FROM THE OFFICE OF PUBLIC AFFAIRS

Mr Chairman. I am pleased to have this opportunity to discuss recent developments in Asian financial markets and the closely related issue of ensuring adequate funding for the International Monetary Fund -- both of which I know have been of considerable interest to this committee and other members of Congress.

Today I would like to discuss the instability in Asia and the risks that a more prolonged crisis would pose to the United States; the Administration's strategy for restoring stability; and the critical need to support the IMF so we can respond effectively, not just to these crises, but to other possible crises down the road.

I. The Risks Posed by the Instability in Asia

As the President said in his State of the Union Address, the Asian economies are our customers, our competitors and our allies. The financial turmoil in the region will have an impact on the growth of the American economy, and the well-being of American workers, businesses and farmers. Our job is to ensure that impact is as small as possible.

Nearly one third of our exports go to Asia -- more than we send to Europe. Already major Fortune 500 companies such as Microsoft, General Motors and Boeing have warned of reduced export demand because of the instability in Asia, reduced demand that we can expect to mean fewer new jobs for American workers.

Our economy is in strong shape to withstand these and other short-term effects of the crises as they have developed thus far. But the potential costs will be much larger if these economies prove unable to restore stability and the crises spread to emerging markets in other regions -- markets which now account for more than 40 percent of our exports. Prolonged instability in Asian and other markets:

• could threaten American exports and the jobs that depend on them, leading to a cycle of costly devaluations and impeding open trade;
• could affect our own financial markets, and with it everything from investment in tools and equipment for workers to mortgages for new homes;
• and could raise serious concerns for national security, given the proven potential for financial crises to trigger broader conflicts. Under Secretary Eizenstat will be addressing this issue in greater detail.

In short, the risks of failing to respond to these crises -- the risks for our economy, the stability of our financial markets and our broader national security -- far exceed the risks of action. We can, and we must work with the International Community to help restore confidence and growth as soon as possible -- so that these nations can continue to be strong markets and stable allies for the United States.

II. The United States' Approach

Our approach to these events rests on four principles:

• first, that the major responsibility for resolving these crises rests with the countries themselves and the actions they are prepared to take.
• second, that the international community should provide temporary, conditioned financial support for countries as a bridge to recovery;
• third, that in the wake of these crises the major industrialized nations, particularly Japan, and the economies of the region must promote growth in their own economies to support the return of market confidence and growth;
• fourth, that we must act with a view, not merely to the present crises but to the kind of international financial system we want to build for the future, by fostering policies around the world to reduce the risk of contagion and prevent further crises.

Let me say a little about each of these, with a special focus on the first two, which rely heavily on the IMF.

1. National Policy

A strong domestic response is the absolute prerequisite for restoring stability. The reform programs we have supported in Thailand, Indonesia and Korea commit these countries to concrete actions to restore stability and lay a surer foundation for long-term growth.

While each program is tailored to address the specific causes of that country's crisis, the focus throughout has been on making the economy more market-oriented and better able to allocate capital and to allow market forces to operate. Important, long overdue, changes need to be made in the structure of these economies -- changes which have been welcomed, in many cases by officials in the countries themselves. The major reform areas include

• measures to strengthen the domestic financial system, through financial sector restructuring, improved transparency and supervision, elimination of the inter-relationships between government and business, and opening of domestic capital markets.
• structural reforms to break up commodity monopolies and open protected sectors to foreign competition.
• restoration of appropriate monetary and fiscal policies, and agreement on stable and transparent rules for policy makers for the longer term

Bearing in mind the strong interest of this committee in the trade aspects of these programs, let me say a little more on this subject.

Indonesia's stabilization package commits the government to eliminating a range of officially-sanctioned import and export monopolies, removing export taxes on resource products, reforming the government procurement process, and accelerating the pace of privatization. Tariffs on food imports have been cut to a maximum of 5 percent, effectively immediately. Similarly, the Thai program includes a greater emphasis on privatization, measures to reduce subsidies to state enterprises, and loosening of the limitations on foreign ownership and exchange controls.

