FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. I am delighted to have this opportunity to discuss recent events in Asia with such a broad and distinguished array of thinkers on these issues.

I would like to spend my time today discussing the short and longer term causes of the recent crises in Asia; the opportunity they present for putting Asia's growth on a more sustainable footing; and some of the implications for the International Financial Institutions.

I. Systemic Roots of the Crisis

In the wake of these crises there has been a great deal of discussion about the "Asian model". To the extent that there exists such a model -- given the enormous differences between the economies of the region -- it lies in a number of common features in their economic and financial approach, an approach that in many ways tracks the postwar development of Japan.

This was built on the fundamentals -- on high savings, high levels of education and hard work. But it was also an approach that favored centralized coordination of activity over decentralized market incentives. Governments targeted particular industries, promoted selected exports, and protected domestic industry. There was a reliance on debt rather than equity, relationship-driven finance not capital markets, and informal rather than formal enforcement mechanisms.

This model has had important and profound successes. And the performance of Asia has truly been spectacular. But it has been a difficult and ongoing question of interpretation quite how much of that spectacular growth was due to strong universal fundamentals, such as high savings and high levels of education, and how much due to practices uniquely Asian. What we can say is that even before the onset of the recent financial problems a reassessment was under way, not merely within American universities but within Asia:

• disappointing economic performance had led to plans for a "Big Bang" liberalization of the financial sector and repeated calls for sweeping deregulation;
• prominent Korean observer Kim Dae Jung -- now, of course, the president -- had published books calling for wholesale reform of the economic system: for an end to government-directed lending to industry, for non-inflationary macroeconomic policies, for reforming the chaebol, and for opening up the financial system.
• respected academic studies of Asia's growth record -- pioneered by Alwyn Young -- began to suggest that the miraculous growth of Asia might owe rather little to sustained growth in productivity and a great deal more to rapid accumulation of capital.

These longer term issues were conflated, in recent years, with a set of shorter term problems of macroeconomic management: the maintenance of mutually inconsistent monetary policy and exchange rate regimes; excess inflows of private capital channeled into unproductive investments; substantially reduced competitiveness; significant failures of debt management that led to unsustainable quantities of short-term debt. All of these elements -- short- and long-term -- came together to produce these crises, and were then reinforced by lack of market confidence so as to set up a situation with many of the features of a bank run.

This, then, is a distinct kind of crisis. It has a common element with almost all financial crises: money borrowed in excess and used badly. But it is also profoundly different because it does not have its roots in government improvidence. Relative to nearly all of the crises we have seen in recent years, the problems that must be fixed are much more microeconomic than macroeconomic, and involve the private sector more and the public sector less.

Another way to put this would be that the reforms are less about changing the short-term policy mix than they are about changing the long-term institutional environment. Short-term adjustments in policy can and have been needed to revive confidence and correct imbalances. But the overriding focus has been on addressing the same long-term challenge at the root of those earlier reassessments: the challenge of building a new system of governance better attuned to the demands of an integrated modern market economy. II. The Approach to Reform

We can see the core elements of such a response in the reform programs the International Monetary Fund, along with the World Bank and the Asian Development Bank, have supported in Asia. The goal in each area of policy is both to tackle the short-term problem of confidence and to clear the way for a new growth path built on private investment and individual opportunity.

Macroeconomic reforms have involved, not merely short-term adjustments to restore confidence and growth, but long-term reforms to make the framework for macroeconomic policy more transparent and accountable. Each of the programs commits the government to regular publication of foreign reserve and other data and greater public scrutiny of policy decisions -- both so as to build consensus and to reduce the scope for unpleasant surprises.

Financial sector reforms have envisaged, not merely restructuring of the financial system, but laying the ground for a new one. While attention has focused on the closure or merger of insolvent financial institutions, at least as important to the long-term resolution of these crises will be the commitment to build a new supervisory and regulatory infrastructure and foster modern credit evaluation and risk management techniques within private financial institutions themselves.

Corporate sector reforms have all involved a recognition that there need to be bankruptcy regimes in place, and system-wide improvements in accounting standards and corporate disclosure to facilitate the move to a more arms-length, market-driven investment culture. If one were writing a history of the US capital market, one of the most important innovations one would say had shaped that market would be the idea of generally accepted accounting principles. It is a minor, but not insignificant, triumph of the IMF program that when I and other members of the Administration were in Korea earlier this year, a teacher of night school courses in accounting told us he normally has 22 students in his winter term. This year he has 385.

