Sustaining Asia’s Recovery from Crisis - Remarks by Michel Camdessus
May 20, 199999/10
Remarks by Michel Camdessus
Managing Director of the International Monetary Fund
at the 34th South East Asian Central Banks Governors’ Conference
Seoul, Korea, May 20, 1999
Thank you Governors, Excellencies, Ladies and Gentlemen. Your invitation to share this occasion with you today comes as a great honor, and it gives me special pleasure, since your meeting this year takes place in an atmosphere of renewed hope and vitality in the region, and in a country whose efforts at addressing the challenges of crisis have been exemplary.
Asia is now emerging from the crisis that engulfed the region just under two years ago, surprising most governments, citizens, investors, and institutions by how rapidly it spread, and how severely it affected a number of countries. Much has been said and written about the causes of the crisis, of its human costs, of the policy decisions that were made by governments, of the support and advice that was offered by the international community, and of the painful process of reform.
But today I would like to pay tribute to those who withstood this crisis: to Korea and the other countries of the region, to their people—especially the most vulnerable, to the corporations and financial institutions, and to the governments and the policymakers; all of them have taken and are implementing courageous and difficult measures, confident in the long-term potential of your countries.
We in the IMF are proud to have stood with you in this time of severe economic imbalance, to have joined you in seeking solutions to a new virulent strain of crises, and to assist as you continue the testing, complex process of reform—a formidable task indeed.
Economic prospects for Asia and the world economy
What are the prospects for Asia now? The countries at the heart of the crisis are close to or even past the turning point. Most clearly in Korea, the Philippines, and increasingly in Thailand and Malaysia, we see signs of an upturn in activity. In Indonesia, where it took rather longer for financial stabilization to take hold, economic activity is expected to pick up also in the second half of the year. What has made this possible? Once the countries had resolved firmly to strive for financial stabilization, supported by the external financing packages put together by the IMF, prospects improved dramatically. Stability in foreign exchange markets was restored and allowed monetary policy to be eased appreciably. Fiscal policy was relaxed both to stimulate economic growth and, simultaneously to allow for a major expansion in social spending, especially on the social safety net. Now tangible evidence of reviving domestic and international confidence is seen in the sharp rebounds in equity markets throughout the region in the early months of 1999. But, as we all know, much remains to be done in strengthening the structures of these economies, before we can be confident that a truly sustained recovery has begun.
And what of the global outlook? In the near-term, the worst of the current emerging markets crisis may well be behind us: beyond Asia, Brazil is also emerging, and the policy dialogue in Russia has moved forward and we hope that the new government will steadfastly implement the program undertaken by its predecessor. For the time being, the recent buoyant mood of financial markets contrasts sharply with the situation just a few months ago in late 1998 when contagion seemed to be spreading inexorably around the globe. But, inevitably, challenges remain. Can the United States, the powerhouse of the global economy for the past several years, achieve the soft landing it needs? How soon can Japan expect to see the long-awaited and expected recovery? Can Europe breathe new vigor into its flagging economic expansion? And will the emerging markets be able to revive growth and sustain sound macroeconomic policies while undertaking the structural reforms that many need? More generally, can the tentative recovery now beginning be extended into a new era of high-quality global growth, in which Asia once again will play a dynamic, leading role? That will depend not just on skillful macroeconomic management but also on whether the international community can advance quickly enough with the challenge, on which it has embarked, to overhaul the architecture of the international financial and monetary system.
During recent months, the international community has reached agreement on some specific policies, and it has been implementing a number of initiatives. The recent Interim Committee meeting was instrumental in reaching this stage, and it is important to maintain the momentum. Last week’s APEC Finance Ministers meeting was very helpful in carrying forward a number of issues. Let me mention just a few points on which we see progress:
- In the areas of transparency, standards, and Fund surveillance, new standards are being defined.
- On the critical issue of financial sector strengthening, the policy dialogue with our members, with you, is being enhanced by the application of the Basle Core Principles—which are also being updated—and by a new framework for financial sector assessment agreed between the Fund and the World Bank.
- An important innovation came in April when the IMF set up the new Contingent Credit Lines to provide precautionary financing to countries with basically sound economies but which are threatened by the potential effects of contagion.
- In dealing with highly leveraged institutions (in particular, hedge funds) more concrete and workable proposals are emerging.
- In the most complex area of the debate, how to involve the private sector in forestalling and resolving crises, greater clarity is emerging on some issues but the debate is far from over.
This long list of tasks completed or work-in-progress is very encouraging; but it is not enough. What should be done next? A few weeks ago I presented to the Executive Board the tasks that I thought should occupy the global financial community in the next few months: it ran to some 30 substantive items, far too many to review with you today. In very broad terms, I see two key directions uppermost in our work: one is to go ahead implementing what has been agreed, a time-consuming and technically complex task; the other is to pursue with even greater vigor the mission that we were embarked upon before this crisis, namely to integrate a larger number of developing countries into the global financial system. Governors, going in these directions we will be faced with several more specific issues that we must address in the coming months and we will greatly value your contributions.
First, a key systemic implication of the recent crises needs to be studied in more depth—exchange rate arrangements. It is striking that each of the crisis countries was operating some form of peg at the time crisis struck. We must consider carefully whether such arrangements are appropriate to certain stages of development, at certain times, under certain conditions; or whether they simply suffered from technical shortcomings.
Second, we need to, focus on the trend toward integration of international financial markets. Countries must be able to tap the benefits of the capital flows that are available by liberalizing their capital accounts through an orderly process, but also guard against the risks.
