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 effects on our economy.

Today I would like to focus my testimony on the Administration's strategy for restoring stability in Asia. I would also like to speak about the critical need to support the IMF so we can maintain our capacity to respond to financial crises around the world.

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 is affecting growth in our economy, and thus is affecting the well-being of American workers, businesses and farmers. Our aim is to restore stability for these key markets as soon as possible.

Nearly one third of our exports go to Asia -- more than we sell to Europe. Already many small businesses and some major Fortune 500 companies are seeing reduced export demand in the wake of the instability in Asia. Reduced demand translates into fewer new jobs for American workers.

Our economy is in strong shape today, so we can expect to withstand likely short-term effects of the crisis as it has unfolded thus far. But the costs could be much larger if Asian economies prove unable to restore stability and if the crisis were to spread to emerging markets in other regions. Prolonged instability in Asian and other markets could:

• lead to a cycle of competitive depreciation and trade barriers;
• threaten American exports and the jobs that depend on them;
• affect our own financial markets, imperiling those who rely on them for investment finance, personal incomes and mortgages for new homes; and
• raise national security concerns, if the financial crisis were to lead to broader conflicts. Under Secretary Eizenstat addresses this risk in some detail in his testimony for today's hearing.

In short, the risk of failing to respond to this crisis -- the risk for our economy, the stability of our financial markets and our broader national security -- far exceeds the risk 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

As Ambassador Barshefsky mentioned earlier, the U.S. economy is strong and our ability to weather the Asian crisis is better at this time than virtually any other time. However, we are highly integrated into the global economy and rely upon these markets for a significant share of our exports. Therefore, it is in our interest to strengthen the markets in Asia. Our approach rests on four principles:

• first, the major responsibility for overcoming crisis rests with the countries themselves and the actions they are prepared to take;
• second, the international community should be prepared to provide temporary, conditioned financial support for countries to provide breathing space for carrying out reforms;
• third, the major industrialized nations, particularly Japan, must promote balanced growth in their own economies to support the return of market confidence and to help accommodate transitional trade imbalances in crisis-affected countries; and
• fourth, the architecture of the international financial system must be modernized to make us better able to prevent and manage crises.

Let me give you a more detailed explanation of these principles, focussing on the first two, which involve the IMF.

A strong domestic response in the countries facing crisis 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 economies 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:

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

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

As part of its IMF program, the Korean government has pledged, among other things, to eliminate subsidies to Korean exporters, ease up on import licensing and cumbersome customs procedures, end government-directed non-economic 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 relationship between the government, the banks and the chaebol conglomerates has been one of the salient characteristics of the Korean economy for years. That relationship has been at the root of our persistent trade problems with the country, because it resulted in poor market access, uneconomic investment, excessive concentration, and excess capacity in key industries. Tackling these practices has been very difficult using traditional trade policy tools. That is because these practices could not be changed without altering fundamentally the relationship between the government and business. Now, President-elect Kim Dae Jung has embraced to an IMF program that aims not only to overcome Korea's financial crisis, but to break up this preferential relationship once and for all.

More broadly, the design of reform programs and the provision of assistance is centered around the IMF. That is why we ask you to support two critical requests: an increase in our IMF quota subscription, and U.S. participation in an augmented back-up facility, the New Arrangements to Borrow, to supplement the IMF's resources. These additional resources need to be put in place as quickly as possible to enable the international community to be in a position to respond to any worsening of this crisis, or to deal with any future crisis that might arise. The likelihood of such developments may be small, but the consequences for America would be large. We cannot afford that risk. Moreover, failure to provide these resources could shake confidence in American leadership in the global economy just at a time when confidence and American leadership are so important in re-establishing stability in Asia.

The IMF has been and must continue to be the institution we rely upon to support countries with severe balance of payments problems. Its conditional finance, bolstered by additional support from the World Bank and the regional development banks, is key to our approach to crisis management. Moreover, our reliance on the IMF and other international financial institutions has ensured international burden-sharing. In contrast to the Mexican support program three years ago where the United States took the lead, the international financial institutions have been responsible for the bulk of the financing provided.

