People's Republic of China and the IMF
People's Republic of China Hong Kong Special Administrative Region and the IMF
Indonesia and the IMF
Japan and the IMF
Singapore and the IMF
Thailand and the IMF
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Hopes and Fears: The Global Outlook, Asia, and the IMF
Thank you for the invitation to address you today. Some of us are just coming off our NewYear's celebrations, others looking forward to the Chinese New Year at the end of the month. This is a time of year—traditionally—when we reflect on the past and make resolutions to ensure a better future.
My remarks today will be in that New Year spirit. First, I'll look back at Asia's recent economic performance and the resolutions needed to ensure a healthy outlook this year and over the longer-term. In the second part of my remarks, I'll describe some of the changes the IMF has made as a result of reflecting on the experience of the Asian crisis. We hope these changes will help ensure a productive relationship in future between the IMF and its Asian member countries.
The Near-Term Outlook
As they say, forecasting is difficult, particularly if it's about the future. So I'll begin my remarks with the somewhat easier task of presenting our forecasts for the year that just ended. In the aftermath of the September 11, 2001 terrorist attacks in the United States, there was gloom about the prospects for economic growth in 2002. The IMF's forecast—made in December 2001—that global growth in 2002 would be 2.4 percent sounded to some like `whistling in the dark.' In other circles, some fairly dire economic scenarios were being entertained for global economic growth in 2002. For instance, the gloomiest of the private sector forecasts was for global growth of under 1 percent, which would have been the worst performance of the global economy in 30 years.
Mercifully, such dire forecasts proved wrong, thanks in part to concerted policy actions by central banks and others in the international community. We estimate that global growth was 2.8 percent last year. This is a pick-up from the 2.2 percent in 2001. Clearly, things did get better last year as far as global growth is concerned.
Asia was the clear winner in the regional race—growth here was higher than in most, if not all, of the other major regions of the globe. Growth among the Asian industrialized countries1 —outside of Japan—is estimated to have been 4.7 percent last year, quite a healthy rate of growth. (I recognize that growth in Hong Kong, however, was much more anemic.)
What can we expect for this year? The IMF's view is that the global recovery will continue. Our forecast is for global growth of 3.7 percent this year, though the most recent numbers indicate that the pace of recovery is rather tepid and downside risks appear to predominate.
Asia—outside of Japan—will in our view continue to perform well:
There are a lot of concerns about events that might derail the global and regional recovery. One concern is that the geopolitical situation will at some point force oil prices to catastrophic heights. This could indeed take a toll on growth—IMF staff estimates suggest that every 5 dollar sustained increase in oil prices shaves 0.3 percentage points off global GDP growth after six months or so.
A second concern is that of further terrorist attacks such as the horrific one in Bali. My colleague Ken Rogoff happened to be giving a press conference here in the region the day after the Bali attack. As he said at the time, the consequences of such attacks for our sense of safety and well—being go infinitely beyond anything that can be captured in numbers. The economic costs of dealing with such attacks are many. There are higher costs of security and surveillance and higher insurance premiums. There is the direct economic impact on industries such as tourism. More generally, if there is a heightened perception of risk from such attacks, it could end up weighing on investment decisions across many sectors of the economy and could lower aggregate growth.
These are just two of many reasons to be concerned about the outlook for this year. But there are also factors which should make us hopeful that the global recovery will continue. These include: the rebound in inventories; the continuing positive news about productivity growth; and the substantial monetary stimulus in the pipeline. Hence, at the IMF, we still remain cautiously optimistic about the ongoing global recovery, but at the moment the emphasis is on caution.
Role of the G-3
I'll turn now to the forecasts for the various regions that underlie our global forecast, focusing on the G-3 and what G-3 policymakers should do. Why spend so much time on the G-3? Because let's face it—while the economies of Singapore and other countries in Asia can, and have, pushed ahead under their own steam, growth in the G-3 remains critical to their prospects. If the G-3 engine is chugging along nicely, life is a lot easier for everyone else. Nimble responses from G-3 policymakers are therefore critical to ensuring a good global and regional outlook.
