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Australian Financial Review
March 4, 1999
The Asian crisis countries have taken important steps on the difficult road back to economic growth. As the global worries about a deepening spiral of contagion and recession recede, the region has reason to hope that the worst is in the past. Even though the Japanese economy remains sluggish, most other countries are returning to the growth track.
The worries about a deeper economic downturn may be easing, but the debate continues to grow over the roots of the crisis, and the policy response to future shocks. Now is the time for governments and international organisations to listen to this debate and devise the appropriate mix of reforms.
The lessons of the crises - from Asia to Russia to Brazil - will play a crucial role in determining these policies. Some have to do with the IMF-supported programs. These, of course, are issues that have been aired at great length in recent months related to exchange rates, monetary and fiscal policies, and structural reforms.
The IMF recently issued an in-depth study of its policy response, "IMF-supported programs in Indonesia, Korea and Thailand: A preliminary assessment". Our conclusions were that, despite some early setbacks, the basic strategy was sound and appears to be working: financial stability has been restored, and a recovery is imminent or already under way in the crisis countries. Moreover, a good start has been made to structural reforms that were essential to the region's long-term recovery prospects.
There is another set of key issues that also must be debated. One of the most important relates to capital flows. The fact that so many external creditors could pull their money out of the crisis countries at short notice was one of the reasons that the crisis spread. There is a need to anticipate and forestall similar reactions in the future. This, in part, requires an effort to avoid the build-up of economic imbalances and heavy inflows of short-term capital that ultimately destabilised emerging market economies.
Would the Asian crisis have been contained had the authorities imposed some kind of involuntary debt rescheduling and capital controls? Probably not. Any hastily designed attempt to keep private creditors in one country could have sent more fleeing from other developing countries, and might well have further reduced the total pool of financing for emerging markets.
Ultimately, this issue is related to the appropriate pace and sequencing of capital-account liberalisation. One lesson of the past 20 months is that the opening of capital markets remains in the best interest of economic development, but that greater emphasis must be placed on attracting stable long-term investments instead of volatile short-term flows.
Since the panicked withdrawal of foreign capital partly reflected shortcomings in the knowledge of investors and creditors, there is a critical need for better information about emerging market economies. This cannot be forced on countries; rather, transparency must spring from an understanding that more information is in the best interests of healthy markets.
To this end, the IMF is working to define and implement higher global standards in data dissemination, monetary, financial and budget transparency. With other organisations, we are developing standards in banking, accounting and bankruptcy.
We also must find appropriate ways to involve private sector creditors in preventing and resolving crises, a crucial need in light of the role the capital markets played in the recent crisis. There are several proposals on the table to accomplish this, including new frameworks for debt workouts.
Another important lesson is the need to have in place safety nets to cushion the impact of a crisis on the poor. An effort involving governments and the international community has ensured that social assistance programs have been established in the Asian crisis countries.
But much more must be done - now and in the future - to strengthen the effectiveness of such programs, with particular focus on ensuring that the most vulnerable do not slip through the cracks. The insights of multinational agencies, governments and non-government organisations will be crucial in refining these policies. The meeting this week in Sydney called by the Minister for Foreign Affairs, Mr Alexander Downer, will make an important contribution to this process.
As in the area of social assistance, what is needed in the broader reform effort is a co-operative approach that will enable the world community to find creative and realistic solutions. The IMF, which was set up to co-ordinate global monetary co-operation, is ready to work together with all parties to achieve that very end.