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Wednesday, 28 January, 1998, 11:44 GMT
Could the Asian crisis turn into a global slump?
Dole Queue
The Great Depression showed itself in lengthening dole queues the world over
Political leaders used to worry about nuclear confrontation. Now the main concern is increasingly the stability of the international financial system, argues BBC Economics correspondent Andrew Wood.

During the Cold War the world lived in fear that a small regional crisis could escalate into a superpower confrontation triggering a nuclear war. The collapse of communism largely put an end to those worries. Now world leaders have to worry about the stability of the international financial system instead.

As markets become freer, it becomes much easier for investors to withdraw money when they suspect a country's problems are getting out of control. Organisations such as APEC, which like to proceed through consensus, seem too slow to react to the instant nature of the electronic global markets.

Could today's crisis in East Asia cause world recession or worse?

Some see similarities with 1929 when the stock market crash ushered in an era of depression. Britain abandoned the Gold Standard. The pound, which was then world's major currency, was devalued, making British products cheaper to foreigners. Other countries panicked. They rushed to devalue their currencies too.

Protectionism flourished, as countries tried to shelter industries from foreign competition. World trade collapsed, falling by 60% between 1929 and 1931. That exacerbated the economic slowdown and the depression continued until the Second World War.

The political climate in the 1930s was very different, as the world prepared to go to war. International co-operation to try to end the world's economic difficulties failed. But that experience led, as the war drew to a close, to the creation of the International Monetary Fund and its sister organisation, the World Bank.

The post-war economic order

The Bank's job was initially, to provide loans to help reconstruct Europe after the war. But its focus soon shifted to the developing world, giving financial and technical assistance to reduce poverty. It continues to help countries recover from war, playing a leading role in reconstructing Bosnia.

The IMF monitors the state of the world economy, and acts as a sort of policeman of the financial system, taking member countries to one side if it thinks they're pursuing unsustainable policies. Unless the country asks for help, it's under no obligation to follow the IMF's advice. For example, the IMF warned Thailand privately in 1996 of potential problems, although the government took little notice.

The IMF help takes the form of loans in foreign currency to get a country through a balance of payments crisis. That gives a country the money it needs to pay for essential imports such as fuel and raw materials for industry, and also for it to continue make interest payments - which are usually in dollars - on any international borrowing.

But countries must promise to reform their economies as a condition of receiving IMF brokered loans. The medicine is usually bitter, but effective. The IMF took the lead in sorting out the Latin American debt crisis of the 1980s. More recently it's helped ease the passage of countries like Russia, Poland and Hungary from communism to capitalism with stand-by credits and stabilisation packages.

Even so rescuing a country requires international co-operation. The United States had to act as a "rich uncle" when its neighbour Mexico got into trouble in 1995 and needed a $50 billion package of loans. Only a fraction came from the IMF; most of the rest was put up by Washington.

Other institutions play their part

The G-7 started as a group of the world's seven leading industrialised democracies. Its members include France, Germany, Britain, Italy, Japan, the United States and Canada, although now it also includes Russia in its deliberations as the G-8.

The members hope to co-ordinate policies to the benefit of the world economy. The countries' finance ministers and central bank governors meet regularly to discuss their reaction to the state of currency markets and what the appropriate exchange rates between major currencies should be. In this way they hope to give guidance to markets

The G-7 or G-8 is sometimes portrayed as being like the board of directors of the world economy - although it excludes many important countries, like India and China. Also it's not a true interntional financial institution as it doesn't have a permanent secretariat.

The Organisation for Economic Co-operation and Development is a broader club for rich industrialised democracies, with 29 member countries. The headquarters are in Paris. Although being a member doesn't guarantee a country continuing success. Two of the latest recruits were Mexico and South Korea.

Links to more Asian economic woes stories are at the foot of the page.


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