FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to represent the United States for the first time at this Annual Meeting of the ADB Board of Governors. I want to thank President Estrada for his welcome and the warm hospitality of his country. I also want to add my congratulations to President Chino for his election. Speaking personally, I look forward to working closely with him once more.

After several momentous years in which the Asian Development Bank has been justly preoccupied with the Asian financial crisis, the region served by the ADB now faces two priority challenges: First, to deepen the essential policy reforms necessary to lay a resilient basis for renewed prosperity. Second, to intensify the attack on the pervasive poverty which has increased due to the economic crisis, in this, the world's most populous region.

Although a good deal has been achieved, there is no room for complacency. Our gathering here is an expression of both our commitment to meeting ongoing regional challenges and our conviction that cooperative international action through multilateral institutions, such as the ADB, remains indispensable to our ultimate success. Commitment, conviction, and cooperation will be key as Asian Development Fund donors begin discussing a new replenishment later this year. A new replenishment provides the Asian Development Bank the opportunity to integrate in its own operations the development strategies and recently learned lessons that enjoy broad international support. The agenda must be ambitious. We must build for the ADB an operational framework that encompasses performance, transparency, good-governance, full participation, adherence to internationally recognized core labor standards, and solid environmental policies.

Mr. President, we are committed to working closely with you and the other shareholders to build a stronger ADB - one capable of meeting the challenges of poverty, as well as financial crises when necessary. Just as individuals and nations have the best hope for enjoying prosperity if they recognize the advantages of cooperation under a common set of norms and standards, similarly, the ADB's effectiveness will be enhanced by strengthening partnership, while simultaneously exercising its comparative advantage in a common framework with other MDBs. For this reason, we favor agreement on a memorandum of understanding between the ADB and the World Bank. We would note that such an agreement is being developed between the African Development Bank and the World Bank and that an agreement covering the Central Asian countries exists between the EBRD and the ADB.

Regional Assessment

As we look across the region, we see improvements brought about by difficult but necessary measures implemented in crisis countries and supported by the international financial community. It is likely that the economic decline in most, if not all, the crisis countries will bottom out this year. Most now enjoy substantially improved foreign exchange reserve positions, better external debt profiles, and some recovery of private capital inflows. The key now is to build on this foundation for stability and sustained growth through implementation of continued programs of reform that address the structural problems that contributed to the crisis. This process would be greatly assisted by continued growth and reform in China and the resumption of sustained growth in Japan.

Crisis Response: What Worked

Why have some countries apparently recovered faster than others? The answer to this question is complex, but I would submit that much of the explanation lies in the relative depth of each country's commitment to reform. Reform programs are inherently painful to implement, but temporarily deviating from them or delaying their implementation only prolongs and deepens the pain. It is inevitable that program alterations may be needed, and in most crisis countries, timely changes have netted improved results. The most successful and enduring policies are those that respond quickly or, even better, anticipate the dangers, thus preventing or minimizing a serious crisis. In the Philippines, initial quick reaction, including floating the peso and adjusting monetary policy, and more importantly, tightening prudential regulation of the banking system prior to the crisis, enabled our host country to weather the crisis relatively unscathed.

Once in a crisis, the key to restoring confidence is corrective policies that are initiated promptly and are applied consistently and credibly. Initially, the programs in Thailand, Indonesia, and Korea were unsuccessful in restoring private sector confidence. As a result, private sector outflows far exceeded program projections. Authorities in these countries were reluctant to tighten monetary policies, both before and after exchange rate pegs were abandoned. This initial vacillation magnified the difficulties of financial and exchange rate stabilization. It was not until early 1998, after Korea and Thailand had adopted more appropriate monetary policies and had taken decisive measures to address structural problems in their financial sectors that the won and the baht started to recover. In Indonesia, delays in decisive implementation of a credible monetary policy were costly, as were the many questions raised about the Indonesian government's commitment and capacity to implement structural reform. Only after strict monetary measures were implemented did the exchange rate begin to recover.

Some have criticized the international community for adopting an inflexible approach in dealing with the crisis in the Asian region, recommending stabilization policies that would have been better suited for Latin America in the 1980s than for Asia in 1997 and 1998. This criticism is difficult to reconcile with the oft-expressed view that the stabilization programs adopted to combat the crisis actually placed too much emphasis on structural reforms. Moreover, it fails to recognize two facts: First, the Asian financial crisis started in Thailand, a country that manifested most of the classic symptoms of macroeconomic imbalance. Second, as the crisis spread, policy prescriptions were adjusted to the changing conditions even though the adjustments may not have been quick enough for some.

