A S A D E V E L 0 P M E N T F 0 R U M 93663 ADF DISPATCHES E a s t A s i a T h e Unf nished Agenda Friday, March 13 STIGLITZ CALLS FOR MORE CAUTION AND SUPERVISION IN FINANCIAL SECTOR W orld Bank chief economist Joseph Stiglitz argued against "mindless liberalization" of the financial sector, and called instead for a carefully sequenced opening of the banking and financial businesses, with an emphasis on monitoring and supervision. In the keynote address at the ADF, where economists and policy makers have been exploring the painful economic reversals in East Asia, Mr. Stiglitz took the position that "across-the-board deregulation of financial markets" isn't justified by either economic theory or experience. Underscoring the need to guard the financial system, he reasoned that banks and financial houses function as the "brain" of an economy, collecting savings and allocating them to the most productive recipients. He urged policymakers throughout the world to "understand the role that government plays" in sustaining financial systems that can support equitable growth. Specifically, he said that governments have a responsibility to: -improve supervision offmancial institutions, including the pro- mulgation of risk-based capital-adequacy standards. -remove incentives that lead to excessive reliance on short- term capital flows. -limit exposure to real estate and foreign exchange. -monitor lending in the corporate sector. Discussing the various imperfections of the financial markets- QUOTE OF THE DAY and the reasons for not relying solely on market forces- Mr. Stiglitz emphasized the frequent lack of information. In the case of "The elements that led to an unrav- the East Asian economies, lenders saw mostly reassuring data on eling of this success must be confronted the macroeconomic conditions. However, it was private sector debt honestly. In the face of relentless global- problems that created the vulnerabilities, he noted, adding that "get- ting information about private sector spending and borrowing is ization, these elements are all the more much more difficult." glaring: lack of proper regulation, trans- Mr. Stiglitz closed with a broadly hopeful message for there- parency, and accountability that are vital gion. "It's hard to imagine the recent turmoil undoing the gains of in a highly integrated global economy. " the past half century," he said. "Several factors bode well: these economies are export-oriented; they have lots of flexibility and ---- Vinod Thomas, Director, Economic adaptability; reforms are comprehensive; and most governments Development Institute, World Bank are reacting fast. Nowhere else has there been this kind of reso- luteness.'O MANILA, THE PHILIPPINES, MARCH 9-13, 1998 PAGE I ADF Briefs ... Tale of Two Cities: Two Mayors and the Impact of Local Communities Thinking about rethinking the Asian miracle essons of civic activism, effective decentraliza L was a topic that drew a capacity crowd yesterday. Harvard's Robert Lawrence remarked, "One of the un- tion, grassroots environmentalism and good gov fortunate contributions that the World Bank made was ernance rarely come together in a single pack- labeling the Asia economic growth a miracle." Meredith age. But the case of two mayors who shared their expe- Woo-Cumings of Northwestern University lamented the riences at ADF illustrates how local communities can lead tendency to "read history backwards" turning Korea's the way in new efforts in societal reform. development success into "a cesspool of crony capital- ism" in discussions of the recent financial crisis. Prof. Richard Gordon, the 52-year-old mayor of Olongapo City, Lawrence drew attention to Asia's ability to continue grow- Philippines (pop. 250,000), helped lead his constituents ing after 1973, when other parts of the world slid into through an overwhelming environmental problem that stagnation and high inflation. "If that resilience can be threatened not just the beauty but the health of the local replicated" today, he added, the future may be much community. Lacking financial resources to deal with the brighter than the current gloom would suggest. mountains of garbage that were daily dumped on the streets, Mayor Gordon pushed not just for legislation and Foisting fiscal medicine on the wrong patients strict law enforcement, but community participation in is a frequent charge leveled against the IMF by Asian achieving his clean-up goals. By convincing people of the economists. For his part, the World Bank's Mr. Stiglitz importance of clean streets to attracting investors, he mo- recalled debates in the White House, where he was eco- bilized his community to join in what was to become a nomic adviser, over a proposed constitutional amendment successful program that today continues to change the requiring a balanced budget. One of the main bases for face of his community. fighting the plan was that it would force fiscal austerity on the country during economic slumps, thereby making Across the world in Bolivia, La Paz Mayor Ronald the bad times worse. Why is this being prescribed for the Maclean-Abaroa helped clean up his city's corrupt finan- depressed Asian economies? "The standard view is that cial management. Redesigning city administrative systems it's important to restore a flow of funds to countries," he and reinforcing accountability of local officials, he drew said, adding that many believe the fiscal discipline will the public's eye onto the way their city was being man- bring back the investment flows, and shore up exchange aged. Corruption was punished, but good behavior was rates. But he added that the resumed flow of external rewarded by increasing the salaries of efficient and honest investment could be offset if "people move the stock of employees. Not only did tax collections increase but also their wealth out." the effectiveness of how the city's money was being used. Muddling through the Indonesian malaise is the likely result of · the current policy impasse in that Information shortages persist, even in the in- economically stricken country, according to Mari Pangestu, formation age. According to Masaru Yoshitomi of the executive director for the Centre for Strategic and Inter- Wharton School, "globalization means that investors do national Studies in Jakarta. "We know we can't go for not know much about each of the emerging markets be- the best solution," she said. Nor can the country remain cause the cost of information-gathering is very high." With locked indefinitely in a standoff with the IMF. The most respect to East Asia, investors responded to the good realistic outcome, she said, will be "to find the least dis- macroeconomic fundamentals, but had trouble understand- torting second best solution." ing the