Stanley Fischer
First Deputy Managing Director
International Monetary Fund
1
June 17, 1999
Use the free Adobe Acrobat Reader to view Chart 1 and Table 1.
1. Introduction
Four months ago in Manila I had the pleasure of addressing the Asia Society's Tenth Annual
Corporate Conference. My talk on that occasion was entitled "The Asian Crisis: The
Beginning of the End?" Tonight we can safely remove the question mark, and talk about
the return of growth in Asia—in the Asian crisis countries of Indonesia, Korea, Malaysia
and Thailand, in the Philippines, which avoided the worst of the crisis, and, significantly, in
Japan.
Like a seismograph, the EMBI spread (Chart 1) provides a good
index of the intensity of a
crisis. The devaluation of the baht in July 1997 shows up as only a minor tremor. The real start of
the crisis is marked on the EMBI index by the attack on Hong Kong in October 1997. The
eighteen months since then have been exceptionally difficult for Hong Kong. Nonetheless, the
Hong Kong economy has successfully withstood massive external shocks, and the linked
exchange rate remains strong. And as the other Asian economies hit by the crisis recover, Hong
Kong too, with its policies continuing on the right track, has very good prospects of recovery in
the second half of this year.
2. The recovery
The regional outlook has improved markedly in the last few months (Table 1). The countries
at the heart of the crisis, Korea, Thailand, Malaysia and Indonesia, are probably past the turning
point. Even in Indonesia, where macroeconomic stabilization took longest, economic activity is
expected to pick up in the second half of the year. The recent economic stability in Indonesia,
supported by generally good macroeconomic policies and foreign official financing, was essential
in helping ensure a peaceful background for the elections.
These recoveries are built on expansionary domestic policies, fiscal and monetary, and on the
beginnings of the recovery of exports. They have been helped by the return of foreign capital,
both financial, which has strengthened stock markets, and foreign direct investment. In
Indonesia, Malaysia, and Thailand, the recoveries remain fragile, and depend on the continuation
of structural reform policies, as well as on an improving external environment. In Korea too, the
structural reform agenda is far from complete, particularly in restructuring the chaebols.
Among the potential victims of the crisis, the Philippines economy performed exceptionally.
The Philippines was in an IMF program at the start of the crisis, and it skilfully pursued good
policies, both by allowing the exchange rate to adjust when it came under pressure, and by
defending it through interest rate policy. As the economy came under pressure, IMF financing
for the Philippines was increased. The country benefitted from the composition of its trade,
which is more heavily weighted towards the United States than that of the more severely affected
countries.
Japan accounts for more than half the output of the region. There could have been no better
news for the region than the strong first quarter recovery reported for Japan. While it is yet to be
seen whether the recovery is firmly under way, policies are now playing a constructive role to
strengthen demand, and bank recapitalization is underway. It will likely be necessary later in the
year to ensure that fiscal policy continues to support the expansion.
And China has continued to weather the crisis better than many expected: a well timed fiscal
stimulus has helped support activity, and the stability of the yuan has been maintained. A
daunting agenda of structural reform of the state sector and the banks remains, but the authorities
have made it clear that they are committed to accelerating reforms in these areas.
3. But there are risks
But all this is fragile. The continuation of the recovery depends on domestic policies, which
in turn depend on domestic politics, as well as on the external environment.
One important risk is that the burgeoning recovery will reduce the urgency of reform, and
allow complacency, or normal politics, to set in. Much structural reform remains to be carried
out in the crisis-struck countries, Indonesia, Korea, Malaysia, and Thailand, and also in China
and Japan. As stability and growth return, and as the role of the international financial
institutions inevitably diminishes, those countries that have had IFI-supported programs are
going to have to internalize the ongoing reform process. We will continue to do everything we
can to support the continuation of the reform process, through the IMF-supported programs as
long as they continue, and then through the surveillance process.
The external environment is also critical. The phenomenal strength of the United States
economy during the last three years has been bulwark of the world economy; essential in
preventing the Asian and then the Russian crises from generating a worldwide recession. United
States monetary policy in October and November 1998, followed a bit later by the co-ordinated
cut in European interest rates, was decisive in containing the contagion from the Russian crisis.
But the United States economy cannot continue to grow at rates well above any estimate of
potential growth, especially when unemployment is so low. We must hope that European and
Japanese growth will pick up in time to offset the inevitable slowdown in the United
States—note though that while a slowdown is inevitable, a recession is not.
Japan's recovery is naturally more important for this region than is that of Europe. This
applies not only to the recovery of output growth—and we must recognize that there has so
far been only one quarter of growth, but also to the strengthening of the banking system, to
ensure the revival of Japanese private sector capital flows to the region. Fortunately, actions
taken to recapitalize the banks in the last year are beginning to pay off. The insurance sector too
will need strengthening, and corporate restructuring will have to accelerate.
There are many reasons to feel more confident about the recovery than we did four months
ago. But the recovery is not yet deep-seated, and this is not the time for over-confidence. And
there are fresh issues to face.
4. The next set of issues
Here are some of the immediate economic issues and questions:
- Can growth resume at pre-crisis rates? The short answer is that we do not know. Many of
the characteristics of Asian economies that produced the high growth of earlier decades remain in
place, among them highly skilled, hard-working, and high-saving workers and entrepreneurs.