Many of these same critics, however, argue that Malaysia's embrace of unorthodox policies such as capital controls has been responsible for its improving economic and financial situation. While it is certainly true that Malaysia's financial situation appears to have stabilized and private sector analysts are raising growth forecasts for 1999, the imposition of capital controls or other radical policies does not appear to be the primary reason. First, Malaysia entered the Asian financial crisis with stronger economic fundamentals and institutions, with a sounder financial system, relatively strong bank regulation and supervision, and relatively low levels of short-term foreign currency debt compared to its regional neighbors. Secondly, the controls were imposed after the ringgit was substantially devalued. Third, controls did not give Malaysia more flexibility to adopt stimulative fiscal and monetary policies than other countries had. The authorities' shift to more stimulative fiscal and monetary policies was similar in magnitude to the adjustments adopted in other crisis countries although interest rates have fallen much farther in Korea and Thailand. Fourth, the Malaysian government has pressed ahead with critical bank and corporate restructuring; capital controls have not been used as an excuse for inaction. These controls also were replaced relatively quickly with a more tax-based measure. That is not to say that imposition of capital controls will not have significant costs for Malaysia. The distortions caused by the remaining controls are likely to increase the longer they are maintained.

What Still Needs to Be Done and Lessons Learned

Much of the groundwork for Asian recovery has been laid. Most countries are now focusing on macroeconomic policies to foster recovery. More stimulative fiscal policies have been adopted, in part to permit increased spending on needed social programs. The restoration of financial stability has allowed monetary policies to be relaxed substantially as well, with interest rates now below pre-crisis levels in many cases. As recovery moves forward, an ever-present danger is complacency, particularly in the financial and corporate sectors.

• Many weak banks continue to balk at making new loans, and remain reluctant to take part in much-needed corporate workouts that would involve difficult write-downs of capital. Prolonging the problem results in insufficient corporate liquidity and a growing number of corporate insolvencies.

• Insolvent corporations, in turn, continue to consume precious national savings that could be employed more productively by viable firms. The result is further losses for the banks and greater need for additional banking sector re-capitalizations.

To support bank and corporate restructuring and to help revitalize Asia's private sector and restore growth, the United States and Japan launched the Asian Growth and Recovery Initiative (AGRI) in conjunction with the ADB and World Bank. A key component of the initiative is the Asian Growth and Recovery Program (AGRP), which will promote comprehensive and integrated strategies for bank and corporate restructuring, and mobilize new support to help finance the fiscal costs of bank recapitalization.

Complacency in the social sector is equally unwise. As the ranks of the poor have swelled due to the crisis, exceptional MDB financing helped to maintain a measure of protection for the most vulnerable groups in society and to prevent disproportionate cuts in programs. As growth returns, it is imperative that governments improve, expand, and target social safety nets to those most in need. The ADB and similar institutions should help governments to put in place such programs.

As we go forward, our attention should be redirected from responding to the immediate situation to laying the foundation for renewed economic development and to strengthening the international financial architecture. Renewed prosperity in the region depends, in part, on several of the region's largest economies playing leadership roles. A growing Chinese economy has been important to the region, and China's stated intention to maintain the current exchange rate regime has contributed. While China has so far avoided the financial instability which struck elsewhere, the country faces serious economic challenges. In the immediate term, Chinese policymakers must maintain growth and resist deflationary pressures through the judicious use of fiscal and monetary policies. Simultaneously, it is important that these immediate challenges not sidetrack them from pressing forward with the comprehensive structural reforms needed to sustain growth over the longer term: building a healthy financial sector, reforming state-owned enterprises, and creating a tax system that effectively and fairly raises sufficient revenues to support needed government programs.

Japan, as the region's largest economy, also has a unique and highly important responsibility. We share Japan's goal of supporting Asian recovery, and we are glad to be working together in the Asian Growth and Recovery Initiative (AGRI) which was announced at the APEC Leaders' Meeting in November. We believe that AGRI will make an important contribution to promote financial and corporate sector restructuring. Japan also is assisting other countries in the region through the New Miyazawa Initiative. Still, the most important contribution Japan can make to aid the recovery of the Asian region and the global economy is to restore sustainable growth in its own economy. Japan must persevere in using all available policy tools to revive its economy, and it must be a leader not a follower in finally repairing its ailing financial system. An economically sound Japan that provides growing, open markets to its neighbors is critical to the long-term stability and prosperity in the region.

ADB's Role and Operational Priorities

We envision the ADB to be an integral part of a stronger, better-functioning international financial system. A new ADF replenishment provides us the opportunity to sharpen and update our vision for the ADB and to continue to improve the efficiency of its development assistance. A full, satisfactory poverty reduction strategy for the Bank will be critical to members reaching agreement on an ADF replenishment. The ADB also needs to incorporate lessons learned in recent negotiations in other institutions and to adhere to and promote the updated features of the international financial architecture. As we promote good governance, transparency, participation and accountability around the world, so too it must be done both through and in the Bank itself.

