SEVERAL leading economists, business and political leaders told attendees at The Nation's ''Asia: Back to Basics?'' seminar that two themes currently being forwarded by the international community -- emphasising free capital movements and concurrently adopting greater exchange rate flexibility -- may be unworkable and incompatible concepts.  

Finance Minister Tarrin Nimmanahaeminda, who chaired the seminar section, said that capital was critical for any economy's development. ''The issue is providing mechanisms broad enough to make savings and capital mobilisation efficient enough,'' he said.  

Richard Cooper, professor of international economics at Harvard University, said that these themes were in deep tension with one another, and particularly incompatible for countries such as South Korea and Thailand. ''These two countries were performing very well economically, but suffered because they still had weak and imperfect capital markets,'' he said.  

He said that when other countries traded with Thailand and Korea, most of them viewed the exchange rate as each country's most important asset price. ''It's disturbing for any economy to have its principal price for allocating resources among sectors jerked around by changes in financial market sentiments,'' said Cooper.  

Moreover, he added, it could be argued that under those conditions, domestic financial markets will not develop. ''Residents can hold their savings abroad,'' he said.  

Cooper sees a deep tension between the two objectives currently being propagated on developing economies by the international financial community. ''I think there has been inadequate understanding of the total consequences,'' he said.  

He said economists had long known of the incompatible triangle of fixed exchange rates, free capital mobility and some flexibility in domestic monetary policy. ''A country cannot have all of those three things at the same time in today's world,'' he remarked.  

If countries choose two options, such as fixed exchange rates and free capital mobility, he said they virtually give up the autonomy of their monetary policy. ''Their monetary policy will be determined principally by the world economic environment and by the country to which their exchange rate is fixed,'' he said.  

Cooper also warned that the concept of floating exchange rates and free capital mobility in countries with imperfectly developed capital markets was also incompatible. ''If I'm right in this, countries such as Thailand will have to choose, and it's an uncomfortable choice, between free capital mobility and some form of fixed exchange rates and loss of monetary autonomy,'' he said.  

Thailand, he said, could also choose to float exchange rates, enact some form of international capital restrictions, and maintain some preservation of monetary autonomy. ''There are ways to influence capital movements without controls -- such as the Chilean method of requiring non-interest bearing reserves,'' he said.  

In 10 years, when Thais look back at the current economic crisis, Cooper said they would remember this as a period of adolescent growing pains. ''The real economy got out in front of the financial system, which in turn got out in front of the regulatory framework,'' he said.  

In Cooper's view, Thailand and Korea will be much stronger because of regulatory improvements and lessons learned from the crisis.  

Clark Andersen, a Goldman Sachs vice president in charge of sovereign risk management, added that the contagion effect of the current economic crisis showed that open developing economies such as Thailand need some form of capital controls. ''Countries must have the means with which to protect themselves from capital volatility,'' he said.  

Admitting that his Wall Street colleagues would recoil in disgust at his suggestion, Andersen said countries such as Thailand needed some type of regulating mechanism because in today's fast moving computer-driven economy, there was a disparity between the contagion's speed and policy-making's deliberate pace. ''Governments simply cannot react fast enough to keep up with a fast-moving crisis, as we have seen over and over during the past two years,'' he said.  

Andersen also warned Thai policy officials to protect themselves from blindly applying free-market thinking. He said that a global capital system as advocated by leading economies such as the US did not and could not exist. ''Capitalism is, and will remain, a national, and not an international phenomenon,'' he said.  

Both Andersen and Kosit Panpiemras, Bangkok Bank's executive board chairman, emphasised that markets were only sustainable to the extent they are embedded in social and political institutions. They added that global markets required a foundation from global and social political institutions, which do not exist.  

Quoting current US treasury secretary Larry Summers, Andersen said: ''We cannot have the impossible trinity of continuing national sovereignty, financial markets that are regulated, supervised and cushioned, and the benefits of global capital markets. They are incompatible,'' he said.  

Syahril Sabrin, Indonesia's central bank governor, said that deterioration of confidence was the main contributor to the current crisis. ''People suddenly lost confidence on the future of the economy and in the government's ability to deal with economic problems,'' he said.  

To bolster Indonesia's recovery, Sabrin said the central bank had to implement and execute a comprehensive policy package which addressed key issues. ''First of all, we initiated a tight monetary policy which was aimed to attain price and exchange rate stability,'' he explained.  

During the crisis's peak, Indonesia's exchange rate depreciated from 2,500 rupiah per US dollar before the crisis to 17,000 rupiah. Inflation ran close to 80 per cent and gross domestic product shrunk by 14 per cent in 1998. ''We now have negative inflation and the rupiah has strengthened and stabilised at 6,500,'' he said.  

Sabrin added that blanket government guarantees on deposits in domestic banks and the current ongoing government-led recapitalisation and restructuring of the financial sector had contributed to the return of confidence in Indonesia's future.  

He stressed that political reform and the recent democratic elections had also gone a long way in boosting sentiment. ''The recent crisis has taught us very valuable lessons. We need to sit back and thoroughly evaluate what basic principles in economics and business we have neglected or violated in the past,'' he said.  

Indonesia, he continued, had learned that it must be consistent and prudent in monetary management and the implementation of general economic policies. ''We have learned that we must strictly adhere to and consistently apply prudential banking practices,'' he said.  

A final principle which Sabrin said Indonesia had learned from the crisis is that over-optimism, particularly for business prospects, is highly dangerous. ''We learned that companies with prudent capital structures, namely low debt-to-equity ratios, survived and were more resilient to withstand economic shocks,'' he said.  

BY K I WOO 
The Nation  
07/31/99