| Provisional Translation |
The Road to the Revival of the Asian Economy and Financial System |
June 20, 2000
Subcouncil on the Revitalization of the AsianEconomy and Financial Markets
Council on Foreign Exchange and Other Transactions
(Summary)
| Introduction |
To ensure that the presentrecovery trend of the Asian economy is put on asolid basis, and to ensure Asia's stability andprosperity in the 21st century, it is necessary tobuild stable economic and financial systems thatcan support sustainable economic growth. Basedupon this understanding, the subcouncilidentified, considered and presented the variousmeasures that it will be necessary for Asiancountries to implement for the sake of the revivalof Asian economy and financial systems in the 21stcentury, focusing in particular on regionalcooperation within the Asian region. In order toreflect the views of Asian countries, members fromnine Asian economies were invited to participatein the deliberations of the Subcouncil.
| (Note) | In this report "Asia" refers primarily to the East Asian region along the Pacific coast from the Republic of Korea in the north to Indonesia in the south. |
| I. The Asian Economy: Current Situation and Prospects |
1. CurrentSituation of the Asian Economy
The Asian currency andfinancial crisis dealt a heavy blow to the Asianeconomy, illustrated by the fact that numerouscountries suffered severe recessions in 1998.However, the real growth rate in 1999 turnedpositive in all countries of the region, althoughthe pace of recovery varied from country tocountry. The factors behind the economicrecovery include the growth of exports, theimplementation of appropriate fiscal and monetarypolicies, and progress in the reform of thefinancial and corporate sectors. Since mid-1999exports of Asian countries have grown sharply, andthat growth has been contributing to thefaster-than-expected recovery of the Asianeconomy. The growth in exports is partlyattributable to a virtuous circle from theregional economic recovery and the interdependenceof the Asian economies.
In order to stabilize theirfinancial systems, many Asian countries have beentaking various measures. As a result they havelargely halted the uptrend in non-performing loans(NPLs), and in many countries these have begun totrend downwards, however, the stock ofoutstanding loans of financial institutions iscontinuing to decline, and this is one of thefactors which impedes the recovery of production.In addition, financial reconstruction is imposinga heavy current and future fiscal burden on theirgovernments.
The Asian currency and financialcrises have had an enormous negative social impacton Asian countries, including increases in thenumber of people below the poverty line althoughthe degree differs according to country, province,sector, and group.
2. Causesof the Asian Currency and Financial Crisis, andLessons to Be Learned
The causes of, and background to,the Asian currency and financial crises differfrom country to country. Basically, however, therewere composite factors comprising macroeconomicfactors - relating to international finance(abrupt and large-scale international capitalmovements) and microeconomic factors - domesticstructural factors (the vulnerability of thefinancial and corporate sectors), meaning that thecrises were "twin crises". In orderto build stable economic and financial systemsthat can support sustainable economic growth, webelieve that approaches must be made from threelevels: (a) domestic efforts at the nationallevel, (b) global efforts to strengthen theinternational financial system, and (c) regionalefforts within the Asian region.
3. TheLong-Term Prospects for the Asian Economy, andIssues to Be Resolved
Although the high growth of theAsian economy up to the time of the currencycrisis was lauded as the "East Asianmiracle", the Asian currency and financialcrisis has given rise to cautious views about thefuture prospects of the Asian economy.
However, we believe that theAsian economy will be able to maintain relativelyhigh growth rates, considering the followingpoints: (a) the strength of the fundamentals ofthe Asian economy, which supported high growthover the past 30 years (e.g. the high saving ratioand continuous investment in education), hasbasically remained unchanged since the Asiancurrency crisis; (b) good education levels make itmore probable that Asian countries will be able touse the advantages offered by the IT revolutioneffectively; (c) given factors such as thestrength of the entrepreneurial spirit in Asia, itshould be possible for Asian economies totransform their growth patterns from aninput-dependent type to an a productivity driventype by strengthening market functions byreforming the financial and corporate sectors, andby encouraging research & development andhuman capital development; and (d) the dynamicupgrading of the industrial structure in Asiancountries, and its intraregional linkages,demonstrate that Asia as a region has the abilityto change its industrial structure in accordancewith changes in comparative advantage.
Foreign direct investment plays animportant role in achieving high growth. Inaddition, it is necessary to form an accumulationof technology across the entire Asian region withan intraregional complementaryindustrial-technology network, while anindependent technology base is established to acertain extent in each national industrialframework.
