Speech

Peter S. Heller
Deputy Director, Fiscal Affairs Department
International Monetary Fund

Presentation to World Bank Regional Meeting on
Social Issues Arising from the East Asia Crisis and Policy Implications for the Future
Bangkok: January 21, 1999

Over the past 18 months, there has been much debate and controversy about the macroeconomic and structural policies that were adopted during the Asia crisis. The IMF staff has just entered this debate, publishing its own in-depth assessment of this policy response, which you can obtain on the IMF’s web page (www.imf.org). Concerns about the effect of this crisis on the most vulnerable segments of society certainly influenced the design of the adjustment programs. Thus, with the benefit of hindsight, we in the IMF welcome the opportunity to examine what were the human dimensions of the crisis and how they were addressed. How did the poor fare and which groups in society suffered most? Which benefited? What were the implications for health, education, and welfare? What policies were introduced to cushion the effects on the most vulnerable and to limit long-run damage to the human capital and social institutions of these countries? Were these policies successful? We look to this conference to provide answers to these vital questions and to assess what can be done better.

Let me be absolutely clear. The human dimensions of macroeconomic adjustment should not be seen as a new preoccupation of the IMF. Indeed, over the last decade, there has been a continuous dialogue between the IMF (and I might add the World Bank) and academics, religious leaders, labor unions, NGOs, and others in civil society as we have sought to understand the social dimensions of adjustment and to take them into account in our work. The IMF has sponsored important conferences examining the linkages between macroeconomic and structural policies, sustainable growth, and equity. Some findings are clear.

Restoring quality growth and limiting inflation are the most potent factors in reducing poverty rates and improving equity in a society. Such an economic environment facilitates a lowering of unemployment; higher incomes; avoidance of the inequities caused by high inflation; and the provision of the additional budgetary resources needed to finance social investments and social insurance schemes. Second, the equity implications of adjustment measures cannot be ignored. Indeed, pursuing equity can be supportive of high-quality growth. Third, social safety nets are a vital component of adjustment. Lastly, transparency about the details of Fund-supported adjustment programs and a dialogue with many concerned groups is necessary both for enhancing public support and developing informed programs. With this perspective in mind, in the recent crisis, the IMF sought to ensure that the macroeconomic policy framework could accommodate social protection measures and emphasized to the authorities that such measures should be part and parcel of IMF-supported programs. It has also led us to reach out actively to labor unions, NGOs, and civil society, and to use our public web site to inform the public on the content of these programs.

But I should also emphasize that, reflecting the respective mandates of the World Bank and IMF, the Bank was principally responsible for designing and monitoring the social protection components of the adjustment programs in Asia. This makes sense. Over the years, the World Bank had developed expertise in the fields of poverty reduction, health, education, and rural development. Even when the balance of payments of these countries was strong, the World Bank has worked extensively in Asia. Witness the many years and considerable resources spent on Indonesia. Thus, when the crisis struck, the World Bank was well placed to design the details of a strategy to help the poorest groups cope. Thus, it is fitting that the World Bank has sponsored this conference on the human dimensions of the crisis.

I have been allotted only 10 minutes for this presentation. Thus, I will be brief . But I hope that in the discussions that follow over the next two days, I can elaborate further on my observations, and with my colleague, Mr. Hubert Neiss, Director of the IMF’s Asia and Pacific Department, discuss your concerns.

Let me initially comment on the overall thrust of the IMF’s efforts. The Asian crisis was unusual, both in terms of the speed with which it took hold and in the complexity of its origins. We were all struck by the sudden loss of confidence in countries that had only recently experienced such rapid growth; by the resulting capital flight and the dramatic erosion of reserves that occurred so suddenly; and by the depth of the output decline that followed. What was novel about this crisis was that its underlying roots lay not so much in the underlying macroeconomic policies, but in the structural weaknesses in the financial and corporate sectors. The intensity and speed of the shock also placed great pressure on all concerned to elaborate quickly policies of social protection to address the increase in unemployment and inflation.

The most fundamental concern of the IMF, both at the inception of the Asian crisis and since, was to develop a macroeconomic and structural policy package in each country appropriate for restoring quickly macroeconomic stability--containing inflation; fostering expectations of a stable exchange rate; and restoring sustainable growth. As I said earlier, this was necessary not only to achieve macroeconomic policy objectives, but also to ensure that the tremendous gains of these countries in reducing poverty were not reversed. Policies were tailored to the specifics of the country but had to remain flexible to take account of the evolving financial situation, changing political circumstances, worsening regional economic situation, and the availability of external financial support, which was not unlimited.

