Presentation by Kunio Saito
Director, Regional Office for Asia and the Pacific
International Monetary Fund
Given at People to People International's 14^th Worldwide Conference
Hong Kong, November 9, 2000

Thank you Mr. Chairman. It is an honor and a pleasure....

Introduction

1. This afternoon, I have been asked to speak on the subject of "The Promise of Asia—Beyond 2000." This is a broad and an open-ended subject. I could, for example, look at Asia's prospects for a very long time period, like a period beyond 2000 to eternity. The topic could also be interpreted as focussing on short-term prospects. And I would then talk about prospects beyond 2000 through 2001. However, like so many other things in life, the best course for me would be to follow the middle path. So, I will talk about Asia's macroeconomic prospects for the immediate and medium-term future. I will talk about some of the economic forces determining these prospects, as well as key risks and uncertainties surrounding them.

Looking back

2. Before starting to look ahead, however, let us do some looking back. A key message here is that projections can go wrong and economists do make mistakes. This is not a very kind message to economists, including myself. But it should be something I should remember when I talk about future prospects later in my presentation. So, for now, let me look back and go over what economists had said and what actually happened in Asia over the last few decades.

3. Some 40 years ago, in the late 1950s and early 1960s, prevailing views among economists were that Asian economies were unique not only for their poverty but also for their economic stagnation. I remember studying, as an economics student in Tokyo in the early 1960s, the works of G. Myrdahl, J. Myint etc., who seemed to have believed that Asian economies would continue to stagnate and remain poor for historical, social, and cultural reasons. Later, when I joined the IMF, I learned that many economists in international organizations had held similar pessimistic views. Asian poverty and stagnation were the reality, and those of us in the region had to accept it with great frustration.

4. But these economists who held pessimistic views about Asia's future turned out to be wrong, as the Asian miracle began. Starting in the late-1960s, Asian economies began taking off one after another, achieving strong growth and steadily catching up with industrial countries. Although the struggle to overcome poverty continued, the region was no longer stagnant; in fact, it was one of the most dynamic in the world. Underlying this process were the ingenuity and hard work of the people. Because of these and other factors—such as high saving ratios and prudent budgetary management—many people in the region believed, and said with considerable pride, that the miracle would continue. So did economists outside the region, including those in the World Bank—who published a book on the Asian Miracle in 1996—and, I must say, many of us in the IMF.

5. We were wrong again. As we all recall vividly, the Asian crisis began in mid-1997, and the Asian miracle came to a halt, at least temporarily. To our great frustration and dismay, the crisis came rather suddenly, and deepened and widened beyond anybody's expectation. Very few people, if any at all, had foreseen a regional crisis. Very few had envisaged that the crisis would expand to the magnitude that we saw in late 1997 and 1998.

6. The crisis spread beyond Asia—to Russia and Latin America—and culminated in the fall of 1998. At that time, economic prospects, not only for Asia but also for the world as a whole, were very gloomy, and there were real fears of a global recession. Growth projections made at that time, including the IMF's WEO projections, were very reserved, to say the least.

7. I do not need to say much about what happened subsequently. The situation turned around in 1999, and economic prospects continued to improve in 2000. This turn-around was a result largely of policy efforts by major industrial countries and those affected by the crisis. And, therefore, I do not think it is really fair to blame economists for making wrong projections, except, perhaps, for underestimating the dynamics of how strongly policies work on economies by changing market sentiments. I also make exceptions for those economists who argued that IMF-supported programs would not work and, by implication, the countries with these programs would suffer a prolonged economic recession. They were wrong. The IMF-supported programs worked and most countries that implemented them are now recovering strongly.

Looking ahead

8. Let me now turn to the second and main part of my presentation and look ahead into the future of Asian economies. My conclusion is that growth prospects are good not only for the immediate future but also for the medium-term. As I said earlier, however, economic projections are a dicey business, and I have to be careful in making a statement like this. So, I will quickly add that this generally positive outlook comes with a number of associated risks. Also, continued economic growth will be accompanied by considerable economic—and social—change, some of which will be painful in the short-run. Appropriate policy responses to these risks and changes will remain essential.

9. I will now elaborate, starting with prospects for the immediate future.

10. As I indicated earlier, global economic situations and prospects turned around markedly in late 1998 and have continued to improve since then. In the latest World Economic Outlook published last month, the IMF staff projects that global growth will accelerate from 3.5 percent in 1999 to close to 5 percent in 2000, the highest in over a decade. Growth is expected to slow down to about 4 percent in 2001, which is generally considered to be more sustainable. The rapid expansion is accompanied by the convergence of growth rates between the major areas. There have been signs of slowing demand growth in the U.S., continuing expansion in Europe, and recovery in Japan. This convergence of growth rates is what has long been waited for, but it is still too early to be sure that it will continue. There are important risks in this respect.

11. The accelerated global growth is due, in no small part, to the strong economic recovery in Asia outside Japan. In particular, growth in 2000 is expected to be 7-8 percent or even higher for economies like Korea—where progress in post-crisis reform has been rapid and far reaching—as well as China, Hong Kong, and Singapore. Growth is projected to be about 6 percent in Malaysia and Taiwan Province of China, and 4-5 percent in Indonesia, the Philippines, and Thailand. The growth of this last group was affected adversely by political uncertainties and in some cases by delays in reform efforts. For 2001, growth in most Asian economies is expected to be 5-7 percent.

