Nearly three years after the birth of the Asian financial crisis, there are disturbing signs that Asia's policy-makers are making the same mistakes. Across the region, governments and central banks are doing their utmost to control their currencies. In Japan, comments from the Bank of Japan and the Ministry of Financeáare nearly always a precursor to heavy intervention to keep the yen fromáappreciating against the US dollar.
In Korea, official policy is to keep the won as weak as possible. Official organs of Korean state policy such as the Korea Development Bank and Korea Electric PoweráCompany are regular and massive sellers of won to keep the currency artificially low.
In Malaysia, currency controls keep the ringgit at RM3.80 to the dollar, while China and Hong Kong persist with their fixed exchange rate regimes.
The concensus among economists is that if all these currencies were freed from the over zealous attentions of the civil servants, they would rapidly appreciate. Even the renmimbi could rise if such a depegging were accompanied by a wholsale deregulation of the country's financial system. Definitely, the won, the ringgit and the yen are all undervalued.
Policy-makers seem wedded to the Orwellian axiom of "exports good, imports bad". Pressured by strong lobby groups of domestic exporters, the official policy has been to promote exports at the expense of domestic consumption. And the easiest method they have to promote this policy is to keep their currencies artificially cheap.
But this is a subsidy that is bad for domestic economies. Sooner or later Koreans, Japanese, Malaysians and the rest of Asia will want better and cheaper goods to buy domestically. And when this consumerist pressure comes to bear, then currencies will have to be allowed to find their own levels.
Before the crisis, the mantra among the ministers was that Asia needed strong currencies. The external debt situation of each of the countries was so great that the subsequent devaluations were catastrophic. Learning from that, governments have had a 180-degree chage of faith. Since the crisis, they have decided to export their way out of trouble. And key to that policy are weak currencies. Korea, in particular, seems so intent never to be in hock to foreign lenders again that it is rapidly building up its foreign reserves to record levels while at the same time maintaining an artificially low level of the won.
This reaction to the crisis is understandable, but wrong. The question is not whether currencies are too strong or too weak. It is not even the specific level where the currencies are trading that is the issue. The real issue is how the currency regime works and how it contributes to strong and stable growth. And any form of official intervention and interference in currency markets is a barrier to efficient markets. And this in turn restrains growth.