For its part the Korean government has pledged, among other things, to eliminate a string of unfair subsidies to Korean exporters, ease up on import licensing and cumbersome customs procedures, end government-directed noneconomic lending and substantially ease restrictions on foreign ownership of Korean companies.

Mr Chairman, it is worth taking a step back to consider what these changes represent. The close and preferential relationship between the chaebols, the banks and the government has been one of the salient characteristics of the Korean economy for years. It is at the root of our persistent trade problems with the country -- resulting in poor market access, uneconomic investment and excessive concentration and excess capacity in key industries. At the same time, these practices have been very difficult to address using traditional trade policy tools. The reforms in the IMF program will go far toward breaking up this preferential relationship once and for all.

2. International Assistance

When -- and only when -- countries are committed to pursuing these strong policies, the international community, led by the United States, has a strong interest in helping them help themselves. By providing temporary financial assistance, we can give these economies vital breathing room while those vital reforms are undertaken.

Without this support, even those countries that are committed to reform might face default -- either at a government level or the private corporate level -- which could have devastating effects on their own economies and significantly raise the risks of contagion in other markets.

The IMF has been and must continue to be the central provider of such assistance, supported by additional help from the World Bank and the regional development banks. It should be noted that in responding to the recent crises in Asia the IMF has been the vehicle for a major multilateral effort to restore stability -- reflecting an unprecedented degree of international burden-sharing. In sharp contrast to the situation in Mexico, the International Financial Institutions have been responsible for the bulk of the assistance provided -- meaning very limited direct financial exposure for the United States.

We have joined other industrial countries in indicating a willingness to provide additional temporary assistance in some situations if a country is continuing with reforms and unexpected developments call for supplementary resources. To date, none of this "second line of defense" funding has been disbursed, and any disbursements that do occur would be highly short-term in nature and guaranteed.

3. Action by the industrialized economies and by the countries of the region

Strong domestic policies in the countries worst affected will be the key to restoring stability in those economies. But in an era of interconnected markets, other countries have a part to play in supporting a rapid return to growth -- and the continued expansion of trade. Given the high levels of regional trade and competition, the largest economies in the Asia- Pacific region have a special responsibility to pursue sound policies aimed at promoting their shared interest in monetary stability and solid growth.

With a balanced budget, the United States government is doing its part, by no longer soaking up $200 billion a year that could be invested in the global economy. Continued strong reforms in China will also be increasingly vital. When we talked recently with Zhu Rhongji, the Chinese Vice Premier, in Beijing we were happy to hear him reaffirm China's commitment to a stable exchange rate, and to dealing effectively with the economic challenges it faces. In the coming weeks and months, though, it will be Japan's turn to step up to the plate -- by acting decisively to stimulate growth and by coming to grips with the problems in its own domestic financial sector.

The industrialized nations can also respond more directly to the crises by helping to support trade flows in the region. There is a severe danger that the domestic recession in these economies will be prolonged by a shortage of short-term trade finance. Weighed down by debt, the financial system in some cases has simply ceased to function -- making it all but impossible for businesses to obtain credit to import vital goods and materials.

Our own Export-Import bank has led the world in offering substantially enhanced short-term export insurance in Korea and is exploring ways to extend this program to other Asian markets. Providing this support is truly a win-win proposition for the United States: it gives immediate to American exports and jobs, while at the same time speeding the long-term recovery of these important markets. Ex-Im is now working to enlist other export credit agencies in a multilateral initiative to support the region's import financing needs.

4. Long-term reform agenda

Mr. Chairman, recent events in Asia leave in their wake an important long-term agenda for the international community. This will not be the last financial crisis. But we need to work to reduce the risks of such events and manage them more effectively when they do occur -- we need, in Secretary Rubin's words, an international financial architecture as "modern as the markets".

President Clinton began this effort four years ago at a G-7 meeting in Naples. At the summit that followed in Halifax in 1995, we launched a broad international effort to strengthen safeguards in the global financial system. Two important parts of this initiative are an international program to strengthen disclosure and the development of core principles in supervision in emerging market financial systems.

To modernize our tools for dealing with crises, the United States has also taken a leading role in devising new approaches to the provision of external finance. Indeed, one outgrowth of this process, the Emergency Financing Mechanism of the IMF, has been a core element of the financial support programs in Asia.

