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MAIN PAGE | SPEECHES & EDITORIALS | 1999 | MEETING THE CRISIS: WHAT SHOULD GOVERNMENTS DO?

Meeting the Crisis: What Should Governments Do? Takeshi Kondo Managing Director, Itochu Corporation (Tokyo) The Asian Financial Crisis: A Focus on Solutions Los Angeles, California Monday, October 19, 1998 Recent events have caused some observers to warn that the global economy is approaching a precipice. Contagion from the financial crisis that swept East Asia last year has infected the Russian economy, and now threatens to envelop Brazil and the rest of Latin America. Japan has recorded three consecutive quarters of negative real GDP growth, while the near bankruptcy of Long Term Capital Management (LCTM) has spooked American financial markets and raised questions about the sustainability of the United States' eight-year economic expansion. The global economic uncertainty that was sparked so abruptly by the Asian financial crisis brings added urgency to government efforts to contain and resolve the financial crisis. In a rapidly evolving world economy characterized by accelerating financial innovation and huge flows of highly mobile private capital, government countermeasures would appear to face significant challenges. Still, I remain optimistic that effective, public-sector initiatives can be mounted to hasten mi economic recovery in Asia and address the causes of the financial crisis. In my remarks today, I will leave aside the issue of revising the international financial architecture, and focus instead on the macroeconomic policies that Japan, the remainder of the G-8, and emerging market countries should adopt to meet the challenges posed by the Asian financial crisis. Undertaken in a coordinated fashion, these policies will contribute significantly to the establishment of a stable global economy. Japan's Role in Assisting Asia The tight financial and economic links that exist between Japan and the rest of East Asia make the current regional crisis a matter of thc highest Japanese concern. East Asia is Japan's largest regional trading partner, and Japanese banks' $115 billion in claims in Asian countries at the end of fiscal 1997 far exceeded those held by any other country[1]. Given the region's economic and strategic importance, it is essential that Japan take a major role in bringing about an early end to Asia's economic crisis. Japanese concern was underscored by its generous contributions to the financial rescue packages coordinated by the IMF and leading commercial banks for Thailand, Indonesia, and South Korea. Of the $17.2 billion, $42.3 billion, and $58.2 billion committed to Thailand, Indonesia, and South Korea, respectively, Japanese bilateral contributions were $4 billion, $5 billion, and $10 billion. Additional assistance in the form of export credits, two-step loans, investment financing emergency structural adjustment loans, rice donations, and grants for medical supplies brought the Japanese total to $42 billion at the end of April 1998. Most recently, Japanese Finance Minister Kiichi Miyazawa unveiled an additional $30 billion relief package on October 3 at the G-7 meeting in Washington. The package consists of loan guarantees, trade credits and money for purchases of Asian debt, and will be distributed through the Export-Import Bank of Japan to Indonesia, Malaysia, the Philippines, Singapore, Thailand, and South Korea. Although financial contributions are both necessary and welcome, Japan can provide far greater assistance by simultaneously implementing effective policies to stabilize its financial system and stimulating strong, sustained demand-led growth. These measures are crucial for exorcising the bearish sentiment that has perpetuated Japan's post-bubble economic stagnation, as well as for reviving imports from and bank lending to Asia. The 16.35 trillion yen ($124 billion) fiscal stimulus package announced in April of this year is a step in the fight direction, but a tuffy effective stimulus requires permanent tax cuts to encourage consumption. Japan's current tax code perpetuates postwar biases toward saving, and must be revised. For example, tax credits for housing loans would stimulate housing demand and cause people to transfer financial assets into a form that improves their standard of hying. At the same time, the government needs to spend heavily on public works projects that stimulate domestic demand. Previous rounds of public investment have been criticized as wasteful and ineffective, but that is simply because they contributed insufficiently to human capital and corporate productivity. Stimulating domestic demand through permanent tax measures and public works spending is an essential prerequisite for reforming the troubled Japanese financial system. Closing banks and disposing of collateral will have a contractionary effect on the economy, so it is important for this rationalization to take place when the economy is growing- For example, the American savings and loan cleanup, which began in 1989 under the Bush Administration, was assisted immeasurably by the economic recovery that began in the spring of 1991. if an environment of