FROM THE OFFICE OF PUBLIC AFFAIRS September 23, 1998RR-2695 Mr. Chairman, members of this Committee, I am glad to have this opportunity
to discuss the recent financial crises in emerging markets, the implications for the United States,
and American leadership of international efforts to contain these crises and build a stronger, more
stable global financial system for the years ahead I. The Global Economic Situation A crisis that began in Asia more than a year ago is today having a substantial impact -- not
merely in the Asian economies but globally. The problems that were first seen in Thailand spread
rapidly to neighboring East Asian economies, and in recent months to Russia and to some extent
Latin America. The troubles of Thailand, Korea and others have in turn worsened, and been
worsened by, a further deterioration in conditions in Japan, the world's second largest economy,
which just recorded a third consecutive quarter of negative growth and is facing banking system
problems that are many times larger as a share of the economy than our own Savings and Loan
crisis in the early 1980s. Economists and historians will be debating the causes of these crises for many years to
come. But there is growing agreement on what the important factors were:
All of these factors have been contributing to financial crises and disturbances for many
centuries. But I think it is fair to say that they came together more virulently in these crises than
they have in the past -- something we can partly attribute to recent improvements in information
technology, which have raised the scale and speed of international flows, and to the development
of derivatives and other sophisticated financial instruments that increase the apparent degree of
liquidity in markets. The very dramatic withdrawal of capital -- a swing of more than 10 percent
of GDP in the case of several of the Asian economies -- and substantial movements in many
disparate markets suggest a contagion and generalization that may be leading to overreactions in
some cases. Yet as Secretary Rubin said last week: "credit and investment decisions need to be
made with careful analysis and judgment of the long term strengths and fundamentals of an
economy, and unaffected by the prevailing mentality of the moment." I do not need to remind this committee that containing these crises, and the losses in market
confidence that have accompanied them, is critically important to America's future. It is about
safeguarding American jobs, American savings and American national security:
While the fundamentals of the American economy remain strong, as Chairman Greenspan
recently reminded us, the United States cannot remain unaffected in a world that is experiencing
greatly increased stress. In a global economy, our future prosperity and security is inextricably
bound up with the prosperity and security of our allies and trading partners -- and that, in turn,
will depend critically on American leadership in the face of global problems and uncertainties.
That is why, since the earliest days of this crisis, we have worked, domestically and
internationally, to support the return of stability and growth in the countries in crisis and to
prevent further contagion in other markets. II. The United States Approach Our response to this situation has been rooted in a concern for America's economic and
security interests. It has rested on three pillars: First, strengthened policy in the major economies of the region in support of growth and
confidence, because no country will emerge safely from crises in an environment of regional
deflation and weak demand:
The second pillar has been the recognition that while the global economic environment is
important and international support can make a difference, countries shape their own economic
destiny. A strong domestic response by the countries affected is the absolute prerequisite for
restoring stability -- because any amount of financial support that goes into an economy will flow
right back out if policies are unsound and governments are not credible. That means sound
monetary and fiscal policies; that means policies to strengthen the financial system; and that
means structural reforms to open the economy, raise transparency and improve the functioning of
markets. Particularly at a time when money is flowing out of a country, it is critically important
to take steps to attract money in. The third pillar has been that conditioned international financial assistance can play an
important part where policy makers are committed to reform but need financial breathing space
to put reforms in place. Financial crises have elements of a self-fulfilling prophecy -- like bank
runs, everyone expects failure or everyone expects everyone else to expect failure, which leads to
a rush to be the first one out and thus causes failure. Temporary, conditioned support gives
countries a bridge to overcome this self-fulfilling prophecy and help restore stability. And here
the IMF has a critical role. The crisis is still very much an unfolding story, and very large challenges lie ahead. There is
no question that there is enormous economic and social distress being felt in the countries worst
affected. This is inevitable given the massive withdrawals of private capital that have occurred.
