FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to represent the United States at this 31st Annual Meeting of the Asian Development Bank.

Since our last meeting, we have faced what may prove to be one the most difficult and complex financial challenges in the post-war period.

The Asian Development Bank, under President Sato's leadership, has been central to the international community's response to the crisis. By responding quickly, with considerable financial force, to support reform programs targeted at very specific policy challenges, the ADB has played a major role in helping to lay the foundation for a return to stability and rising incomes.

The Challenges Ahead

We are now beginning to see some initial signs of progress towards stability in the Asian financial markets. The macroeconomic policy frameworks now in place in the countries in crisis are supporting a recovery in confidence. Reforms to strengthen the financial sector are beginning. The currencies most affected by the initial crisis have appreciated significantly from the lows and are now exhibiting some signs of stability. Some countries are beginning to regain access to the private capital markets. Outside of Indonesia, the anticipated acceleration in inflation has been contained to moderate levels. External imbalances are adjusting very quickly. In Thailand and Korea, short-term external debt is being reduced and international reserves are being rebuilt.

Despite these encouraging signs, we are still at an early stage in the resolution of this crisis. Formidable challenges lie ahead, as the Ministers and Central Bank Governors of the countries affected know better than anyone of us. These are some of the most compelling challenges.

1. Sustaining a strong macroeconomic policy framework and the reform effort.

The paradox of the recovery process is that each step toward apparent financial stability will bring escalating political pressures to prematurely relax the macroeconomic policy stance which would only prolong the pain of adjustment. It is important that we support these governments resistance to this pressure. A rush to relax policy or to arrest the consolidation in financial and corporate sectors that is now underway would risk jeopardizing recovery. The markets are more likely to penalize than to reward any signs that politics are reasserting their claim on economic policy. Strengthening the independence of central banks in the region would make an important contribution to this effort. Sustained, credible commitments to the reforms necessary to restore private market confidence are the only viable way to quick recovery.

2. Addressing the social consequences of the crisis.

Prospects for recovery in the region will depend in part on whether the governments are able to generate and maintain the broad-based popular support necessary to sustain reforms. And this in turn will depend in part on whether they are able to cushion the impact of adjustment on the poorest segments of society. This is why it is so important that the IMF has agreed to adjust fiscal targets as the crisis has deepened, and to encourage governments to protect social programs from expenditure cuts wherever possible. This is why it is so important that the World Bank and the ADB have targeted assistance at projects that are employment intensive, support humanitarian assistance, and strengthen the social safety net. And this is why we believe it is important to encourage the IFI's together to work with the labor community to shape reform programs and to advance core labor standards in the region. We hope the ADB can play a particularly active role in this area.

3. Strengthening national financial systems.

Restoring the capacity of the financial sector to finance investment and trade will remain the dominant challenge of governments across the region over the medium term. A successful strategy will require decisive actions to restore the confidence of depositors, to close weaker institutions and consolidate the system, to sell the assets underlying bad loans, to recapitalize remaining institutions, to strengthen disclosure and prudential standards, to remove the supervisory authorities from political control, to end direction by the state of private lending decisions, to design and adhere to effective exit strategies from broad guarantees of bank liabilities, and to build the capital markets as a complement to bank intermediation. History has shown that gradualism is not an option that the countries in crisis can afford, unless they are prepared to tolerate a protracted damaging burden on future growth. The ADB, working closing with the IMF and the World Bank, remains at the center of this effort.

4. Corporate Restructuring.

Even a successful program of financial restructuring will not eliminate the need for a wrenching restructuring in the over-leveraged corporate sectors that exist in many of the economies of the region. This process will be easier and more efficient where the market is allowed to work, where bankruptcy and insolvency regimes are made to function effectively, where equity holders, managers, and creditors are made to bear the consequences of failure, where new investment is encouraged, not deterred, and where strong corporate governance principles are put in place. Here, the IFIs need to be particularly careful not to support efforts by governments to sustain firms that are not financially viable on their own, either directly with multilateral resources or indirectly. We complement the ADB for its work to promote corporate governance and legal frameworks for corporate restructuring.

The Role of the International Community

The international community has a major interest in seeing an early return to growth and rising living standards in the region. In support of the reform programs adopted by the countries in crisis, we have together mobilized substantial amounts of conditional financial assistance. We have provided humanitarian assistance where necessary to help ensure that the people of the countries affected have access to basic necessities of food and medicine. We have provided support for an early resumption of trade finance that is so critical to the recovery process.

This effort has involved an impressive global coalition of governments, which is appropriate given the global scale of the risks involved.