At President Clinton's initiative, the United States will convene a meeting later this spring of finance ministers from around the world to continue these efforts and start developing a consensus on policies to deal with new challenges to the international financial system.

The crucial imperatives of this agenda include:

• promoting measures to make global markets function more efficiently, for example through increased surveillance and enhanced national supervision and regulation;
• increasing transparency and disclosure, for example of all encumbrances on foreign reserves;
• strengthening prudential standards, both globally and in individual economies
• improving domestic policy management, exploring ways to manage policy to help avoid crises and deal with crises that occur;
• strengthening the role of the international financial institutions in financial crises, to ensure that the international community can respond quickly and appropriately to problems and act to prevent their recurrence;
• ensuring appropriate burden-sharing by the private sector in the resolution of crises.

These issues are as complex as they are important. Given the high stakes involved, we cannot risk pushing through major reforms before the consequences have been thoroughly examined -- nor can we afford to leave the IMF ill-prepared to respond to this and future possible crises until these questions are resolved. However, it is important to note the important progress that we have made in recent months -- even in the midst of crisis -- toward some of those long-term reform goals:

• to promote transparency, as a condition for disbursements of financial support in Thailand, Indonesia and Korea, we strongly, and successfully, urged that governments publish the "Letter of Intent" outlining the reform measures agreed with the IMF.
• with the United States again taking the lead to ensure that the means of support match the situation, the most recent programs have also rested on the concept of supplemental reserve financing at a premium interest rate -- where the aim is to provide the necessary emergency finance and to maximize the private sector's incentive to raise funds for itself.
• by involving the foreign creditor banks in the resolution of the Korean crisis, we have supported an important innovation in the international community's approach to crises of this kind and helped catalyze a major private sector effort on behalf of restoring stability.
• in addition to pressing for the major financial sector strengthening included in the IMF support programs, we have reached agreement with Asian governments on the development of regional surveillance mechanisms to promote Asian financial stability and increase financial market transparency at a regional level.

To repeat, Mr Chairman, these and other steps must be seen as part of a rolling reform agenda -- in a sense, one that will never be completed. As long as the global economy changes, we will need to ensure that the international financial architecture changes with it.

III. Support for the IMF

Let me turn now to the immediate need to ensure adequate funding for the IMF at this critical time. On Monday the President asked, as a supplementary request, for Congress to approve supporting the IMF in two important ways: first, through an increase in our quota subscription, and second, by contributing to an augmented emergency facility, the New Arrangements to Borrow, to supplement the IMF's resources to deal with these kinds of crises.

Mr. Chairman, we have responded to these crises because they raise important risks for our core economic and national security interests, risks that will increase the longer the instability continues -- and the further it spreads. We must support the IMF as we work through these crises, and ensure it is ready to respond to future crises, because it is, quite simply, the cheapest, most effective way for us to promote those core American interests.

Fifty years of bipartisan support for the IMF has not cost the American taxpayer one cent, because it has not had a major default, and because its lending is backed by very substantial gold reserves. The IMF presently has $65 billion in loans outstanding -- and fully $40 billion in reserves. It operates much like an international credit union. We and other countries provide a line of credit, and when the IMF draws on our commitments, we receive a liquid, interest bearing offsetting claim on the IMF. That is why there are no direct budget costs. That is why our contribution does not increase the deficit, or impact other spending priorities.

By imposing conditions, the IMF supports the right policies. By injecting short-term finance it prevents further devaluations -- and supports the return of long-term growth. It promotes changes that are in our long-term interest: such as making these economies more open to foreign trade and reducing domestic subsidies. And it provides us maximum leverage: each dollar we contribute levers more than five from the rest of the world. Even with these new funds the IMF's resources would still represent well under 1 percent of global GDP -- little more than half what they were 20 years ago.

The IMF needs to be better governed. It needs to be more transparent in its operations and accountable for its decisions if it is to command the confidence of taxpayers and investors. These are aspects of the IMF that are quite appropriately the subject of Congressional examination. And let me be clear: these are aspects we plan to change.

