From the Asian Crisis Toward a New Global Architecture -- Address by Michel Camdessus
June 23, 1998
As prepared for delivery
Address by Michel Camdessus
Managing Director of the International Monetary Fund
to the Parliamentary Assembly of the Council of Europe
Strasbourg, France, June 23, 1998
Members of Parliament, ladies and gentlemen. I am delighted to be able to address you in this place, which is filled with history. As this is our first meeting, I would have liked to have described the International Monetary Fund to you in some detail, but your time is precious and the world is at a dangerous crossroads. Once again, we are the witnesses both of the benefits of globalization—a huge pool of resources for investment and the growth of well-managed countries—and of its risks: financial instability, crises, and the marginalization of countries that are unable to join this powerful current of world economic unification. A world of promise, but a dangerous world! So let me stick to immediate events, to the threats approaching us from Asia.
— What went wrong in Asia?
— What are the IMF and the international community doing to contain the crisis?
— How do we plan to ensure that the global economy will be less prone to such disturbances in the future?
What went wrong in Asia? We have all admired the "Asian miracle" based on saving, prudent fiscal policies, investment in physical and human capital, and the liberalization and opening up—albeit in unequal measure—of economies. The results are there to see, particularly in terms of a reduction in extreme poverty. But there was a dark side, and the lesson from this crisis is that in a globalized economy a few macroeconomic virtues are not enough. Constant vigilance must be maintained over all the socioeconomic parameters; yet in each of these countries, there were lapses. The soundness of the banking system in particular must be monitored at all times; yet, here too, these countries failed, and, what is more, their unsustainable accumulation of short-term financing made them vulnerable to swift changes in market sentiment. Finally, countries must take great care to ensure that their affairs are conducted in an irreproachable and transparent manner and that all forms of corruption, nepotism, and favoritism are shunned; yet, over time in Asia, these afflictions took hold and overpowered systems that were otherwise remarkably successful.
But let us not single out the Asian countries alone. These blemishes exist to a degree everywhere, and these countries’ problems would not have reached such proportions if certain financial institutions in major industrial countries had not taken excessive risks. There are, however, lessons to be learned here, so I shall return to this point.
What is the IMF doing to contain the crisis? As soon as it was called upon— unfortunately, typically, too late—the IMF helped Korea, Indonesia, and Thailand formulate, and adapt as necessary, reform programs aimed at restoring investor confidence, reestablishing access to international capital markets, and reversing excessive currency depreciation. These programs—I would like to emphasize—go far beyond restoring the major fiscal, monetary, or external balances. Their aim is to strengthen financial systems, improve governance and transparency, and restore economic competitiveness through, for example, the elimination of monopolies and the modernization of the legal and regulatory environment. To ensure the success of these efforts, we have marshaled an unprecedented volume of financial support. And in varied ways, we have helped all the countries throughout the world that were being threatened with contagion to strengthen their equilibria and their structures.
But now, in recent weeks, a new crisis—a crisis within the crisis—has emerged with the dramatic fall of the yen. This new development reflects a serious lack of confidence, provoked by Japan’s sluggish reaction to an economic slowdown that is turning into recession and the crisis in its financial institutions. Clearly, the fall of the Japanese yen is not unrelated to the Asian crisis, but it could also seriously jeopardize the ongoing recovery of the economies that were hit first. And it adds to the market instability that is again affecting Russia and some emerging economies.
Faced with these developments, an immediate, forceful reaction was required. The joint interventions of the United States and Japan on the foreign exchange market to help the yen regain lost ground were justified, but the effect will be lasting only if Japan promptly adopts energetic measures for the rehabilitation of its banking sector, tax relief, public investment, and the opening up and deregulation of its economy. The world cannot stand by, however, and simply wait for the good health of theU.S. economy and the strength of the recovery in continental Europe to dispel the crisis and restore harmonious, broad-based growth. So I would like to list, if I may, several other urgent tasks facing the international community.
First, we must strengthen the adjustment programs of the countries most severely affected by the crisis in southeast Asia and support their economic recovery. The multilateral institutions—the IMF, World Bank, and Asian Development Bank—have taken on this task. But there is also a need for countries that have been accumulating balance of payments surpluses for some time now, including certain European Union countries, to recycle those surpluses in the form of untied loans to countries in the process of adjustment. I appeal to the European countries—particularly those with surpluses—to increase their humanitarian aid. As creditors, they should stand ready to grant generous terms for the restructuring of their claims, support the recovery in Asia through new loans—and, above all, keep their markets open. This will be a good investment in their own future.
Second, we must strengthen policies to improve fiscal management, in order to guard against further economic downturns. This message applies to all countries, including those now taking the historic step of adopting the euro. It applies in particular to the transition countries and certain emerging countries, particularly those in Latin America, which are more vulnerable than others. It applies most especially to Russia, which has also been severely shaken by the crisis and which knows that additional external assistance would provide only scant relief unless accompanied by far-reaching financial adjustment measures that are long overdue.
