Director, IMF Regional Office for Asia and the Pacific
The Forum Economic Minister's Meeting
Apia, Samoa
June 30, 1999

Honorable Prime Minister Tuilaepa Sailele Malielegaoi of Samoa, Honorable Ministers, distinguished guests, and ladies and gentlemen.

It is an honor and a pleasure for me to address this distinguished gathering. It is indeed a privilege to speak to the Ministers on the eve of their important meeting, and I am grateful to the host for giving me the honor. I would also like to say that, having worked on the Pacific island countries (PICs) for many years, it gives me a special pleasure to return to the region and to be among my old friends.

Tonight, I will speak on the subjects of good governance, transparency, and accountability. These are the key elements of the reforms that are taking place globally, in Asia, and, of course, in the Pacific island countries. The global reforms - often referred to as the building of a new international financial architecture-and the reforms in Asia spring directly from the Asian Crisis, while reforms in the Pacific island countries have their origins in your own policy deliberations and initiatives.

In the remainder of my presentation, I will first review the events surrounding the Asian Crisis - how it started, and how it is being resolved. Based on this review, I will try to explain how reform in general - and the principles of good governance, transparency, and accountability in particular-have come to be recognized as the key to the resolution of the crisis and the prevention of its recurrence in future. Secondly, I will review what efforts are being made to put these three principles into practice in the context of the global architecture work and in the Asian crisis countries. Finally, I will touch on your own reform efforts and some related issues, from the viewpoint of a concerned and friendly observer from the outside.

The Asian Crisis

Let me start with the Asian Crisis, focusing on a number of its key features.

The first and unique feature of this crisis is that it spread quickly and widely. As is still fresh in our memory, the currency crisis that surfaced in Thailand in July 1997 had spread to Indonesia, Korea, and many other Asian countries by end 1997. This contagion was triggered by massive outflows of private short-term capital. The outflows were, in turn, attributed to the herd behavior of market participants based on insufficient and, at times, inaccurate information. They were also attributable to underlying structural weaknesses - including the lack of transparency, weak governance, and weak accountability among Asian governments and corporations - and the resultant loss of confidence on the part of market participants.

Second, the crisis was extensive, affecting all sectors of the economy. It was simultaneously a currency crisis, a banking crisis, and an economic crisis, as well as, in some cases, a social crisis, as the economic turmoil threatened the lives of the poor and unemployed. For example, in Indonesia, the currency depreciated by 80 percent at its worst, real GDP declined by over 10 percent in 1998, and more than two-thirds of private banks have now been closed, nationalized, or put under government control. The situation in other countries was not as bad as in Indonesia, but it was similar.

Third, the extensive and complex nature of the crisis called for careful and forceful policy responses. In particular, interest rates had to be raised initially to contain the crisis, and lowered subsequently when policy priority shifted from containing the crisis to facilitating economic recovery. Fiscal policy was initially restrictive or neutral, but was later relaxed to support recovery and facilitate social expenditures. Fiscal policy could have been more accommodative from the beginning (as some critiques of the Fund-supported programs have argued), had it been known ex ante that the ex post declines would be as serious as they turned out to be. Economic reform, especially banking and corporate restructuring, began almost immediately after the crisis surfaced, and has continued since.

Fourth, policies worked. The policy programs, supported by financial packages in the case of Indonesia, Korea, Thailand, and the Philippines, were instrumental in containing the crisis and restoring growth. The currency crisis was arrested and the market stabilized in most Asian countries by February 1998 and in Indonesia by mid-1998. The recession in Asia bottomed out in late 1998 or early 1999. In the meantime, most Asian countries continue to maintain expansionary fiscal and monetary policies, combined with flexible exchange rate arrangements, while forcefully pursuing economic reform.

Fifth, as a consequence, there now appears every prospect that we shall see a U-shaped recovery in Asia. For those economies most affected by the Asian crisis - the four large ASEAN economies (Indonesia, Malaysia, the Philippines, and Thailand) plus Korea, Hong Kong SAR, and Singapore - the IMF staff now projects real GDP growth of 1-2 percent for 1999 and 3-4 percent for 2000. There is no guarantee that such a recovery profile will, in fact, be achieved. Risks remain, particularly those related to the assumption of a soft-landing of the U.S. economy, continued economic recovery in Japan, and a resumption of capital inflows to Asia. There are therefore considerable uncertainties and associated risks, but the Asian recovery has so far started strongly: IMF staff projections may need to be revised upward.

Sixth and lastly, the continuation of this recovery process over the medium-term depends very much on the progress of structural reform. Expansionary fiscal and monetary policies alone cannot sustain the recovery. Structural reforms will have some negative impact on aggregate demand and employment in the short-run (this explains the U-shaped recovery in Asia), but they are essential in strengthening the economy's productivity, efficiency, and competitiveness, and thus, establishing a base for sustained growth over the medium-term.

