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A new global financial architecture: a Thai perspective
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. - (Studies on international financial architecture ; 2000,4 : e-mail-vers=
ion)
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A new global financial architecture: a Thai perspective
 / Thanong Khanthong - [E-mail-version, electronic ed.] - [Bonn, 2000] - 30=
 KB, Text &amp; Image file
. - (Studies on international financial architecture ; 2000,4 : e-mail-vers=
ion)
<br>Electronic ed.: Bonn : FES Library, 2001
<br><br><font size=3D"-1"><i>=A9 Friedrich-Ebert-Stiftung</i></font>
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<p>
</p><ul>

<p><a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E1">SUMMARY</=
a>
</p><p><a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E2">Intro=
duction</a>
</p><p><a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E3">A Mis=
match</a>
</p><p><a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E4">The T=
hree Islands of Stability</a>
</p><p><a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E5">Float=
ing Exchange Rate Regime</a>
</p><p><a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E6">Sound=
 Macroeconomic Policy</a>
</p><p><a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E7">Capit=
al Controls and the Hedge Funds</a>
</p><p><a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E8">Concl=
usion</a></p></ul>
<br><br>
<p><font size=3D"+2">A New Global Financial Architecture: A Thai Perspectiv=
e</font>
</p><p><font size=3D"+1">Thanong Khanthong</font>
</p><p><br><br>

</p><center><table width=3D"95%" border=3D"0" bgcolor=3D"C0C0C0">
<tbody><tr>
<td colspan=3D"2" valign=3D"top">
<a name=3D"E9E1"></a><p align=3D"LEFT"><font size=3D"+1">SUMMARY</font><br>=
<br>
</p></td></tr>
<tr>
<td valign=3D"top">
<p>Any discussion on the new international financial architecture will have=
 to start with the mismatch between the sizes of the economies, the financi=
al markets and the financial institutions of the more advanced countries an=
d the developing countries. It will also have to take into account the pred=
ominant roles played by the dollar, the euro and the yen. Exchange fluctuat=
ions among these three currencies have created global financial instability=
. Thailand and
</p></td><td valign=3D"top">
<p>other emerging-market economies have been advised to adopt a floating ex=
change rate regime and pursue sound macroeconomics management, apart from u=
ndertaking structural reform to stay competitive. Yet it remains uncertain =
how the emerging market economies can cope with the forces of globalization=
, financial turbulence information revolution and liberalisation even thoug=
h they manage to put their houses in order. </p></td></tr>
</tbody></table></center><br><br>


<p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E1"><img src=3D"=
https://library.fes.de/images/digbib/d_prev.gif" border=3D"0" alt=3D"Previo=
us Item"></a>
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#I0"><img src=3D"ht=
tps://library.fes.de/images/digbib/d_oben.gif" border=3D"0" alt=3D"Page Top=
"></a>
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E3"><img src=3D"=
https://library.fes.de/images/digbib/d_next.gif" border=3D"0" alt=3D"Next I=
tem"></a>

<a name=3D"E9E2"></a></p><p align=3D"LEFT"><font size=3D"+1">Introduction</=
font><br><br>
</p><p>Thailand is taking a textbook approach in strengthening its financia=
l regime to become part of the international financial architecture, whatev=
er it is. The economic crisis over the past three years has become a painfu=
l adjustment. It is now trying to put its house in order. The crisis has be=
come a dear lesson. The Thai policy-makers believe that the structural refo=
rm, which is now being put in place, is expected provide a stronger regime =
for healthier growth and stability in the future. They also hope that it wi=
ll strengthen the safeguard against a recurrence of the economic crisis.
</p><p>By putting its house in order, Thailand is now working to improve go=
vernance and other internal practices. Apart from creating a more equitable=
 social distribution and forge political development, it is trying to stren=
gthen the competitiveness of the country as a whole. Finally, it is facing =
a daunting task of addressing the country=92s huge public sector debt, whic=
h is now running at about 60 per cent of the gross domestic product (GDP).=
=20
</p><p>Following the Asia crisis, there has been an ongoing debate over an =
appropriate global financial architecture, which ideally should provide a s=
tability framework for nations to participate in global growth and prosperi=
ty. But this is not going to be the case. It remains uncertain how the new =
architecture will look like. There is virtually no interest on the part of =
the more advanced economies to change the status quo because the present sy=
stem serves them well. The present international monetary system can be cha=
racterised as a mismatch between the sizes of the economies, the financial =
markets and the financial institutions of the more advanced countries and t=
hose of the developing countries. Also, the currencies of the emerging mark=
ets look vulnerable in the face of the floating dollar, the euro and the ye=
n, which virtually dominate the international transactions. For the emergin=
g-market economies, including Thailand, it is unclear how they will survive=
 in the new global financial order, characterised by globalization, financi=
al turbulence, information technology revolution and economic liberalisatio=
n. The best they can do is to put their house in order as a shield against =
the external instability.
<br>
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E2"><img src=3D"=
https://library.fes.de/images/digbib/d_prev.gif" border=3D"0" alt=3D"Previo=
us Item"></a>
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#I0"><img src=3D"ht=
tps://library.fes.de/images/digbib/d_oben.gif" border=3D"0" alt=3D"Page Top=
"></a>