Let's begin with the G-1. In the United States, growth is expected to be 2.6 percent this year. But much will depend on the timing and extent of a sustained pickup in private investment—such a pick-up is not yet evident in the numbers. Next, for the Euro area, our forecast is for growth of 2.3 percent this year. Most recent indicators for the Euro area have been disappointing, posing significant downside risk to this forecast. Japan is expected to be the slowest-growing of the G-3 with growth of only 1.1 percent this year. Here again, recent numbers—including the December Tankan survey—are pointing in the direction of posing a downside risk to this forecast.
So how should policymakers in the G-3 act to keep the global recovery going and keep—to the extent possible—these downside risks from materializing? Well, economic doctors don't have magic pills that can boost growth right away. Their medicines take some time to work. The quick-acting medicine—which nevertheless can take anywhere from three months to a year to show any effects on growth—is monetary policy. We think that the stance of the Federal Reserve and the recent actions of the ECB have been appropriate. Both institutions have some more room to act should the situations in their respective regions warrant it.
It is in the case of Japan that more aggressive monetary easing is needed to address deflationary pressures.2 Persistent deflation can hamper private spending, especially when the policy environment is uncertain and unemployment is rising. Deflation also hurts investment by increasing real debt burdens of corporations and eroding profitability. Together, these factors compound deflation's psychological impact on expectations and aggravate pessimism about the country's prospects. Over the past century, no major economy has enjoyed sustained growth under persistent deflation.
Restoring positive inflation is necessary for recovery in Japan and it will yield some positive growth benefit regardless of what else is done. But the growth benefit will be relatively small unless the Bank of Japan's actions are accompanied by broad economic restructuring of the banking and corporate sectors. Japan's decade-long economic slump owes much to the delays in implementing such a restructuring. While some stronger Japanese companies have restructured quite successfully, many more firms have delayed adjustment and failed to correct their excessive debt overhang. Until this problem—and the associated bank weaknesses—are addressed, a lasting recovery in private investment and consumption will remain beyond reach. The positive confidence effects from clear progress on reform could outweigh the negative effects on aggregate demand, even in the short run. It is not simply Japan's health that is at stake, but the economic health of the Asian region and the global economy. Successful resolution of Japan's difficult structural problems would provide an important source of growth stimulus to the Asia-Pacific region over the medium-term, one lacking in recent years.
Europe too has enormous potential for medium-term growth if its implements its agenda for structural reforms. Many of these items, particularly dealing with inflexibilities in labor and product markets, have now been on Europe's list of things-to-do for many years. What is needed to boost Europe's growth prospects is that some of these items get crossed off the list as "done".
From a global perspective, faster growth in the euro area and Japan would be highly desirable for a number of reasons. It would reduce what might be called the "over-dependence" of global growth on conditions in the United States. And it would reduce the risk of disorderly adjustment of current account balances. Relative to the size of trade flows, the present nexus of current account balances has risen to levels almost never seen in industrial countries in the postwar era. The historical evidence shows that large balances are sometimes reversed rapidly and with potentially disruptive changes in exchange rates and financial markets. So it would be prudent to reduce the risk of a disorderly adjustment through a pick-up in growth in areas with current account surpluses, namely the euro area and Japan.
Lest you think that the United States is going to get away without a lecture, let me assure you that will not be the case. The IMF is very even-handed when it comes to lecturing our major shareholders. It was said about our former Managing Director Michel Camdessus that at different times he annoyed all of our shareholders, but was careful never to annoy too many at the same time.3 As far as U.S. macroeconomic policy is concerned, medium-term fiscal consolidation should now be the central goal. On the structural side, U.S. policymakers need to continue to act vigorously to penalize cases of corporate fraud and to dispel skepticism about the quality of accounting practices and reported earnings of major corporations. It is critical, however, for the regulatory authorities to avoid over-zealousness—the United States owes its dynamism to the fact that the rules for corporate governance have involved the proper mix of regulatory and market-based incentives and penalties.
