Transcript

Press Briefing by Teleconference with Hong Kong SAR and Singapore by First Deputy Managing Director Stanley Fischer

October 15, 1998

MR. BRAUNING: Thank you for being available at this early hour. It seemed the most convenient compromise time all around, given our late evening here in Washington. My name is Roberto Brauning from the IMF External Relations Department. This will be a briefing that is on the record, and we expect it to last about one hour. The contents of the briefing will be embargoed until 30 minutes--that is, one half hour--after the end of the briefing. So nobody needs to feel the pressure to go out and file.

We thought that the best way to organize a truly interactive briefing would be to have each of the two sides ask two questions in turn. So I believe we'll start with two questions from Singapore and continue with two from Hong Kong and so on. All will have a chance to ask one or more questions.

Well, I don't believe you need to be introduced to the First Deputy Managing Director of the IMF, Mr. Stanley Fischer, who is to my left. So we will go directly to the briefing. Mr. Fischer, would you like to make some introductory remarks?

MR. FISCHER: Thanks very much, Roberto. Let me just try and keep this brief and start with recent events in Washington.

We finished the Annual Meetings at the end of last week, and the focus there was on two things. The first, which everyone talked about a great deal, was the new international economic, financial architecture, and we were treated to a blizzard of metaphors, architectural metaphors. I'll talk about that second because the other part of what we heard was about the question of how to deal with the current crisis before there's time to make a lot of change in the architecture. And one of the clear achievements of this meeting was to focus attention very attentively on that.

I think it's clear that the European policymakers came to the conference thinking that the situation was pretty good with some minor disturbances elsewhere, and left thinking that we face real challenges in the global economy.

Now, there were important developments about how to deal with this crisis. In the first instance, the Fed had reduced interest rates before the meeting and, as you know, today made a second move in that direction, cutting interest rates again by 25 basis points. As a result, the U.S. stock market went up by 350 points today, and bonds have strengthened as well.

Second, there was a much clearer understanding and statements by the Europeans about the need for them to reduce interest rates. They said in the meeting that any thought that there may have been that, instead, European interest rates would converge by the end of this year, by the high rates coming down and the low rates coming up, was gone; that they would converge by the other countries coming down to the German and French levels. But, subsequently, German policymakers have begun to talk about the fact that their interest rates could be reduced. This is an important part of an emerging consensus on the need to reinvigorate world growth.

Now, in Japan, which obviously is the weak spot among the G-7, we've just had the Diet approve banking legislation that was initially very well received, extremely well received, particularly because the amounts are very large. Subsequent developments have led to some rethinking, but still it's a big plus.

We had the Japanese Government talking about plans to cut income tax rates and to avoid any drop-off in public investment. There was a concern in this latter respect, that in the second half of '99 there'd be declines in Japanese Government spending. I think they've told us that isn't going to happen.

Immediately after the meeting--we’re still not quite there yet, but in essence it is done--the Congress approved the IMF quota increase and the U.S. contribution to the New Arrangements to Borrow. So this problem, which has hung over our heads for a year, of whether the Congress would or would not support the quota increase--and if it didn't, there wouldn't be any quota increase--that has been resolved in a way which is good for our ability to help countries that could get into trouble, and which is also a sign that the United States is willing to shoulder its responsibilities in the international economy. That was an underlying issue that worried everybody as this debate dragged on. That issue has been resolved, and that's important.

Further, we were involved in discussions with Brazil over how to deal with their economic problems. We reached a preliminary agreement with the Brazilians and put out a statement last week, just before the Brazilians went back, explaining the parameters of the program, saying that the Brazilians would now go back to work out the details, that we would then get together--and this will happen in the coming days--to discuss the final details of their economic program. President Cardoso has announced he will be making a public address next Tuesday, and that is part of the ongoing process by which we will be reaching an agreement with the Brazilians on a package in support of what they are doing.

The Brazilians have made it very clear that they want this to be their program, one we can support. They don't want it to be the IMF dragging them along. We're not doing that. They know what needs doing, and they are planning to do it, and it is something we will be able to support.

All these things, including the Japanese developments, are very important for Asia, and they're also important for other emerging markets.