<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E4"><img src=3D"=
https://library.fes.de/images/digbib/d_next.gif" border=3D"0" alt=3D"Next I=
tem"></a>

<a name=3D"E9E3"></a></p><p align=3D"LEFT"><font size=3D"+1">A Mismatch</fo=
nt><br><br>
</p><p>Any discussion on a new global financial architecture will inevitabl=
y have to start with a mismatch between the sizes of the financial markets =
of the more advanced countries and those of the developing economies. As of=
 February 2000, the stock market capitalisation of the US amounting to a st=
aggering US$15.48 trillion, compared to US$8.94 trillion for Europe and US$=
4.58 trillion for Japan. At the same time, the sizes of the emerging market=
s in Southeast Asia look tiny compared with the three giants, which represe=
nt the global financial centres. Malaysia=92s stock market capitalisation w=
as US$173 billion, followed by US$53 billion for Indonesia, US$51 billion f=
or Thailand, US$37 billion for the Philippines. This mismatch in sizes is t=
he underlying problem in the instability of the emerging markets as they op=
en up their economies and capital markets to join the globalization bandwag=
on. As Stephen S Roach, the chief economist and director of global economic=
s at Morgan Stanley Dean Witter, noted: "A 1 per cent asset allocation shif=
t out of the United States is, in and of itself, worth US$150 billion; that=
 would overwhelm any of the emerging equity markets =96 leading to the type=
s of asset bubbles that have been all too evident in emerging markets in re=
cent years."=20
   <font size=3D"-1"><i>[ Stephen S Roach, "Architectural Reform: Managing =
Financial Market Volatility in the New Millennium," paper presented to Apec=
 Forum on Shared Prosperity and Harmony, Seoul, Korea, March 31, 2000]</i><=
/font> =20
</p><p>A merger between Deutsche Bank and Dresdner Bank, both of Germany, w=
ould have created a banking group with a gigantic asset size of US$1.2 tril=
lion. At the same time, a merger between Bangkok Bank and Thai Farmers Bank=
, Thailand=92s two largest private banks, would have created a new banking =
entity of the size of about US$50 billion. The size of the Thai banks is eq=
uivalent to only a community or regional bank in the US with no participati=
on in the international transactions. Moreover, Microsoft=92s market capita=
lisation exceeds US$500 billion, compared with US$150 billion of the size o=
f the Thai GDP as a whole. So the fundamental question is how the financial=
 institutions or economies of the emerging markets can compete head-on agai=
nst their rivals from the more advanced economies in the first place. It is=
 like putting a flyweight boxer to face Mike Tyson in the boxing ring.
</p><p>Besides, enormous capital has already been accumulated in the more a=
dvanced economies because of their development hundreds of years before. Th=
e capital from the more advanced economies has simultaneously become a bles=
sing and a curse for the emerging-market economies. When the capital leaves=
 the global financial centres into the emerging-market economies, it leads =
to economic boom and asset bubbles. When the capital is pulled back due to =
a reversal in sentiment, it creates financial shocks and economic dislocati=
ons.
</p><p>The Thai experience is just another example of the boom-bust cycle c=
reated by capital flow. Thanks to Thailand=92s financial liberalisation, fo=
reign capital flooded the country in the tune of US$30 billion alone betwee=
n 1992 and 1994. As a result, easy money drove banks into reckless lending.=
 Companies diversified into businesses they knew very little about. All maj=
or industries poured money into expansion to create an overcapacity. The pr=
operty market went out of hand. Eventually, the country ran up US$90 billio=
n in US dollar currency debts. The financial bubbles would pop.
</p><p>When sentiment changed in 1997 with the devaluation of the baht that=
 triggered the Asia crisis, capital flew out of Thailand in droves. Between=
 1997 and 1998, some US$20 billion fled the country in panic, creating a cu=
rrency crisis, a severe credit crunch, a banking crisis and the economic an=
d social upheavals.
</p><p>For the emerging-market economies, there appears to be no middle gro=
und when it comes to dealing with capital flow. It is either too much money=
 or too little money since the foreign bankers, financiers, money managers =
and investors largely act on a herd instinct. The dilemma for Thailand and =
other emerging-market economies is how they can strike a balance and cope w=
ith the volatility or financial turbulence as they open up their economies =
to embrace capital, technology and know-how; and how they can make the best=
 use of  globalization, where capital, which has both its beneficial and de=
structive elements, moves rather freely in search for the best returns.

