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Web-only Exclusives November 30, 2000 From Our Correspondent: Hirohito and the War A conversation with biographer Herbert Bix From Our Correspondent: A Rough Road Ahead Bad news for the Philippines - and some others From Our Correspondent: Making Enemies Indonesia needs friends. So why is it picking fights? |
ASIAWEEK EXCLUSIVE INTERVIEW: JANUARY 6, 2000
Still More Work To Do
The IMF's outgoing Asia hand takes stock
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 Hubert Neiss |
What is your assessment of the Crisis-hit economies now?
In all Crisis countries, the situation has stabilized and the real economy has turned around. In that sense, the Crisis is over. However, in all countries, there are still the after-effects of the damage to the banking system and to the corporate sector. Efforts are still underway and have to be continued to repair these damages. In this sense, the Crisis is not yet over. But with continued macroeconomic support, with a continued favorable world economic environment, and with continued efforts to restructure banks and enterprises, the recovery will continue [this] year.
Are you particularly concerned about any of the Crisis countries?
Clearly, [South] Korea is more advanced among the Crisis countries [in recovering] and Indonesia still has to catch up. Indonesia now has a new government and the chance to accelerate catching up. No doubt substantial progress has also been achieved in Indonesia. The financial situation has also stabilized and growth has also turned around and is positive. And there is virtually no inflation. The damage to Indonesia was much larger and it will be more difficult to pull this country out of the recession.
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The priorities are corporate restructuring and the further strengthening of the financial system. To be more specific, within corporate restructuring, the priorities are to agree and complete the workout on Daewoo, one of the largest [conglomerates or chaebol], and to protect the financial system from the repercussions of that workout. That means further strengthening the banking system as well as the investment trust companies.
What are obstacles?
Well of course, there are always obstacles to restructuring. These are technically complex and politically sensitive issues which take a longer time to deal with. It is very important that the government is fully and strongly behind this process. And that certainly has been the case in Korea so far.
Has there been any complacency?
Complacency is always a risk in any of the recovering countries. But so far I personally have not encountered actual complacency. In all countries, governments are active in pushing the recovery and restructuring process.
What about Thailand?
In Thailand, the priority is to further strengthen the banking system and to speed up its recapitalization and reduce the amount of non-performing loans, which are particularly high in the Thai banking system.
What needs to be done more specifically?
What needs to be done is what, in various forms, is being done in other countries. [For example,] to develop a mechanism by which non-performing loans can be taken off the balance sheet of banks. In Indonesia, for example, it's the asset management unit. Other countries have various forms of asset-management corporations. That's the first step. The second step is to speed up recapitalization of banks, partly through the market and partly through government support. Again, there are various mechanisms to do that.
Is banking reform going too slowly in Thailand?
The direction is right. The pace certainly should be faster.
What about the highly publicized scandal at state-owned Krung Thai Bank?
This is just one symptom that restructuring of the banking system has not yet been completed and must be pushed forward.
In Indonesia, are politics and other domestic issues getting in the way of real economic reform?
There is always such a risk not just in Indonesia. But in Indonesia, it is now less so than before because there is a new government that is considered by the majority to be legitimate and therefore, there is a new opportunity for this government to continue the restructuring and recovery process.
But with all the problems the administration has with Aceh and concerns about the military, can the new leadership get anything done on the economic side?
As long as there is social and political stability, the possibility is there to even accelerate the progress of rehabilitation of the Indonesian economy.
What lessons should we get out of Malaysia and its apparent success with capital controls?
The lesson I would personally draw is that exchange controls and capital controls played a minor role in the recovery process of Malaysia. They came late in the game anyway and then were watered down to a 10% withholding tax. Nevertheless, I think that countries should not necessarily jump to instituting controls but should keep open the possibility of putting in certain restraints if warranted. The Malaysian lesson is not that controls are always necessary to get the country out of the crisis. Countries without controls have done just as well as Malaysia. In fact, the Philippines has done even better. They hardly had a decline in output last year. So I wouldn't jump to conclusions.
IMF official like to mention the Philippines a lot these days.
It shouldn't be overlooked because there can also be lessons learned. The Philippines, like Malaysia, had earlier had banking difficulties but already introduced some reforms so that the banking system was in a stronger position when the Crisis broke. That certainly helped. Although the Philippines did have short-term debt, like Malaysia, it didn't push it as excessively as other countries. So that helped to weather the Crisis. We refer to the Philippines often because it was the only country that did have an IMF program already before the crisis. So the program strategy cannot have been wrong because they weathered the Crisis better than the rest.
But Filipinos are now wondering if the economy will recover as strongly as the rest.
That is true. The issue now in the Philippines is how to promote the faster recovery and here, traditionally, fiscal policy has been the Philippines' Achilles heel. And we are now discussing with the Philippines how to strengthen fiscal policy, in particular tax reform, to ensure that the fiscal situation remains sound. That is important for the recovery and to generate the necessary confidence.
Is that going to be a problem with other economies as well?
Not really. Traditionally, most Asian countries have been fiscally conservative. That was a big advantage in the Crisis because they started with relatively low public debt, with the possible exception of Indonesia. Therefore, these countries could afford to go into deficit during the recession and recovery to support the economy and to use public funds for bank recapitalization. But no doubt over the medium term, these countries will have to adjust fiscal position again and revert to their earlier, much more balanced fiscal position to keep their debt position sound.
Will that be difficult?
It will be, but the difficulties are not insurmountable. As I said, most of these countries have had a tradition of conservative fiscal policy.
What about Japan's rebound?
The third-quarter growth results were somewhat disappointing. And the latest monthly indicators are not too encouraging. Nevertheless, I believe the Japanese economy is in the process of a slow recovery. Japan is benefiting from a return of confidence after the banking crisis was tackled with determination. You can see the confidence in the development of the stock market. And Japan also benefits from the generally buoyant world economy and especially the recovery in the region. It is necessary, of course -- and the third-quarter results have underlined this -- that macroeconomic policies must remain strongly supportive. That means that fiscal policy should remain expansionary. A new supplementary budget and a new stimulus package have assured that. And monetary policy should remain as expansionary as possible. The Bank of Japan has also indicated that. No doubt Japanese recovery remains fragile at this point. And there are also risks.
What are those risks?
There are basically two risks. One is that the yen appreciation gets extreme. The other risk is that the U.S. slowdown is more abrupt than presently expected -- that the U.S. has a hard landing. That would influence developments in Japan adversely and would have repercussions on financial markets in the region. But this is a risk, not a forecast.
Are you concerned about how well economic policy is coordinated in Japan?
The strategy is in the right direction: an expansionary fiscal policy, an expansionary monetary policy, completion of restructuring of the banking system and supporting corporate restructuring. These are the main elements that are responsible for Japan's recovery and a resumption of sustained growth in Japan.
Is real reform happening in Japan and what about its mounting debt?
After several years of expansionary fiscal policy which was necessary to support the economy, there is the medium-term issue of fiscal consolidation which will surely be a difficult task.
Could it impinge on recovery?
No I don't think so. The recovery is supported by fiscal policy. But once the recovery is firmly in place, the recovery itself will help in the process of fiscal consolidation. As the economy grows faster, tax revenues will grow faster and the need for public expenditures will recede.
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