Speech

Is The Asian Crisis Over? - Address by Michel Camdessus

April 2, 1998

The crisis in Asia hit the front pages last July, when Thailand devalued the baht. And in the months since then, it has remained at the top of the news as the international community, working through the IMF, has sought to overcome the crisis.

As you know, there has been more than a certain amount of skepticism about whether this approach would work. Some people doubted that the programs supported by the IMF focused on the right things. Some said the programs were too tough, or too intrusive on issues such as governance and monopolies and investment restrictions, or both.

Well, the crisis in Asia is not over--not yet. But the approach is working, and there are a number of encouraging signs that some countries in the region are beginning to turn the corner. So let me begin with an update on the situation. Then, I would like to turn to implications of the crisis for the IMF and the international financial system.

Developments in Asia

Let's begin with the situation in Thailand and Korea. I am happy to say that market confidence in both economies seems to be returning. The Thai baht has strengthened by over 40 percent its low since January, and the Korean won by over 30 percent since its low in mid-December. The Thai and Korean stock markets are up 25 percent and 30 percent, respectively, since the beginning of the year. And in both countries, new foreign direct investment and portfolio investment are beginning to flow back in again.

Furthermore, market participants are beginning to differentiate among countries--and cautiously returning to the countries where economic problems are being forcefully addressed. This is also a good sign. It shows both that markets are recovering from their panic of a few months ago and that they are looking more carefully at the countries in which they are investing.

This is not to say that the situations in Thailand and Korea are easy. They are not. We expect GDP to decline by about 3 percent in Thailand this year and by 1 percent in Korea. This is very painful for countries accustomed to long-term growth rates of 7-8 percent and with so many poverty problems still to be resolved. But without these programs and the international support behind them, the slowdown in these economies would be much more dramatic, the costs for the general population much higher, and the risks to the international economy much greater. That being said, the IMF and the Thai and Korean authorities have been keeping developments under continuous review. And together, we have adapted the programs to cushion the downturn and its impact on the poor and the unemployed, while still ensuring that the tough adjustments that are needed are carried through. Certainly, this is not a simple balancing act.

Indeed, we are now seeing signs of the economic adjustment that will lay the basis for future growth. The trade positions of both Thailand and Korea have improved significantly, and their foreign exchange reserves are being rebuilt. Moreover, with the improvement in market conditions, domestic interest rates are beginning to decline, albeit cautiously.

Some may be surprised to hear this essentially positive assessment. What accounts for this improvement?

To begin with, very much to their credit, in the midst of the crisis, both Thailand and Korea have embarked on ambitious programs that go to the heart of their economic problems. In each case, the centerpiece of each program is a set of forceful, far-reaching structural reforms to strengthen financial systems, increase transparency, open markets and, in so doing, restore market confidence. To this end, insolvent financial institutions are being closed down. Other institutions are being required to come up with restructuring plans and to comply--within a reasonable period that varies from country to country--with internationally accepted best practices concerning capital adequacy, prudential standards, and accounting and disclosure rules. Other institutional changes are under way to strengthen financial sector regulation and supervision, increase transparency in the corporate and government sectors, create a more level playing field for private sector activity, and increase competition. Taken together, these reforms should promote a significant change in domestic business practices, corporate culture, and government behavior.

Added to this--with new governments in both countries--these programs are being carried out very forcefully. In Thailand, the authorities have not shrunk from closing down more than half of all finance companies and in intervening in the weakest banks. Clearly, markets have taken note of the government's determination in effectively wiping out the capital of the politically powerful shareholders of these institutions. This same determination has been evident in the prudent manner in which interest rates have been raised to appropriate levels, and in which budgetary discipline has been maintained. The same is true in Korea, where the government has met all its commitments under the program and, in several areas, has exceeded them. Moreover, President Kim Dae-jung has taken the initiative to develop a strong consensus in support of reform, as reflected in the recent Tripartite Accord among business, labor, and government. This is very promising for the future harmony of the social dialogue.

Turning to Indonesia, I would have to say that we are not yet at the point where we are in Thailand and Korea--with strong programs being forcefully carried out. Time has been lost--due to policy slippages, including in the crucial area of monetary policy, and other developments. As a result, the rupiah is now substantially over-depreciated, inflation has picked up dangerously, and economic conditions have deteriorated.

This is why it is urgently important to get Indonesia's reform program back on track so as to strengthen the rupiah before hyperinflation sets in. An IMF team is in Jakarta right now, trying to do just that. Their negotiations cover three broad areas:

• one, reformulating the monetary and fiscal programs in light of the deterioration in economic conditions. In this regard, monetary policy has already been tightened sharply in order to bring the exchange rate to a more appropriate level and contain inflationary pressures. Meanwhile, the fiscal program is being revised to take account of the decline in economic activity, the need for temporary subsidies to protect low-income groups from the rise in prices of food and other essential items, the large cost of bank restructuring, and the decline in international oil prices.

• two, strengthening the framework for addressing the financial sector problems and the external debt of private corporations. To this end, bank restructuring is being accelerated, IBRA, the specialized bank restructuring agency, is being strengthened, and various initiatives are under consideration to facilitate the resolution of corporate debt problem.

• and three, getting on with some of the structural reforms that had been pledged in January, but were subsequently delayed or reversed. These include eliminating restrictions on foreign investment in wholesale trade and dismantling key cartels and monopolies.