economic growth can be achieved, legislation passed last week to recapitalize weak banks and liquidate failed institutions will be able to rationalize the Japanese banking system with a minimum of collateral damage to the real economy. Economic Policies for the G-7 The other industrialized nations must act as sources of world demand by maintaining domestic patterns of stability and growth. While Europe faces the particularly delicate task of implementing monetary union a fashion that contributes simultaneously to firm domestic demand and a strong euro, the United States should continue its recent record of fiscal discipline. It is also important for the U.S. to fulfill its international responsibilities by providing its share ($18 billion) of the $90 billion increase in capital that the IMF requires to continue dealing effectively with world economic crises. The agreement on IMF funding reached last week in Washington between the Clinton Administration and the Congress is most welcome. But while pro-growth policies will benefit crisis-stricken Asian countries which are seeking to export their way to recovery, the commitment of Japan and the other industrialized nations to world economic health cannot be considered genuine without the explicit endorsement of open markets. Obviously, Japan should demonstrate greater willingness to play a leading role in realizing APEC's goals of free trade between developed members by 2010 mad between developing country members by 2020. The U.S. Congress should award "fast track" negotiating authority to President Clinton to demonstrate its commitment to market liberalization. But more important are our responses to the increasing number of petitions by domestic industries for protection from a surge of cheap Asian imports. We should stand firm in resisting any form of disguised protectionism. Ultimately, the G-7 countries should affirm their commitment to an open trade and investment regime by helping a new round of multilateral trade talks to be launched at the WTO trade ministers' meeting that is scheduled to convene in Washington on November 30, 1999. Such a "millennium round" would provide a needed forum for thc discussion of trade in services and agricultural products, the treatment of foreign investors, and competition policy. Embarking on a new round of talks is especially important for defusing the protectionist sentiments that could potentially accompany deteriorating world economic conditions. Emerging Market Economies Finally, the emerging market economies must fulfill their responsibilities. Obviously, these include increasing transparency by adopting international standards of disclosure for the public and private sector, and strengthening national financial systems through better supervision of both financial and corporate activity. But more importantly, these initiatives must be accompanied by sound macroeconomic policies to stabilize exchange rates, control inflation, and establish a sustainable balance of payments. These macroeconomic policies must be backed by a strong political commitment to refrom a commitment which stems directly from democratic participation in the political process. The pain associated with economic structural adjustment has caused a certain degree of disenchantment in developing countries with the doctrines of free trade and investment And while I am prepared to make a limited exception for measures to help authorities achieve economic stabilization in times of crisis, I strongly recommend that developing countries continue to liberalize their trade and investment regimes. Capital controls themselves have a habit of disrupting thc trade in goods, inspiring corruption, delaying necessary structural reforms, and discouraging foreign direct investment. And it was, after all, FDI which funded much of the export-oriented economic growth which saw Asia's share of world exports rise from 12% to 17% from 1990 to 1996[2]. The industrialized countries must increase the incentives for openness in developing countries by supplementing the technology transfers and other spillovers which accompany FDI with efforts to develop human resources in the public and private sectors. Current initiatives representative of this effort include IMF training for member country supervisors in areas such as bank licensing and credit assessment, and Japanese official development assistance programs (J-[CA) which accept trainees and dispatch specialists to provide technical expertise. Turning the Economic Crisis into an Opportunity? If all parties fulfill their economic policy responsibilities in a coordinated fashion, I am optimistic that the world can overcome the current economic crisis, and even transform it into a sort of opportunity. For by instituting the economic policies that contribute to balanced, sustainable growth in the near term, we can lay the foundation for global economic stability in the 21st Century. [1]Bank for International Settlements, The .Maturity, Sectoral, and Nationality Distribution of International Bank Lending, May 1998, page 9. [2] Fischer, Stanley, "Capital Market Liberalization and the Role of thc [MF," IMF Seminar Paper, 19 September 1997.