</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E3"><img src=3D"=
https://library.fes.de/images/digbib/d_prev.gif" border=3D"0" alt=3D"Previo=
us Item"></a>
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#I0"><img src=3D"ht=
tps://library.fes.de/images/digbib/d_oben.gif" border=3D"0" alt=3D"Page Top=
"></a>
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E5"><img src=3D"=
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tem"></a>

<a name=3D"E9E4"></a></p><p align=3D"LEFT"><font size=3D"+1">The Three Isla=
nds of Stability</font><br><br>
</p><p>Apart from the mismatch in the size of their financial markets, the =
emerging-market economies are also vulnerable in the face of the foreign ex=
change fluctuations. Managing an appropriate foreign exchange regime has be=
come a tough choice. For the present global financial architecture is based=
 on a floating exchange rate regime, dominated by the dollar, the euro and =
the yen. They are the three islands of stability, the centres of global gra=
vity. Over the past four to five years, the US, Europe and Japan have enjoy=
ed internal stability through subdued inflation, which ranges at 2-3 per ce=
nt a year. Yet the dollar land, the euro land and the yen land have created=
 financial turbulence in the rest of the world by the sharp volatility of t=
heir exchange rates. As a result, the other economies outside the three isl=
ands of instability is either inflating or deflating according to the movem=
ents of the three major exchange rates or the cycles of their economies.
</p><p>Robert Mundell, the Nobel laureate in economics, views the floating =
exchange rate system anchored by the dollar, the euro and the yen as "an ab=
sence of monetary rule". In his speech to Apec Forum in Seoul, Korea, deliv=
ered on March 30, 2000, he made it clear that the world has to go back to t=
he fixed exchange rate regime. "Should we have a fixed or flexible exchange=
 rate is not an option. A fixed exchange rate is not a monetary rule =96 it=
=92s the absence of monetary rule," he said. He called for a establishment =
of a global financial architecture based on a fixed exchange rate regime, s=
imilar to the old Bretton Wood system that the US tore apart in 1972. For t=
he rest of the world will find it increasingly difficult to manage their ow=
n stability in the face of the exchange rate volatility triggered by the wo=
rld=92s three dominating currencies.
</p><p>The Thai crisis can also be seen as a foreign exchange crisis emanat=
ed from the fluctuations between the dollar and the yen. In 1985, the dolla=
r was trading at about 250 yen. But 10 years later it was at 79 yen. Betwee=
n 1984 and July 1997, the baht was pegged to the dollar. The dollar weaknes=
s initially helped to boost the Thai exports. But starting in mid-1995, the=
 dollar began to appreciate sharply against the yen, making the Thai export=
s less competitive and precipitating the economic crisis. There was little =
movements between the baht and the dollar then because it pegged to the gre=
enback, but the baht rode on the dollar=92s back to appreciate sharply agai=
nst the yen to create a currency crisis.
</p><p>As Mundell has suggested, it will be necessary for currencies in the=
 emerging markets to enter a broader arrangement for create a regional fixe=
d exchange rate mechanism =96 exactly the same way that Europe has done wit=
h the euro. Japan wants to play this leading role, but it is still lack the=
 political courage to forge ahead into this direction. And there are a lot =
of reservations among the Asian countries, who still differ substantially o=
n the monetary and political union.
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E4"><img src=3D"=
https://library.fes.de/images/digbib/d_prev.gif" border=3D"0" alt=3D"Previo=
us Item"></a>
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#I0"><img src=3D"ht=
tps://library.fes.de/images/digbib/d_oben.gif" border=3D"0" alt=3D"Page Top=
"></a>

<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E6"><img src=3D"=
https://library.fes.de/images/digbib/d_next.gif" border=3D"0" alt=3D"Next I=
tem"></a>