The negotiations have made good progress over the past two weeks, and we are optimistic that an agreement will be concluded soon. And once the program is brought back on track, it will be potentially a very strong and comprehensive package. But, its success will depend on an early restoration of confidence and a strengthening of the rupiah; and that, in turn, is basically in Indonesian hands, of course! It will require strong policy implementation and avoiding everything that, in the past, has undermined confidence in the government's commitment to reform. No doubt action in the next few weeks will be critical to this end, and nobody, I presume, knows that better than the new Indonesian team.

Implications for the IMF

But now let's broaden the perspective. The crisis in Asia has been very challenging indeed! But perhaps we still face the greatest challenge of all--that of drawing the appropriate lessons from this experience and acting upon them. I will tell you quite candidly that recent experience has prompted a great deal of reflection and soul-searching--both within the IMF and among our shareholders--about what more could be done to prevent such crises, how to deal more effectively with the ones that do arise, and how, in general, we could make the IMF an even more effective institution.

Let me share a few reflections on these issues.

The primary focus of the IMF is on sound money, prudent fiscal policies, and open markets. We must maintain that emphasis, because these are the prerequisites for economic growth and financial stability. Yet, I do believe that we must broaden the scope of our concerns to include other elements that--in a globalized world, in the world of the new century--are also important in achieving these goals. What elements?

• the creation of a more level playing field for the private sector--yes, by dismantling monopolies, setting up simpler, more transparent regulatory systems;

• stronger banking systems that protect the savings of small depositors--and that must be freed from government intervention in the allocation of credit so that they can channel it not just to a favored few, but to those who will use it productively;

• reductions in unproductive government spending, such as costly military build-ups, prestige projects, and subsidies and guarantees to favored sectors and firms;

• higher and more cost-effective spending on primary health care and education; adequate social protection for the poor, the unemployed, and other vulnerable groups; and environmental protection;

• greater transparency and accountability in government and corporate affairs; and

• a more effective dialogue with labor and the rest of civil society--to increase political support for adjustment and reform and to ensure that all segments of society benefit from the resumption of growth, while core labor rights are protected.

The crisis in Asia has underscored the importance of these elements; indeed, in many respects, they are the bedrock of the programs we are supporting in the region. But our concerns about these issues do not begin and end in Asia; we are emphasizing these points in many other member countries, as well. Why? Because we think we can, and should, do more about them.

What about crisis prevention? This will not be an easy task, but already there are a number of good ideas on the table. Let me mention some of them:

• one, we must continue to encourage countries to improve the quality of information that they make available to the IMF and to the public.

• two, we must find ways to strengthen domestic financial systems by improving domestic regulation and supervision and increasing financial sector transparency. Over the past year or so, the Fund has helped develop a set of "best practices" in the banking area, so that practices that have worked well in some countries can be adapted and applied in others. We are now disseminating these best practices around the world through our policy dialogue with member countries.

• three, as we push even harder for trade liberalization, and as countries open their economies to foreign capital, we must encourage them to liberalize capital flows in a prudent and properly sequenced way that will maximize the benefits and minimize the risks of freer capital movements. To this end, work is under way on an amendment to the IMF's charter that would make the liberalization of capital movements one of the purposes of the Fund and extend its jurisdiction to capital movements.

• four, we must continue to pursue good governance and intensify the fight against corruption. Our approach is to encourage countries to maximize the transparency of government operations and thereby minimize opportunities for special favors. But we are also prepared to interrupt Fund-supported programs on grounds of corruption, and we have already done so in a number of cases, when it threatens to have a macroeconomic dimension.

As the IMF presses its members to become more transparent, the question arises: does the IMF practice what it preaches? In recent years, we have made a major effort to provide more information to the public, as any visitor to our website can confirm. Looking ahead, I think that the crisis in Asia will be a watershed, convincing many members of the benefits of greater transparency. And this, in turn, will enable the Fund to become more open in the future, an objective I very much support, even if we are very much dependent on our membership's consent.

The more vexing question is whether the Fund should blow the whistle on a country it thinks is heading for a crisis. The danger, of course, is that our predictions may not always be right. Moreover, our warnings could provoke the very crises that we are trying to prevent. It is far better for market participants to come to their own conclusions. That is why we have set up data standards to guide members in releasing reliable data to the public, along with a bulletin board on the Internet so that the public can track the practices of individual countries. But, of course, member governments continue to have full access to information on the Fund's views and operations through their representatives on our Executive Board.

But realistically, the international community cannot expect to avert every potential crisis. So what else can be done to ensure that future crises can be handled effectively?

• Certainly, better ways need to be found to involve the private sector in official efforts to resolve debt crises and avoid the problem of moral hazard, perhaps through orderly mechanisms for settling and restructuring debts. Countries should also be encouraged to strengthen the laws and institutions covering debtor-creditor relations, including domestic insolvency laws.

• In addition, we need to enhance the effectiveness of multilateral institutions, which includes, of course, ensuring that they have sufficient resources and personnel of the highest caliber to do their jobs.

The IMF cannot perform a central role in crisis prevention or crisis management, or do its part in addressing financial problems that exceed the capacity of individual countries to resolve alone and in a way that shares that burden fairly, unless it has adequate resources. Let me tell you: There are still major risks in the world economy. Thus, it is a matter of concern that the IMF's usable resources have dropped to a level that leaves us little room for maneuver to respond to a new crisis.

In the meantime, the blueprints for the new architecture for the international financial system are still on the table. I am confident that the international community will decide to deal seriously with these issues and that your great country, as our largest shareholder, will maintain its leadership by supporting the IMF.