One of the most important contributions the major economies can make to this region is to provide a supportive economic environment a strong macroeconomic policy and financial environment that can provide growing markets for the exports of the region and strong private flows of finance. In this context, we welcome Japan's recent announcement of a substantial package of fiscal measures to strengthen demand. We hope the Japanese government will move quickly to put in place these measures along with additional actions to open its markets and strengthen its financial system that can help provide the basis for the strong, enduring domestic demand led recovery that is so critical to recovery in Asia.

Strengthening the International Financial System

As we support efforts by countries in the region to resolve the current crisis, we need to move ahead to explore changes to the international financial architecture that could help reduce the risk of future crises and improve our capacity to respond to those that occur.

The crisis has already been the catalyst for a number of important changes to the system, including the creation of the IMF's supplemental reserve facility, the establishment of substantial, fast disbursing loans by the MDBs, and some innovative solutions for involving the major private financial institutions in crisis resolution.

We are now involved in a variety of fora trying to develop concrete proposals to address the risks in the system. This month in Washington, we launched a global effort, with initiatives to improve transparency and disclosure, to strengthen financial systems, and to reduce moral hazard and increase private sector burden sharing.

This will be a difficult and complicated process. The countries in the region have a major role to play in contributing to this effort.

Policy Challenges for the Bank

Notwithstanding the recent challenges and responses to the crisis, the Bank's main function must remain that of supporting long-term sustainable development initiatives to improve living conditions of the people of Asia, and to strive towards the goal of poverty alleviation. Additional challenges still need to be addressed:

The Bank must continue to strengthen its efforts to select projects and sectors based both on past performance and on countries' commitment to policy reform. The selectivity process needs to be based on clear and monitorable performance indicators.

Many of us have noted how crucial good-governance is for sustainable development. This institution has been proactive in the area of good-governance, leading the MDBs with a Board-approved policy in 1995. We welcome the need for a policy on anti-corruption to complement the good-governance policy, and we hope the new policy will not shy away from key issues, but will ensure that country operation strategies address corruption, and that the level of corruption and lack of progress in good-governance will be considered in Bank assistance. The policy should enact procurement changes which help ensure that MDBs rules and documents are uniform and of the highest standard.

The private sector will be the engine of Asian recovery. The ADB has improved private sector operations considerably in recent years, but needs a more forward-looking strategy that: (1) substantially increases resources available to private sector operations; (2) allocates more staff to a reorganized private sector department; and (3) fully integrates private sector strategy into country operational strategies and programming.

The Bank has begun to take important steps towards elevating the importance of core labor standards in its work, most recently by prohibiting child labor in the Export Finance Facility to Thailand. We hope the Bank will move forward to incorporate core labor standards into country operations. Better integration of social issues, including gender, must also be a priority.

The Emerging Asia study recognized that environmental protection should be better mainstreamed into Bank operations to ensure sustainable growth. The next generation of environmental programs should get to the root of the policy and structural causes of environmental degradation, such as sustainable resource use and widespread application of clean technologies.

Transparency is clearly an important part of well functioning markets, and is also key to successful operation of the MDBs. The ADB's Information Disclosure Policy is one of the better such policies among the MDBs. We complement the ADB for releasing its country strategies to the public, and urge other MDBs to learn from this example.

President Sato recently recognized the need for a review of current loan charges, which will not provide adequate income after 2000. Across the MDBs, we think it is important that charges be adjusted to provide adequate income to meet the costs of: reserves, administration, cover concessional lending, and other loan funds.

There are two issues in the ADF-7 replenishment which require attention: (1) The ADF-agreement directs the Bank to transfer net income to the ADF when such funds are available after making provisions for reserves and TASF. We are disappointed that nothing from the Bank's 1997 OCR net income was transferred to ADF. (2) The ADF-7 replenishment identified wasteful military expenditure as an impediment to growth. UN Secretary General Kofi Annan has recognized the importance of this issue, and we, too, believe it must become a much higher profile issue. An important first step, and one that the Bank should recognize, is that governments receiving Bank assistance should submit their military budget for independent, professional audits and those audits made available to civilian authorities. This will help ensure that fungible funds from the MDBs are not used to augment military prowess of developing countries.

Conclusion

This Bank, under President Sato's strong leadership, has undergone significant transformation from a project finance institution to more of a full fledged development institution with emphasis on policy dialogue and increased focus the private sector. This institution is widely regarded as the most efficiently run development bank. This reputation is well deserved. There are a number of important issues where the ADB has lead new initiatives at the frontier of the development banks governance is a good example. We hope the Bank will move forward in other areas as well to meet the development challenges and financial risk in this new era of globalization.