Asia looks to rework IMF relationship, G-20 for expanded role to combat economic turmoil

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David Pilling and Geoff Dyer
Asia, so far at least, has escaped relatively lightly from a financial crisis that began in the US and ended with the nationalisation of a large chunk of the west's financial system.
Fairly well capitalised banks, cautious regulation and mountainous foreign exchange reserves have shielded the banking systems of most Asian economies from the worst of the financial hurricanes wreaking havoc in the US and Europe.
But Asia, already suffering from shrinking demand for its products, has a big stake in trying to prevent a new financial crisis in Asia 10 years after the last one, and in ensuring robust mechanisms are in place if catastrophe strikes again.
That partly means reworking its relationship with the International Monetary Fund (IMF), an institution in which Asia is under-represented and in which its faith was badly dented by the 1997 Asian crisis. Then, the IMF set strict conditions for borrowing in stark contrast to its relatively liberal lending to Iceland and Hungary this time around.
The tables have also been turned in that Asia's regulatory prudence - often criticised as inhibiting the efficient functioning of capital markets - has come back into fashion.
"This provides an important chance for reconciliation between the IMF and Asia," says Takatoshi Ito, professor of economics at Tokyo University and a former adviser to the IMF's research team.
Nicolas Sarkozy, president of France, a strong advocate of a radical shake-up of international regulation, has supported greater involvement by the big emerging powers, foremost of which are China and India. But in a meeting of Asian and European leaders in Beijing last month, China gave a fairly cautious response. Wen Jiabao, the premier, called for a "fair, just and effective international system" but said the biggest contribution China could make was "to maintain fast and stable growth".
China, which has yet to open its capital account, is still not fully integrated in the global financial system, say experts, limiting its scope to contribute to the regulatory debate. It has been ambivalent about taking a bigger quota in the IMF, wondering what it would gain. Beijing also feels vulnerable because of recurring accusations about its undervalued currency.
Stephen Roach, chairman of Morgan Stanley Asia, said too much was being expected of China. The idea, for example, that it could be an engine of international growth was ludicrous, he said, given its tiny capacity to consume compared with the US and Europe.
Yet some Chinese officials and academics feel that Beijing should seek to parlay its relatively healthy economy and financial system into greater influence.
"This is a moment where there has to be some give and take," says a senior academic at an official think- tank in Beijing.
"If the US and the west want us to be so helpful, they have to do something to guarantee our interests too."
Japan, keen to help coordinate an Asian response, has dispatched envoys to swap ideas. Proposals being floated include earmarking a portion of Asian reserves for the IMF to use as emergency liquidity funds, or building a separate Asian fund for the same purpose.
Another despatch by Jonathan Wheatley in São Paulo adds: G20 officials agreed yesterday that developing nations should have a greater role in tackling financial and economic crises but appeared to be far from agreeing how this goal should be achieved.
Guido Mantega, Brazil's foreign minister and chair this year of the G20, which brings together finance ministers and central bank governors from the world's biggest developed and developing nations, said that the group should become a decision-making organisation of heads of state and government.
The weekend meeting was called to prepare proposals for the summit of G20 heads of state to be held in Washington on Saturday.
But Robert Zoellick, head of the World Bank (WB), also present at the weekend meeting, said the G20 was "too unwieldy" and argued for a flexible arrangement involving the G7 group of the world's richest nations with the participation of other countries, such as Brazil, China, India, Mexico, Russia, Saudi Arabia and South Africa. However, Mr Mantega complained that developing nations had been invited to G7 meetings "only to take part in the coffee breaks".
Mr Zoellick said there had been clear recognition of the need to improve regulation of global financial markets. One possibility was to expand the role and membership of the Financial Stability Forum, set up with the G20 in 1999 in response to the financial crises of the 1990s.
But he said there had been disagreement over the role developing economies could play in alleviating the effects of the current global financial and economic crisis, such as the extent to which they should use government spending to stimulate growth, helping to compensate for recession in the richest nations. "Some emerging market central bankers are concerned there may be less room for fiscal expansion," he said.
Mr Mantega and other Brazilian ministers have argued for a boost in government spending to ensure Brazil's growth does not fall below 5.0 per cent this year and 4.0 per cent next year. The central bank, which held interest rates steady last month after four big rises this year, has continued to voice concern over rising inflation.
In his opening speech, Luiz Inácio Lula da Silva, the Brazilian president, called for an expanded role for developing nations. However, he said that in dealing with the current crisis: "The example must come from the rich countries. They must implement the principal measures."