Asia's Choice

Keynote Address

Tadao Chino

Asia's Choice: Open Markets or Government Control?

Asia Society's 10th Annual Corporate Conference
Shangri-La Hotel, Makati City
February 24-26, 1999

I. Introduction

Your excellencies, ladies and gentlemen, it is a great pleasure to address this important gathering. I thank the Asia Society for its kind invitation and excellent arrangements.

In my talk today I will focus on the role of the international community, particularly, the international financial institutions, in fighting the Asian crisis as well as in restoring Asia's growth.

At the outset, I would like to make it clear that the international financial institutions have played a positive role in helping the Asian economies contain the financial crisis. Restoring Asia's growth and preventing similar crises in the future are at present the most challenging tasks. Whether or not we can succeed in accomplishing these tasks will have significant implications not only for Asian economies but also for the rest of the world. I believe that the international financial institutions will have a vital role to play in restoring Asia's growth and bringing in the world a more stable environment conducive to sustained growth for developed and developing economies alike.

I will first briefly touch upon the Asian crisis, mainly its major causes and lessons. Although these issues have been widely discussed, a good understanding of them is critical to assess and define the role of the international financial institutions. After that, I will discuss how the Asian Development Bank has responded to the crisis. I will then share with you my views on the role of the international financial institutions in the wake of the Asian crisis. Finally, I will conclude by saying a few words about the prospects of Asian economies.

II. The Crisis

The Asian crisis was a surprise to almost all, particularly the extent to which it has affected the economies of the region as well as the rest of the world. What has caused the crisis? In essence, there has been a mismatch between capital account convertibility and weakness in the financial and corporate sectors in the crisis-affected economies. With good investment potential built up by past economic success, foreign capital inflows accelerated, especially since the capital accounts were liberalized. However, the institutional capacities in the financial sectors of these economies were not robust enough to manage these inflows effectively. In essence they lacked the capability to allocate capital resources efficiently through a mechanism to assess values of future profits dispassionately. Poor corporate governance due to lack of transparency, as well as inadequate accounting and auditing standards, also contributed to the emergence of such overly risky behavior. Moreover, short-term external loans were often used for financing projects with long gestation periods, resulting in a mismatch in maturity. Part of the foreign capital inflows were also invested in real estate, stock markets and other sectors, which were prone to speculation.

Therefore, the cause of the Asian crisis lies more in structural deficiencies than in macroeconomic mismanagement. In this sense, the Asian crisis is a new type of crisis that may be called a "capital account crisis" as compared with the conventional "current account crisis."

What are the major lessons learned from the crisis? First, sound macroeconomic fundamentals do not suffice to achieve sustained economic growth. Structural factors have played a much more decisive role in the Asian crisis. Second, for developing economies to reap the benefits of an open capital account, greater attention should be paid to the institutional capacity in the financial sector and to the sequencing of financial sector reforms. Third, it is vital to develop domestic capital markets in the region. This is particularly true as the region has a lot of savings. A well functioning capital market can mobilize long-term capital and encourage more efficient allocation of resources under market scrutiny.

Fourth, the Asian crisis poses a new challenge to the international financial system. What is needed is essentially a system that enables international financial institutions to back up the ailing countries with sufficient amount of liquidity, so that the governments can concentrate on structural reforms, especially on restructuring of their weak financial and corporate sectors, without unduly contracting the real economies. There is also a need to prepare an architecture to monitor international capital flows, whose reversal has proven to be devastating for capital receiving countries. Monitoring mechanisms should be enhanced not only at the national level, but also at the regional level to stave off the risks of contagion.

III. The ADB's Response to the Crisis

Let me now talk about how the Asian Development Bank has responded to the crisis. Since the outbreak of the crisis in July 1997, ADB has provided emergency assistance to Thailand, the Republic of Korea and Indonesia, in close collaboration with the International Monetary Fund, the World Bank and various bilateral institutions. We have also extended fast disbursing, precautionary assistance to the Philippines at the end of 1998. In total, ADB has so far committed over $9 billion dollars to assist the crisis-affected economies.

While our resources have certainly helped economies to meet their financing needs in difficult times, our programs have been designed to have much more enduring benefits.