Asia's Longer-Term Growth Prospects
Now what about Asia's longer-term growth prospects? Despite the global recovery, and despite the fact that Asia has done quite well relative to other regions in the last couple of years, there appears to be anxiety in the region about Asia's longer-term growth prospects. Many of the concerns are tied to the role that trade will play in the region in years to come. Will countries remain dependent on growth in the G-3 economies? With more Asian countries—China in particular—joining the club of exporters, is there room for each country to carve out its own niche? Some other concerns have to do with the implications of the apparent fizzling out of the information technology revolution. Let me offer some views on these questions.
There is no doubt that trading relationships in the region are changing. One significant development is the rise in intra-regional trade among the emerging market economies of East and Southeast Asia. This has been aided both by regional trade liberalization initiatives and closer ties between China and its neighbors. At present, much of this trade appears to be linked to processing of products for eventual sale outside the region. But over time, these closer economic ties and the ensuing diversification of export demand could help reduce the region's vulnerability to swings in demand in the G-3 economies.
Will countries be able to carve out market niches? The past experience of the region gives hope that this will happen. The so-called flying geese paradigm has been successful in describing trade patterns of a number of Asian countries. As you know, this paradigm visualizes Asian countries following behind Japan as the leader in terms of the technological sophistication of its exports. Over the course of three decades, starting with the 1960s, labor-intensive production and exports have moved from Japan, first to the Asian Tigers and then to the ASEAN-4. So, at least until the 1990s, Japan and many other Asian countries were comrades in a process of technological upgrading and of increasing specialization and intraregional trade.4
Has the emergence of China turned comrades into fierce competitors?5 People who subscribe to this view often point to the alleged 40 percent devaluation of the renminbi in 1994 as triggering a round of competitive devaluations in Asia in subsequent years. China has indeed gained market share in some export industries over the course of the last decade. For example, China has now displaced countries such as Korea in exporting apparel and footwear to the major industrialized markets such as the United States. But a careful look at the data shows that this was a trend that was ongoing for well over a decade before the devaluation of 1994.
In general, and quite contrary to popular perceptions, China's gains have not come about at the expense of the labor-intensive ASEAN-4 economies. Instead, China and the ASEAN-4 have together displaced the Asian industrialized countries in sectors—such as apparel, footwear, and household products—that these more advanced economies were relinquishing. This is a healthy, rather than disturbing, development. It mimics the earlier period, when the newly industrialized economies moved into the industries relinquished by a more advanced Japan.
In sum, China's emergence as a major player in international trade, and its accession to WTO membership, represent an important step forward for economic integration in the region—it will generate sizeable benefits for both China and its trading partners.
While regional trade is likely to grow in importance, Asia's full participation in an increasingly open multilateral trading system is crucial for the sustained growth of the region and the rest of the world. The vital importance throughout the global trading system of resisting appeals from special interests for protectionist policies, which could intensify if global recovery falters, almost goes without saying. And as both the IMF and the World Bank have repeatedly emphasized, the G-3 economies have a special responsibility to show leadership in this area. First, they need to resist protectionist pressures in their own countries. Second, they should make the compromises needed to ensure that substantive progress is achieved with the Doha Round of trade talks.
Issue Two: what's left of the IT revolution and what implications does this have for Asia? There are three main channels through which developments in the IT sector affect Asian economic performance. First, the future viability of Asia's semiconductor, computer hardware and electronics industries is clearly tied to the health of the global IT sector. Second, longer-term growth in the G-3 economies obviously depends on productivity growth. As Paul Krugman once said, "Productivity isn't everything, but in the long run it is almost everything." Stronger productivity growth in the G-3 boosts their incomes and thereby their demand for products of Asian countries. Third, stronger productivity growth in the Asian countries itself acts as a direct boost to incomes.
