"The Georgeous East": What the Asian Economies Can Teach the World, Keynote Address by Anne Krueger, First Deputy Director of the International Monetary Fund

August 21, 2004

"The Gorgeous East": What the Asian Economies Can Teach the World
Keynote Address by Anne O. Krueger
First Deputy Managing Director, International Monetary Fund
At the Harvard Project for Asian and International Relations (HPAIR)
    Business Conference
Shanghai, China
August 21, 2004

Good morning—and thank you for that kind introduction. I am delighted to be here in Shanghai. This is my first visit to the city for many years and the stories are true—it has changed beyond all recognition. This is an exciting time to be visiting this city, and China, and Asia. This is currently the world's most rapidly-growing region, and its dynamism is evident as soon as one steps off the plane.

The title of my talk—the gorgeous East—comes from one of the most famous English poets, Wordsworth, writing almost two hundred years ago. The wonderful picture that Wordsworth evoked is, I'm happy to say, still evident. The East has not lost those distinctive and attractive features that mean we never forget which part of the world we're in.

Yet at the same time it is clear that globalization is alive and well. This region is dependent on, and gains much from, its contacts with the rest of the world. Asian policymakers and entrepreneurs have long shown themselves adept at learning from the experience of others. Much of the region's growing prosperity and economic success derives from an understanding of what has bred success elsewhere.

But Asia's success is far more than a straightforward imitation of the patterns of economic activity elsewhere. There is an important homegrown element to the often spectacular economic progress we have seen in many Asian countries. I want today to focus particularly on those factors that have helped deliver rapidly rising living standards across Asia; and to suggest ways in which other parts of the world could learn from this region's success.

Given the limitations of time, I hope I will be forgiven if I speak of Asian countries as if they were a homogeneous group, even though there are major differences among them—in the length of time they have been undergoing reforms, how far reforms have progressed, and in their individual circumstances. But despite that Asia as a region does stand out as singularly successful.

Economic growth

Perhaps the most striking feature of Asia's economic record in the past half century or so is the pace of sustained growth that we have seen in many countries across the region. The numbers are impressive. The official figures show that China, the host country for this year's conference, experienced an annual average rate of increase in real per capita GDP of over 8% during the 1990s. Real per capita GDP in Korea, Thailand and Singapore has grown by more than 5% a year, on average, since 1960. India has experienced more rapid growth rates following the reforms program introduced in 1991. Since 1990, Asian per capita incomes have grown nearly twice as fast as that of the United States.

With appropriate policies and strong commitment, Asia has shown that it is possible for countries to grow rapidly over a long period of time. What's more, this impressive growth performance was often achieved against an unpromising backdrop: countries with few natural resources, or small populations, have grown at a pace that has consistently eluded some larger or more resource-rich countries elsewhere.

As citizens across Asia know from their own experience, rapid and sustained growth is the key to rising living standards and falling poverty. The official figures show that the infant mortality rate in China fell by around 83% between 1960 and 2002. Thailand, Indonesia and Sri Lanka saw drops of a similar magnitude. Singapore saw a decline of 90%.

Over the same period, life expectancy for Indonesian men rose by 24 years to around 62 years; for women it rose further, by 26 years to 66 years. In Malaysia, life expectancy for men is now close to 70 and for women it is almost 75.

Literacy rates have seen similar impressive improvements. And the increase in school enrolments ensures that literacy is on the way to becoming universal. I could go on: this pattern of improvement has been seen in most Asian countries, though clearly some have done better than others.

So what can Asian economic performance tell us about delivering growth elsewhere in the world—and, indeed, what can the example set by more successful Asian economies teach those economies in the region that have hitherto experienced less rapid economic expansion?

As I said, sustained and high growth rates are, with the right commitment from policymakers, feasible. But Asia's experience has shown that this commitment must be so strong as to be virtually single-minded.