Most government policies, and the structures of economies, will be stronger in the post-crisis
period than they were before. Capital flows are already returning. It seems now that the very
high growth of the last few years before the crisis to some extent reflected overheating. Growth
in the higher income economies in the region will in any case slow as they approach the levels of
the most advanced economies. Most likely, the stronger Asian economies will recover to growth
rates well above the world average, but below the remarkable records of recent decades. Some of
the weaker economies are likely to take more years to recover, as they deal with the aftermath of
the crisis, particularly in the financial sector.
- How quickly should fiscal consolidation be achieved? Budget deficits have appropriately
been widened—though generally by less than planned—during the crisis. But the
financial crisis has imposed heavy longer-term burdens on the budget in several countries. Some
countries, notably Japan, face large future costs of social safety networks; other countries should
improve their social safety nets. Budget deficits will have to be reduced in the medium term, and
the efficiency of tax systems enhanced. Fortunately, there is no tradition of large budget deficits
in the region, and so governments are likely to seek to restore budget balance within a matter of a
very few years. That too is appropriate. The speed at which it needs to be done varies across
countries, depending in large part on the size of the explicit and implicit debts that have built up
in the last few years.
- Sustaining reforms in the financial and corporate sectors, and in governance. Real progress
has been made in improving legal systems, prudential regulations, and supervisory frameworks,
but these mechanisms still need to be applied rigorously and effectively—and this includes
bankruptcy as an essential mechanism in economic restructuring. Transparency will play a key
role in all these areas, and here the IMF can help, including through the experimental
transparency reports we are now beginning to prepare in cooperation with the countries
concerned.
- Dealing with international capital flows. As international capital returns to the region, the
challenge is to ensure that the international and domestic macroeconomic and structural
frameworks are strong enough to discourage excessive fluctuations in short-term flows, and
adequate to deal with the fluctuations that will inevitably occur. This could include market-based
measures to discourage short-term capital inflows. It should certainly include stronger domestic
policies and financial systems, strengthened prudential regulations in both the capital-originating
and the capital-receiving economies, and much better data on the nature and sources of the flows.
The role of short-term capital flows and how to deal with them is one of the topics now being
examined by a working group of the newly-created Financial Stability Forum.
- A word on the exchange rate regime: In the wake of the crisis, we are likely to see more
countries adopting flexible exchange rate systems, or, if they fix, doing so in a definitive way, for
example, as in Hong Kong, through a currency board. However this simple dichotomy is
unlikely to be the last word, and some countries may seek intermediate regimes, for instance a
broad target range for the exchange rate, around a central rate that could itself move gradually.
Countries that adopt floating rate regimes will have to consider the basis for their monetary
policy; increasingly, around the world, the benefits of an inflation targeting regime are being
recognized.
5. Final reflections
Let me conclude by reflecting on a few broader issues raised by the crises of the last two
years.
- At the height of the crisis, most pundits proclaimed this the crisis of globalization. But it is
clear from the responses of policymakers that globalization is here to stay, for virtually
unanimously policymakers resisted the siren calls to withdraw from the system, close down their
capital markets, and retreat into financial isolation. Of course, their reaction only increases the
obligation to reform the international financial system.
- Accordingly a major effort is now under way to strengthen the architecture of the
international financial system. The IMF's new Contingent Credit Line, the CCL, is designed to
offer assurance to countries by offering them contingent financing, which will become available
if they are affected by contagion. The CCL is only for countries pursuing good policies and
seeking to meet relevant international standards—and it thus enables the IMF for the first
time to lend in a precautionary way, outside the context of a crisis, and to provide incentives for
good policies. One key issue in the reform of the system is the role of the private sector in the
prevention, mitigation and solution of crises. It is also clear that the activities of highly leveraged
institutions—an issue that has justifiably concerned policymakers in Hong
Kong—need to be looked at very closely. The new Financial Stability Forum, which is
itself an important response to the crisis, has a task force addressing this issue, with some Hong
Kong officials taking part.
And ranging a bit wider yet:
- The commitment of the political leadership of a country to reform is essential. Each of the
IMF-supported programs in Asia took hold only when the political leadership changed. Public
support for the reforms is also essential. This requires both consultation and discussion with a
wide spectrum of society, and ensuring adequate social safety nets for the poorest.
- Finally, we need also to reflect on the political aftereffects of a crisis as deep as this one has
been. In the 1980s Latin America went through a profound economic crisis, more prolonged
than the Asian crisis will be; the 1980s in Latin America are described as the lost decade. But
the decade was not entirely lost, for it was during that decade that economic reform finally took
hold in Latin America. It was also the decade in which democracy took firm hold in Latin
America. Asia is different, for its economic policies before the crisis were much stronger than
those of Latin America before its lost decade. But the crisis has led to a reconsideration of the
tight links among business, government, and the financial sector characteristic of several
economies, and it is leading to more transparency in the economy and in economic
policy-making. And that transparency too will have wider consequences.
1This is an outline of comments prepared for
delivery at a dinner of the Asia Society, Hong Kong, June 17, 1999. I am grateful to Daniel Citrin
and David Robinson for their inputs. Views expressed are those of the author, not necessarily of
the International Monetary Fund.