Third, social policy has come to the forefront of the international debate on the architecture in the last few months. It must be kept in the forefront. Asia’s experience with crisis reminds us that countries need strong social policies.
Fourth, it is high time to bring the debate on debt relief to closure, lifting the burden of unsustainable debt on the poorer countries. I have little doubt that an important step forward will be taken soon.
Fifth, we need to press ahead with adapting international institutions, including the IMF, to the new challenges posed by globalization. The more responsibilities are entrusted to us, the more the IMF needs to be able to count on the strongest possible support and close involvement of all national authorities in decisions that affect the global community.
Governors, I have spoken about the key elements of our agenda to build a more secure future for the world economy. But many of these principles are not new for you as they have been at the heart of your ambitious programs of reform. Increasingly the question arises, nevertheless, as to what would be the result. Well, few observers doubt Asia’s potential to return to rapid growth. But I would suggest that what is in the making is not just a return to the successful trends of the past but a new model of higher quality growth solidly rooted on the amazing strength of your Asian traditions and values.
Let me elaborate and tell you why I refer to such a concept of growth, one that is of higher quality and that draws its strength from your traditional values.
Growth of higher quality? For many reasons! Because, first of all, it will be rooted in an environment of fair and transparent competition on an even playing field, and because it will be based on sound economic and financial institutions and a strong sense of social justice.
Yes, your reforms are promoting an independent, competitive private sector. Weak corporate governance was a serious flaw in many Asian economies. In the near term, a priority is to press ahead with corporate debt work-outs to establish viable corporations on a sound financial footing.
Simultaneously, you are adopting high standards of public governance and transparency. "Arm’s length" relationships among governments, corporations and banks, are essential as a starting point for good corporate governance. The international standards for transparent policy formulation and data dissemination now under preparation will enhance public sector credibility.
Your reforms are also addressing the problems of your financial systems whose weakness was one of the central flaws in the emerging markets crisis. A good start has been made. Now authorities throughout the region need to give the highest priority to complete this task by ensuring that sound regulatory and supervisory structures are in place. Certainly it will mean continuing bold measures to strengthen the banking system, including the closure, restructuring, or recapitalization of troubled banks. It will also mean looking at the present supervisory arrangements themselves. One of the key issues for this region is to establish supervisory agencies that have a high degree of independence from the banks, the private sector, and other official agencies. The precise institutional arrangements will vary from one country to another—whether it be an independent agency, a part of the monetary authority, or affiliated with a government ministry—but the execution of its mandate should be without external influence.
Such strengthening of the financial system will be an essential precondition for your continuous progress toward open capital markets. Everybody now, I presume, has clearly understood that to liberalize successfully their capital accounts, countries should do so under two broad conditions: first, liberalization should proceed in a properly sequenced fashion with the strengthening of their domestic financial systems. Second, they should not allow the easing of controls on longer-term flows, especially of direct investment, to lag behind the liberalization of short-term flows. This is one of the key lessons of this crisis.
Another such lesson suggests making the concern for social justice truly central to the design of national policies. This calls for enhanced social welfare and protection. As recession deepened, many descended into poverty as formal social safety nets were missing, placing too heavy a burden on the protection provided by the extended family. In the context of the Fund-supported programs, major steps have been taken to develop such social systems in collaboration with the World Bank. Social safety nets are essential to protect those affected by the dislocation—such as unemployment—that remains a risk in even fast-growing economies. And for long-term development, stronger education systems will be needed, a point that I hardly need to stress in a country such as Korea, which has been able in 30 years to bring the literacy rate to 98 percent.
Already this emphasis on social objectives brings us to the heart of what I see as the contribution of your strong traditional values to high-quality growth. But let me add three more examples.
First, your clear acceptance of open competition as a condition for progress. It is impressive that, even when faced with such a severe recession, most countries in the region have eschewed protectionist policies. You have recognized, correctly, that the strong growth of the past was promoted by the progress toward open trade, investment, and payments regimes. This necessary, if not sufficient, condition will need to remain at the heart of your economic thinking and lay the groundwork for further progress.
Second, your genuine consensus in seeing sound macroeconomic policies as key for success. The sound macroeconomic policies that were long perceived to be one of the hallmarks of the high-growth era in Asia are now being reinforced with robust institutions and market-based policy instruments that will permit a flexible implementation of policies. For the time being a relaxed stance of fiscal and monetary policy remains appropriate until the recovery is well underway. I have little doubt that eventually, if the time comes for a tighter policy stance, your governments, who have an instinctive preference for fiscal prudence, will rise to the challenge.
Third, the remarkable importance you attach to saving in private and public finances. The high rates of domestic saving that were observed in the past were indispensable for financing development. As recovery resumes, strong macroeconomic conditions and institutional requirements will foster continued strong saving, and this will be all the more desirable as it is likely that foreign resources may be more constrained and more expensive than in the past.
Governors, the traditional mission of the IMF has brought us closer to you at a time of the most severe economic crisis of the last fifty years. This has been a dramatic experience that you and your countries have faced with admirable lucidity and determination. Today I see it as a distinct privilege to have been able to share with you a message of confidence for the future.
Yes, I believe that your countries are now or will soon be on a solid track of recovery.
Yes, I believe that your perseverance in implementing your programs and your contributions to laying the foundation of the new world financial architecture have all the potential for establishing your economies on a new promising track of high-quality growth.
Yes, I believe that these new features of your development will give new chances to a better shared prosperity, to a social cohesion and promotion of your cultures, all the more as this new pattern of development will be solidly rooted in the richness of your traditional values.