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

Meeting the Crisis: What Should Governments Do? John S. Wolf U.S. Ambassador to APEC The Asian Financial Crisis: A Focus on Solutions Los Angeles, California Monday, October 19, 1998 Thank you for this opportunity travel to Los Angeles, and the chance to talk to one of my favorite audiences — a business audience. I only wish the circumstances were a bit more upbeat. Not withstanding the bounce last week in stock markets, the fact is that we face a very difficult economic situation. For nearly sixteen months, we in government and you in business have faced a world economy wracked by a financial storm that is unparalleled in any of our experiences, and for which the path back to sustainable equilibrium is still not fully charted. Eleven months ago, when APEC economic leaders met in Vancouver, there was a general belief (more just a hope) that Asia's decline would have bottomed out, and that all we'd be debating is the shape of the recovery — U vs. V. In fact, we may not be at the bottom yet and the Asian financial crisis has ricocheted around the world. Make no mistake about what is at issue. Across Asia, tens of millions have fallen below the poverty level. Unemployment and bankruptcies are rising daily. The middle classes — who were the proudest champions of economic and political openness — are under siege. The US has not been immune. Our exports to Asia were down 14%; our trade deficit was up 37% this June compared to last June; and our financial system has been at least dented by the misfortunes Abroad, In California, exports to the Asian 10 (China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, S. Korea, Taiwan, and Thailand) in the first quarter of 1998 were down 11.1% compared to 1997 first quarter. This all sounds pretty bleak. Fortunately there are some real positives to note — developments still not widely recognized certainly in the popular press. In Korea, Thailand, and Indonesia there have been substantial first steps in areas like financial sector restructuring, corporate debt workouts and bankruptcy procedures. The currencies are strengthening. In Korea and Thailand, interest rates are down, and the equity markets are trending up. Export growth is up in volume (although not in dollar terms), but imports (including those from the US) remain cratered. Indonesia has taken some important steps within its IMF program, and its currency this morning broke under 8000. I'd hasten to say that its economic difficulties are all bound up with the still evolving political situation — and a real return of market confidence there is unlikely before there is a lot more clarity on the political front. It may be that some of these positives have been around for three or four months — but were masked by the drag that Japan has exerted during months (in fact years) of indecision and wavering. Markets have been looking to Japan to fix its problems, and to help lead the region out of turmoil. The past months without any real action have crushed market confidence. The costs far surpassed the big financial aid packages Japan has announced. Now, there is room for hope But that hope will remain well tempered until there is clear evidence Japan is in fact actively cleaning up its banking mess, deregulating its economy, and opening its marketplace. So what lies ahead? I'd like to touch on three areas briefly, and leave plenty of time to hear your thoughts. First, the recent international financial meetings that were held in Washington DC; secondly, next month's APEC Leaders meeting in Kuala Lumpur; and finally, the importance of the United States' leadership in helping the region return to sound growth. DC Financial Meetings To put the recent IMF/World Bank meetings in context, I want to start with President Clinton's September 14th speech to the Council on Foreign Relations in New York. The President outlined a number of steps to address the financial crisis — now a global concern. He talked about the need to spur growth, the need to get viable businesses running again, the need to help those who have been devastated by the crisis, the need to make changes to the international financial architecture to keep this from happening again, and the need for the United States to do its part by funding the IMF and keeping our markets open. Renewed growth, not bailouts, is the key to recovery. Renewed growth can lift millions of people around the world back into the global middle class. But growth cannot stand alone. We must also find ways to address the impact of globalization on the international financial system. Opportunity awaits, but not without challenges. The myriad of meetings two weeks ago in Washington — the G-7, G22 and the Bank/Fund meetings produced some familiar themes -sound macroeconomic policies, market confidence, exchange rate stability, transparency, social safety nets, no silver bullets. But there was also some fleshing-out of ideas. Greater transparency and accountability was a predominant topic. National authorities could increase transparency of economic policies, foreign exchange reserves and external debt positions. International financial institutions, such as the IMF, could make public many of their policy papers, reports and program reviews. And the private sector could create and implement internationally accepted standards for disclosure and accounting. All these are components of restored confidence and reduced risks and necessities for economic recovery. We in government have to help restore market confidence through strengthened macroeconomic policy, by providing the regulatory framework for efficient capital markets, and by helping to smooth over rough spots. But there is heavy lifting as well for the private sector in addressing this crisis and heading-off future crises. It must manage better its risks, and