<a name=3D"E9E5"></a></p><p align=3D"LEFT"><font size=3D"+1">Floating Excha=
nge Rate Regime</font><br><br>
</p><p>At the heart of the Thai financial reform to join the global financi=
al architecture lie the floating exchange rate system and the sound macroec=
onomic policy. Both the Finance Ministry and the Bank of Thailand are commi=
tted to a floating exchange rate mechanism. They believe that the value of =
the baht will have to be determined by the market force. Under the floating=
 exchange rate regime, the central bank will let the baht move rather freel=
y with the economic fundamentals of the country. It will refrain from inter=
vening in the foreign exchange market to support the baht, except in specia=
l circumstances.
</p><p>The floating exchange rate policy is in contrast with the currency p=
eg system of the past. Between 1984 and 1997, Thailand adopted a fixed exch=
ange rate regime. The Thai baht was then traded at 25 to 26 baht to the US =
dollar, compared to 37-38 baht to the US dollar presently. The currency peg=
 acted as a nominal anchor, providing macroeconomic stability and boost con=
fidence among the foreign investors who brought their money into the countr=
y for investment. Under this policy, the central bank, using its internatio=
nal reserves, would intervene in the foreign exchange market to keep the mo=
vements of the baht at a fixed rate. The fixed exchange rate policy worked =
well for Thailand because the baht was pegged to the US dollar, which weake=
ned mostly against the  major currencies during the period. This helped boo=
st the Thai exports. Most of the foreign exchange rate systems in the regio=
n also pegged their currencies to the US dollar.
</p><p>Overconfident with the growth prospects, Thai authorities started a =
series of financial liberalisations in the early 1990s, culminating in the =
opening up of the capital account. The policy amounted to opening up a floo=
dgate to foreign capital, which flowed into the country en masse. As a resu=
lt, foreign debt in 1996 mushroomed to more than US$90 billion, of which US=
$70 billion was private debt.=20
</p><p>Cracks began to show in the Thai fixed exchange rate system in mid-1=
995 when the US dollar began to strengthen against the Japanese yen. Two ye=
ars earlier China also devalued its currency by about 35 per cent. The Thai=
 exports, which had been the engine of economic growth over the past decade=
, began to lose its competitiveness. Without strong export earnings, there =
was increasing concern in 1996 over how Thailand would pay off its foreign-=
currency debt. The crisis was looming ahead.
</p><p>At the same time, the fixed exchange rate system posed a dilemma to =
the monetary authorities. For the fixed currencies induced foreign capital =
inflow, which added on domestic price pressures. This forced them to raise =
interest rates to bring prices under control. But wider interest rate diffe=
rentials between the baht and the US dollar further encouraged foreign capi=
tal inflow. The Thai authorities were caught in a "triangle of impossibilit=
y": they could not maintain a fixed exchange rate system, allow free flow o=
f capital and manage an independent monetary policy all at the same time.
</p><p>Eventually, the monetary authorities caved in to the pressure to aba=
ndon the fixed exchange rate region by floating the baht on July 2, 1997. T=
he crisis broke out to create a regional contagion effect. The authorities =
quickly introduced a series of measures to stem the tide of speculative mon=
ey. In the end, the Thai authorities would be left with the task of trying =
to keep an independent monetary policy.
</p><p>Now the floating exchange rate provides more flexibility to the mone=
tary authorities. They don=92t have to lose reserves in defending the curre=
ncy. Before the fixed exchange rate automatically helped to keep prices in =
check. But with the floating exchange rate, the task of the monetary author=
ities has to shift to maintaining price stability through inflation targeti=
ng. Now inflation targeting set in the medium term will form a nominal anch=
or for the macroeconomic management. As discussed above, it remains doubtfu=
l that a medium-sized and open economy like Thailand can achieve stability =
by adopting the floating exchange rate regime due to the highly instable na=
ture of the global financial system.
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E5"><img src=3D"=
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us Item"></a>
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<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E7"><img src=3D"=
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tem"></a>