First, we must address the needs of Asia's poorest. One billion of the world's poorest remain in the ADB's backyard, and the ADB's primary mission must be the promotion of enduring poverty reduction. The street children of Asia can make it if they try, but their odds will increase if the ADB can give them an effective helping hand. In this connection, we welcome President Chino's statement that poverty reduction is the over-arching objective of the Bank. The ADB's short-term response to the Asian crisis of providing finance for social safety net programs, especially for women and children -- which we strongly encouraged -- filled a critical gap. Moving forward, it is clear that a more comprehensive, long-term approach is needed. By investing in jobs for the poor, health, education, and safe water and sanitation, we make an investment in the healthy, productive workforce that is necessary for sustainable growth, and thus sustainable development. We are pleased that the Bank is producing a detailed strategy for poverty reduction. We believe it should include a road map of necessary policy reforms.

Second, good governance matters enormously for economic success. The documentation on this proposition is overwhelming. We believe there should be no further debate. The ADB and the other international financial institutions must address this issue resolutely and systematically in their lending and internal operations. Delivering effective assistance to those who most need it requires that recipients have sound policies and institutions without which a compelling case for substantial assistance cannot be made. Poor policies and pervasive corruption undermine equitable and sustained development in this and other regions, and it likewise undermines public support for development assistance. Development resources are too scarce to distribute to those countries that choose to disregard standard rules of governance while many citizens do not have access to basic services. We should all agree that the era of crony capitalism feeding off international public resources is over. Continued aid for those who consistently fail to adopt basic economic and governance reforms only hurts the economic prospects we aim to enhance.

We congratulate the Bank for the first important steps it has taken in this area by approving formal policies on good governance and anti-corruption. However, full implementation and constant refining of ongoing implementation is imperative. The ADB must convincingly take the next crucial step by systematically linking lending allocations to monitorable, transparent, performance criteria, which include governance.

We were reminded by the Asian financial crisis that good corporate governance also is an essential element of governance policy. The Bank has appropriately stressed good corporate governance practices in its financial sector loans; it must set a good example of transparency, accountability, and participation in its own corporate governance.

Good governance is also about making sound fiscal choices. The ADB, and indeed all the IFIs, need to work more systematically and effectively with borrowers to ensure that budget decisions are sensible and transparent, that non-productive spending, particularly for military purposes, does not come at the expense of Asia's poorest or most crisis-affected. Additionally, all fiscal choices should be fully understood by and accessible to the citizens whose lives they directly affect.

Third, we believe that the Bank has much progress to make in effectively addressing the critical private sector issues in the region. This component of the Bank's programs must be broader, stronger, deeper and supported with greater resources. This is particularly important in the post-crisis environment. We must remember that the private sector is the engine of job and income generation, and strong economies are built on the backs of small and medium-sized enterprises. These SMEs are labor intensive, and are adaptable to changing economic conditions, and they account for a large share of the GNP of the region. The Private Sector Group has an important role to play in mobilizing capital, working hand in hand with program and project departments.

Fourth, internationally recognized core labor standards should be incorporated into MDB programs and policies. Cooperation with the ILO should be increased and formalized, and analyses of adherence to core labor standards should be a key element of country assistance strategies. Other MDBs are embracing this policy orientation, and given the critical role of labor policies in the formation of sustainable development, these issues deserve to be central to the development agenda for the ADB.

Fifth, long-term sustainable development means addressing the serious issue of environmental degradation. Many Asian cities have dangerously high air and water pollution levels that impose significant health care costs. Taking these costs into account when making policy decisions on investments in energy, transport and water sectors makes good economic sense. We expect that the next generation of ADB environmental programs will address the root of the policy and structural causes of environmental degradation.

The Bank has clearly demonstrated that it has the capacity and will to respond quickly to difficult issues. The Bank's recent track record has been impressive, and several recent initiatives deserve recognition: strong policies regarding gender, NGOs, and indigenous peoples; the Law and Development Program; and a policy on information disclosure which is one of the best among the MDBs. This proven track record demonstrates that the Bank is well positioned to address the challenge of making itself a more poverty-focused, performance-driven institution, while still maintaining its capacity to assist its members facing sudden crises. In this regard, the Bank has to take steps to strengthen its income stream, in order to improve its financial position. We welcome the Bank's initiative to review the terms of the hard-loan window, a needed step toward sustaining the financial health of the institution. We strongly urge the Bank to move quickly to adopt an emergency lending instrument with higher terms and shorter maturities, designed for those middle-income developing countries that may be most vulnerable to future financial crises.

Closing

This Bank and the global financial system depend upon their multilateral character as one of their strengths. Both face challenges, but none that cannot be overcome through increased cooperation, commitment, transparency, and strong policies. The necessary policies and groundwork for recovery in Asia are being put in place. If the ADB draws upon the strengths of its many elements, including its shareholders and its highly qualified staff, through an open and even-handed process, it has the capacity to help bring renewed prosperity and sustainable broad-based growth to fruition in the region.