The Reform Process

As I just mentioned, the most important challenge facing Asian countries is to sustain economic recovery over the medium-term, by continuing the reform effort on all fronts. This also applies to the international community in general, which, as I mentioned earlier, has been working on a new international financial architecture. The objective of this work is to help ensure sustained growth of the world economy by preventing crises or, when they occur, by handling them better and minimizing their negative impacts. Obviously, these two reform efforts, by individual countries in Asia and elsewhere and by the international community as a whole, are closely related to each other.

So, let me now explain what efforts are being made, beginning with the new architecture discussion.

Discussion on the new architecture is being conducted by various policy fora - the G-7, G-22, etc - and involves the IMF, the BIS, and other international organizations. It covers a wide range of issues and is difficult to present in a simple and straightforward manner. Nevertheless, at the risk of over-simplification, I will try to summarize the work by dividing it into three areas.

The first area of work is that of helping market participants become better informed, and this is particularly relevant to your discussions here at the FEMM. It relates to the issues of transparency, data dissemination, and standards setting, as well as good governance. One of the lessons of the Asian crisis is that market participants overreact and misbehave if they do not have sufficient information. So it is essential to inform them better by enhancing policy transparency and providing more and better data. Providing improved data and enhancing transparency requires setting global standards - standards of good practices against which improvements can be assessed. Considerable progress has been made in this area and I will just mention a few in which the IMF has been directly involved. First, the IMF's Special Data Dissemination Standard (SDDS) has been strengthened by including more data on reserves and short-term liabilities. Second, a Code on fiscal transparency has been adopted and is being put in place in many countries, and, third, a similar Code on monetary and financial sector policies has been drafted and is expected to be finalized by this fall. Also, a number of steps have been taken to enhance the transparency of the IMF's own activities. The tasks now are for more member countries to adopt and implement the expanded SDDS and the transparency Codes.

The Architecture discussion has two other aspects, which I will mention only briefly, because they have less relevance to your deliberations. One is to define the exceptional circumstances under which it would be appropriate to restrict capital flows or to moderate the activities of some market participants, such as highly leveraged institutions, including hedge funds. There is a broad consensus in both respects and these discussions are now focusing on the concrete steps needed to translate this consensus into action. In the case of highly leveraged institutions, those actions have included a tightening of prudential regulations on banks, and the related strengthening of supervisions.

The other aspect of the Architecture debate is the need to increase the resources on which a crisis-hit country can draw, since recent - 21st century type - crises usually involve a massive capital outflow. The IMF has addressed this issue by introducing in late 1997, the Supplemental Reserve Facility and more recently, the Contingent Credit Line. It has also strengthened its own resources as the quota increase and the New Arrangements to Borrow (NAB) have recently been put into effect. The remaining issue is to find the best way to involve private creditors - by providing credit lines prior to a crisis, and by facilitating debt rescheduling and debt forgiveness when a crisis occurs. There is broad consensus to move ahead in this direction, and concrete steps are currently being considered.

Let me now touch briefly on the reforms being undertaken in Asian countries, and I will start with the aspect that is most relevant to your discussion - reforms aimed at achieving good governance, transparency, and accountability.

As I mentioned a few minutes ago, for Asian countries too enhanced transparency is vital to inform and guide market participants appropriately. But, for Asian countries transparency means a great deal more. It was a means, in my view, to achieve good governance and accountability, and to eliminate such practices as corruption, collusion, and nepotism. For many Asian countries, eliminating these practices and establishing good governance, transparency, and accountability have been critical elements in containing the crisis. This will be clear if you recall that one of the fundamental causes of the crisis was the lack of these qualities and the resultant loss of market confidence.

What about implementation? I must say that the crisis-hit countries have dealt with these issues with great determination and vigor. Considerable progress has been made in many respects, and the markets are becoming convinced that the countries have changed for good. Nevertheless, these are complicated and difficult tasks, and efforts will clearly have to be continued. In the meantime, most Asian countries have indicated their willingness to accept the outcome of the Architecture discussion - including the expanded SDDS and the transparency codes on fiscal and monetary policies - as well as the codes of good governance developed by various bodies including APEC.

Another key aspect of the reform process underway in Asia is the restructuring of the financial and corporate sectors. This restructuring, unprecedented in terms of both its scope and speed at least in Asia, is painful in the short-run but essential for sustained growth over the medium-term. It has many interesting features and provides lessons to be learned by outsiders. But I will not go into detail on these aspects, because they are not as directly relevant to the PICs.

The Forum Process

Let me now turn to a subject that is closer to home for most of us and that is, after all, the reason why we have come to Samoa, namely the third Forum Economic Ministers Meeting (the FEMM), which starts tomorrow. While this meeting may not attract the same headlines as the events I have just talked about, it is nevertheless important not only to the Pacific island countries themselves but also to the international financial community at large. It is important because the outcome of the meeting will say a lot about how the Pacific island countries - mostly small in size and resources, but diverse and rich in history and culture - are succeeding in developing a joint approach to economic and financial management, and how they plan to translate intentions into concrete actions in the context of a regional reform program. There are lessons to be learned not only for the region but also for many people outside the region.