The bursting of the "dot com" bubble has led to questions about whether the IT revolution was a mirage. But at the IMF we still view the evidence as showing that much of the productivity growth resulting from the IT revolution has been real.6 There often tends to be hype about the promise of new technologies that dramatically cut the costs of transportation and communication. This is then typically followed by hysteria at the collapse of stock prices of the companies involved in the production of the new technology.
When the new technology was wireless telegraphy, no fewer than one hundred and fifty companies with some connection to this information technology were initially listed on the New York Stock Exchange in 1902. Of those 150 companies, guess how many were left five years later, making a profit and paying dividends? Only one.
Similar story with railways. (Now I'm really taking you back in time—this is right around the time the Singapore International Chamber of Commerce was established.) Railway company stock prices soared during the early 1840s in Britain as enormous increases in profits were forecast, only to crash in 1845. But while the bursting of the railway bubble led to significant consolidation in the industry, it neither led to a collapse in economic activity nor affected the significant contribution of railway technology to economic growth in the second half of the 19th century.
Why, then, is there the perception that the IT revolution has been derailed? One reason may be that the impact of the correction in stock prices and IT investment was felt in many countries simultaneously. IT production has truly been a global phenomenon, perhaps leading to strengthened real and financial linkages across countries involved in it. So the slump in spending on IT goods—driven mainly by developments in advanced economies—had a synchronized adverse impact on many countries that are heavily dependent on IT production, countries as far-flung as Sweden and Singapore.
But looking past the gyrations in stock market valuations of IT companies, the broad dynamic of the present IT revolution appears similar to those in earlier technological revolutions. In the first stage, productivity growth in the innovating sector contributes directly to economic growth. Then a fall in the price of the innovation encourages its widespread use by businesses and also confers gains directly to consumers. And finally, as production in virtually all sectors of the economy begins to reorganize around the capital goods that embody the new technology, there is a much broader-based surge in productivity. The IT revolution has experienced the first two stages and in the years ahead we expect that will move more firmly into the third stage of providing broad gains in productivity.
Asia and the IMF
Let me turn now to the second part of my remarks, the relationship between the IMF and its Asian members. The IMF has made many changes in the way it does business in response to the lessons learnt from the experience of the Asian crisis of 1997 and `98.
This crisis tested the IMF as never before. Almost every aspect of our core operations came in for scrutiny and criticism.
Let me describe how the IMF has changed the way it does business in each of these three areas.
First, with reference to our macroeconomic advice during the Asian crisis, one feature that has drawn a lot of attention is the belt-tightening recommended to Thailand at the start of the crisis. It is worth recalling that in July 1997, Thailand was still expected to post reasonable growth, it had a huge and growing current account deficit (more than 8 percent of GDP), and it faced large fiscal liabilities to recapitalize the financial system. It was against this background that the IMF recommended a roughly-unchanged fiscal position. However, once the scope of the crisis in Thailand and in the region became evident, we quickly changed course. Indeed, IMF-supported programs in Thailand and other crisis countries were soon marked by large budget deficits, in part because of increases in spending on social safety net programs. As a result of the experience during the Asian crisis, our fiscal policy advice these days is much more attuned to the need to allow automatic stabilizers to work wherever possible—that is, to allow fiscal deficits to rise in times of recession in cases where this can safely be done. We are also much more sensitive to the need to shield vulnerable segments of the population from the effects of the financial crisis.
The more acrimonious debate may be on the appropriateness of the IMF's advice on monetary policy during the Asian crisis. We feel that the case for temporary monetary tightening as part of the strategy for coping with outflows still stands up, although there are limits to what monetary policy alone can do. When a country's exchange rate is depreciating because capital is trying to leave the country, and the country's financial institutions are in trouble, there is a conflict between restoring external confidence by raising interest rates and providing for financial repair through increased liquidity. As Larry Summers noted, "it's a classic problem of a single instrument and multiple targets. Confidence is widely recognized as essential in combating financial crises."