financial firms and corporate structures that kindled the crisis. D PAGE 2 ASIA DEVELOPMENT FORUM ADF INTERVIEWS: WOMEN LEADERS AT THE FORUM Close to 300 people from around Asia gathered at the Asia Development Forum to discuss the present crisis and the unfinished economic agenda of East Asia. Female economists, professors, policy-makers, and NCO leaders constituted about a quarter of participants. ED/ interviewed Mari Pangestu and Atchaka Brimble on March II . D1: Pangestu leads the Center for Strategic and International Studies in Indonesia and Ms. Brimble is Director of the International Affairs Division of the Board of Investment qf" Thailand. Mari Pangestu Atchaka Brimble Q: What brought your country into the financial cri- Q : What are the most serious consequences of this sis? financial crisis ? Dr. Pangestu: Both domestic and external factors played Ms. Brimble: I would have to say the huge government a role. The contagion factor led to the initial decline of bailout of finance companies that had considerable non- the rupiah, because of similar structures (with neigboring performing loans. It became a public burden. Asian countries). Indonesia was seen as the best, and it initially made the right responses by tightening monetary Q : How does this crisis bring change into the lives of policy. But things went wrong after the first IMF pack- workers, farmers, manufacturers and consumers? age, not because of the IMF package per se, but be- Ms. Brimble: Urban workers and consumers are badly cause of inconsistent domestic policies. affected in terms of higher prices and unemployment. The manufacturing sector is also affected, especially the auto- Q: Domestically, what was wrong? motive industry where domestic demand fell60 percent. Dr. Pangestu: Indonesia suffered from a weak financial The impact on farmers is not clear. Although prices of system: overborrowing, exposure to risky sectors such consumer goods rose, so did the prices of agricultural prod- as property, and too many banks. The set-up (for a fi- ucts. This in a way helped reduce the negative effects on nancial crisis) was there, and it made the crisis worse. them. Many farmers, in fact, can now pay back their loans. Q: Some Asians blame financial globalization, par- Q : How is your government implementing the restruc- ticularly international speculators, for this crisis. Do turing and reform conditions of the IMF and what is the you share the view? biggest barrier ? Dr. Pangestu: Blaming globalization is a dangerous trend and we need to fight it. Globalization is not the cause of Ms. Brimble: For one, the definition of non-performing the crisis. The failure of institutions is the actual cause. loans is now being made stricter. Before, 12 months was the period of non-payment for a loan to be considered Q: What will be the most important factor that will non-performing. This was reduced to six months in De- lead Asian countries to recovery? cember and is now down to three months. Banks are also Dr. Pangestu: We have to have restoration of being forced to recapitalize. Company assets are being confidence. This is a difficult and complex answer. auctioned off to pay back creditors. We need to restore the credibility of the government, not just in Indonesia, but in other countries as well Q : What is the impact of the crisis on the political because ofthe contagion effects; restore the banking processes and governance ? sector, because the economy needs a normal, func- • Ms. Brimble: People are now talking about the need to tioning banking sector; and to restore private sector improve governance. Nobody knew the magnitude of the debt. These are parallel developments." D problem. I also think that the crisis will also push the pub- lic to agree to broader political reform. D ASIA DEVELOPMENT FORUM PAGE3 •· TOUR OF THE THINK TANKS VIEWS FROM ADF PARTICIPANTS This financial crisis calls for pooling intellectual resources within the D What will you take home from ADF? region. A session entitled Think Tanks as Development Agents al- lowed researchers from major think tanks in Asia to make contacts "It gives me more things to do." and exchange views on major issues. For a layperson, the meeting Romeo Acosta, P rogra m Director, was also a good opportunity to compare notes with representatives of Department of E nvironment and well-known think tanks in neigboring countries. Natural Resources, the Philippines Thailand Development Research Institute--Tha iland "The return of confidence in the (Asian) economy." The first policy research institute in Thailand. Non-profit E milio Antonio, J r., Director, and non-governmental. The major research areas are Insti tute for Economic Policy Research macroeconomic policy, science and technology, human "I am keen on the issue of community participation. resources and social development. I got lots of lessons from people with first-hand ·experiences and met people. Some were very good Institute of Southeast Asia n Studies -- Singapore runs." An autonomous regional research centre for scholars and Shankar Ghose, Executive Director, other specialists. A major publisher of scholarly books. National Foundation for India Its focus is on Southeast Asia's socio-political change, economic development, as well as stability and security "We could learn from each other. Rising unemploy- issues. ment in crisis-hit countries is also our problem, as reform proceeds." Malaysian Institute of E conomic Research -- Hong Wang, Professor, Dept. of Health Malaysia Economics, Beijing Medical Univ. Independent and non-profit. Research focus is economic, financial and business issues. "It helped better understanding of development related to this crisis." Philippine Institute for Development Studies - - Paul Byrne, Rural Development Philippines Consultant, Ireland The main research arm of the country's Nationa l Economic and Development Authority (NEDA). Non- "It was a good learning opportunity particularly with stock and non-profit. Long-term policy-oriented research many speakers from advanced countries. Different on social and economic development. It regularly gives culture and cross-questioning also interested me." out sound economic policy advice to the highest levels of Farrukh Sohail Goindi, the Philippine government. It produces nu merous Pakistan Peoples Party publications "Perseverance-- continue on what you have started dealing with macroecomic and sectoral issues affecting whether the crisis." the country. Linda Medalla, Research Fellow, Philippine Institute for Development University for Asia and the Pacific -- Philippines Studies A private sector think tank that concentrates on business and economic research. The business community is its mainclient. D PAG E 4 ASIA DEV E LOPMENT FORUM