Nowhere is this depth of commitment more evident than in attitudes towards trade. As every economist knows, an open trading system is crucial for economic success. It is possible for closed economies to achieve high growth spurts. But no country—in Asia or elsewhere—has managed rapid growth over a sustained period without opening its economy to the rest of the world.

Trade brings competition—and this is a powerful force for increased economic efficiency. Protectionists worry about jobs lost to foreign competition. But protection costs jobs. It imposes costs on producers, especially those geared to export production (or who would be without these cost penalties). It raises the cost of protected intermediate products and thus puts producers competing with exporters in other countries at a cost disadvantage.

Competition helps increase efficiency and ensures that resources are allocated in the best possible way. It helps eliminate domestic monopolies. And so it drives down prices both for domestic consumers—as well as producers in import-consuming industries—and in the international marketplace. Prices fall because import-competing industries are no longer protected and because more competition forces monopolists to lower prices.

Trade also helps create employment, especially in emerging market countries. Open economies have an outlet for large pools of unskilled labor: instead of being a drain on resources, unskilled labor becomes an opportunity to benefit from export markets for goods whose production is labor intensive in the early stages of economic growth.

In general, the more open an economy is to the outside world, the higher are the growth rates that result. A study by Warcziarg and Welch of 133 countries between 1950 and 1988 showed that countries that liberalized their trade regimes enjoyed annual growth rates of about one half of one percentage point higher after liberalization. And opening up to international trade seems to have become increasingly important: removal of trade barriers during the 1990s raised growth rates by an estimated 2.5 percentage points a year.

Asia has seen a remarkable increase in its share of world trade. In 1980, this continent accounted for just under 16% of world merchandise exports: by 2003 that figure had risen to over 28%. You will not be surprised to learn that China accounted for a sizeable part of that increase: its share of world trade rose from less than 1% to nearly 6% over the period. In 2003 China was the second largest exporter in Asia, after Japan. But Korea, Malaysia, Thailand and Singapore all showed significant increases. Of course, even by Asian standards, Korea's export performance over a long period stands out—and I want to return to say a bit more about that in a moment.

But the rewards of openness are widely spread. Even small economies like Vietnam—which had negligible exports in 1980—have seen relatively large increases in their share of global trade as they have opened up.

Countries in other parts of the world, countries that have, for one reason or another, not opened their economies in the way that most Asian countries have, have recorded markedly inferior growth performance.


Asian policy makers have also shown the importance of focus. The impressive performance of many Asian economies owes much to the single-minded drive of governments and policymakers who were willing to persevere with their goals and who refused to be deflected. This singlemindedness is especially important once growth starts to accelerate and the temptation to relax or be distracted by other policy concerns can undermine long-term growth objectives.

Willingness to learn

Singleminded, yes: blinkered, no. Success has come in Asia in part because of the willingness of policymakers to learn from their mistakes—and, perhaps more unusually, from the mistakes of others. Governments and policymakers are like the rest of the human race—typically displaying an instinct for learning the hard way. But an adaptable approach to economic policymaking in many Asian countries has enabled governments to avoid the siege mentality that can often make problems worse, rather than better. The Asian crisis of the late 1990s, to which I will return in a moment, was a good example of how policymakers—even those not directly affected by the crisis—modified economic policy to reflect the lessons learned.


I promised to return to the example set by Korea. I can think of no better illustration of what rewards consistency and ambition can bring than this country—which, remember, was a poor, rural peasant economy in the 1950s. Indeed, it was so poor that there was a widespread view that it was not a viable economy without significant injections of foreign aid.

Yet from the late 1950s onwards, Korea undertook a series of wide-ranging reforms aimed at transforming itself into a fully-fledged market economy. Part of the impetus for this was the prospect of declining American financial aid. But the reforms systematically addressed fundamental problems. There was a determination to tackle structural problems in the economy, and to stick with a reform program. Sound macroeconomic policies were put in place.