But it is encouraging that in those countries that were first hit and where policy has been most
determined there has been evidence of containment. Countries that have consistently followed policies that the IMF were able to endorse and
support -- specifically the Philippines, Korea and Thailand -- have begun to see signs of a return
to stability. Although there is clearly a great deal of work yet to do, in Korea and Thailand the
currencies have broadly stabilized, nominal interest rates are down in the low teens, and real
interest rates have fallen to well below pre-crisis levels. At the same time these countries are now
working to expand their fiscal policy to use the room provided by their sound policies for the
fastest possible return to growth. It is vital to remember that the distress and difficult outcomes being seen in Asia are not a
consequence of IMF policies or IMF finance. These are, rather, the attempts to palliate the true
cause of the distress: the withdrawal of private capital and declines in domestic confidence that
led to that withdrawal. Put simply, we must not confuse the doctor with the disease. In those
cases, such as Indonesia and Russia, where governments did not carry through on their policy
programs, inflation, interest rates and losses in output will certainly be much higher, and the
return of confidence is now that much more remote. To be sure, as countries choose their policies and the IMF makes judgments about what
types of programs it is willing to support financially, difficult questions of balance will inevitably
arise. Notably:
These issues of balance will no doubt be debated and there is no guarantee that the IMF will
get it precisely right on every occasion. But let me say that I have no doubt the situation over the
past year would have been much worse -- with greater devaluations, more defaults, more
contagion, and greater trade dislocations -- without the programs agreed with the IMF and the
finance it has provided. I might just add, Mr Chairman, that when the IMF supported Russia last July -- in the face
of what were clearly serious obstacles to carrying out effective policies -- it was taking a
calculated risk in defending the fixed exchange rate regime. It was a risk that in the end was not
rewarded but was justified, in our judgment, by the large stake that the world has in continuing
Russian reform. Russia today needs to build a political consensus behind policies of reform.
When Russia is prepared to move down that path, the United States and the international
community are prepared to support it. III The Way Forward Mr. Chairman, we noted some time ago that the financial strains being felt in Asia could
spread and have far reaching consequences for the rest of the world financial system. And
certainly, financial strains have increased in recent weeks -- to the point where they are as serious
globally as any we have encountered in a long time. In this context, the President in his remarks
in New York last week, and the G7 finance ministers and central bank governors' statement
released at the same time, have discussed how this approach can best be carried forward. First, recognizing that with inflation low or falling in most parts of the world, and the
consequent shift in the balance of risk in the global economy, we are working with our G-7
partners in an enhanced emphasis on implementing policies to promote sustainable global
growth. In this regard the President and Japanese Prime Minister Obuchi devoted a substantial
portion of their meeting this week to financial problems, with the President stressing our belief
that it is essential for the global economy that Japan swiftly infuse public money, on a
substantial scale with appropriate conditions, into its banking system. In our judgment this is the
only way both to maintain stability and provide for growth going forward. Second, we are focused on reinforcing the capacity of the international community to
provide financing to countries that are pursuing sound policies and are nonetheless affected by
contagion. Of course, adequate funding for the IMF is critical to this effort, and let me reiterate
the importance of Congress taking action. It remains a central plank of our approach to these
crises that the IMF cannot help countries that are not committed to helping themselves. But
where policy makers are committed, the IMF's involvement is central to an effective
international response. And today the IMF's resources are at historic lows. The Senate has twice now approved full IMF funding by large bi-partisan majorities. Let me
pay tribute to members of this committee for the leadership they have shown in supporting the
IMF requests and working with us on crafting tough but realistic reforms. At a time when the
markets are looking to see if the international community has the capacity to deal with these
crises, passage of IMF funding would send a critical signal. Third, in conjunction with the international financial institutions and the countries in the
region, we are looking at ways to accelerate the pace of comprehensive corporate and financial
restructuring in countries where there is a systemic problem -- notably in Asia where the severe
indebtedness of both the financial and corporate system is a serious barrier to recovery and where
addressing the overhang of domestic debt is essential. This was also an important area of
discussion between the President and Prime Minister Obuchi. Fourth, we are also working with the Multilateral Development Banks to provide increased
