It is nine months since the troubles in Asia first hit the headlines with the devaluation of the Thai baht. News from the region is still filling the newspapers; not all of it is good. In some countries the outlines of a solution are visible. But the economies affected have a long way to go before stability and growth are fully restored.
The US's stake in this is huge. One third of its exports go to Asia-more than to Europe. Companies such as Intel, Boeing and 3M have already felt the impact of the crisis in reduced export orders. Americans today have nearly 30 per cent of their assets invested in the stock market -more than they have invested in their homes. Prolonged instability in Asian and other markets stands to have a direct impact on those assets.
Moreover, the US remains keenly aware of its core national security stake in the region. It has 100,000 troops based in Asia, 37,000 on the Korean peninsula alone; history has shown how financial instability can trigger broader conflicts.
There are big differences between the economies in Asia, but they share certain common features. The "Asian" model was built on high savings, high levels of education and hard work. But it also favoured centralised co-ordination of activity over decentralised market incentives. Governments targeted particular industries, promoted selected exports and protected industry. There was a reliance on debt rather than equity; relationship-driven finance rather than capital markets; informal rather than formal enforcement mechanisms.
This model has had important-and justly admired-successes. But it is difficult for economists to gauge how much of that success is due to the universal fundamentals of high savings and education, and how much to uniquely Asian practices. Even before the onset of the recent crisis, a reassessment from a number of quarters was under way.
Academic studies of Asia's growth record-pioneered by economists such as Alwyn Young and Paul Krugman-had begun to suggest that Asia's miraculous growth might owe little to sustained growth in productivity, and a great deal to rapid accumulation of labour and capital. At the same time, within Asia itself, Japan's disappointing economic performance had led to plans for a "big bang" liberalisation of the financial sector and repeated calls for deregulation of goods and services. In Korea, prominent observers (among them president Kim Dae Jung) published books calling for radical reform of the Korean economy: for an end to government-directed lending; and for opening up the financial system.
These long-term issues were conflated with short-term problems of macroeconomic management: the maintenance of mutually inconsistent monetary policy and exchange rate regimes; excess inflows of private capital channelled into unproductive investments; substantially reduced competitiveness; and a build-up in short-term debt.
These short- and long-term factors came together to produce a crisis; they were then aggravated by a collapse of market confidence. This resulted in a situation similar to a bank run-when fear that even a sound institution might fail can become a self-fulfilling prophesy.
The problems in Asia have something in common with nearly all financial crises: too much money borrowed, and used badly. But the Asian crisis does not have its roots in government improvidence causing excessive budget deficits, high inflation or insufficient saving. In contrast to the other recent crises, the problems to be dealt with in Asia are more microeconomic than macroeconomic and involve the private sector more than the public sector.
The aim of reform programmes in Asia must be to create a proper framework for private investment. This means preparing the ground for a new financial system: one in which lenders can put their trust in transparent, independent financial regulation and accounting standards; a system which rewards hard work, not hard graft, and which settles disputes in the courts, not the palace. The IMF-supported programmes in Thailand, Korea and Indonesia commit these governments to big steps in this direction; but rapid and credible implementation is the key.
Some believe that the world would be improved without the IMF-that it would be better if there was no collective capacity for international financial response to crises. Countries cannot be helped by the IMF if they are not willing to help themselves. But without the IMF, even countries committed to reform might face default, which could have a devastating effect on their own economies and raise the risks of contagion in other markets.
We cannot know what would have happened in Asia without the IMF. We cannot know what will happen in Asia in the months ahead. But we do know what happened in Europe in the early 1930s, when there was no IMF and no US leadership. Devaluation, deflation, contraction and widespread depression prepared the ground for the greatest conflict the world has ever seen.
Even some of those who support the IMF's existence have questioned its prescriptions in Asia. They argue that the programmes are excessively contractionary and focus too little on the need to restore growth. But the primary focus of these programmes is structural-the promotion of policies which will support growth by allowing markets to function. The main emphasis has not been on reining in public budgets.
The macroeconomic aspects of the programmes-including interest rate policy-are designed to balance the need to shore up free-falling markets on one hand, and the need to avoid further knocks to domestic demand on the other. There is no guarantee, in every case, that this difficult balance will be struck correctly. But IMF programmes are designed with one overriding aim: restoring growth as quickly as possible.
Other critics have, ironically, focused on the opposite concern: by providing financial assistance to these economies the IMF has let governments and investors off the hook, thereby encouraging them to behave irresponsibly in the future-what economists call "moral hazard."
As far as governments are concerned, it is clear that the long-term costs of these crises far outweigh the fleeting benefits of international support. The situation for investors is less clear-cut. It is certainly not our aim in the US to provide one penny to bail out private creditors who have made bad loans, or to prevent them from accepting the pain associated with restructuring. In fact, creditor banks and other institutions have suffered significant losses in these crises. However, support for economic growth and stability will sometimes unavoidably benefit private creditors. To an extent this has been true in Asia. But the alternative-forcing these creditors to take losses-would raise even graver risks for long-term stability.
Recent events demonstrate the need for evolution and change at the IMF itself. The organisation must adapt to a world which is dominated by capital accounts and in which transparency of international financial and economic data is a critical bulwark against instability. The IMF must build on recent efforts to pay closer attention to the needs of the poor; and encourage governments to cut unproductive spending, for example on the military. The IMF must also bring more of the values it stresses to its clients-transparency and accountability-to the organisation itself, with wider publication of IMF internal data and greater use of external evaluations.
If we are to keep up with the pace of change in the new global economy, we must update and improve the IMF-just as we must work to improve the entire international financial architecture of which the IMF is a part. The US is fully committed to that challenge. But not to support the IMF at this critical time would be like cancelling one's life insurance when one has just gone down sick. This is not a risk we should take.