First of all, ADB has supported crucial financial governance reforms that will provide a strong institutional platform for future growth. For example, ADB has provided assistance in restructuring of financial and corporate sectors and in strengthening the effective regulatory oversight of banks and other financial entities and to promote greater reliance on the use of market forces. ADB has extended sizable support to improve the financial and corporate governance through strengthening of accounting and auditing practices, information disclosures, and legal recourse mechanisms.

Second, ADB financial assistance has been used to protect hard won social achievements and provide the safety net support that helps maintain the social cohesion needed for economic growth and stability.

For example, ADB has provided a Social Sector Program loan to Thailand last march. That is the first social sector load approved by the international financial institutions ever since the crisis. The objective of this loan is to help the affected economies directly mitigate the social impacts of the economic fallout by supporting the delivery of essential social services to the most vulnerable segments of their societies. Subsequently, ADB has also provided similar types of social sector program loans to Indonesia.

Incidentally, during my recent trip to Thailand and Indonesia it was gratifying to see the benefits of the ADB social sector loans are reaching out to those in need. In the Wat Sawetachat School near Bangkok, I met with 16 out of more than 260,000 students, who have received scholarships under the Bank-financed program loans. When I asked these students what they wish to be in the future, many said they would like to be a teacher or a doctor. It was a great feeling to learn that despite the crisis, these students could remain studying at school. It was equally pleasing that ADB was able to contribute something to help these students realize their goals in the future. In Jakarta, I also visited the Rumah Singgah Setia Kawan, a street children drop-in center that has received assistance from the Bank's program. This center serves as an open house for some 2,000 street children. I was impressed and encouraged by the smiles of the children.

Third, apart from provision of assistance in the financial and social sectors, ADB has taken and will continue to take a more direct measure to encourage the flows of private capital into these economies to support their productive sectors. In Thailand, ADB has extended the Export Financing Facility to the exporters and small and medium sized enterprises. With a direct load from ADB of $50 million combined with a partial guarantee facility, an additional $950 million was mobilized through syndicated commercial banks to alleviate a serious credit crunch in the country.

Beyond providing emergency assistance programs, ADB is assisting the crisis-affected economies in a variety of other ways. For example, as part of the "New Miyazawa Initiative," the Government of Japan is proposing to establish a special fund, the Asian Currency Crisis Support Facility, in the amount of 367.5 billion Yen or approximately $3.3 billion U.S. dollars. At the request of the government of Japan, ADB will be administering this facility which consists of both interest payment assistance and technical grant assistance as well as financial assistance through guarantees. This facility will complement ADB's assistance to the affected economies and help mobilize the needed financial resources from both the official and private sectors. Furthermore, ADB is directly supporting the "Asian Growth and Recovery Initiative" that is jointly sponsored by the leaders of Japan and the United States.

ADB is also using its non-lending operations to help the crisis economies. The Bank has recently established a Regional Economic Monitoring Unit to help its member countries build the capacities they need to better detect and respond more effectively to, looming vulnerabilities. In this context, at the request of the Association of Southeast Asian Nations (ASEAN), ADB has provided considerable technical support to the ASEAN Surveillance Process. ADB will continue to provide such technical assistance.

IV. Role of the International Financial Institutions

Ladies and Gentlemen, let us now consider the role of the international financial institutions in fostering economic recovery in Asia, and more generally, in helping create conditions that are conducive to sustained economic growth in developing countries.

First of all, we should look at the issue from a perspective beyond the crisis. While immediate support to the affected economies in response to the outbreak of the crisis has been timely and necessary, we cannot let the crisis blur our vision over the long run's development objectives. Asia is still home to the world's poor. Almost one billion Asians, or roughly one third of the region's total population, live in absolute poverty. Many of the Asian economies are still at the subsistence stage. It is a region that has approximately one third of the world's arable land but must feed almost 60 percent of the world's population. It is a region facing tremendous environmental challenges. And such challenges will become increasingly acute as the region is to become more and more urbanized and industrialized with development.

Infrastructure of many countries in the region is still underdeveloped and has become one of the bottlenecks of its further economic development. The needs for external financing are tremendous. Our own analysis prior to the crisis indicates that in developing Asia, the demand for infrastructure will amount to about one trillion US dollars for the decade. Some other projections indicate even a larger figure -- that East Asian economies alone will need to spend some $1.5 trillion over the next ten years. Obviously, these estimates will need to be adjusted downwards in the wake of the crisis. But, it is still fair to say that the demand for infrastructure will remain high in the region for the next ten years. Therefore, foreign capital inflow is still very much needed not only for the resources that it adds, but also for the know-how and expertise it brings to the region.