<a name=3D"E9E6"></a></p><p align=3D"LEFT"><font size=3D"+1">Sound Macroeco=
nomic Policy</font><br><br>
</p><p>Thailand will be sticking to sound macroeconomic policy as another h=
allmark of its policy framework. Yet at this point, they have go for defici=
t financing for three years in a row to jump-start the ailing economy. But =
monetary conditions have been largely eased to accommodate the recovery. Th=
e failures of the financial system have created a huge burden on the budget=
, which has to fiscalise the cost of financial restructuring. The debt of t=
he Financial Institution Development Fund, which has guaranteed the deposit=
s of the public and senior foreign debts, have reached Bt1.3 trillion. In t=
he medium term, the fiscal policy will have to be tightened to prevent gove=
rnment debt going out of control.
</p><p>On the monetary front, amendment of the Bank of Thailand Act will pa=
ve the way for the Thai monetary authorities to focus their task on maintai=
ning price stability through inflation targeting. The central bank will ado=
pt more transparency to its operation. It will set medium term target for i=
nflation and try to manage the monetary policy to achieve the target. It wi=
ll have to report its operation to the Cabinet and to Parliament. It will a=
lso be required to publish its international reserves on a weekly basis.
</p><p>Moreover, the domestic institutions are under an ongoing reform. Par=
t of the Thai crisis can be blamed on the weak institutions that support th=
e capitalist system. From the legal, accounting, judicial, regulatory to th=
e financial supervisory institutions, they cannot cope with the fast change=
 of the new business and economic environment. It was not until March last =
year that Thailand have put in place a bankruptcy and foreclosure framework=
. The bankruptcy court was created only in June that same year. Without the=
 sophisticated institutions, economic development will eventually run into =
a snag.
</p><p>Moreover, financial sector is going through recapitalisation and deb=
t restructuring period. The Thai authorities are committed to liberalisatio=
n and best international practices in this sector to create more competitio=
n and efficiency.
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E6"><img src=3D"=
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us Item"></a>
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<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E8"><img src=3D"=
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tem"></a>

