"Meeting the Crisis: What Should Governments Do?"
Thank you for this opportunity to 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.
Notwithstanding 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 class
-- who were the proudest champions of economic and political
openness -- are under siege.
The U.S. 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, South 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 U.S.) remain
cratered. Indonesia has taken some important steps within its IMF
program, and its currency this morning broke under 8,000. 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
The myriad of meetings two weeks ago in Washington -- the G-7, G-
22, 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.
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, 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
We want to accelerate technical assistance activities planned in
collaboration with the IFIs 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
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
U.S. 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.
I've addressed how the international community has confronted the
crisis and where that [fits] in the APEC context. Underpinning
this all is the necessity for the United States to take a
I often have been asked what, really, is the U.S. 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
U.S. 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.
Ex-Im and OPIC are looking at how they can expand further their
There is a long way to go back to real equilibrium. President
Clinton has outlined a clear path for ways [for] 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 --
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.
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