Finance Loan

Costello Urges Asia To Invest Its Savings On Building Up Its Own Backyard

2 August 2007

APEC finance ministers grapple with the unexpected shift in global capital flows.

TEN years after Asia's financial crisis, unsustainable capital flows are again worrying the region's finance ministers. But when they meet today on Queensland's Sunshine Coast, the problems they will tackle are the reverse of those that pitchforked Asia into its last slump.

The problem then was that Asia was borrowing too much in foreign currencies, unsecured by hedging. Today, Treasurer Peter Costello says Asia is lending too much overseas and investing too little at home to accelerate growth. And Costello, as chairman of the Asia-Pacific Economic Co-operation forum finance ministers' group, has succeeded in focusing ministers on discussing the perverse direction of capital flows - characterised by poor nations lending to the rich - and the need to deepen and broaden private capital markets in the developing countries of Asia and Latin America.

The two-day meeting - which has attracted new World Bank president Robert Zoellick, China's Finance Minister, Jin Renqing , and Japan's Finance Minister, Koji Omi, among others - will also focus on climate change and energy security, discussing the best way of reducing carbon emissions without reducing economic growth.

They will also be looking at how to reduce risks to public finances, particularly from off-balance-sheet liabilities such as commitments to public-private partnerships, loan guarantees to private or state companies, and pension entitlements.

At Costello's behest, they will be talking about reform and how governments can ease the path of bringing it about, and secure a consensus for change when powerful interests want things to remain the same.

While climate change is taking top billing almost everywhere, in Coolum it will have to share it with the unexpected shift in global capital flows, and what governments can and should do about it.

A Treasury paper says that while investment has surged in China and in resource-exporting countries such as Australia, Mexico and Russia (all APEC members), the reverse is true in most of South-East Asia, where the growth slump since the 1997 crisis is primarily from lower investment.

"Investment in many emerging Asian economies is still well below the levels before the 1997-98 financial crisis, particularly in private investment," it says. "While pre-crisis levels may have been unsustainable, there is a sense that current levels are not adequate to support the rapid growth potential of emerging East Asia."

Rising trade and current account imbalances around the globe are widely seen as the biggest threat to financial stability. International Monetary Fund managing director Rodrigo de Rato issued a warning this week that it was time for action, and US Treasury Secretary Henry Paulson has skipped the APEC meeting to fly to Beijing for more talks with Chinese leaders on their undervalued currency and reforms needed to raise demand in China.

But senior Treasury officials argue that while the currency issue matters, the problems - and solutions - are more complex. Emerging Asian economies, they say, have not developed the financial infrastructure and instruments to allocate their massive savings efficiently in their domestic economies. "APEC emerging economies generally have underdeveloped private capital markets and are highly reliant on bank finance," Treasury says. "Private capital markets are equivalent to less than two-thirds of GDP (compared with) more than 21/2 times GDP in mature APEC economies. Bank finance comprises 62 per cent of total private funding, compared with 29 per cent in mature APEC economies. Corporate bond and derivatives markets are particularly underdeveloped."

As Costello argued yesterday, it would do the world more good if emerging Asia could invest its savings in its own financial markets to develop its own economy, rather than pumping them into US Treasury bonds and the like. The first step to reform is for leaders, ministers and officials to become aware of the problem, the ways of solving it, and the potential gains if it can be solved.

That's the benefit of APEC. It makes no decisions, but participants exchange ideas and share experiences, in the process transferring the ideas, bureaucratic and political skills that, in time, might result in decisions that change the world.

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