<a name=3D"E9E7"></a></p><p align=3D"LEFT"><font size=3D"+1">Capital Contro=
ls and the Hedge Funds</font><br><br>
</p><p>Another important subject in the international financial architectur=
e is how countries should cope with the flow of short-term capital and deal=
 with the highly leveraged hedge funds. At the height of the Thai crisis, e=
xternal private debt reached US$70 billion, of which US$40 billion was shor=
t-term capital. Short-term capital is defined as capital with a maturity of=
 less than one year. The abrupt movement of the short-term capital can crea=
te instability. When Thailand faced a classic balance of payments crisis in=
 1997, there were fears from the foreign lenders that the country might not=
 have enough dollar to service its foreign debt. For short-term capital of =
US$40 billion alone already exceeded the country=92s international reserves=
 of US$30 billion. Hence, there was a big scrambling for investors or lende=
rs to get out of Thailand as quickly as possible.
</p><p>Even a US$17.2 billion rescue fund from the IMF could not calm the p=
anic. The outflow of short-term capital created a severe credit crunch for =
there was not enough dollar for the local banks or corporates could not con=
vert their baht assets into dollar assets for repayment. Buying the dollar =
further put downward pressure on the baht. Besides, liquidating assets in t=
ime of the economic crisis was all the more difficult because they were no =
buyers or liquidity.
</p><p>After the Thai crisis, there has been growing interest among emergin=
g countries as to how they can control the flow of short-term capital. In p=
ractice, it is difficult to control short-term capital because there is alw=
ays a put option if a corporate fails to meet one of the covenants in its l=
ong-term loans. Yet short-term capital or hot money will have to be dealt w=
ith for their movements affect the foreign exchange and monetary policies o=
f a country.
</p><p>Malaysia=92s measures have been more direct. In September 1998, the =
authorities declared offshore ringgit to be inconvertible to curb speculati=
ve currency trading, thereby creating heavy losses among the hedge funds an=
d currency speculators. In doing so, Malaysia has been able to bring stabil=
ity to its ringgit, which ever since has been fixed at 3.80 to the dollar.
</p><p>Hedge funds are the pirates of modern global finance. This is the un=
spoken view of Asian financial policy-makers. After the collapse of Long-Te=
rm Capital Management, a US hedge fund, in August 1998, there has been incr=
easing attempt to regulate the hedge funds.
</p><p>At the Seoul Apec Forum, which ended last week, the destabilising ro=
le of hedge funds was highlighted as part of an effort to create a new glob=
al financial structure. If the new financial architecture is to be fair and=
 transparent to all participating countries, the hedge funds have to be tam=
ed. The reason is that some of the most highly leveraged hedge funds are ma=
naged secretively. They are registered in offshore financial centres to esc=
ape the watchful eyes of the regulatory authorities.
</p><p>When they take on financial markets with their sheer leverage power =
and intense speculative trading practices, they can create instability to t=
he financial system. Medium-sized open economies are particularly vulnerabl=
e to hedge funds.
</p><p>Members of the Association of Southeast Asian Nations have submitted=
 a proposal to the IMF Fund on the need to improve transparency and the mon=
itoring process of hedge funds. Yet the IMF=92s response has been rather lu=
kewarm.
</p><p>Countries have different methods to cope with the hedge funds. After=
 the baht crisis, the Thai authorities have moved to curb baht trading in t=
he offshore markets. Local banks are restricted from supplying the baht to =
the hedge funds or foreign investors in the offshore market.
</p><p>Hedge funds aggravated Thailand=92s financial crisis when they joine=
d in the attack on the baht in 1997. They were viewed as a necessary evil t=
hen because they imposed market discipline to the economy. With the Thai au=
thorities refusing to face the reality of the baht, hedge funds launched a =
US$10 billion attack on the currency on May 14, 1997 alone. After the victo=
ry over the baht, the hedge funds went on a regional rampage, attacking nat=
ional currencies and precipitating the regional crisis. The Hong Kong dolla=
r was also come under the heavy attack, but it escaped the turmoil due to i=
ts sound fundamentals.
</p><p>"If we impose more restrictions on domestic financial markets to pre=
vent huge capital inflows, these hedge funds will move to these offshore ba=
nking units, rendering the restrictive measures ineffective," said Paul Chi=
u, Taiwan=92s finance minister.=20
   <font size=3D"-1"><i>[ Paul C. H. Chiu, minister of finance, Chinese Tai=
pei, "Short-term Capital Flows and the Related Financial Architecture in Em=
erging Market Economies," paper presented at the Apec Forum on Shared Prosp=
erity and Harmony, March 31, 2000, Seoul, Korea]</i></font>
 =20
</p><p>The advanced economies are adopting measures to require the hedge fu=
nds to disclose requirements, and to require banks to enhance their risk ma=
nagement capabilities in order to curb excessive lending to hedge funds and=
 other highly leveraged institutions. In this regard, hedge funds are being=
 controlled indirectly.
</p><p>The G-7 countries began to take a serious look at the destabilising =
effect of hedge funds only after the collapse of Long-term Capital Manageme=
nt. In the end the bankrupt US hedge fund had to be bailed out by other US =
investment banks because if it was forced to liquidate its US$1 trillion po=
sitions, it could have brought down the global financial markets. The failu=
re of Long-Term Capital Management also pointed to poor risk management by =
the US and European banks, which allowed the hedge fund to leverage 20 time=
s its capital base.=20
</p><p>But Chiu said these disclosures or risk management measures were not=
 enough to shield emerging market countries from the threat of the hedge fu=
nds. In Taipei, he said, foreign investors were required to register as qua=
lified investors and to disclose pertinent information, including the names=
 of their beneficiaries. "At the same time, Taipei has regulated hedge fund=
s in a manner similar to regulating securities investment trust funds by pr=
ohibiting transactions supported by margin financing," he said.
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#E9E7"><img src=3D"=
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us Item"></a>
<a href=3D"https://library.fes.de/fulltext/iez/00768.htm#I0"><img src=3D"ht=
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"></a>

<a href=3D"https://library.fes.de/fulltext/iez/00769.htm#E9E9"><img src=3D"=
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tem"></a>

<a name=3D"E9E8"></a></p><p align=3D"LEFT"><font size=3D"+1">Conclusion</fo=
nt><br><br>
</p><p>Despite the rhetoric over the new international financial architectu=
re, it remains uncertain how its final face will look like. But the world o=
ut there is very crude and brutal for the emerging economies. Thailand and =
other emerging economies are facing the dilemma of having to deal with glob=
alization, which comes with the information technology revolution. But in g=
lobalization, there is an inherent instability of the financial markets, do=
minated by the dollar, the euro and the yen.
</p><p>To participate in the globalization or the new architecture, Thailan=
d will have to put its house in order and liberalise its financial system a=
nd economy. But if it fails to do so appropriately, it will risk facing ano=
ther crisis.=20
</p><p><b>Thanong Khanthong </b>is Business Editor of The Nation, Bangkok, =
Thailand
<!-- START END -->
</p><hr>
<font size=3D"-2">
=A9 <a href=3D"mailto:wwwadm@www.fes.de">Friedrich Ebert Stiftung</a>
| <a href=3D"https://library.fes.de/fulltext/iez/support.html">technical su=
pport</a> | net edition=20
<a href=3D"mailto:walter.wimmer@fes.de">fes-library</a> | Juli 2001
</font></td></tr></tbody></table>
<!-- END END -->

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