The debate over this issue has launched a thousand doctoral dissertations. Ph.D students and their professors have been studying the relative costs of higher interest rates versus exchange rate depreciation. To the extent that there is a professional consensus on this topic at the moment, it is that the costs of letting the exchange rate go are much higher than that of a temporary increase in interest rates. The issue is far from settled, but clearly what's needed is honest debate and a closer look at the empirical evidence, not polemics.
Second, how has the IMF beefed up its monitoring of economic and financial conditions since the Asian crisis? As I noted, we were surprised by the speed and virulence with which the crisis spread to many countries in the region. The experience revealed the IMF had not kept up with the rapid developments in international capital markets, a deficiency it has tried to rectify through a number of steps taken over the last couple of years. Our new International Capital Markets department issues a regular Global Financial Stability Report on risks and vulnerabilities in these markets. Our management and senior staff now meet for an informal dialogue with representatives of internationally-active private institutions through a Capital Market Consultative Group. Meetings of this group have taken place in various financial centers around the globe, including in Asia. The presence of an IMF representative here in Hong Kong also helps with the monitoring of market developments in an important international financial centre.
The crisis has also changed the tone of the policy advice that the IMF provides to countries on the costs and benefits of openness to capital flows. Today, the IMF is more vocal than in the past in pointing out the risks of capital account liberalization when regulatory frameworks are weak and other distortions remain in place. While such cautionary notes about premature liberalization were always been present in IMF advice, today they are much more likely to be given greater prominence. For instance, last year we advised Sri Lanka against opening up its capital account until its financial sector was further strengthened. China and India have been pursuing gradual approaches to opening up their capital accounts and their policy stances have received broad support from the IMF.
Third, the Asian crisis has led us to revisit issues concerning the adequacy of IMF funds and the terms and conditions on which our funds are made available. We are working to establish clearer definitions and policies on access to IMF financing. This is a complex issue, but ultimately we cannot escape the fact that the IMF is not a global lender of last resort—it does not have the ability to create liquidity by issuing money. Since the IMF's resources are limited, it is useful for regions to pursue initiatives for self-help, as Asian countries have increasingly been doing. The numerous efforts underway to strengthen regional economic and financial cooperation in Asia—through groups such as APEC, ASEAN and the Manila Framework Group and through the "Chiang Mai" initiative—can play a very useful role in helping to foster regional and global financial stability.
The Asian experience has also had an impact on IMF conditionality—the conditions that countries are asked to fulfill in order to get and retain access to IMF funding. In June 2001, the Japanese Ministry of Finance and the IMF convened a conference in Tokyo which brought together many of the key players during the Asian crisis. Some participants at this conference thought that the IMF programs should have been flexible enough to allow countries some choice in how to go about achieving commonly-agreed goals. After all, as Deng Xiaoping famously said, it does not matter whether the cat is black or white, as long as it catches mice.
Other participants at the Tokyo conference questioned the need for many of the conditions or their proper sequencing. In the case of Indonesia, Mr. Boediono (currently the country's Finance Minister) said that "perhaps the dismantling of the clove monopoly and the rationalization of the national car and airplane industries could have been postponed until our head was above water." The Philippine central bank's Cy Tetangco noted his country was—as he put it— "a veteran" in negotiations with the IMF. While acknowledging the overall benefits to the Philippines of IMF assistance and conditionality, Tetangco pointed out that the 1998 program had over 100 conditions in 8 areas. Some of them, he thought, were critical to helping the Philippines weather the crisis; but many others were not or were, in any event, better handled by the multilateral developments banks than by the IMF.
This kind of input from people whose opinions we highly value, and our internal assessments as well, have moved us in the direction of streamlining conditionality. The intent is to have fewer and less intrusive conditions and to limit them to areas critical to achieving the goals of the IMF-supported program. This review of our conditionality has now resulted in a new set of guidelines which were posted on our website last September.