A number of concerns have been raised about our continued support of the IMF. Let me take a little time to address some of these.

Excessive austerity?

There have been legitimate concerns that IMF stabilization programs in Asia have been excessively contractionary and focused too little on the need to restore growth and provide for rising individual incomes and opportunities in these countries.

The primary focus of these programs is structural -- on the promotion of policies that will promote growth by allowing markets to operate and market forces to operate. The macroeconomic aspects of the programs are designed to balance the imperative to prevent further declines in markets and a free-falling currency, on the one hand, and the imperative of avoiding further knocks to domestic demand, on the other. There is no guarantee that this difficult balance will be struck correctly. And as we go forward the United States will watching closely to ensure the right balance is being struck as conditions change and confidence is improved. But be clear: these programs are designed with one objective and one objective alone -- achieving the fastest possible restoration of growth.

Where a crisis has occurred and adjustments have to be made, it is crucial for us all to recognize that these changes have to be carried out effectively -- and equally critical that they be designed to promote an equitable return to growth. In fact, all of the recent programs have been designed to ensure that the necessary adjustments do not come at the expense of the poor:

• in the Indonesian and Thai programs, spending on health, education and social programs have been expressly protected from any fiscal consolidation, and where possible, efforts to target spending on the poorest segments of society have been intensified. In Korea, the program commits the government to strengthening the labor insurance system, and the promotion of active labor market policies to lessen the shock to employment due to the crisis;
• in designing programs to supplement the IMF program, both the World Bank and the Asian Development Bank have been acutely aware of the need to focus on the impact of policy on the most vulnerable, both in the new lending provided to these countries and through the restructuring of existing lending programs to promote urban and rural employment and basic health services. New World Bank lending to Thailand and Indonesia, for example, foresees upwards of $600 million in new loans for improving the social safety net in each of these countries.

Finally, and more broadly, we should remember that these programs center around the urgent need to restore confidence in financial markets -- because that is the critical first step to a recovery in growth and investment. In that sense they are aimed squarely at promoting the long-term interests of workers in these countries.

Insufficient concern for core labor standards?

A closely related concern about these programs has been that they fail explicitly to incorporate requirements to improve labor standards in these countries.

Establishing core labor standards and ensuring human rights are vital to successful development -- and they have been and will continue to be a critical priority at Treasury. In recent years we have made important progress in pressing these issues within the World Bank and other International Financial Institutions and we are committed to progressing further. To cite just two recent examples:

• we have secured a major World Bank effort to fight against forced and exploitative child labor, and successfully urged the World Bank to publish major policy paper on the subject and to strengthen its partnerships with the International Labor Organization and other labor organizations;
• and we have persuaded the IMF to institute a policy dialogue with the ILO and to undertake a pilot program of in-country consultations on labor market issues and worker rights.

In Indonesia, the United States Executive Director in the World Bank has specifically raised the issue of worker rights in Board Reviews of the Country Assistance Strategy for Indonesia, urging that the World Bank consider and better integrate core labor issues into its Indonesian programs and operations.

Our Executive Director to the IMF has also raised the question of Indonesian labor market practices in the context of the most recent financial package. And just last week, the United States Trade Representative raised worker right issues with officials in Indonesia, outlining an action plan for progress and setting benchmarks on freedom of association and the right to organize.

In Korea, with the strong encouragement of the IMF during their official negotiations -- and in addition to the commitments to strengthen labor insurance programs mentioned earlier -- the government has created a tripartite business-labor-government committee to negotiate the terms for the restructuring of Korea's chaebol-based industrial sector. This is a ground breaking achievement that puts labor directly at the table in designing the future shape of the Korean economy.

And yet, as Secretary Rubin has said, it is important to recognize that in these types of emergency situations, it is simply not feasible -- and almost certainly unwise -- to attempt to address these hugely complex issues at the same time as achieving all the steps needed to restore financial instability. To be effective, these programs have to focus on the immediate sources of the problem. They cannot be used as a vehicle to address the full range of other issues that are of particular concern to us, however appealing that possibility might be -- much less those of the 180 odd other IMF members.

Fueling moral hazard?