The second discussion which took place all the time was about the new international architecture. There’s not yet a full plan of the new system. There are important elements which will make a big difference. There's the emphasis on transparency of the IMF, transparency of markets, new standards for corporate and financial sector governance, and emphasis on financial sector reform and the role of the international institutions in helping strengthen financial sectors; proposals for greater provision of information all over the place--that's part of transparency--and further surveillance by multilateral bodies, particularly the IMF; and, finally, and very difficult, proposals to involve the private sector in the prevention of future crises and in financing the solutions to crises when they do happen. That is immensely difficult. We've been grappling with that issue through these crises. How do you keep the private sector in without frightening them out of other places? There's progress in that direction. It will be a critical element in the new architecture. I wouldn't say we're there yet, but it's something we're working on and on which I expect we will make progress.

Let me just mention briefly how we see the Asia situation. It does seem that the Asian crisis countries are beginning to stabilize or have stabilized. The financial stabilization is very clear in Thailand and Korea. But developments in the last few days in Indonesia are also encouraging, and when you meet Indonesian ministers, they say the currency is getting too strong. It's a welcome relief from the problems we've had to deal with for a few months now.

I expect that Thailand and Korea will begin to grow early next year. The Philippines is doing well. Its growth is slowing now, but we hope, and they hope, that there will be growth next year. And, as I said, in Indonesia there are signs of improvement.

All this has come, this crisis has come at immense social cost, and the human crisis has been very large. Together with our colleagues in the World Bank, we have pushed very hard in each country for increased spending in support of social programs, unemployment programs in Indonesia, subsidies for food in other countries, work programs. And the social safety net is developing in Korea.

We find ourselves in the unusual position with some Asian governments who don't like this of pushing for more spending because of these needs. It's important that Asian governments do not want large budget deficits. That's something that shouldn't change for the long run. But at present, the size of deficits we're seeing in Asia is acceptable and will help in the recovery of growth.

And, as you know, interest rates in the crisis countries of Korea and Thailand have come down well below where they were before, at around 6 to 7 percent in each country. That's something we had expected to happen as they stabilized. It is happening. It's another impetus for growth.

So there are encouraging signs. There's a long way to go. Some of this is based on the strengthening of the yen, but it is a moment to think that things are beginning to be seen to work in the Asian crisis countries. In the long run, our task is to make sure that those countries return to growth rates that they had before or something close to that that can be done. And we will continue to work together with countries, together with the World Bank and the ADB, to make that happen.

QUESTION: Dr. Fischer, this question relates to the $18 billion that Congress has just passed yesterday. How does that--how do you see that affecting the way you approach countries in future crises? Is that going to put severe restrictions on the way you do things? Is it going to change the way you do things?

MR. FISCHER: We're still looking at the constraints that the Congress has put on this money, and the bill isn't finally done yet. It's pretty close to being done.

Some of what is there, including, for instance, this much publicized need to charge higher interest rates, is already embodied in one of our instruments, the supplemental reserve facility, which was the way we helped Korea.

We'll have to look more closely at what they want, but the idea that is there in the Congress is sort of classic lender of last resort financing. The classic advice of Bagehot is to lend freely--we'll never be able to lend freely--but to do so at penal rates. And the idea is if the country is fundamentally sound but is in a liquidity crisis, you should make a lot of money available, but make sure that it pays the market rate and above. That was what was done in the case of Korea. It clearly worked in the case of Korea. The reserves have more than recovered to the position they were before, and they will be able to repay that.

We will look at the other constraints we face. The constraints on transparency are nothing that we will have trouble dealing with. We favored that. So my guess is, if there are constraints, they are likely to be constructive ones, but we can't give you a final answer to that for a couple of days yet.

QUESTION: The Director of your Asia Pacific Department was here a couple days ago, and like yourself, he made very encouraging remarks about the prospects for Asia and indicated that a recovery in Asia will be likely within or by the first half of next year. At the same time, the IMF has forecast a slowdown, and perhaps a sharp slowdown, in the world economy. In light of that, what will be the mechanics of an Asian recovery, and what will be its nature? Will it be just a recovery from the horrendous levels of the past year, or will it be something that's solid and sustained?

