HEINER FLASSBECK Wanted: an International Exchange Rate Regime. The Missed Lesson of the Financial Crisis A re international institutions able to learn? The world financial crisis which hit Asia and other countries around the globe in 1997 and 1998 is an extremely good example to test the case. The acute crisis is over. Most of the Asian countries are head­ing back to high growth rates. Korea and Malaysia are definitively out of the slump, Thailand is wavering but on a good track. Others are worse off: Indonesia is still in a mess and Japan has not yet found a solution for its deflationary depression. Brazil has turned the corner but Argentina has to fight with a huge overvaluation of its currency as the mirror opposite of Brazil’s depreciation. Even Russia, which had been the most vulnerable of all the crisis countries, reported positive growth rates in 1999 – for the first time since the beginning of the transformation. What remains? For many observers the financial crisis had been mainly a crisis of the banking system in the Asian countries whereas Russia and Brazil had to cope with other structural problems. But such a view raises more questions than answers. How were countries with a supposedly»rotten« banking and financial system like the Asian»Tigers« able to overcome such a severe crisis just by devaluing their currencies? How were they able to be so extremely successful in terms of catching up with the western world in the past? No region of the world, outside the part we today call the»western industrialized countries«, has ever accomplished such a long and stable phase of high growth rates as the Asian»Tigers« in the 1980 s and the 1990 s. How was Brazil able to survive most of the 1990 s in good shape? How did Russia manage to achieve positive growth rates with its state owned mono­polies? Why is Japan unable to escape? The Japanese slump leads to the most impor­tant question: Why is it that very different coun­tries have been the subject of a banking crisis? On the one hand we have seen the failure of countries with large current account deficits and competitive weaknesses such as Thailand, Malaysia and Korea. On the other hand, and this is a neglected fact of the events which are called the»Asian Crisis«, there is Japan – a country which got into trouble despite having a very high current account surplus and without having fundamental competitive pro­blems. The remedy for the acute crisis in the »weak« countries had obviously been a sharp devaluation of their currency vis-à-vis the rest of the world. In Japan it is just the other way round. The Yen was strong most of the time and in the first months of 2000 Japan faces a revaluation that is not justified by the»fundamentals« and that has to be fought by the central bank by buying foreign currency with Yen. If a country has a weak currency because it has a»rotten« banking system, how can a country like Japan have a very strong currency although it seems to share the same weaknesses with regards to the financial structures and the banking system? Thus, the conjecture of a»rotten« banking system in Asia and of other»structural« problems around the world is not a convincing hypothesis. There must be other factors, beyond»rottenness«, which explain the problems of the banking system and there must be other factors which explain the crisis in different»structural« environments. The Japanese Yen and the Way into Deflation Japan’s economy is in a deep crisis for the fourth consecutive year. Although there seemed to be the first signs of a recovery in the summer of 1999 the outlook remains rather bleak as there was a severe setback in the last quarter with overall GDP figures falling again. In the last years a lot of ideas have been launched to explain the persistent slump of an economy which, for decades, had been the role model for many»sclerotic« economies in the Western World. Most explanations of the Japanese 282 Heiner Flassbeck, Wanted: an International Exchange Rate Regime IPG 3/2000