In 1960, there was a large but necessary devaluation, and export incentives were adjusted to relative constancy in the real returns to exporters. Over the next few years, many quantitative restrictions were converted to tariffs. In 1964, a major fiscal reform was introduced, which greatly reduced the government's budget deficit; at the same time interest rate ceilings were relaxed and the exchange rate regime was changed to a crawling peg.

Tax policy was reformed and tax collection improved. Public spending was brought under control and high tariffs reduced. The huge budget deficits were virtually eliminated in just a few years. At an early stage, the importance of infrastructure investment as an aid to exporters and import-competing firms was recognized—and appropriate measures taken.

Later in the reform process, greater emphasis was put on further liberalization of trade and the financial sector. And the reform process is, arguably, continuing as Korean policymakers continue to adapt to deal with the problems that come with further growth. But the main thrust of economic policy has remained largely constant—an outward orientation with strong incentives for exporters, and a commitment to growth through trade. This has meant that the country has been well-placed to cope with the fresh challenges that economic success brings.

I don't have to remind you about the results of Korea's reform efforts. Economic growth was spectacular, especially in the 1960s and early 1970s. GDP per capita rose seven fold in the three decades to 1995. The third poorest country in Asia in 1960 became one of the region's richest by the mid-1990s. It is a performance of which any country would, and should, be proud.

Korea's successful performance was reinforced by policymakers' ability—and willingness—to try to anticipate bottlenecks and potential crisis points. They were arguably successful in this until the 1990s when they failed to anticipate the problems that weaknesses in the financial sector could bring for the wider economy.

The Asian crisis

Korea was, of course, one of the countries most badly-affected by the Asian crisis of 1997-98. This was a shocking experience for many of those in the countries affected. Years of spectacular growth ended in a dramatic series of national financial crises, demolishing almost overnight the image of the Asian tiger economies as invincible economic powerhouses.

With hindsight, of course, it should have been more evident to many of those involved—including the IMF—that trouble was brewing. But hindsight, though a wonderful thing, is never available when you need it most.

The proximate cause of the crisis was the sudden sharp reversal of capital flows to the region. Net inflows to the Asian crisis countries were roughly 6.3% of their GDP in 1995, and 5.8% in 1996. In 1997, net outflows were 2% of GDP, a figure which rose to 5.2% the following year. The economic dislocation caused by the sudden reversal was huge, and would have been so for any country.

But it is worth emphasizing that the change in investor sentiment was not, as some have argued, wholly capricious. There had been a huge expansion of credit over a relatively short period of time. Rapid credit growth is almost always indiscriminate and, in many Asian countries, the result had been a sharp rise in the number of bad loans. These bad loans had reduced the rate of return on capital, and, in time, they reduced the rate of growth. Once the international capital markets recognized that credit had been misallocated, it was inevitable that they would reassess the risks involved in lending to countries whose fundamentals were less sound than they had previously appeared.

Once investor sentiment shifted, several factors conspired to make the situation worse. Fixed exchange rates compounded the problem. Poor regulation of the banking and financial sector in many countries had enabled banks to build up liabilities in one currency and assets in another. Government assurances that exchange rate pegs would be sustained left currency mismatches unrecognized. Devaluation then left financial institutions facing massive losses, or insolvency. Once the cushion of foreign capital was removed, the weaknesses of domestic banking systems were revealed—as was the impact on economic performance.

The contraction in GDP that most crisis countries experienced made things even worse, of course, because the number, and size, of non-performing loans grew rapidly. The further weakening of the financial sector inevitably had adverse consequences for the economy as a whole. In short, the crisis economies found themselves in a vicious downward spiral.

Lessons for policymakers

The crisis of the late 1990s was a shock for policymakers in the affected countries. But it is important to remember that once again, Asian countries displayed remarkable resilience. In spite of the gloomy predictions that followed the crisis, most countries bounced back with remarkable speed. Korean GDP was back to pre-crisis levels within a two years, for instance. Indonesia, the last of the crisis countries to complete its Fund-supported program, was able to exit at the end of last year. So perhaps the first lesson of the crisis is that it pays to ignore the pessimists: that there are significant rewards to be had from confronting problems head-on and tackling them promptly.