MR. FISCHER: We're not forecasting a sharp slowdown next year. The growth rate projected for this year is 2 percent by the World Economic Outlook and close to 2.5 for 1999. So there's not a forecasted slowdown into next year.

Now, in answer to your question on what will produce growth in Asia and will it be just a slow recovery, the answer depends to some extent on Japan, and it depends on what happens in Europe and the United States. Our forecast assumes a significant slowdown in the United States, but not a recession. We don't see a recession in the United States. The Fed is doing what is necessary by moving aggressively on interest rates to help prevent a slowdown becoming worse than that, and Europe, again, seems to be seized with the need to take action.

So I think the forecasts on Europe and the United States have good reason to eventuate, and we forecast a very modest growth for Japan. If it would undertake resolute fiscal expansion and if this strengthening of the yen stays there, Japan will also be able to undertake a more aggressive monetary expansion by buying a lot more assets, putting more liquidity into the economy. If those things are done, we could hope to see Japan beginning to grow.

In that external environment, the Asian countries can begin to grow again. They will need export markets, but they're also growing on the basis of domestic demand, and that comes from the very low interest rates that they now have--and Indonesia will have when it stabilizes--and from the fiscal expansion that is coming. The fiscal expansion can't be too big because they can't finance themselves, but there are large fiscal deficits in those countries. And it will come from the restructuring of the financial system. Banks will begin to lend again.

So it's not going to be a sort of jump up, but I think it will be sustained and increasing.

QUESTION: Mr. Fischer, now that the U.S. has reduced interest rates twice, is the priority in your mind on the U.S. cutting interest rates again, or now is it Europe's turn? What is more important now going forward, and why is it more important?

MR. FISCHER: I'm not sure I can answer which is more important. That European interest rates on average should come down is important, and they will come down. I'm not sure that Europe is yet at the point where the lowest interest rates need to be cut. They need to monitor what is happening inside Europe carefully as well. All these cuts sort of have to be based on how is the outside world affecting our economy, and so far Europe continues to look strong.

But certainly an interest rate cut in Europe would do no harm. The high rates coming down is all to the good, and one could see somewhere down the road if the fears and the weakening world economy continue, that could enable the low-interest rate Europeans to cut their rates. Remember, the British have also cut rates recently.

As to what the Fed should do, we need to watch. We're operating now very much on the basis of expectations of what is happening in the third and fourth quarters. The third quarter data is about to come in. If that's very bad, then you could imagine the Fed taking another look. We'll just have to wait and see. And I'm sure that inside the Fed they are doing their own forecasting on what's happening. If the slowdown is along the lines we had expected when we did the World Economic Outlook, they could wait a few weeks and see. If they know more than we do, you could imagine them taking further action, but that's not something that outsiders can tell at the moment.

QUESTION: Dr. Fischer, you mentioned U.S., Japan and Europe. I wonder if you'd say something about how you see China over the next year or so and how you evaluate both the reform program and its influence one way or the other on an Asian recovery?

MR. FISCHER: The appreciation of the yen has removed a lot of concerns about China and about the possibility of a devaluation. And with the yen in the 120 range, today 115, we needn't worry too much about China having to devalue or wanting to devalue. That's very important for the other countries in Asia.

Within China itself, we see renewed confidence that with larger government spending they can meet their high growth targets, which are pretty remarkable. To be growing anywhere near 8 percent in this crisis is a very impressive performance.

There are deep structural problems in China. There is a financial system to be cleaned up. There are problems of labor moving from the countryside to the cities, and problems on such a scale in such a large country, that the clean-up of the state-owned enterprises and the financial system will take superb management. But we've seen excellent management so far.

So I think what you have to say is we see a country facing very large problems, dealing with them very well and apparently determined to get on and deal with them.

At the same time, as they say in the stock markets--and I guess they believe it now--trees don't grow to the sky, and 8 percent growth is a very high rate. Nobody's going to grow at 8 percent forever. So sustaining those rates for a very long time is inherently difficult, but so far, so good. It's been going on for nearly two decades now. But it's not something that can be sustained for many decades.