The industrialized nations are also directly responding to the crisis by helping to support trade flows in the region. At present domestic recession in the affected Asian economies is being exacerbated by a shortage of short-term trade finance. Weighed down by debt, some financial systems virtually ceased to function -- making it all but impossible for businesses to obtain credit to import vital goods and materials.

Our own Export-Import Bank is leading a global effort to provide needed trade finance. Providing this support is truly a win-win proposition for the United States: it gives immediate protection to American exports and jobs, while at the same time speeding the long-term recovery of these important markets. Ex-Im has offered enhanced short-term export insurance in Korea and recently announced $3 billion in additional loans and loan guarantees for sale of American products to Korea, Thailand and Indonesia. Other export credit agencies have also joined in the multilateral initiative to support the region's import financing needs.

III. Long-Term Agenda

Mr. Chairman, recent events in Asia leave in their wake an important long-term agenda for the international community. We need to work to reduce the risk of financial crisis and learn to manage them more effectively when they do occur. We need, in Secretary Rubin's words, an international financial architecture as "modern as the markets it serves."

President Clinton began this effort four years ago at the G-7 Summit in Naples. The next year in Halifax, we launched a broad international effort to strengthen safeguards in the global financial system. Two important parts of this initiative were an international program to strengthen disclosure and the development of core principles for supervision of emerging market financial systems.

The United States continues to take a lead role in modernizing our tools for dealing with the crisis. One outgrowth of the Halifax process, the Emergency Financing Mechanism of the IMF, has enabled the institution to respond quickly to problems in a number of Asian countries. More recently, the IMF membership agreed to establish a new set of financing parameters, through the Supplemental Reserve Facility, which provide for shorter maturities and premium interest rates on exceptional programs -- this facility is being utilized for much of the program for Korea.

At President Clinton's initiative, the United States will convene a meeting later this spring of Finance Ministers and Central Bank Governors from 22 countries to continue these efforts and start developing a consensus on policies to deal with new challenges to the international financial system. A week ago, Deputy Secretary Summers held a productive, preparatory meeting with his counterparts from these countries. And just last weekend, the G-7 Finance Ministers discussed the subject of modernizing financial architecture in their meeting in London.

In shaping that agenda, we aim:

• to promote measures to make global markets function more efficient, for example through enhanced surveillance and enhanced national supervision and regulation;
• to increase transparency and disclosure, including for a broader range of central bank and commercial bank data;
• to strengthen financial systems in emerging markets and globally, for example, through strengthened banking supervision and wider adoption of Basle Core Principles;
• to improve domestic policy management in emerging market countries;
• to strengthen the role of the international financial institutions in preventing and responding to financial crises; and
• to ensure that the private sector plays an essential role in the resolution of crises.

These issues are as complex as they are important. Some will take time to work through and then to reach consensus with others in the international community. 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 until these issues are resolved.

We are already making progress -- even in the midst of crisis -- on some items in this agenda:

• to strengthen crisis prevention in the future, we have reached agreement with Asian governments on the development of a regional surveillance mechanism to promote Asian financial stability and increase financial market transparency.
• to promote transparency, as a condition for disbursements of financial support in Thailand, Indonesia and Korea, we strongly, and successfully, urged that governments publish their "Letter of Intent" outlining the reform measures agreed with the IMF.
• to reduce moral hazard, we created a new IMF lending facility (mentioned earlier) under which much of the IMF financing is provided at shorter maturities and a premium interest, increasing the incentive for borrowing countries to restore their creditworthiness quickly and regain access to private capital markets.
• to enlist the private sector to play a greater role in crisis resolution, we catalyzed a major private sector effort to extend credit maturities for Korean commercial banks.

To repeat, Mr Chairman, these and other steps must be seen as part of a rolling but accelerated reform agenda to which we are fully committed as an urgent priority.

