People's Republic of China Hong Kong Special Administrative Region and the IMF
Indonesia and the IMF
Japan and the IMF
Republic of Korea and the IMF
Malaysia and the IMF
Philippines and the IMF
Thailand and the IMF
United States and the IMF
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The Asian Crisis: the Return of GrowthStanley Fischer
First Deputy Managing Director
International Monetary Fund1
June 17, 1999
Four months ago in Manila I had the pleasure of addressing the Asia Society's Tenth Annual Corporate Conference. My talk on that occasion was entitled "The Asian Crisis: The Beginning of the End?" Tonight we can safely remove the question mark, and talk about the return of growth in Asia—in the Asian crisis countries of Indonesia, Korea, Malaysia and Thailand, in the Philippines, which avoided the worst of the crisis, and, significantly, in Japan.
Like a seismograph, the EMBI spread (Chart 1) provides a good index of the intensity of a crisis. The devaluation of the baht in July 1997 shows up as only a minor tremor. The real start of the crisis is marked on the EMBI index by the attack on Hong Kong in October 1997. The eighteen months since then have been exceptionally difficult for Hong Kong. Nonetheless, the Hong Kong economy has successfully withstood massive external shocks, and the linked exchange rate remains strong. And as the other Asian economies hit by the crisis recover, Hong Kong too, with its policies continuing on the right track, has very good prospects of recovery in the second half of this year.2. The recovery
The regional outlook has improved markedly in the last few months (Table 1). The countries at the heart of the crisis, Korea, Thailand, Malaysia and Indonesia, are probably past the turning point. Even in Indonesia, where macroeconomic stabilization took longest, economic activity is expected to pick up in the second half of the year. The recent economic stability in Indonesia, supported by generally good macroeconomic policies and foreign official financing, was essential in helping ensure a peaceful background for the elections.
These recoveries are built on expansionary domestic policies, fiscal and monetary, and on the beginnings of the recovery of exports. They have been helped by the return of foreign capital, both financial, which has strengthened stock markets, and foreign direct investment. In Indonesia, Malaysia, and Thailand, the recoveries remain fragile, and depend on the continuation of structural reform policies, as well as on an improving external environment. In Korea too, the structural reform agenda is far from complete, particularly in restructuring the chaebols.
Among the potential victims of the crisis, the Philippines economy performed exceptionally. The Philippines was in an IMF program at the start of the crisis, and it skilfully pursued good policies, both by allowing the exchange rate to adjust when it came under pressure, and by defending it through interest rate policy. As the economy came under pressure, IMF financing for the Philippines was increased. The country benefitted from the composition of its trade, which is more heavily weighted towards the United States than that of the more severely affected countries.
Japan accounts for more than half the output of the region. There could have been no better news for the region than the strong first quarter recovery reported for Japan. While it is yet to be seen whether the recovery is firmly under way, policies are now playing a constructive role to strengthen demand, and bank recapitalization is underway. It will likely be necessary later in the year to ensure that fiscal policy continues to support the expansion.
And China has continued to weather the crisis better than many expected: a well timed fiscal stimulus has helped support activity, and the stability of the yuan has been maintained. A daunting agenda of structural reform of the state sector and the banks remains, but the authorities have made it clear that they are committed to accelerating reforms in these areas.3. But there are risks
But all this is fragile. The continuation of the recovery depends on domestic policies, which in turn depend on domestic politics, as well as on the external environment.
One important risk is that the burgeoning recovery will reduce the urgency of reform, and allow complacency, or normal politics, to set in. Much structural reform remains to be carried out in the crisis-struck countries, Indonesia, Korea, Malaysia, and Thailand, and also in China and Japan. As stability and growth return, and as the role of the international financial institutions inevitably diminishes, those countries that have had IFI-supported programs are going to have to internalize the ongoing reform process. We will continue to do everything we can to support the continuation of the reform process, through the IMF-supported programs as long as they continue, and then through the surveillance process.
The external environment is also critical. The phenomenal strength of the United States economy during the last three years has been bulwark of the world economy; essential in preventing the Asian and then the Russian crises from generating a worldwide recession. United States monetary policy in October and November 1998, followed a bit later by the co-ordinated cut in European interest rates, was decisive in containing the contagion from the Russian crisis. But the United States economy cannot continue to grow at rates well above any estimate of potential growth, especially when unemployment is so low. We must hope that European and Japanese growth will pick up in time to offset the inevitable slowdown in the United States—note though that while a slowdown is inevitable, a recession is not.
Japan's recovery is naturally more important for this region than is that of Europe. This applies not only to the recovery of output growth—and we must recognize that there has so far been only one quarter of growth, but also to the strengthening of the banking system, to ensure the revival of Japanese private sector capital flows to the region. Fortunately, actions taken to recapitalize the banks in the last year are beginning to pay off. The insurance sector too will need strengthening, and corporate restructuring will have to accelerate.
There are many reasons to feel more confident about the recovery than we did four months ago. But the recovery is not yet deep-seated, and this is not the time for over-confidence. And there are fresh issues to face.4. The next set of issues
Here are some of the immediate economic issues and questions:
Let me conclude by reflecting on a few broader issues raised by the crises of the last two years.
And ranging a bit wider yet:
1This is an outline of comments prepared for delivery at a dinner of the Asia Society, Hong Kong, June 17, 1999. I am grateful to Daniel Citrin and David Robinson for their inputs. Views expressed are those of the author, not necessarily of the International Monetary Fund.
IMF EXTERNAL RELATIONS DEPARTMENT