QUESTION: The question I have is on the fiscal deficit. Now, Thailand, Korea, Indonesia, all these countries are seeing shrinking of their GDP, and some of them have started posting significant current account surpluses. Would it not be a good idea to have bigger fiscal deficits than about 3 percent of GDP and genuine expansion?

MR. FISCHER: Those numbers are not quite right. The Indonesian deficit's going to be somewhere around 8 percent of GDP, and they are financing that all with external assistance. I don't think it should go very much bigger. And as the rupiah strengthens, it may well happen that it declines somewhat.

In Korea, we are discussing with them their goal of having a deficit of 5 percent of GDP. It's not there now. But that is the agreement that we have with them, so I think that fiscal expansion could well take place.

Interestingly enough, it’s difficult to get countries to welcome it, as I mentioned earlier. In most countries, we have to encourage countries to cut deficits. In East Asia, we're encouraging countries to spend more, for the reasons you gave, and that is the impetus in Korea. And in Thailand, there is room for a bit more fiscal expansion, although the Thai Government is very concerned about being able to finance these deficits, as everyone should be. It's not that easy to borrow too much.

I should also mention that, for historical reasons, the deficits are measured on a different basis in these countries. In some countries, the cost of financial sector restructuring is included; in others it isn't. And I believe in Thailand it isn't. So the Thai deficit is bigger, relatively speaking, than it seems when you see the raw numbers.

I think there is fiscal expansion taking pace--there should be--and we will keep pushing for it.

QUESTION: At the World Economic Forum here in Singapore, there was a lot of discussion about the new financial architecture, and you have talked about this. I was wondering whether you could go deeper into it and give people a sense of when we can expect it, what forms this new architecture will take. If it will take several years, should we be fixing the house we have instead of waiting for this new architecture?

MR. FISCHER: We've already asked our staff to begin to try to assemble a coherent plan of action out of all the suggestions that have been made during the past year or so, and I expect that in a week or two we'll get that plan of action.

We will have to make an important report to the international community through the Interim Committee of the IMF when it meets in April 1999 on what has been done, and we will move ahead as fast as we can in a variety of areas. It will take three to four years, we think, to take effect, but I think you will be seeing movement well before that. It depends on the areas in which we're looking for movement.

For instance, in one area, President Clinton made the proposal of a new facility in the IMF to provide significant amounts of funding when a financial panic hits a country that's behaving well. That work could be done relatively quickly. You could see that change possibly within months, not years. We'll have to see how it's fleshed out. But that idea is a constructive one that would begin to have an impact.

On the involvement of the private sector, that's an evolving field. We're actually seeing now in a variety of countries ways of involving the private sector. It was done in Korea, in one way. It was done in Thailand in a very quiet way, namely, by Japanese creditors agreeing among themselves to continue to roll over Thai credit. So there was private sector involvement there. It's being done in Indonesia via the agreements which have not yet taken force, but there's a framework there. And similarly, I think as you look around other countries, we're working now, for instance, with Ukraine in a program. The private sector is participating there.

So I expect this will develop on two tracks. One is sort of case law. You look at each case and try and solve it and find a way of involving the private sector. And another is a more legal framework. We're looking for ways of modifying contracts, finding ways of changing legal frameworks so, let's say, bond contracts make it easier to restructure bonds. Very complicated things which will take more years, but in the meantime, I expect you'll see things happening on the ground.

Let me just say one thing that drives us on involving the private sector. It is an enormous issue here, the issue of contagion. What we've been concerned about and were concerned about in the Asian countries was if you see a crisis--if a country is getting into trouble and you ask the private sector, or you require them to stay involved in that country, what do you do to other countries? Namely, if you tell the creditors of--let me take examples because it happened--of Thailand that you are required by law to keep your money here or by international law or whatever, what happens to the creditors of Indonesia or Korea? Don't they rush to pull out?

That issue of contagion is a major one that the international community has to deal with. That's the underlying source of tension. But you will see progress on that.

