Remarks by Dr. Sung-hee Jwa
President, Korea Economic Research Institute (Seoul, Korea)

Ladies and gentlemen, it is my pleasure to be a part of this conference today, to share my views and to listen to other views on the important topic chosen today. I would like to address two of the questions posed by this session that are both important and relevant to the overall theme of today's conference. The first is related to the question of whether the IMF and the World Bank should be more sensitive to social and political considerations of the countries that they help. In my opinion, the appropriate question is not whether they need to be more sensitive in the social and political sphere but whether they need to be more sensitive to the economic conditions of countries they are trying to help. Regarding the social and political considerations, it is needless to say that the IMF and the WB has to pay closer attention as policy prescriptions by these institutions after crisis-intervention do affect the status quo of the country and thus touch upon socio-political aspects. The second question is the issue of whether and how to change the existing international monetary arrangement as well as the system of international capital flow.

The answer to the first question is straightforward: of course they need to pay attention to the local conditions before pulling some old remedies as cure-all policy prescriptions. A case in point is what has happened in Korea since late last year. The high interest rate regime recommended by the IMF has remained in Korea longer than necessary and thus has aggravated a contractionary momentum which is behind the very serious current economic conditions. In retrospect, it was not a very professional approach either because it was not well thought out or because the policy measures were worked out by people not familiar with the Korean situation. The main point behind what I have just said is that whether you like a high leverage ratio or not (which characterizes almost all Korean firms), one has to be careful of the repercussions that prolonged high interest rates has on corporate sector with a high debt burden. While the IMF has been criticized for its high interest rate policy, it's role in reminding Koreans of fundamental reforms has been viewed positively.

Of course, the tasks we need to focus on now are to limit the spreading of financial market troubles and to take steps to introduce a measure of stability in the international capital markets. In this regard, the IMF and the WB still have important roles to play in both coordinating the support to be offered to countries that have been afflicted by the recent round of troubles, and in ensuring that the recipient countries do not expend the infused financial resources frivolously. Furthermore, the IMF and the WB need to make sure that the key conditions attached to emergency financial aid are observed by the recipient countries.

However, once the fire-fighting phase is over, it is then time to seriously consider what type of international monetary arrangements to have. Ultimately, the question about the appropriate role to be played by the IMF or the WB is inseparable from the second question I mentioned at the beginning about whether and how we are going to change the existing international monetary arrangement and the system of international capital flow.

We have experimented with some combinations of independent national monetary policy with a fully flexible exchange regime (i.e., like the system in the US), and a fixed exchange rate arrangement (i.e., Hong Kong, Argentina). Many countries followed an intermediate path of allowing different degrees of flexibility for their exchange rates while retaining control over their domestic monetary policies. On the capital flow side, a clear trend has emerged over time, allowing freer movements of capital across national borders, which, in fact, I strongly support.

Regarding the international monetary arrangement given the free flow of capital, the choice seems quite clear: either to adopt a fully flexible exchange rate system which affords the independence of sovereign monetary policy, or opt for some sort of internationally coordinated monetary policy which means the loss of independent monetary policy with a fixed exchange rate regime. I am well aware of the fact that either option entails perhaps too much for many countries. Excessive volatility that is likely to accompany the free floating exchange rate system as well as concerns about the price competitiveness of one's exports might prove to be too compelling to be ignored by policy makers to leave the exchange rate alone. On the other hand, the second option in turn asks the impossible of relinquishing sovereignty over one's national monetary policy. Well, indeed it is a matter of choice. If we agree that ultimately a freer flow of capital is good for improving the standard of living everywhere, then we need to consider all options about putting in a solid institutional framework. A hard choice between the two may be inevitable if we are to ensure free and orderly international flow of capital.

Otherwise, we will have to learn to muddle through dirty floating or pegged exchange rate system with some sort of capital controls and discretionary national monetary policy. This, I don't think should be an alternative choice for a long-term solution.

Recently when the economic policy makers around the world gathered at the IMF-IBRD annual meeting in Washington DC, improving transparency of economic management and timely and full release of economic data was emphasized. More complete disclosure of economic and financial data might be able to mitigate any future crisis. However, it may not be sufficient enough to prevent investors from taking speculative positions that help to destabilize currencies and financial markets. A lack of transparency sure does not appear to have been the catalyst that provoked investors to test the durability of Hong Kong's dollar-peg since summer 1997. It is more of testing the sustainability of the peg in a different political and economic environment.

The most recent round of FX troubles have spread to many countries around the world in a relatively short period of time and the contagion effect is quite visible. So it is not unreasonable to think that this could lead to serious repercussions in terms of imposition of restrictions on capital flows for many countries. The recent constrictive reaction seen in Malaysia could spread to different countries if timely and appropriate steps are not implemented. Thus, how improbable the choices may seem, the two options of the fully flexible exchange regime or the tightly coordinated monetary policy and fixed exchange rate regime, should be the starting point of our discussions about a changed or new system of international monetary arrangement and international capital flow.