12. Notwithstanding the positive outlook I just mentioned, important risks remain. I have already noted the risks related to possible growth developments in the U.S., Europe, and Japan—including a possible hard-landing of the U.S. economy and a faltering of the recovery momentum in Japan—which would have considerable adverse impacts on Asian economies. There are associated risks of exchange rate instability that might arise depending on developments in the economies of the three major currencies. There are also risks related to the continuing high level of oil prices and volatile financing to emerging market economies, including those in Asia.

13. Looking ahead further over the medium-term, the most important risks to Asia's continuing growth would arise, I believe, from the authorities' policy stance, in two areas. The first is budgetary consolidation. As the recovery in Asia gathers pace and output gaps continue to shrink, financial policies need to be adjusted to a more neutral stance. In particular, governments will have to start budgetary consolidation and restore the region's tradition of fiscal prudence. But policy makers might be tempted to delay the needed budgetary tightening and wait until it is too late. One possible consequence would be the emergence of inflationary pressures, which might derail Asian economies from the projected growth path.

14. The second risk is related to ongoing reform efforts. Encouraged by the strength of the recovery, policy makers and the public may fall into complacency and slow their efforts to advance structural reforms. This may also undermine the projected growth over the medium-term. To underline the significance of this risk, let me go over what reform is trying to achieve, especially in the financial sector, where the IMF has been actively involved. I think the reform has two aims.

15. The first, and well-known, aim is to strengthen the financial sector, by completing efforts to restructure weak institutions, whose problems surfaced and worsened during the crisis. These efforts have involved reducing non performing loans; closing entities with insolvency problems but without viable plans to overcome them; recapitalizing the remaining relatively strong entities; and management and operational restructuring, including strategic mergers and alliances with other firms, redeployment of workers, and changes of management itself. In many cases, these restructuring steps required government interventions and injections of large public funds. Also, financial sector restructuring is being followed by corporate restructuring, especially debt restructuring.

16. The second, and not so widely recognized, aim is to establish a financial system that is less vulnerable to future crises. On a national level, such a system would identify financial problems and weak institutions early on and should let supervisory authorities intervene in weak institutions for early correction of the problems. The system should also be transparent to help prevent market participants from over-reacting, due to lack of information, to perceived weaknesses, as they did during the recent crisis. At the international level, efforts are being made to develop various international codes, standards, and best practices, such as the Basle Committee's codes of best banking supervisory practices and the IMF's transparency codes for monetary and financial sector policies. Also, the IMF, together with the World Bank and other international organizations, has been asked to monitor, initially on an experimental basis, the implementation by national authorities of these and other related codes and standards. When completed, these national and international efforts will help lower the risk of another financial crisis—and help sustain growth without disruptions. This emerging system also means that financial institutions in Asia will be operating on the same supervisory and transparency rules as those elsewhere in the world. Asia will be more closely integrated into the global system.

17. This brings me to the next and last topic—globalization—which generally refers to increased cross border flows of people, goods, and capital. More specifically, it refers to such phenomena as increased short-term capital flows and cross border mergers and acquisitions of financial institutions and industrial firms. It is an emotional and controversial subject—as you all recall, there were large-scale demonstrations against it last year in Seattle at the time of the WTO meeting, and more recently in Prague at the IMF/World Bank Annual Meetings. I would like to make three points.

18. First, globalization helps economies to develop and grow faster. In fact, globalization is one of the key forces underlying Asia's continued economic expansion over the medium-term; another key factor is the so-called IT revolution, which I understand will be the theme of discussion at a later session in this conference.

19. Second, policy responses to globalization can be painful in the short run, but they are essential in sustaining growth over the medium-term. Such responses include those for promoting globalization—such as deregulation and liberalization (opening up) of an economy. Policy responses also include the ongoing reform measures that I mentioned earlier—to strengthen financial and corporate sectors and make them less vulnerable to another possible crisis. In both cases, policies would involve restructuring of weak and uncompetitive enterprises, which would often result in business failures and unemployment. Nevertheless these policies are essential for sustained growth over the medium-term.

20. Third, globalization has created the need for an increasingly large number of international standards, codes, and best practices, and it is in Asia's interest to implement them expeditiously. Some people in Asia say that these international standards are not Asian, and are destroying "Asian ways of life." This is not quite true, as Asian officials have been very much involved in developing these standards, making sure that agreed codes and standards reflect Asia's interests. Also, international standards and best practices keep evolving, and they can be replaced by "Asian ways" if and when Asia comes up with one that is better than the existing best practices. And I am hopeful that this will happen sometime not too far in the future.

Conclusion

21. I have one more point, which is my conclusion. That is that globalization is here to stay. Asia is better off to live with it, as the region has done always in the past, taking advantage of the merits globalization offers and working with others in the international community in dealing with its shortcomings. In this way, Asia will remain a key member of a globalized world, and as such, will be able to prosper in it. To me, this is the promise of Asia—beyond 2000, and I believe it can be delivered.

Thank you.