On transparency, you have already seen a lot of progress. You've probably visited our Web site. You see many more publications there than you ever saw before. Letters of Intent are being published. PINs, Public Information Notices--they used to be called Press Information Notices, just for you--but now they're Public Information Notices. And we will, I think, in the months to come make progress in publishing more and more of our material.

So I think you will see the architecture beginning to change. When will we know that there's a new building in place, a new structure in place? These things sort of happen. Five years from now you'll look back and you'll say, my, this is a very different world than the one we had. There won't be a day on which somebody cuts the ribbon and says congratulations, we have the new architecture in place. But you will see a lot happening pretty soon.

None of that is to change the theme that you heard in the World Economic Forum, namely, we'd better get on and deal with our current problems now with the tools we have and not wait for a new system to be in place. That's true.

QUESTION: You talked about private sector involvement. I was wondering if there's some problem with that in Brazil and whether that was holding up a rescue package for Brazil?

MR. FISCHER: No, the private sector issue is not holding up the rescue package. The Brazilians are moving on a schedule that was agreed with us. This is their schedule, and it's one we can live with, and it's a matter of how the government puts its program together.

We agreed a week ago on what the fiscal targets are. It's one thing to agree on targets. It's another thing to go back home and work out the laws and the mechanisms and talk to your political supporters to make sure that you can actually get those mechanisms and laws in place and that they will meet the targets.

So that's what they were doing this week, getting agreement on what needed to be done, and we will be discussing all that with them in the next few days.

QUESTION: What are your views on the slowdown of growth in Hong Kong, and how do you see its economic future?

MR. FISCHER: I can't elaborate very much on the Hong Kong growth story. Hong Kong has been hit hard by this crisis, obviously. Asset values, property values have declined. But the defense of the system by the Hong Kong Monetary Authority, by the administration of the SAR, was impressive and succeeded.

Commenting on Hong Kong's long-run future is commenting on China's long-run future because that's where much of the strength, the underlying strength of the Hong Kong economy comes from, plus the fact that it's a financial center for Asia. I expect that the China-related elements will be kicking back in strongly in the coming year and that the financial centers will rebuild themselves.

Everybody's taken a tremendous hit this year from the financial dislocation, all the financial centers, and that's a negative factor. But as we know from history, periods like these are finite. They end. Confidence is restored. Actions we take in the IMF, in the international community, will determine how quickly confidence is restored, and as that happens, financial centers will strengthen again.

So there is every reason to think that Hong Kong, with its people, its extraordinarily skilled and industrious labor force, with its geographical location, has a very bright economic future.

QUESTION: Dr. Fischer, do you know that in large parts of Asia, the IMF is being named [inaudible]? In fact, in Indonesia the IMF stands for "I'm finished." What do you think the IMF can do to rescue its reputation?

MR. FISCHER: First of all, I don't think if you go to Indonesia that you will find that is a predominant view. As far as I can tell--and I've spoken to lots of Indonesians--there's much more of a view that the IMF has played a thoroughly constructive role in Indonesia.

The question of what will happen to the IMF is a question of what happens to the countries that have had IMF-supported programs compared with countries that haven't and how well they come out. I think what you will see is that the countries that have had IMF programs and have had the support of the IMF have attacked their underlying problems very rapidly. You see it in Korea. You see it in Thailand. You will see it happening in Indonesia. But it goes on with restructuring the banking system, with the help of the World Bank and of us, also. They're working on the financial systems, and they're going to work on corporate debt.

These are issues which have to be tackled. This crisis started, let us remember, in Korea without the IMF being there. When I read stories that say the IMF created a panic in Korea, I think people just didn't notice that Korea ran out of reserves before it invited the IMF in, and at that point there was a panic and there was a disaster.

So the notion that the IMF caused this recession strikes me as one that is very difficult to sustain. I think you will find in a year or two that countries that had programs come out better than countries that didn't, and that there will be much more long-lasting beneficial changes in countries which deal with their problems quickly.

We're often told that we shouldn't have moved so quickly on banking sector problems. That's exactly wrong. Countries that are not dealing with their banking sector problems have still got to deal with their banking sector problems and will still face all the difficulties that that entails and that are now being faced by Korea, by Indonesia, by Thailand, up front, in a constructive way. But we'll have to wait and see what happens. I'm pretty confident about the outcome.