Many economies in the region have high saving ratios. For example, the saving ration of East and Southeast Asian economies is the highest among all other comparable regions in the world. However, the financial markets have not been able to fully transform the savings into effective and productive investments, especially long-term investments. We cannot therefore over-emphasize the importance of developing capital markets in the region. Capital market development is essential in further mobilizing the long-term domestic savings. As indicated by the crisis, the foreign resources alone are not suitable for financing the investments that have long gestation periods and generate earnings mainly in domestic currencies. It is true that capital inflows into the region from official sources have recently been dwarfed by those from the private sector. However, the large capital inflows have concentrated on only a few economies in the region. And high volatility of these capital flows has been devastating to some of these economies.

All in all, this suggests that Asia is facing mounting challenges ahead in its development. The issues that need to be addressed include, among others, poverty reduction, economic growth, financial sector development and environmental protection.

It is critical to realize that these issues are interrelated. For example, without sustained growth, poverty alleviation will not succeed, and the quality of life for a large portion of the world's population will be seriously impaired. Without sustained growth, incomes in developing countries could fall even further behind those in the world's more affluent economies. These outcomes would not only be socially and economically divisive, but also destabilizing from the perspective of peace and security. Ultimately, growth in the developing world is crucial not just for global prosperity but also for peace and harmony.

Therefore, there is a need for adopting a comprehensive approach to address these issues effectively and it is critical to have a genuine partnership between public and private sectors, and between the domestic and international community as well.

In particular, the international financial institutions should continue to provide financial assistance to help Asian economies move up the development ladder. At the same time, we should increasingly use our financial assistance to encourage policy and institutional reforms, to leverage the private sector development and investments, to reduce poverty, to protect the environment and to enhance the government's capacity in economic management. In my view, the development assistance program built on such a broader vision will have lasting impact.

The international financial institutions also need to promote regional and global cooperation to reduce the likelihood of crises, and to effectively deal with them when they indeed occur. In this regard, the international financial institutions, together with others including those in the private sector, must strike carefully a balance between liberalizing capital flows, and the stability of international capital markets. International capital flows to developing economies have rapidly changed. They have become larger in size and more complex in structure, involving more capital flows from the private sector and sophisticated financial arrangements. Such complexity is one of the factors that have hampered the smooth resolution of the current financial crises.

The international financial institutions need to place an increasing emphasis on helping developing economies enhance their own capacity in economic management and financial supervision. For any given economy, capacity building and the pace of financial sector reform should be carefully coordinated. It is important for the international financial institutions to bring about the needed reforms through provision of financial assistance. It is equally important to involve people in these economies in designing the reform program, as this would contribute to enhance the ownership and implementation of the program. In other words, the international financial institutions and developing economies should collaborate as true partners in the area of development. In this regard, ADB views itself much as a home doctor of Asian and Pacific developing economies. As we always say in the ADB, we listen before we speak. We diagnose before we prescribe, and we continue to follow up.

V. Conclusion

Ladies and Gentlemen, Asia has been facing mounting challenges in its development. The recent financial crisis has only highlighted the urgency of meeting the requirements of the challenges.

Over the past several decades, Asia has shown to the world that it can overcome various difficulties and come out from crises brighter and stronger. I believe and certainly hope that Asia can do the same in the face of the present crisis. I say so because I believe the economic fundamentals of the Asian economies are still strong. Strong willingness to save for future, continuing open economic policies, the motivated labor forces and emphasis on education are all the important factors that will help the regional economic recovery. Moreover, the strong fundamentals will be further strengthened by the ongoing reforms in the financial and corporate sectors. Therefore, with continuing assistance from the international financial institutions and help from all others, Asia will return to the path of growth. Over the future course of development in Asia, the international financial institutions will have an important role to play in helping Asia not only to come out from the crisis sooner, but more importantly to sustain its future growth. By contributing to the development of Asia, the international financial institutions will make an equally important contribution to the development of the world. As a regional development bank located in the region, with warm-hearted and genuine interest in the welfare of the people of the region, ADB will continue to assist the Asian and Pacific economies for their further development.