Ensuring a Sustained Asian Recovery

An Op-Ed
By Shigemitsu Sugisaki
Deputy Managing Director, IMF

Asiaweek
December 15, 2000

Asia's markets in recent weeks have felt the effects of a sudden gloom about the region's economic prospects. Some analysts are even raising fears of a new financial crisis. Behind these worries are—outside the region—sharply higher oil prices and signs of a possible slowdown in U.S. demand for electronics exports. And, in Asia, concerns about the pace of corporate restructuring and financial-sector reforms in some of the countries hit by the crisis.

It is important not to overreact. Just as investors only a year ago may have been over-exuberant because of Asia's rapid rebound from the depths of the crisis of 1997-98, so perhaps now there is too much pessimism. Short-term forecasts for economic growth may indeed have to be adjusted downward in the coming months, particularly because of the higher oil prices. But the current global outlook remains positive.

Asia now is quite different from 1997. Countries continue to post significant current account surpluses, foreign exchange reserves have been replenished, and short-term debt is manageable. Exchange rates are being managed more flexibly, too. All of these factors, supported by appropriate economic policies, have reduced the risks of instability. In addition, Japan continues to recover from its long recession, and China is on track for 8 percent growth this year.

It is the factors from outside the region that are causing the most concern right now. There are indications, however, that the U.S. economy will be able to avoid a hard landing, and that has positive implications for the global interest rate environment. Although high petroleum prices so far have not had a large impact in Asia—and in fact have brought benefits to its oil-exporting nations—sustained high prices could trim growth in some countries.

Nonetheless, Asia's smooth adjustment to this shifting economic climate will require a continued commitment to financial-sector and corporate restructuring. The Asian crisis highlighted the connections between economic instability and weaknesses in those sectors. But Asian countries have made measurable progress on financial system reforms since 1997-98. They are paying off the external debts left over from the crisis, reducing the non-performing loans in their banking systems, and rebuilding capital. Moreover, countries are putting in place new laws and regulations to improve the way corporations and banks are run.

The process of financial sector restructuring takes time anywhere in the world. It is also very costly—estimates of the public sector costs of bank restructuring in Indonesia, Korea, Thailand and Malaysia range between 15 percent and 45 percent of GDP spread over several years. Many other countries have experienced financial system turmoil: from the U.S. to Sweden to Mexico. Those experiences contain lessons for Asia, but they also underline the importance of adapting each country's reform program to its own circumstances.

What is essential now is a continuing commitment to reform on the part of Asia's governments, its financial sectors and debtors. That is why the recent negative signals from the financial markets are instructive to all parties. Investors are saying that a lack of tangible progress in the long-term restructuring process poses a danger to long-term stability. It's a message worth heeding. In Indonesia, for example, there needs to be real progress on the sale of corporate assets taken over by the government, and resolution of unpaid corporate debt to foreign lenders. In Thailand, banks' non-performing loans need to be reduced even more. And in Korea, further steps should be taken to reduce the debt of corporations through divestitures and asset sales.

There is also a broader message for the rest of the world. Since the Asian crisis, the international community has undertaken a series of initiatives aimed at preventing future turmoil. A central pillar of this effort is a focus on strengthening financial systems and highlighting potential vulnerabilities. Tangible progress has been made in promoting openness and accountability; developing international standards that will allow for more uniform regulation in different countries; and increasing the ability of international financial institutions and governments to assess countries' vulnerabilities to external shocks.

The international community has called upon the International Monetary Fund to play a central role in the process of crisis prevention, and it is clear that this is one area in which our work needs to be strengthened. The IMF and the World Bank already are working together to make discussions of member countries' financial systems a part of the regular policy dialogue with the institutions.

The Asian crisis offered some hard lessons about the importance of sound banking and corporate systems. For the IMF and its member countries alike, the real demonstration that we are taking those lessons to heart will come when financial systems show that they can withstand the short-term economic fluctuations that can unnerve investors.