Third, we must help preserve the stability of exchange rates in countries whose actions may be crucial to market stability, such as China and Hong Kong, despite the short-term negative impact of the crisis on their exports and growth. In these countries, as in Singapore and Taiwan Province of China, there is a certain margin for fiscal stimulus, which should be used without delay if it becomes necessary.
Lastly, the attention focused on the problems of Asia should be coupled with an equally determined effort to help Africa escape marginalization and accelerate its growth, which is finally positive again after two lost decades. I would like to mention just two IMF initiatives in this regard:
• The effort to put the ESAF—our facility for loans at an interest rate of 0.5 percent—on a permanent footing and increase its effectiveness in terms of growth and social priorities. The ESAF is the instrument we use to providefinancing to the poorest countries. Again, I appeal to the European countries. This facility is one of the cornerstones of international cooperation. You cannot allow it to be underfinanced.
• Rapid implementation of our joint initiative with the World Bank for the heavily indebted poor countries. Just 18 months since the launching of this initiative, commitments of about $6 billion have been made to six countries, and I hope that a good number of others will follow.
I am convinced that if such a package of measures is promptly adopted, the crisis will be averted and those who have suffered the most will soon emerge stronger than ever. I trust, however, that no one will want to stop there. We have lessons to learn and an international financial system in need of rebuilding. These are the requirements for stable world growth in the era of globalization. How can this be achieved?
Stable growth in an era of globalization
Let us begin by focusing our attention on the lessons of the Asian crisis. These lessons hold a message for us all and should be put into practice especially in the most vulnerable countries, such as the countries in transition. Allow me to digress briefly on this subject. Undoubtedly, 1997 brought good news for these countries: positive growth was recorded for the first time in eight years, and the overall expansion is expected to strengthen this year and next. Regrettably, a number of these countries have been feeling the after shocks of the turmoil in Asia: their export prices have weakened, conditions in international capital markets have become less favorable, Asian investors have scaled back investments, and their currencies have come under attack.
The challenge for us, therefore, is to assist these countries in safeguarding and extending their progress through sound macroeconomic policies and structural reforms aimed at the strengthening of bank regulation and supervision; further privatization and enterprise reform; the minimization of monopoly power; legal and institutional modernization; improvements in tax systems; health and education reforms; pension reforms; and above all, good governance. The IMF will naturally continue to support such programs. I should emphasize, however, that these types of measures are vital throughout the world, and particularly in the emerging countries wishing to obtain financing from global capital markets.
So how can we make the world less prone to financial crises? What kind of new architecture of the global system could achieve this? Let me describe for you four areas of reform on which the IMF has been asked to work.
First, we must continue our efforts to make Fund surveillance more effective and to enhance transparency in international finance. Indeed, transparency is the golden rule for a globalized economy. If the IMF receives the necessary resources, it can play a central role in crisis prevention by encouraging members to strengthen their macroeconomic policies and financial sectors. The IMF must now step up its efforts on surveillance of the financial sector, capital flows, and the risks posed by a sudden reversal of capital flows. Work is also underway to develop a "tiered response," whereby countries that are believed to be seriously off course in their policies would be given increasingly strong warnings.
In order for our surveillance to be effective, however, data provision needs to be timely, accurate, and comprehensive. Thus, the IMF has decided to be more demanding about the coverage and quality of the data provided to us and communicated to the markets.
Second, financial and banking systems, as well as their supervision, must be strengthened. For some time now, the Fund has been working to help disseminate a set of "best practices" in the banking area—as developed by the Basle Committee—so that standards and practices that have worked well in some countries can be adapted and applied in others. These efforts will now be stepped up.
Third, we need to establish more effective procedures to involve the private sector in preventing and resolving debt crises. Clearly, better ways must be found to involve private creditors at an early stage, in order to achieve equitable burden sharing vis-à-vis the official sector and to limit moral hazard.
Fourth, we must continue to liberalize international capital flows. This does not mean a mad rush to liberalization, regardless of the risks. What it does mean is liberalizing these flows in an orderly manner that takes account of the specific circumstances prevailing within each individual country, without forgetting that the countries that take appropriate steps to achieve liberalization, while strengthening their economic equilibria and structures, will reap the rewards of global competition.
In the months and years ahead, we look forward to working with the international community, including all the countries represented at the Council of Europe, on shaping this new global architecture. In the ultimate analysis, our goal is to ensure that the world—and each country at its own particular stage of development—is afforded adequate protection against the risks entailed by globalization and is helped to embrace the opportunities that globalization provides. This is the challenge that the countries in this forum have instructed the Fund to address, and I thank them profoundly for their wholehearted support.