Considerable importance was also attached to ensuring that the macroeconomic framework would allow budgetary room for governments, working with the World Bank and the Asian Development Bank, to finance expenditures for enhanced social safety nets and to protect public spending in health and education. The IMF worked closely with the World Bank and the country authorities to incorporate such social policy interventions in the programs, and perhaps more importantly, to ensure that they were effectively being implemented.

Take Thailand as an example. As the recession deepened, the government strengthened its safety net programs in the 1998/99 budget (to over 3 percent of GDP) to include: the expansion of a large public works program that would create 500,000 man-months of jobs over the next 2 ½ years; the extension of the student loan program to maintain student attendance; the provision of free medical treatment and improved rural health care facilities; and the maintenance of a subsidy on transportation in the urban areas. In Indonesia, we supported the provision of subsidized food, petroleum products, and electricity, with an emphasis on targeting these efforts toward the most needy groups and thus cutting unproductive expenditures. In Korea, we advocated an extension in coverage of unemployment insurance programs and an increase in minimum benefits. For all of the Asian program countries, once the depth of the recession became clear, we were prepared to support more expansionary fiscal packages as long as these packages addressed important social concerns.

Time and perspective have also highlighted several areas where we all need to do to better in helping these countries and others cope with the human dimension of such crises.

• First, countries need to strengthen their capacity to monitor, on a timely basis, the situation of the poor. Witness how the first impressions of the human impact of the crisis have had to be revised. Only several months ago, the World Bank and International Labor Organization were suggesting that in Indonesia, the number of poor would almost double. Now, the evidence suggests that poverty rates in Indonesia may not increase so dramatically. It is the urban poor and middle class that now appear to have been most affected, with rural food producers largely protected, if not benefiting. Without a capacity for monitoring, countries risk devoting scarce budgetary resources to safety net policies that are not targeted efficiently to those most in need.

• Second, policies for economic growth need to be complimented by the development of both a limited framework and enhanced administrative capacity for cost-effective social protection programs. Despite the past rapid economic growth of these Asian countries, their social protection systems were inadequate to cope with the strains of a sharp rise in unemployment. In late 1997, even Korea’s relatively developed unemployment insurance scheme only covered large enterprises, exposing many in the labor force to the risks of unemployment. In some countries, there were striking weaknesses in the administrative capacity to design and implement policies targeted at the most vulnerable groups. Developing such a policy framework will require innovative approaches that avoid the types of labor market distortions evident in many OECD countries. Equally, administrative capacity is not created overnight, but work must begin soon, together with a resumption of growth.

• Third, the crisis also reminds us of the importance of high-quality growth. When rapid growth is built on asset price bubbles, inefficient and expensive infrastructure projects, and implicit public guarantees of poor investments or financial sector behavior, the foundation for sustained higher income levels is shaky. IMF surveillance and World Bank country assistance strategies must be ever vigilant in warning authorities of these dangers.

• Fourth, we must recognize that one cannot expect an active fiscal policy to have immediate stimulative effects. Although we pressed for a policy of fiscal stimulus in each of these countries, implementing such a policy has not proven easy, particularly in the short run. Good quality, activist, fiscal measures can take time to develop and introduce; witness the delays in the design and implementation of new social protection programs. Also, accurately assessing the true stance of fiscal policies can be difficult, ex ante; increased fiscal deficits can simply reflect the economic downturn and not policy stimulus, especially if the downturn is more severe than expected. Thus, the nature of the fiscal stance needs to be frequently assessed and, if necessary, deficit targets reconsidered in light of the macroeconomic situation.

• Lastly, the word "crisis" in Chinese characters means the combination of "danger" and "opportunity." This crisis has created opportunities for efficiency-enhancing policy reforms, and has heightened the importance of governments being responsive to the changing demands for public services. For example, in the health sector, budgetary pressures have intensified as households have shifted their demand away from private health providers. If governments can be flexible and open to change, this could facilitate a useful and long overdue restructuring of budgetary expenditure resource allocations toward more efficient and effective policy programs. This has already begun to happen in Thailand and Korea. Witness the shift toward purchases of generic drugs as one example.

These are important lessons as we move forward. I would hope that this conference will offer additional lessons that will enable the World Bank and the IMF to better address the human dimensions of such crises. Thank you.