Reforms of the role of government have sought, not merely an end to those public interventions directly contributing to the crisis, but fundamental change in what government is expected to do. The emphasis is on reducing direct public involvement in the productive sector -- as, for example, in the Korean pledge to eliminate non-economic lending to industry. And it has been on opening the economy to foreign participation and competition with sweeping trade and financial sector liberalization, both to improve the efficiency of the economy and to let long-term capital in.

But this is only one part of the story. The emphasis of these programs has been at least as much on improving the quality of government intervention -- to make it more transparent, less open to corruption, and more focused on the things that sustainable market-led growth depends on, but markets alone cannot provide. Most notably, all of the most recent reform programs include measures to improve the quality of the social safety net, and to maintain and improve government spending on education, health and other basic services.

It is arguable that reform would not be politically sustainable in these situations without an assurance that the pain of adjustment will not fall only on the poor. What we know for sure is that they would not be economically sustainable, in the long run, without these kinds of reforms. Years of research into the business of "picking winners" in development has given a clear verdict: when it comes to the long-term economic return, public investments in health and education and an effective social insurance system win out every time.

Decisively implemented, these changes will help address Asia's shorter and longer term imperatives: they will increase confidence and attract private capital in the short run. And they address the longer term problem of allocating capital on a more market-oriented basis. They are also important for the International Community, because an Asia that addresses these problems will be a stronger, more balanced contributor to global growth and trade. And, we should remember, they will offer the prospect of resuming sustained growth in living standards and opportunities in a region where two-thirds of the world's population live.

III The Role of the International Financial Institutions

This many-sided response is a response to the particular challenges facing Asian economies in these crises -- and in each case, to the specific circumstances of each country. But it is not an Asian response. Nor is it an Anglo-Saxon response. It is, rather, an effective response, grounded in the now very broad consensus in favor of economics based on markets -- and market-supporting institutions.

For all the debates we have seen recently about the proper role of the IFIs, they have focused to a very large extent on the means and modes of official assistance. The end goal, of laying the foundations for market-led growth, is no longer in question. What has been a matter of continuing debate and pressure on the part of the United States has been the desire to ensure this objective is being met as effectively as possible.

Let me just highlight three areas where we have pressed for change in areas that have been brought out with particular salience in the Asian case:

1. Laying the foundation for stable finance

We have pressed to ensure that the IMF would never again stand for "It's Mostly Fiscal", by working to adapt the IMF's policies and practices to meet the needs of a more integrated and market-driven global economy. For example:

• the US-initiated creation of the new Emergency Financing Mechanism, to provide for more rapid agreement to extraordinary financing requests in return for more intense regular scrutiny.
• by successful urging the IMF to take the lead in international efforts to promote greater disclosure of economic and financial data and improved banking supervision in emerging markets. More than 40 countries have already subscribed to the IMF's Special Data Dissemination Standard created in April 1996. And the IMF was closely involved in the development, by the Basel Committee, of Core Principles For Banking Supervision and Regulation that were formally approved by the G7 countries last year.
• and most recently, through the US-inspired Supplementary Reserve Financing facility to let the IMF lend at premium rates in short-term liquidity crises and improve borrower incentives -- a mechanism that grew out of recent developments in Asia and has played a major role in the IMF's assistance to the region.

Let me applaud the commitments that Jim Wolfensohn has made since becoming President of the World Bank to upgrade the organization's involvement and expertise in the area of financial sector reform -- if there is one area where I welcome a competition among the IFIs it is here. And indeed, a large, in many cases the major portion of new ADB and World Bank lending to Korea and Thailand in response to the crises has been focused on this sector.

2. Greater Emphasis on Good Governance

The Asian crises have brought out even more clearly what Jim Wolfensohn and Michel Camdessus had already recognized: that good governance is a core institutional underpinning for growth. With strong United States urging and support, both institutions have rightly been moving toward making reduced corruption as central to their assessment of countries as more traditional, narrowly economic concerns such as tariff reform and tax administration.

