FROM THE OFFICE OF PUBLIC AFFAIRS

The period since our Hong Kong meeting has been marked with unprecedented turmoil as the Asian crisis has affected financial markets both within and outside the region. The economic impact has been greatest in those countries most directly affected -- particularly Indonesia, Korea and Thailand -- but others inside and, to a lesser extent, outside the region have also experienced spillover effects. Despite the welcome signs of stability now emerging in response to the implementation of necessary economic reforms, we must guard against complacency. We also need to use this time to begin considering the lessons of the latest crisis, both to relearn old truths and be taught new ones.

Economic Situation

The economic situation in some of the countries at the center of the crisis has begun to stabilize as their authorities implement IMF-supported programs. Korea and Thailand are experiencing a restoration of market confidence. This has fueled a 40 percent appreciation of their currencies and a 30 - 35 percent increase in stock market valuations from their low points around the turn of the year as capital, both domestic and foreign, returns. However, these countries face a difficult road ahead that will test social cohesion and political will. The international community can continue to help to ameliorate the adverse consequences, but only resolute action to keep to the agreed policy course will bring an end to the crisis and a resumption of sustained growth.

In Indonesia, agreement on a revised program supported by the IMF provides a new beginning. The need now is for full, sustained and decisive implementation of their program. The markets and the international community will be looking closely at whether both the letter and the spirit of the commitment to reform are being observed. It is imperative that confidence be restored by a sustained implementation of this commitment.

The contagion effects of the crisis on other emerging markets have so far been contained as these countries have responded quickly to sustain market confidence by adapting economic policies and strengthening financial systems. A temporary slowdown in growth is expected in light of reduced capital inflows and the impact of economic policy adjustments. Nevertheless, most countries should continue to perform well in the years ahead, as the economic stabilization and reform efforts of recent years bear fruit.

Resolution of the Asian crisis requires that the major industrial countries pursue policies to sustain open, growing economies. In the United States, growth is expected to continue at a sustained pace consistent with the productive potential of the economy. Inflation remains subdued, and cost pressures well-contained. The budget will be in surplus this year for the first time in nearly 30 years, with further substantial surpluses over the next five years.

However, a global expansion concentrated in only a few countries experiencing increased domestic demand would quickly become unbalanced and contain the seeds of future difficulties.

As Europe moves toward monetary union, it is important that policies in this region be directed at fostering domestic-demand-led growth, reducing high levels of unemployment, and making Europe more flexible and dynamic. How successful Europe is in this regard will have a lot to do with the success of EMU itself and its contribution to international monetary stability. We are beginning to see signs that the current recovery is becoming wider and deeper. However, unemployment remains at extremely high levels, and a significant reduction will necessitate implementation of labor market reforms and greater openness of product and financial markets.

The situation in Japan poses great challenges to Japanese authorities and the international economy. A sustained global expansion and recovery in Asia cannot be achieved when the second largest economy in the world, accounting for more than half of Asian output, is in recession and has a weakened financial system. Japan must generate substantial growth to help maintain a growing world economy and to absorb a growing share of imports from emerging markets. We welcome Prime Minister Hashimoto's recent announcement of steps to stimulate the Japanese economy. We look forward to substantial and effective actions to achieve the long-promised domestic-demand-led recovery, to restore health to the financial sector, and to make progress on deregulation and openness.

Strengthening the international financial system

The Asian crisis demonstrates anew that global financial markets dominated by private capital flows provide both immense opportunities and great challenges. Our task must be to continue to adapt the global financial architecture to reflect today's realities in order to maximize the benefits while not falling prey to the risks. The international financial institutions, particularly the IMF, have a critical role to play in this effort by promoting greater openness and transparency, by building strong national financial systems, and by creating mechanisms so that the private sector shares more fully in the responsibility for preventing and resolving crises.

