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The Straits Times
July 16, 1999
Reproduced with the permission of The Straits Times
The recent turnaround in Asia's economic fortunes has gone a long way to bind the wounds of the past two years.
With stock markets on the rise, economic fundamentals rebounding and currency turmoil a distant memory, it may be easy to suggest putting the past behind us.
In reality, there is still much hard work to be done to cement the current stability-and to ensure that those who bore the brunt of the economic downturn can also enjoy the fruits of recovery.
Moreover, any view of the future must be colored by a clear understanding of the lessons we have learned.
The Asian crisis--and how it was handled--continues to be debated intensely by policy makers, academics, the media and the public.
While some issues will be discussed for years, certain conclusions can be drawn, and a reform agenda involving important aspects of the global financial system has been placed before the international community.
The International Monetary Fund (IMF) was at the center of the efforts to deal with the Asian crisis, and it is well aware of the controversies that arose from its programs.
That said, two years down the road, the economic situation in the three main crisis countries--Thailand, Korea and Indonesia--has turned around, and the deep-rooted structural problems in these countries are being tackled.
Moreover, the threat of a global economic disaster has receded significantly.
Thus, the passage of time casts a different light on some of the criticism of IMF-supported programs.
Still, the lessons from that debate have been central to the reforms aimed at dealing with future crises, which have come to be known collectively as the "new international financial architecture".
One of the key lessons that hindsight allows us to draw involves financial sector reforms. The concentration on bank restructuring, debt restructuring and regulatory oversight in the crisis countries has been crucial to their economic revival.
While there are always important questions about the timing and focus of structural reforms in a crisis situation, there is no serious doubt that the effort to resolve crises and prevent future turmoil must involve such initiatives.
The Asian experience--both before and after the crisis--illustrates the importance of transforming governing practices and business habits in the financial sector.
Indeed, it is clear that stability is enhanced by clearly-defined regulations that are enforced equitably and transparently.
Progress has been made throughout the region and elsewhere in moving towards clearly-defined rules and practices--together known as standards--and by making openness a commonly accepted principle. But much more needs to be done.
For its part, the IMF, along with member governments and other interested parties, is preparing a code on transparency in monetary and financial policies to provide its member countries the outline for future reforms.
In addition, oversight of financial sector trends is becoming a regular element of IMF review of economic trends in all its member countries, with a view to identifying potential problems at an early stage.
Many other international organizations and industry groups are involved as well, reviewing the role of highly-levered institutions in international markets, devising revisions to international banking guidelines, and developing a set of international accounting standards and principles of corporate governance.
The notion of broader transparency extends into other areas. The IMF is encouraging public disclosure of economic data, including timely information on foreign-exchange reserves. This was a key problem faced by markets at the height of the Asian crisis in 1997, when investors were unaware that some countries had literally exhausted their reserves.
The Fund's Special Data Dissemination System (SDDS), under which governments commit to issuing detailed economic statistics, would highlight developing imbalances before they reach critical mass.
There also is a greater need for governments to provide full information about their spending plans--and how they devise them--to allow citizens a say in public policy priorities and to help fend off corruption.
To this end, the Fund has introduced a code of good practices on fiscal transparency, to help governments to increase the credibility of their budget processes.
For all of these steps, the fact remains that we will continue to live in a world of very large--and potentially volatile and destabilizing--capital flows.
While the appropriate speed and sequencing of the opening up of national economies to international capital is a matter of legitimate debate, most observers suggest that "the genie cannot be put back into the bottle" once a country has moved in the direction of liberalization.
The problem is how to cope best with an environment that both creates immense opportunities and serious risks.
Exchange rate policy is a crucial element in this policy conundrum. The IMF intends to explore the issues related to the volatility of major currencies, as well as the consequences for the exchange-rate policies of emerging market economies.
But in the face of the challenges of capital mobility, it is essential to put in place policies that will reduce the potential for future crises and the danger of contagion.
With this in mind, the IMF has just created a Contingent Credit Line (CCL), an experimental program aimed at providing countries with resources to combat a loss of market confidence that may have little bearing on their own policies or economic conditions.
In essence, it will function as an insurance policy for the healthy countries of the world financial system.
To qualify for the CCL, countries will need to make progress in adhering to international standards; work to establish and maintain strong financial systems; maintain sound fiscal and monetary policies; and establish constructive relationships with private creditors.
In fact, it is private creditors who remain the crucial link in the process of forestalling crises. An insufficient understanding of the role of private capital in the early stages of the Asian crisis contributed to the contagion that swept through the region.
Thus, defining strategies to "bail in" the private sector is a major element of the current debate on the reform of the international financial system.
Part of that effort involves changes in the way in which borrowers and creditors evaluate and price the risks they assume in investments and loans. For example, the Basel Committee on Banking Supervision has just recommended revisions to bank capital adequacy standards that will likely reduce over-reliance on short-term loans.
Other proposals before the international community include: Greater use of private contingent credit lines to be drawn upon in times of crisis. Provision of full or partial official guarantees on new borrowing in emerging markets. Restructuring of international sovereign bond contracts to allow qualified majorities of bond holders to prevent individual bond holders from blocking debt workouts.
All of these issues stem from the upheavals that the world economy and global markets have experienced during the past two years.
It will require a constant reassessment of our assumptions and strategies if we are to prevent future crises.
The writer is director of the IMF-MAS sponsored Singapore Training Institute. He contributed this article to The Straits Times.