But in terms of the policy adjustments that rapid recovery from the crisis required, the experience of the Asian economies—and for that matter many of the other countries that experienced capital account crises in the 1990s—has given us useful lessons. It reminded of things we already knew, but perhaps underestimated the importance of. There is no getting away from the importance of a sound macroeconomic framework. The crisis countries now have better macroeconomic frameworks in place. Monetary policy has become more focused. Fiscal policy reforms are under way in several countries. And flexible exchange rate regimes are now the order of the day in most countries in the region.

The Asian crisis underlined that the benefits of short-term exchange rate stability are greatly outweighed by the risks that pegged or tightly-managed exchange rate regimes bring—not least from the danger of currency mismatches in the corporate and the banking sectors. Fixed exchange rates can result in very large—and sudden—changes in the rate, thus creating great volatility and lost output over the longer term.

So the crisis also brought home to us the importance of a healthy financial sector. As economies become more sophisticated, so the role played by a strong, deep, financial sector in allocating resources efficiently becomes ever more important. We also now appreciate the importance of a healthy corporate sector—and how much this matters for the soundness of the financial sector. A weak financial sector cannot be nursed back to health if corresponding weaknesses in the corporate sector are ignored—any remedy will turn out to be no more than a short-term fix as more corporate loans go bad.

A strong, well-regulated financial sector means addressing often difficult issues such as non-performing loans; capital adequacy; and effective supervision. Financial institutions need the appropriate incentives to develop the skills required to assess and manage credit risk and returns. Effective bankruptcy laws—that strike the right balance between creditors' and debtors' rights—need to be in place.

There is, though, always more to be done—I noted earlier that Korea's successful economic performance over such a long period owed much to the readiness of policymakers to adapt to changing circumstances. Some countries need to do more to strengthen their financial sectors, especially those where banks and companies are still struggling with weak balance sheets. Japan's experience has shown how difficult this can be to resolve—but also how much more difficult it is when reforms are postponed. A weak financial sector undermines growth opportunities. It is no coincidence that those countries that have been more aggressive in the area of financial sector reform have enjoyed better growth performance.

So more effort is needed to deepen financial markets—to extend the number and variety of instruments available, for instance. A more rapid shift towards greater use of equity and bond financing would reduce reliance on the banking sector. It would improve the assessment and management of credit risk. And it would help in the creation of a thriving financial market which is, of course, the lifeblood of capitalism.

Improved corporate governance is a requirement of corporate sector health. As has become clear in all too many countries around the world, lax standards can undermine business performance and, in turn, economic growth prospects when investor confidence is damaged.

Lessons for the Fund

Asia's economic record and the response of Asian countries to the crises of the late 1990s offer important lessons for the rest of the world. They are also important for the Fund. Apart from anything else, it is important that we in the Fund can point to examples of economic success. We can hardly hope to convince skeptical policymakers of the benefits of economic liberalization if we have only textbooks to show.

But we too learn from mistakes, and the crises of the late 1990s brought about important revisions to our thinking and our policy advice.

The development of sustainable economic policies has always been at the heart of our work. What's changed is how we define sustainability. We now pay particular attention to debt sustainability, for example, and mis-matches in exposure. Debt sustainability analyses are standard. Capital account crises invariably involve the market concluding that a country will not be able voluntarily to continue to service its debts. Assessing a country's debt burden, and its ability to service that debt, is one important way in which we can seek to prevent crises.

But we also pay close attention to the financial sector, not least because of the contingent liabilities involved. There are several important ways in which we can make a judgment about the robustness of the financial sector. These include the health of the banking system—and here the level of non-performing loans is relevant; the extent to which risk is clearly defined in the financial system; and the systems' transparency.