• Openness and Transparency: For capital to flow freely and safely to where it can be used most efficiently to promote growth, high quality information about each economy and investment opportunity must also be freely available. The IMF introduced the Special Data Dissemination Standard (SDDS) in 1996 to improve the information collection and publication practices of countries accessing international capital markets. At present, 44 countries subscribe to the SDDS and are expected to be in full compliance with this code of best practices by the end of the year. However, recent events and the review of the SDDS indicate that important gaps need to be filled to build on the progress that has been made.

As a first step, we need to consider ways to encourage the nearly 80 percent of the membership which do not subscribe, particularly emerging market economies, to participate in the SDDS, possibly by making full compliance by the end of an IMF-supported program a condition of the program. We believe it could be appropriate for the IMF to publicize which countries subscribe and which do not so that creditors and investors can reflect that status in their decisions.

The provision of timely, accurate and comprehensive data is essential for sound policy-making and effective decision-making by markets. Indeed, institutional investors have a responsibility to ensure that they have adequate information before committing the funds of their shareholders and clients.

The state of a country's foreign exchange reserves is an important leading indicator of potential problems but can only serve this function adequately if information is provided more frequently and includes the extent to which these assets may be encumbered. Consequently, the SDDS should require countries to provide a complete picture of usable central bank reserves, including forward liabilities, and better information on the size, composition and maturity of the foreign currency liabilities of the government and financial sector. As we have also learned that private debts can all too easily become public liabilities, we need to develop ways to collect and disseminate information on the foreign currency liabilities of private non-financial firms and the aggregate financial condition of the banking system.

Expanding the SDDS to provide more and better data should be complemented by wider access to the IMF's assessments of countries' economic policies, financial sectors and statistical systems.

The IMF should build on the favorable experience with Press Information Notices (PINs) by creating a presumption that all members would issue PINs following the conclusion of the annual Article IV consultation. Members should also be permitted to release the full staff report on their Article IV consultation. All countries obtaining IMF loans should be required to release their Letters of Intent and, if applicable, Policy Framework Papers, and to agree to issue PINs. Finally, consideration should be given to creation of ways to enable the Fund to make public its views on a member's performance under an IMF-supported program.

The IMF and other international financial institutions also have a responsibility to make their activities open and transparent as a means of enhancing accountability. The recent external evaluation of ESAF and the proposed review of IMF surveillance by independent experts are steps in the right direction. However, more could be done to dispel the notion of the IMF as a secretive organization by, for example, improving access to the Fund's archival material, releasing reports to the Interim Committee -- such as those for this meeting -- and staff papers on key policy issues, and publishing more summaries of Executive Board meetings.

• Financial sector reform: The IMF's recent review of the Asian crisis experience highlighted the key role played by the domestic financial sector as the flash point and transmission mechanism for the crisis and contagion. Rapid growth and expanding access to international capital had run ahead of the development in countries in trouble of a genuine credit culture to assess risk and channel investment efficiently and of an effective financial sector regulatory and supervisory mechanism. The situation was further exacerbated by inconsistent macroeconomic policies, generous explicit and implicit government guarantees, significant injections of public funds to provide liquidity support to weak institutions, and to some extent capital controls that distorted the composition of capital flows.

Some have argued that this experience points to the need to turn back the clock on capital market integration and to slow the pace of future liberalization. In our view, the right response to recent events is not to slow the pace of liberalization but to accelerate the creation of an environment in which capital flows to its most productive uses and which also encourages the strengthening of the financial sector.

At a time when the IMF has become increasingly involved in helping countries realize the opportunities and manage the risks of global capital markets, it is important that its charter reflects the reality of the marketplace. We welcome the progress that has been made in the Executive Board, particularly the broad support for including capital market liberalization as a purpose of the Fund. We look forward to continued progress by the Executive Board toward completion of an amendment.

The international community has a clear interest in helping countries put in place the institutional arrangements to integrate successfully with the global financial marketplace. The Basle Committee has now developed the "Core Principles for Effective Banking Supervision" and IOSCO is already well on the way to developing similar principles for the supervision of securities firms. Consideration should also be given to developing appropriate international standards in other areas related to the underlying strength of the financial system, including accounting and disclosure, loan classification, credit risk management and overall corporate governance. The proposed code of good practices on the transparency of government fiscal activities illustrates the potential for developing standards in the public sector. Also, in conjunction with these standards, we must find ways to foster the creation of a strong credit culture and strengthen the requisite skills in a nation's financial system.