In the wake of these programs, an important concern has arisen that, by providing financial assistance to these economies, the IMF -- and with it the United States -- may have encouraged irresponsible behavior by governments and investors in the future (the problem of "moral hazard").

Where governments are concerned, all of the economies who have had to seek IMF assistance in recent months face months of severe economic distress and implementation of difficult reforms to restore confidence. Clearly, the overall costs of the crises will far outweigh the fleeting benefit of emergency support.

In the case of investors, the situation is less clear-cut. Creditor banks and other institutions can and have taken significant losses in the wake of these crises; and in Korea, especially, creditors have shared a good part of the burden for restoring stability. One Federal Reserve estimate suggests that investors could face losses of $700 billion following the decline in equity markets in these economies. Already, three major U.S. banks -- J.P. Morgan, Chase, and Citibank -- have reported that developments in Asia have had a substantial negative impact on their profits. And a story this week in the Financial Times cited a market forecast, which may or may not prove to be accurate, that European banks alone could face losses of $20 billion on their lending to Asia because of the crises.

However, it is true that in some situations providing support for countries can have the inevitable, and undesirable side-effect of shielding investors and banks from the full consequences of their actions. The trouble is that the alternative, of forcing these creditors to take losses, would raise even graver risks for long-term stability, not merely in these economies but around the world. Banks might withdraw from these economies -- and, perhaps, a great many other markets, undermining the continued flow of investment funds to emerging economies and, quite possibly, the stability of our own financial markets.

We can and must work to promote investor responsibility in this new global economy: but we must do this in a way that supports rather than threatens the long-term financial stability in which American workers and businesses have such an enormous stake. In the meantime, we cannot afford to leave the IMF poorly positioned to respond to another wave of instability in Asia -- or a different crisis down the road.

Imposing harsh outside remedies?

Finally, there has been widespread unease that, in designing these programs, the IMF -- led by the United States -- has imposed sweeping reforms without regard for the views and concerns of the governments that must implement them.

Few, if any, of the negotiations leading to the recent reform programs have resembled this description. In fact, the broad outlines of the program -- and a large chunk of the specific reform measures -- have almost always originated with officials in the countries themselves, many of whom have welcomed the opportunity to undertake long-sought reforms. Kim Dae Jung, the incoming Korean President published a book in 1996 making a compelling case for ending government-directed lending to industry, for promoting non-inflationary monetary policies, for keeping budgets under control, for reforming the chaebol, and for opening up these economies' financial systems -- all reforms which the IMF program will now help him to undertake.

Mr Chairman, there will always be room for disagreement about which policies are the right ones. And the United States will always have a stake in pressing for programs that reflect our core values: the importance of transparency, fighting corruption, promoting the environment and protecting core labor standards. But we will only have an effective voice in the IMF to ensure that it promotes the right policies -- and the IMF will only be able to help protect the financial stability we have a stake in -- if we do our part to ensure it remains adequately funded.

IV. Concluding Remarks

Mr. Chairman, these are serious crises that we have seen in Asia. Even if stability is now restored, the effects of the crises to date on the United States will be real. If the instability were to spread or intensify, the potential risks to American jobs, American financial markets and our national security could be grave indeed.

We are in a strong position to withstand the effects of these crises: our economic performance is the best in a generation and unrivaled among the major industrialized economies. The uncertainties in the situation are great: there can be no guarantee that our efforts to restore stability and minimize the effects on our economy will succeed. But -- given the risks involved -- we have a responsibility to do all we can to protect America's core economic and security interests, by responding to these crises and working to restore stability with the most effective mechanisms available to us.

To fail, at such a time, to fund the IMF adequately would be to take real risks. It would risk our not being able to respond with adequate financial support in the event that this crisis spreads. And it could risk a further shock to the confidence of international investors at a time of considerable market fragility. These are not risks we should take. They are not risks that the American taxpayer would want us to take -- especially when we can invest in the protection of the IMF at zero net cost to the budget.

I look forward to working with you, Mr. Chairman, with other members of this committee and with others in Congress as we work to ensure that the IMF continues to promote our core interests in the months and years to come. Thank you.