Honorable Ministers, we believe that the FEMM process has come a long way in promoting reform in Pacific island countries. As a representative of an institution, the IMF, that has followed the process closely, allow me to go over its history briefly, and reflect on progress being made in promoting reform in the PICs. The starting point, I think, should be the first Forum Finance Ministers meeting in Suva, Fiji in early 1995. This meeting focused mainly on domestic policy and development issues in a broad and pragmatic way, but it also stressed the need for structural reform with strategic vision. At the next Forum Finance Ministers meeting, held in Port Moresby, Papua New Guinea in late 1996, the international dimension of economic development and reform was recognized, and at the same time, some more concrete objectives were defined in the area of structural reform, mostly for public sector activities and management.

However, it was not until the first Forum Economic Ministers Meeting in Cairns, Australia in July 1997 that a formal Action Plan was formulated and endorsed by the participating countries as a guideline for their domestic policies. In our view, this represented a quantum leap in the regionalization of economic and financial policy making in the Pacific island countries. It represented a major step toward understanding the commonality of problems as well as interests in PICs, and toward defining a regional strategy not only for pursuing these common interests, but also in support of sound domestic policies. It is also our view that the Cairns Action Plan appropriately recognized the concrete steps needed to develop and implement economic reform strategies successfully. In particular, the Plan recognized the importance of public accountability and good governance for the success of reform programs. Toward that end, the participating PICs committed themselves to the so-called Eight Principles of "Best Practice" for Public Accountability, recognizing that policy making and implementing processes can be just as important as, or even more important, than ultimate outputs.

The 1998 FEMM in Nadi, Fiji reviewed implementation of the Cairns Action Plan, revisiting the theme of good governance and public accountability. This meeting also adopted the International Monetary Fund's Code of Good Practices on Fiscal Transparency, as "a model on which Forum countries can draw." This meant that the PICs would remain in close contact with major policy reform initiatives designed to become a standard world-wide. An additional benefit of the adoption of the IMF's Code is that PICs can now draw on the extensive information and advice embodied in the Code. The issue of transparency is now being broadened and recently a transparency code on monetary and financial sector policies has been drafted. This draft code is now on the IMF's internet for comments from the public, and the IMF Board is expected to complete this work by the time of the next meeting of the Interim Committee in the fall.

Good governance, transparency and accountability were the principal messages at the Conference on Fiscal Policy and Reform held here in Apia in February this year. The Conference was organized jointly by the IMF and the Pacific Financial Technical Assistance Centre (PFTAC), and with the generous support of the Samoan authorities. Its conclusion are outlined in background Paper FEMS.10 for tomorrow's meeting. As mentioned in the background paper, the conference participants underscored that fiscal policy and reform will remain at the heart of economic, financial, and social development in PICs. They agreed that commitment and ownership are essential for the success of reform programs. Participants also noted that the tight resource constraints that prevail in most PICs require that particular attention be given to prioritization and sequencing. In this context, participants emphasized the importance of stronger regional cohesion and cooperation and of appropriate and well-coordinated external financial and technical assistance.

Conclusion

Honorable Ministers, ladies and gentlemen, for the last twenty minutes or so, I have been talking about the reform efforts that are taking place globally, in Asia, and the Pacific island countries. Everywhere reform is proceeding rapidly and forcefully, especially with regard to its three key elements - good governance, transparency, and accountability, I have also noted that considerable progress is being made in setting codes, guidelines, and standards, which can be used by individual countries, including Pacific island countries, in advancing their reforms.

In the Pacific island countries, efforts have been made to make reform a regional strategy, and in this respect, considerable progress has been made since the first Finance Minister's meeting in Suva in 1995. The region now has more experience with reform programs, as well as a clearer understanding of policy issues, including the need for transparency. Discussions that have since taken place also highlighted the common issues for the PICs, such as limited implementation capacity and the related need to prioritize reform agenda, as well as the importance of ownership and commitment.

All these observations suggest that reform in the PICs, and the Forum process, have now reached a higher, advanced level. In particular, there appears to be a need to deepen and broaden the understanding of priority policy issues for the region through solid information and analysis. In addition, there appears to be scope for a further strengthening of ownership and commitment through peer support - or pressure - and through an effective working of the Forum process itself. More generally, these observations suggest that the 1999 FEMM, as well as future minister's meetings, will have an important role to play in the advancement of economic and social development of the region. In short, what I am suggesting, I am afraid, is that Ministers have plenty of work to do at their meeting in the next few days.

Let me conclude by saying that I am looking forward to the discussions over the next two days. On behalf of the IMF and, I wish the organizers and participants all the very best for a fruitful exchange of views and experiences. I also hope that the meeting will result in yet a further strengthening of regional cohesion, cooperation, and coordination.

Thank you.