Consideration should also be given to a means to conduct international surveillance of countries' financial regulatory and supervisory systems, comparable to the surveillance of economic policy conducted by the IMF. One approach might be to encourage a joint initiative by the IMF and the World Bank, assisted by regulatory and supervisory experts. The results from such surveillance would assist national authorities in enhancing their practices, and market participants would benefit in terms of reflecting the results in their own decisions. This would in turn help induce greater compliance with standards and adoption of reforms.

• Crisis resolution: Our efforts to reduce the risks of crises caused by poor policy or investor decisions need to be complemented by measures to equip investors, governments and the international financial system with the means to deal with those crises that do occur. The ultimate test of resilient national and international financial systems is how they deal with shocks and their ability to limit the broader consequences.

The IMF plays the central role in the system by providing conditional international assistance to give countries the breathing room to stabilize their economies and restore market confidence. To fulfill this responsibility, the IMF must have adequate resources. We share the Managing Director's concern that IMF liquidity has fallen to dangerously low levels that could impair the Fund's operational capacity to respond to renewed pressures and meet normal demands. The United States is making an intensive effort to obtain the necessary legislative approval for our participation in the NAB and quota increase.

However, recent crises have brought home that in a global financial market we need to find more effective mechanisms for sharing with the private sector the burden of managing such problems. In a world in which trillions of dollars flow through international markets every day, there is simply not going to be enough official financing to meet the crises that could take place. Moreover, official financing should not absolve private investors from the consequences of excessive risk-taking and thus create the "moral hazard" that could plant the seeds of future crises.

We do not underestimate the difficulty of developing arrangements which balance the desirability of facilitating international capital flows with the need to equitably share the responsibility for maintaining a stable system. However, there are some steps that the IMF could take now while more fundamental reforms are being examined.

In particular, IMF financing could be used in a manner that would encourage debtors and creditors to resolve debt problems among themselves. This might include, for example,:

• expanding the IMF's policy on lending into arrears to provide greater scope to foster orderly workouts between debtors and creditors;

• increasing the price of external assistance and shortening maturities through greater use of the Supplemental Reserve Facility in emergency situations to heighten the incentives for governments to seek private financing; and,

• conditioning any official support in some cases on appropriate involvement of the private sector.

More ambitious ideas such as an international bankruptcy regime may have great appeal, but do not now seem feasible. However, resolution of debt problems can be fostered by the existence of strong bankruptcy laws and institutions covering debtor-creditor relations.

Conclusion

Developing ways to strengthen our international financial architecture is an urgent and compelling challenge. The ultimate objective of fashioning a strong, resilient global financial system is to underpin a vibrant, productive, growing global economy that provides benefits broadly to workers and investors in all countries. The IMF has a key role to play in this area through the policies which it advocates and the economic reform programs it supports.

The primary focus of the IMF is on sound money, prudent fiscal policies, and open markets. In recent years, the Fund has broadened its perspective to take account of a wider range of issues necessary for economic growth and financial stability. It must continue to do so in order to:

• create the more level playing field in which private sector competition can thrive, including through trade liberalization;

• reduce unproductive government spending, including excessive military expenditures, white elephants, and subsidies and guarantees to favored sectors and firms;

• achieve greater transparency and accountability in government and corporate affairs to reduce corruption;

• protect the most vulnerable segments of society from bearing the brunt of the burden of adjustment; and,

• encourage a more effective participation by labor and the rest of civil society in the formulation and implementation of economic policies, including protection of core labor rights.

We should not underestimate the difficulty or the time it will take to build an architecture for the 21st century. We have begun to take the initial steps but have much further to go. The Asian crisis has pointed us in the direction we must follow. Now, we must show the imagination and courage to get the job done.