IV. Support for IMF

Mr. Chairman as I stated earlier, we need to ensure adequate funding for the IMF at this critical time. The President asked, as a supplementary request, for Congress to support 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.

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 this crisis, and ensure it is ready to respond to any future crises, because it is, quite simply, the cheapest, most effective way for us to promote those core American interests.

Without the IMF, at times of crisis, there would be greater pressure on the United States to act unilaterally with taxpayer resources to protect our interests without the global leverage the IMF provides.

Today, as much as when it was established with U.S. leadership more than 50 years ago, the IMF acts to promote out economic values and interests. The IMF helped Poland recover from the collapse of communism and become one of the fastest growing economies of Europe and brought Russia back from the brink if hyperinflation. In Argentina, the IMF supported Argentina's economic transformation from a country characterized by anemic growth and hyperinflation to one that enjoys strong growth (8% in 1997), near zero inflation, declining fiscal deficits, and a more private-sector oriented economy. And in Uganda, it has helped promote ten years of successful economic reforms which have generated average annual growth rates, in real terms, of over six percent a year.

By imposing conditions, the IMF supports the right policies. By injecting short-term finance it prevents further currency depreciation -- 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 four to five from the rest of the world. Even with these new funds, the IMF's resources would still represent well under half a percent of global output, less than half of what they were 15 years ago (1983). In relation to private capital flows going to developing countries they are one-twentieth as large as they were 15 years ago.

I thought that it may be helpful for me to say a few words about the financing structure of the IMF. In some ways, the IMF operates like a credit union. We extend a credit line -- for most of our quota subscription and for our proposed NAB commitment -- which the IMF can draw on. Any drawing by the IMF gives us a claim -- not unlike a deposit -- in the IMF, which is of equal value, pays interest, is supported by over $30 billion in gold, and which we can withdraw essentially on demand if necessary. For these reasons, U.S. participation in the IMF is treated as an exchange of financial assets. U.S. transfers to the IMF are not scored as budget outlays, and do not come at the expense of domestic programs.

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

Some have expressed the concern 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 hardships that have come with the "slowdown" in growth in Asia stem mainly from domestic policy mismanagement and the ensuing loss of market confidence, not from the involvement of the IMF. The IMF has offered finance and, in Korea, Thailand and the Phillippines, has triggered a restoration of confidence that is already lessening the burden of adjustment. 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.

Macroeconomic programs must always weigh what is needed to stop a free-falling currency, and what can be done to maintain production. 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 the objective of quickly restoring stability, which is the surest route to a restoration of growth.

Another concern is that the international financial institutions work to ensure that the impact of adjustment on the poor is cushioned. This is being addresses in several respects:

• 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.

IV. Concluding Remarks

Mr. Chairman, the globalization of financial markets has been a breathtaking development. Huge amounts of capital flow quickly among closely integrated financial systems. Technological change has made possible flows of information and finance on a vast scale. Globalization has thrust the private sector into a predominant role in financing development around the world. Private capital has financed great advances in productivity and has raised living standards, and created new markets for U.S. goods. Globalization has created great new opportunities for America.

At the same time, globalization brings new risks. The Asian crisis will likely be viewed as the first crisis of the new global economy. To date, the impact of the crisis on our country is moderate, and manageable. We are in a strong position to withstand the effects of this crisis: our economic performance is the best in a generation and unrivaled among the major industrialized economies. But, if instability were to spread or intensify, the potential risks to American jobs, American financial markets and our national security could be much greater. Given the risks involved, we have a responsibility to protect America's core economic and security interests, by working to restore stability with the most effective mechanisms available to us.

To fail to fund the IMF adequately and promptly would risk our not being able to respond with adequate financial support in the event that this crisis were to spread. 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.

Mr. Chairman global markets of the twenty first century present both opportunities and risks for the American people. Making the most of those opportunities, while minimizing the risks, will be a central issue for this Committee, and the nation, in the years ahead. U.S. leadership in these matters will be indispensable for fostering growth and stability around the world -- and protecting and promoting the interests of the American people. Thank you very much.