The way the IMF went about this "conditionality review" illustrates the way the Fund has increasingly been carrying out its reforms. We encouraged open debate on conditionality by holding conferences in Tokyo and other locations throughout the world. We invited comments through our website from interested stakeholders everywhere. And we relied, of course, on the wide experience of our own staff, and the judgments of our Executive Board, on how to make conditionality more effective. This reflects the emphasis placed by our Managing Director on making the IMF an institution that is listening and learning, an institution where IMF staff do not come to the table with their minds already made up.
Let me conclude. The global economy experienced what proved to be a short-lived and generally quite mild slowdown in 2001. Despite terrorist attacks in many countries and other adverse developments, global growth recovered to 2.8 percent in 2002 and a further pick-up is expected this year. The IMF's assessment is that the global recovery is continuing, even though the vigor of the recovery may now be falling somewhat short of earlier expectations and downside risks predominate.
Asia weathered the slowdown better than other regions, and our expectation is that this year as well growth in most of the Asian countries will be above the global average. Despite this performance, there are anxieties in the region about longer-term growth prospects, some of them induced by questions about where the IT revolution is going, some by questions about how trading relationships among Asian countries will evolve. Reliance on trade has helped Asia immensely over the past few decades. I hope an outward orientation will remain a core component of Asia's future development strategy, though it is useful that a debate has emerged in the region on how to make domestic demand also play a more supportive role in growth.
The IMF is eager to help Asia meet the challenges that lie ahead. Learning from our experience during the Asian crisis we have, as I've described, made many changes in the way we do business. I hope Asian countries will continue to suggest changes that would make the IMF more effective. In turn, Asian countries can continue to rely on the IMF for help and advice, though we also support the many initiatives for self-help that are ongoing in the region. Thank you.
1 This refers to the "newly industrialized Asian economies" of Hong Kong SAR, Korea, Singapore and Taiwan Province of China.
2 The following discussion is taken from "Revitalizing Japan: Risks and Opportunities" by Kenneth Rogoff, published in The Nihon Keizai Shimbun, November 7, 2002 (http://www.imf.org/external/np/vc/2002/110702.htm).
3 "At different times the MD has irritated almost every power bloc in the membership: the Americans, the Europeans, the developing nations, you name it. Yet he has been careful never to irritate too many at once." (Stanley Fischer, Farewell Reception in Honor of the Managing Director, February 10, 2000)
4 Terrie Carolan, Nirvikar Singh, and Cyrus Talati, 1998, "The Composition of U.S.-East Asian Trade and Comparative Advantage," Journal of Development Economics, Vol. 57, No. 2, pp. 361-89. Ishac Diwan and Bernard Hoekman, 1999, "Competition, Complementarity and Contagion in East Asia," Chapter 10 in The Asian Financial Crisis: Causes, Contagion and Consequences, ed. by Pierre-Richard Agénor, Marcus Miller, David Vines, and Axel Weber (New York: Cambridge University Press).
5 See Noland, Liu, Robinson and Wang, "Global Economic Effects of the Asian Currency Devaluations" Institute for International Economics, July 1998; John Fernald, Hali Edison and Prakash Loungani, "Was China the First Domino? Assessing Links Between China and the Rest of Emerging Asia," Journal of International Money and Finance, 1999, Vol. 18, No. 4, pp. 515-36; Prakash Loungani, "Comrades or Competitors: Trade Linkages between China and Other East Asian Economies", Finance & Development, June 2000, vol. 37, #2.
6 The following discussion is taken from World Economic Outlook, October 2001, Chapter III, "The Information Technology Revolution" and from Rogoff and Morsink, "Taking a Chance on a Permanent Tech Revolution.," Financial Times, September 21, 2001 (http://www.imf.org/external/np/vc/2001/092101.htm).
IMF EXTERNAL RELATIONS DEPARTMENT