Asia will survive with realistic economic policies (2)

This is the second of two articles based on a speech presented by International Monetary Fund chief Michel Camdessus to Southeast Asian business leaders in Kuala Lumpur last week.

KUALA LUMPUR: Developments have shown that whether a country follows prudent policies is not simply a matter of national concern. As we have seen in this region, spillover and contagion effects can be so rapid and so costly to countries with basically sound policies that every country has a strong interest in seeing that its neighbors manage their economies well.

Experience shows that there is considerable scope for improving policies when neighboring countries get together on a regular basis to encourage one another -- and, at times, to exert some peer pressure on one another -- to pursue sound policies.

For this reason, it is very encouraging to see the efforts under way to develop a mechanism for more intensive surveillance and dialogue among participating finance ministries and central banks of the Pacific rim to complement the IMF's global surveillance over its members' policies and performance.

Of course, to be effective, regional surveillance has to based on sound economic analysis. In this connection, the IMF stands ready to contribute to regional surveillance in Asia, as requested in the recent Manila meeting and Vancouver Summit meetings, and as it already does in the G-7 and other fora.

Developments in Southeast Asia also offer some insight into how governments should approach markets. Perhaps the best place to start would be by giving credit where credit is due: the capital provided by global markets has been a key factor in Southeast Asia's exceptional growth rates and its ability to lift so many out of poverty.

Certainly, there are risks in tapping global markets. But markets also provide tremendous opportunities to accelerate growth and development, as Southeast Asia itself so vividly shows.

The key is to approach markets in a responsible manner -- with strong macroeconomic fundamentals and sound structural policies that give markets confidence and therefore encourage long-term investment; with respect for the signals that markets provide; and with transparent and market-friendly policies that allow markets to allocate resources efficiently.

Let me say a few more words about the benefits of openness and transparency. When economic policies are transparent, policy makers have more incentive to pursue sound policies. If I may cite one pointed example among many, would the Central Bank of Thailand have accumulated such large forward liabilities if the public had regular access to information on central bank operations?

On the contrary, the authorities would have had to face the problem of Thailand's dwindling reserves much sooner; and most likely, they would have taken corrective action before reserve losses became so large.

Likewise, when timely, accurate, and comprehensive data are readily available, markets adjust more smoothly. Thus, countries are less vulnerable to adverse market reactions when problems eventually come to light, as indeed they always do. Especially when governments are trying to rebuild confidence, a free flow on information allows markets to assess the extent of underlying problems and the seriousness of efforts to correct them.

Of course, transparency also limits the opportunities for corruption, which can otherwise distort resource allocation, undermine investor confidence, and inhibit growth. For all of these reasons, openness and transparency can make a substantial contribution to better policies, more stable markets, ad hence, more sustainable growth.

As developments have shown, confidence, once lost, is hard to regain. Restoring confidence takes a strong commitment to economic adjustment and reform, demonstrated by the implementation of what are often painful measures. It also takes openness and transparency. And, of course, it takes time.

That process is now under way in Southeast Asia. The first step has been to design effective strategies to reinforce macroeconomic policies as needed, strengthen financial systems and lay the basis for robust growth to resume.

Then comes the more difficult task: implementation. This is the task of the national authorities, and it takes leadership. One aspect of this leadership is to take responsibility for the programs being implemented, explain to citizens why adjustment is needed and enlist their support.

Too often citizens have the impression that the programs their governments are attempting to carry out have been imposed from outside. To authorities who have to carry out painful measures, this may seem convenient but it is counter productive because it undermines public support for their efforts.

The IMF works very closely with the country authorities to design effective programs. We give our views on the pros and cons of various adjustment measures and on which combinations of measures are likely to work. Needless to say, we do not support programs we think will be ineffective. But ultimately, it is the authorities' decision what the program consists of.

Our requirements are: One, that the program be well designed; and two, that it has the authorities' full support. That being said, the IMF is there to help the countries of this region pull through this difficult period. The programs we are supporting with our financial resources are bold, but realistic, and go to the heart of these economies's problems.

IMF support has (also) helped mobilize additional resources from other bilateral and multilateral resources. Along with the World Bank, the Asian Development Bank and others, we are also providing a considerable amount of technical assistance, especially on financial sector issues.

Looking ahead, growth can be expected to rebound strongly after a relatively short, but sharp, weakening of economic activity, and a rapid narrowing of external deficits. In fact, we are already seeing improvements in exports, even though recent exchange rate changes have not had much opportunity yet to generate their effects.

And as these adjustment take place, each of these countries will be embarking on a longer-term process of structural change that will strengthen their economies in fundamental ways such as by restructuring their financial systems, increasing domestic competition and otherwise improving the climate for productive investment and high, but sustainable, growth. That is why I believe that these economies will emerge from this period stronger and more dynamic than before.

-- The Business Times