Putting the fight against corruption at the heart of development programs is an economic as well as an ethical imperative. Corruption results in distorted allocation of resources. And new laws and supervisory systems will do little to safeguard stability if there is no credible -- and honest -- authority to enforce them. As we are learning, any country's capacity to take on major reform challenges such as those faced in Asia will depend critically on the credibility of its policy makers and public institutions -- credibility that corruption fatally undermines.

It is my hope and expectation that there will be a great deal of further attention given to this issue in the months ahead. But as you know, promoting good governance does not only, or even mainly, involve "anti-corruption" measures. Greater transparency and accountability of public institutions, the elimination of cartels, subsidies, trade restriction and other distortions -- all of these will have a direct effect on the scope for cronyism and corrupt practices, and a direct, and positive long-term effect on growth. The proposal for an IMF code of fiscal transparency provides just one example of ways that the IMF could press governments to move further in this area in the future.

3. Greater Emphasis on the Social Implications of Reform

A concern with the quality of public spending -- as well as the absolute quantity -- has been a long-running object of United States pressure on both the IMF and the World Bank. We have pressed the IMF to pay closer attention to the needs of the poor in designing adjustment programs, to encourage cuts in unproductive expenditures such as military spending and shifting of more resources to primary education, health care and essential public investments. Since 1990 military spending has declined from 5.5 percent to 2.2 percent of GDP in program countries, and has declined as a share of government spending while social spending has increased.

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 in 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. Planned 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.

There is a broader point that needs to be made in these discussions. We do not emphasize financial stability for its own sake. Stabilizing capital flows is a means to a more ultimate objective: of increasing living standards and economic opportunities for all of the world's population. Yet in working to promote free flows of capital we will not and cannot allow ourselves to get caught in a race to the bottom -- a bottom in which governments cannot promote fair taxes, uphold fair labor standards or protect the environment.

That is not the world we want to build. It is not the world we are building. That is why we are working with other countries to promote global cooperation against corporate and legal tax havens. That is why we are working actively in the OECD on the issue of tax competition. It is why we have worked, within the IMF and the other IFIs to ensure that the concerns of labor and the environment get a fair hearing in devising reform programs and sustainable development strategies. And it is why fair labor and environmental standards have played a core role in our bilateral and multilateral trade liberalization initiatives.

IV The Immediate Need to Support the IMF

The crises have brought home the absolute indispensability of the IMF as the core provider of emergency, conditioned international support to countries in financial difficulty. Long experience has taught that countries cannot be helped by the IMF -- or, indeed, any of the multilateral institutions -- if they are not willing to help themselves. But without the IMF, even those countries that are committed to reform might face default -- either at a government level or through the failure of the financial system as a whole -- which could have devastating effects on their own economies and significantly raise the risks of contagion in other markets.

It has rightly been said, in this context, that if the IMF did not exist we would have to invent it. But of course, we do not need to imagine such a possibility, we can simply look at the history of the late 1920s and early 1930s, when there was no collective response, and no United States leadership to address serious financial problems, and lenders and creditors were left to sort things out by themselves. The result was a vicious cycle of devaluations, deflation and depression, which laid the ground for the greatest conflict the world has ever seen.

For all the controversy surrounding the IMF in recent months, it is striking that relatively few of the critics -- more than one perhaps, but it is fair to say relatively few -- have consistently suggested that there should be no IMF to respond to these situations. The call, rather, has been for a different IMF.

We agree on the need for change at the IMF. Indeed, we have done much to change it and point it in new directions these past few years. And we will be keeping up the pressure for change because there is -- there will always be -- room for improvement at the IMF, and every one of the IFIs, if they are to be up to the challenges of a fast-changing global economy. But -- leaving aside, for a moment, the merits of the particular reforms being called for -- there is a curious recklessness in the proposition that to make the IMF do its job better we should jeopardize its ability to do it at all.

Without new resources, the Fund's capacity to respond to future outbreaks of Asian flu -- or other crises that may arise down the road -- is very much in doubt. We must and will continue to equip the IMF -- equip all of the IFIs -- to meet the demands of a demanding new world. But we must not, and will not, do this in a way that undermines the very international financial stability we are seeking to promote -- and in which our economy has such an enormous stake. Thank you.