practice (GAAP), including the use of what is known as accrual accounting. While most companies employ GAAP, governments use cash accounting, which only counts money actually spent in a given year and ignores future spending even if it is mandated by law. Accrual accounting, however, forces them to include these costs on current books. The government is still free to overspend, but everyone--opposition politicians, the electorate and foreign investors--can see exactly what's going on and act accordingly. Similar examples of initiatives to improve governance can be found in places as diverse as Hungary and Australia which have launched innovative reforms of their social security systems. If successful, the two approaches--based on continued financing of existing state pension liabilities while giving employees a chance to put some or all of their contributions in stocks and other investments--may show other countries a way out of the dual dilemma facing developed countries around the world: an aging population and a declining or at best stable workforce. The magnitude of the crisis in Asia should not make us lose sight of the small but concrete steps being taken by responsible politicians around the world. On the contrary, now is the time to propagate these best practices as widely as possible. Rather than chasing after economic miracles or universal solutions, it could well turn out that manyof the answers to the problems of globalization are right next door. --Reported by James Graff /Chicago, Elizabeth Love /Santiago, Kate Noble /London and Simon Robinson /Auckland
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