Asian Economic Outlook 1998-1999

Abstract

The assignment given to me for this conference was two-fold: to present the economic outlook for the Asian region and to discuss the currency crisis in Southeast Asia. As it turned out, those two subjects are actually one as the currency crisis has been prolonged, spread to Northeast Asia, and to equity markets throughout the world. It is directly and indirectly impacting on the economic outlook for the region. The financial turmoil has brought to light two characteristics of the global economy that has not been given a great deal of attention. The first reflects the fifty years of effort to liberalize world trade. This has resulted in a situation as close to free trade as the modern world has ever seen. An unanticipated consequence of free trade is that when business firms loose their pricing power because of international competition, mistakes of monetary policy appear in asset markets rather than goods and service markets. For example, if the monetary authorities were to be too easy, property prices and stock prices would rise rather than the producer or consumer price index. Hence, traditional measures of inflation will not be an adequate guide for monetary policy. The second characteristic is that international capital markets are even more integrated than are the underlying economies. Information technology has overcome the tyranny of distance. With instantaneous information and secure communications, money can be transmitted anywhere with the press of a button. A consequence of this is that domestic monetary policy -- the most effective policy instrument of government -- is constrained by international financial markets. In combination these two characteristics may mean that a monetary authority may not be aware that it has made a mistake or that the domestic financial system is fragile until the markets inform them.