assume greater responsibility in the workouts countries are undertaking to adjust and restructure. One caution... no measure vis a vis the international system is a substitute for efforts by each economy to address its structural weaknesses or macroeconomic imbalances. Capital controls cannot substitute for specific measures to restore macroeconomic stability and to strengthen domestic financial systems. Yes, capital market liberalization must be done in an orderly, gradual, and well-sequenced manner. Yes it must be done hand-in-hand with strengthening countries' ability to sustain its consequences. But the whole system is threatened when individual countries try the path of financial autarchy. APEC The financial situation will be a chief discussion topic at the APEC Leaders Meeting in Kuala Lumpur on November 17-18. Doubtless the Leaders' message will be upbeat- a reassertion of confidence that Asia will rebound. Leaders will certainly recognize the need for pro-growth policies, in line with IMF understandings, to relieve the social pressures and political reaction to reform. Hopefully, too, the message will emphasize that the path toward renewed growth is a path that continues to build on opening markets, and competing internationally. Leaders might address next steps on how to restructure corporate debt, strengthen financial architecture (especially management of volatile short-term capital flows), and expand multilateral bank social safety net programs and the use of loan guarantees and other innovative mechanisms to leverage private sector lending. We hope too that leaders will endorse the need to improve economic governance, including corporate governance. And, while they may be circumspect in what they say, I suspect no one will overlook that the countries that are progressing best in their efforts to restructure and reform economically are those with broad popular political support. We want to accelerate technical assistance activities planned in collaboration with the IFls to help economies build stronger financial sectors. We are also very interested in how to increase private sector involvement in addressing these technical assistance opportunities. It might be possible to encourage organizations like the Financial Services Volunteer Corps to develop a program in Asia like the one it is pursuing in Europe. Beyond financial system reform, we ought not to forget that further market opening and liberalization are important positive signals to investors that Asia is still open for business. An important trade goal for the APEC region this year is successful conclusion of the APEC Early Voluntary Sectoral Liberalization (EVSL) initiative. We have made progress in developing the nine Priority Sectors (Chemicals, Energy, Environment, Fish, Forestry, Gems and Jewelry, Medical Equipment, Telecom MRA, Toys) since APEC Leaders agreed to pursue this liberalization approach last year. Advancing EVSL can help rebuild market confidence; Asians need also to understand that success in EVSL can help us here in the US to push back the calls for protectionism that come here with our rising deficits. If we're to succeed, APEC economies need to craft a much better package that assures there is mutual benefit... a one-sided, or tepid, package will not sell. U.S. Role I've addressed how the international community has confronted the crisis and where that takes in the APEC context. Underpinning this all is the necessity for the United States to take a leadership role. I often have been asked what really is the US doing to assist countries in crisis. My answer is straightforward. We are continuing to grow. and taking the monetary and fiscal steps to ensure that growth path is sustained. We are taking steps to assure our financial system remains broad, deep and resilient. We will remain a champion for freer and more open trade and investment but we also must resist the pressure some are exerting to close our open markets. We hardly can lead if we are going backwards. We are committed to assisting those who have been drastically affected by the crisis. We are working through US AID, with the World Bank and other international institutions to address social safety issues. Innocent bystanders should not have to suffer the consequences of others' mistakes. Exim and OPIC are looking at how they can expand further their Asian programs. Conclusion There is a long way to go back to real equilibrium. President Clinton has outlined a clear path for ways the international community — including the United States — to resolve this crisis and thwart future crises. There are lots of other ideas out there. They need careful evaluation; but time is passing, confidence is eroding quickly, and we need to act — now. America's interests are at risk and we will continue to provide leadership in the recovery efforts. But responsibility also lies around the globe, firstly with other developed country governments, but also with those of developing countries, the private sector, and the international financial institutions. Some protest that the system is unfair. Yes reforms to the system are necessary, but these cannot be allowed to become an excuse for avoiding the domestic reforms that are needed now. The task we all face is critical. At risk are the gains so many have worked to make over the past several decades — gains that are both economic and political. Restoring macroeconomic stability, strengthening national financial systems, improving the efficiency of the international financial system, all these are tasks that will take immense amounts of energy on the part of the international community. Successfully meeting these challenges is critical to global prosperity and to each of our country's economic and political well-being for years and decades to come. I'd welcome your thoughts and comments. Thank you.