We have made our financial sector assessments more rigorous. In 1999, we introduced the Financial Sector Assessment Program (FSAP) that aims to help member governments strengthen their financial systems by making it easier to detect vulnerabilities at an early stage; to identify key areas which need further work; to set policy priorities; and to provide technical assistance when this is needed to strengthen supervisory and reporting frameworks. The end result is intended to ensure that the right processes are in place for countries to make their own substantive assessments.

The FSAP also forms the basis for Financial Stability Assessments (FSAs) in which IMF staff address issues directly related to the Fund's surveillance work. These include risks to macroeconomic stability that might come from the financial sector and the capacity of the sector to absorb shocks. FSAPs have benefits for the whole range of our membership.

We have also worked with the World Bank to develop a system of Standards and Codes—using internationally-recognized standards—that form the basis for Reports on Standards and Codes (ROSCs). These cover twelve areas, including banking supervision, securities regulation and insurance supervision. The financial sector ROSCs are an integral part of the Financial Sector Assessment Program and are published by agreement with the member country. They are used to sharpen discussions between the Fund—and, where appropriate, the World Bank—and national authorities; and, in the private sector, including rating agencies, for risk assessment purposes.

I think our work in this area, and the experience of the Asian and other crises of the 1990s, also greatly reinforced the importance we attach to transparency. The Fund is now far more transparent by far than it used to be—we try hard to be clear about what we do and why. And for national governments, transparency can be a vital ingredient for success. It has become clear that policymakers did not used to talk even to each other enough; such was the culture of secrecy that surrounded much economic and financial policymaking. As we saw, though, that increases the risk that policies will be inappropriate and the shocks bigger and far more painful to deal with.

Governments in Asia and around the world have learned the benefits of transparent policymaking, though we sometimes need to remind them how significant these benefits can be in terms of strengthening confidence and so, in some cases, reducing borrowing and transactions costs.

This might all sound rather worthy but dull. Don't be mistaken. As several countries in this region can attest, when financial crises erupt, they do so suddenly and brutally. They can quickly lead to panic and even, in extreme cases, chaos on the streets. Anything we can do to reduce the risk of that happening is clearly of the utmost importance.

Looking ahead

My theme today has been what Asia can teach the world. But I cannot forebear to remind Asian policymakers that they need to maintain their impressive ability to learn from their own experience as well. They also need to remain alert to, and ready to deal with, the problems that continuing economic success can—indeed, will—bring.

It is important that Asian policymakers do not slacken at this juncture: they need to push ahead and complete the structural reforms that most countries embarked on after the crisis of the late 1990s. In particular, I make no apology for emphasizing, yet again, the importance of a sound financial sector. Postponing change will not make the need for it go away—quite the reverse. Asian countries need look no further than Japan if they want to see quite how high the price of prolonged inaction can be.

While financial sectors remain weak, economies remain more vulnerable than they need be to sudden external shocks. They also remain exposed to internal shocks, or shifts in investor sentiment.

I accept that a more benign outlook deprives policymakers of a sense of urgency. It can be more difficult to explain the need for unpopular economic policy decisions when growth is buoyant. But, as I said, adjustments are less painful when made from a position of relative strength. It cannot make sense to wait until circumstances require far more painful measures.


This continent's economic performance has been truly remarkable. Asia's ambition, determination, focus and, above all, commitment to economic liberalization are all important beacons for many parts of the world. Asian economies have shown what is possible if the right policies are applied in a rigorous manner.

The lessons from Asia's experience are clear: persistent application of sound, pro-growth macroeconomic policies. Flexible exchange rates which reduce the risk of severe output shocks. A strong, well-regulated and deep financial sector. And a constant eye on the future—a readiness to learn from mistakes and respond to success.

If I sound a note of caution it is simply to remind policymakers that there is never a good time to relax one's watch. Adaptability is a vital ingredient for success in the modern economy. I want my successors to be able to extol Asian economic virtues in the years to come—and to be able still to refer to this as the "gorgeous East."

Thank you.


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