social safety nets in the countries in crisis to help the least advantaged citizens in those countries
who are experiencing hardship. As the President said last week, "if we want these countries to
do tough things, we have to protect the most defenseless people in the society and we have to
protect people who get hurt when they didn't do anything wrong." Finally, the unacceptably large number of major financial disturbances we have seen in
recent years suggests a need to give very serious thought to how the global financial system and
its institutions function with respect to preventing and responding to crises. This has been an
important preoccupation since the Naples Summit and has as a crucial element the bringing
together of both traditional and newer players on the international financial scene. Last year, under President Clinton's leadership, we launched an intensification of this effort
by convening a meeting in April of a broader grouping of 22 countries, including key developing
and emerging economies. Last week, he asked that Chairman Greenspan and Secretary Rubin
chair a second meeting of finance ministers and central bankers early next month to continue the
work undertaken by this grouping and to expand the reach of its efforts. At the April meeting,
ministers and governors created working groups that will shortly be coming forward with
concrete proposals for change in three areas. First, increased transparency and disclosure. Mr Chairman, if one were writing a history of
the American capital market I would suggest to you that the single most important innovation
shaping that capital market was the idea of generally accepted accounting principles. We need that
internationally, and we need it at the level of individual companies and financial institutions.
Crucial issues here include: ensuring that markets and policy makers have an accurate
understanding of the true reserve position of governments and the scale and maturity of a
country's external obligations; measures to increase openness about the underlying policy
process in individual countries; and steps to make the private sector more open in a world in
which a single financial and corporate institutions may have substantial cross-linkages with
markets and institutions overseas. Second, concrete proposals for how best to strengthen domestic financial systems and put in
place the legal and regulatory infrastructure to realize the opportunities of open capital markets
while handling the risks. This means "best-practice" models for supervising financial institutions
for developing a strong credit culture, including effective risk management procedures, and it
means finding the best ways to bring together the World Bank and IMF to help countries in their
efforts and for the international system to provide incentives for those efforts to be
substantial. Third, concrete proposals for more effective burden-sharing arrangements in the response to
financial difficulties, particularly at the domestic level, so as to reduce the scope for individual
failures to become domestic, systemic failures -- and for national crises to become international
ones. Among the crucial issues here are devising effective corporate insolvency regimes and
developing more effective mechanisms and institutions for assuring that creditors and debtors are
able to resolve problems fairly and cooperatively. Mr Chairman, I would expect that the review would also consider how the international
financial institutions' structure and programs can best be adapted to the kinds of crisis we have
seen in recent years. Here there is a growing consensus on a number of points:
More broadly, there are a range of ideas for reform of exchange rate regimes, the ways in
which capital flows or financial firms are regulated, or the creation of new institutions, which
may be important to explore. The task is not to deny the benefits of open, truly global capital
markets -- but to work out the best set of policies (international and domestic) for ensuring these
are safe and sustainable. IV Concluding Remarks Mr. Chairman, these are immensely challenging times in the global economy. But one thing
is clear: United States leadership has been indispensable during this crisis and our economic well
being and national security are critically at stake. We have pursued a sound and coherent
strategy, in concert with the IMF and our economic partners, while adjusting judgments and
programs when circumstances warranted. Looking forward, as Secretary Rubin has said, the key is for all countries to work together
and meet our respective challenges. For the countries in crisis, that means sustained adherence to
sound reform programs. For the major industrialized nations that means cooperating to spur
global growth. In particular, in Japan, the world's second largest economy, it means
implementing the policies needed to repair the financial system and achieve sustained domestic
demand-led growth. Finally, for the United States it means continuing to pursue sound policies at home to
maintain our strong economy. Most immediately, it means the imperative of approving full
funding for the IMF, which is needed for our own prosperity as well as for the rest of the world's.
In so many ways, the world's response to these crises looks set to determine the shape of the
global economic system of the next century. Yet our capacity to be influential on these issues will
be very much related to whether we meet our obligations to the IMF today. Thank you. I would
now welcome any questions.
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