QUESTION: I would like to ask about the ability of the countries to borrow. The Electricity Generating Authority of Thailand recently issued a bond with the help of the World Bank. I understand Malaysia is looking for a similar deal with Japan. Is there anything that could make it easier for these countries to borrow money commercially at a time when the spreads are so large?

MR. FISCHER: There are a lot of suggestions for enhancement by the public sector of private loans. And the World Bank and the Inter-American Development Bank--and I suppose eventually the Asian Development Bank might be interested as well--are studying ways of enhancing private sector credit by providing guarantees of some parts of loans, not the whole thing, typically.

They seem to be making progress. I expect we will see some elements of that in Latin America, in the next couple of months, possibly. Some countries are concerned. One finance minister said to me, I'm not sure I want this because if I have to guarantee some of the credit to my country, the question is going to happen, What about the rest? Are they also going to be guaranteed?

But I could see the possibility in a deep crisis like this of saying for a finite period, some institution--the Fund doesn't have the ability to operate with the private sector in that way--some institution would for a limited period operate in that way to get the flows of credit starting again. But it would be understood that this is not a permanent feature of the international system.

QUESTION: If this is a finite period, when we enter the next period, should Asian countries be aiming for 8 percent growth? Are they capable of 8 percent growth? Or is a safer course to aim a little lower and drive more safely?

MR. FISCHER: I'm always unclear as to what difference it makes where you're aiming on growth. I think you get as much growth as you can, and then you look at the macroeconomic consequences. So I think of the question a bit more as being what sort of growth rates can they sustain, and for a country like Korea, with a relatively high per capita income, sustaining a growth rate like that is simply not possible, and they'll have to get used to the idea that lower rates, still well above world averages--are necessary.

For countries lower down--for China, for example, at levels of per capita income of $1,000--8 percent growth could be possible for a while longer. And then you have Thailand in between.

I think we'll sort of have plenty of time to answer that question as countries begin to recover, and we'll see what new savings patterns emerge, what new investment patterns emerge, what the role of foreign investors becomes--there's got to be much more foreign investment in many of these countries--and what sorts of financings there are for these countries from abroad.

It's not generally realized that many of the proposals for transparency, for involving the private sector, are, in fact, proposals that will lead on average to larger spreads during good times. We're all acutely aware that countries can't borrow now when spreads are too high, but it's also true that spreads were too low a year ago.

So it may well be that in the future, in the world with the changed architecture, capital flows will be more expensive, certainly at the longer end, so there will be less of it. And that will also affect the sort of growth rate that countries can sustain.

So let me duck your question and just say we can approach the question of whether it's 6 or 8 about three or four years from now, and when we get up there, both you and I will be looking a lot happier, and we can enjoy that debate around that time.

QUESTION: There’s much discussion of the impact of the IMF on the Asian countries. I'll turn that the other way around and ask you what the impact has been on the IMF of the Asian crisis, particularly Indonesia, the social ramifications of what's happened. Has that changed the way the IMF now approaches its role?

MR. FISCHER: I think that's an interesting question. It relates as much to the World Bank as to the IMF. It's clear one of the things we've understood much more clearly is that if you're going into a situation that is so fraught with danger as, say, Indonesia was, it's necessary to begin putting these safety nets into place quite rapidly. That is something that the World Bank usually does. It's enhanced the need for us to coordinate fully with the Bank as we go in and to bring them on board very quickly.

We've discussed how to operate. We've agreed that there are crises that can come up so quickly, that demand such rapid action, that the Fund would go in first, but that we try to bring the Bank along as rapidly as possible.

On the structural issues that the Bank deals with, which are banking, corporate, and especially--and this we really see as critical--on the social side, I suspect in future crises--and I hope they won't be on such a scale--that we'd have to get working on the social sector issues a lot more rapidly.

These crises have also reinforced something which we sort of knew was coming, but still need to do more on, and that's the absolutely critical role of the financial sector and financial sectors strengthening. The Managing Director of the Fund was quoted in 1995 as saying: We know that the next international crisis will be led by a banking sector crisis. He said that in '95, and we knew it. But sort of galvanizing the international system to do something about banking sectors in individual countries and being able, when a crisis comes, to move in very quickly and try to help that country deal with its banking sector, that's something which we thought we understood, but that now after the Asian crisis is burned deep into our collective consciousness. I don't mean only the IMF and the World Bank. I mean the entire international community. And that emphasis surely will be reinforced from the Asian experience.

There's another lesson which I'll mention, but I don't know that there's anything to be done about it. It is an extraordinarily important and interesting fact that each of the programs in the three crisis countries in Asia took hold only after political change. And we need to think about that. I don't know what it implies, but it does suggest that if a program is going to work, you need a government that really believes in it, that is willing to carry it out. Part of the problem is you never know until afterwards when somebody's signed a piece of paper whether they really, really mean it.

But that fact so stands out that I keep grappling with what it means for our actions. I don't have any conclusions. It's just something hanging out there that is very, very clear from this crisis.

QUESTION: There is now a combination of financial assistance from Japan, lower interest rates in some of the countries in Southeast Asia, combined with the sort of fiscal expansion that promises to bring a little bit of economic growth, and certainly something that I think cheers a lot of people in this region. At the same time, there are some commentators who are arguing that the multiplier effect of fiscal expansion at this time will be fairly limited; that that money needs to be spent first on the cost of recapitalizing banking sectors; and that the start of economic growth would possibly remove some of the pressure that's needed to get governments and the private sector to make difficult decisions that are necessary in bank restructuring. Is the banking restructuring process so far along that that money is not needed?

MR. FISCHER: I've read that argument, too, particularly expressed with regard to Korea. I don't think the money issue is particularly critical. As far as I can see, the programs we're discussing with these countries have enough financing available for covering both the banking sector issues and the fiscal expansion. But the political economy issue is a much harder one. I had never thought of this until I heard the argument last week from somebody who basically said precisely what you've just said. It strikes me as a bit unusual that you'd want to keep the country in crisis so you could get on with the banking sector and corporate restructuring. But I suppose it's possible.

One benefit of having an IMF program is we come and nag every couple of months and we check. We have these reviews; we have these schedules. Things are supposed to get done. The World Bank similarly in its programs has a schedule of operations.

So I hope that we don't have to rely on keeping countries in unnecessarily long recessions to get them to move on the corporate and bank restructuring. I hope normal Fund procedures of reviews--which means to say we show up and say you haven't done this yet or why haven't you done it, you can't get more money--that process of review by the Fund and the World Bank I hope will be sufficient to keep these things poking along in all of these countries.

QUESTION: Regarding the point you made earlier on poverty. We are thinking about these things now. I think there's a lot of people who seem to wonder why the Fund does not make a political analysis as far as possible of the situation in a country when framing a program.

MR. FISCHER: Well, I don't think the Fund has any particular comparative advantage in presenting political analyses. We make a basic judgment when we decide on a program, namely, whether the program is likely to be carried out by the government or not. And our political analysis and our political decision making comes much more from the Executive Board. All members of the Fund, as you all know, are represented in the Board. We present a program. We've discussed it with the Board before it even goes to the Board, so we know their views. And I know there are political judgments in that from each country. But those are judgments which have to be worked out by the governments which instruct their Executive Directors as to how to vote.

And the decision whether, to take an example that is now history, whether the IMF should make a loan to Indonesia, when it has been thought that there's a lot of cronyism and so forth. That decision is one which is made by our Board members on the basis of a judgment--which I would share--that it's very hard to think that it's your job to punish citizens of a country for all the sins of the government unless you think that your financing is going to be misused.

So if you think you can control the use of the financing and you think you're doing good for the citizens of the country, then my own personal judgment is we have an obligation to the people in that country to go ahead. We don't need to form very sophisticated judgments about the political forces in those countries. We basically have to form a judgment on whether the government will do what it says it will do in an overall satisfactory way.

That's the judgment we form. Sometimes we're right. When we're right, you tend not to hear about it. Sometimes we're wrong. When we're wrong, you certainly hear about it.

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