4. TheDeepening of Interdependence in the Asian Economy
The pattern of trade in 1997 often Asian economies (4 ASEAN countries, the NIEs,China, and Japan) shows that 46% of exports and50% of imports were intraregional. As a result ofthe chain of upgradings of industrial structuresin the Asian region, very close trading andinvestment relationships have arisen, and this iscreating a value-chain structure of trade andinvestment within the region. It is forecast thatthe degree of intraregional dependence in Asiawill increase still further in the future as aresult of the expansion of the regional market andthe progress of free-trade agreements such as theASEAN Free Trade Area (AFTA). The Asian economyhas been shifting into a new stage in which thereis vertical and then horizontal division of labor,based upon the expansion of Asian countries'domestic markets or the formation ofindustrial-technology networks. The Asianeconomy has attained a high level ofinterdependence, not seen before in the region,and economic and social unity is beingstrengthened.
| II. | The Building of Stable Economic and Financial Systems that Can Support Sustainable Economic Growth |
1. DomesticEfforts Taken within Individual Asian Countries
| (1) | Reform of financial and corporate sectors Many Asian countries have been taking vigorous steps to rehabilitate their financial and corporate sectors (including through the liquidation of failed financial institutions, recapitalization of financial institutions, disposal of NPLs, and restructuring of corporate debt). As a result of these efforts certain progress has been made in the reform of their financial and corporate sectors. Nevertheless, many problems remain unresolved. We believe that the continued rehabilitation and strengthening of those sectors is also an important issue to be addressed. Economic recovery is providing an environment that will enable the structural reform of their financial and corporate sectors to be carried out in a robust manner. It is essential for Asian countries not simply to satisfy themselves in the recovery of their economies, but to make vigorous use of the opportunity this creates to further accelerate structural reform. To adduce specific measures: (a) strengthening the functions of financial institutions; (b) promoting finance to small and medium-sized enterprises; (c) developing domestic bond markets; (d) strengthening the operation of bankruptcy laws; and (e) strengthening corporate governance, are important. |
(2) |
Although the appropriate exchange rate regimes for Asian countries differ in regard to aspects such as their economic scale, dependence on trade, trade structure, and the stage of sophistication of their financial systems, it has been pointed out that both fixed and floating exchange rate regimes retain various problems for many Asian countries. If countries want to stabilize their exchange rates, the real effective exchange rates will be more stable if a currency basket comprising the yen, the dollar, and the euro is selected, rather than the dollar alone, given that Asian countries have diverse trade and other economic dealings with Japan, the United States, and Europe. Therefore, we believe that a persuasive option for many Asian countries is an exchange rate regime in which the currency is held stable against a currency-basket made up of components such as the dollar, the yen, and the euro, each being assigned a weight in light of trade and other economic factors. Such currency-basket regime should also ensure flexibility by such means as having a sufficiently wide band in which to move. |
(3) |
Appropriately sequenced capital liberalization is important for emerging market economies. Although capital controls are not substitutes for sound macroeconomic policies and structural policies, they would be a possible option in the event of sudden large-scale short-term capital inflows in economies in which financial systems are insufficiently developed. |
(4) |
For social safety nets to function well during times of currency crises, it is necessary to put appropriate ones in place prior to the occurrence of the crises. Asian countries are at differing stages of economic development and have different cultures and traditions, and they have developed their own unique systems and practices to resolve social problems. In view of this, when developing social safety nets it is necessary for them to conform with the realities of the situation in each country. |
2. GlobalEfforts to Strengthen International FinancialSystem
| (1) | Report by G7 finance ministers to the Cologne Summit in June 1999 and the Financial Stability Forum G7 Finance ministers issued a report entitled "Strengthening the International Financial Architecture" at the Cologne Summit. Steps to carry out the proposals in this G7 finance ministers' report are currently being vigorously pursued in such fora as the IMF, the G-20, and the Financial Stability Forum. Among these, the Financial Stability Forum established three working groups to examine: (a) highly leveraged institutions; (2) capital flows; and (3) offshore financial centers; and these working groups issued their final reports in March 2000. |
(2) |
The reform of the IMF is essential in order to build an international financial system that will not succumb easily to currency crises. The following aspects must be important in carrying out reform of the IMF: (a) to improve conditionality; (b) to pay greater attention to large-scale and abrupt international capital movement when conducting IMF surveillance and when formulating programs, and that greater importance be given to crisis prevention than to crisis management; (c) to strengthen the accountability of the IMF by enhancing its transparency and improving its policy-making procedures; (d) to improve the contingent credit line (CCL); (e) to review the allocation of quotas; and (f) to develop a mechanism for complementing IMF assistance. Over half a century has passed since the establishment of the IMF. Despite the fact that many emerging economies, including in Asia, have become important economic powers, the allocation of quota shares, voting shares, and Board representation of emerging market economies have been considerably limited. A review of quota allocation, voting shares, and number of Executive Directors to more appropriately reflect the economic realities of member countries is an important issue related to the IMF's governance and accountability. We believe that an immediate review and correction are essential. |
3.Regional Efforts within the Asian Region
An important point that was madeclear by the currency crisis is that as a resultof the increasing interdependence in trade andinvestment in the Asian region, if a currencycrisis occurs in the region it can spread rapidlyto many countries, and there is a risk that thiswill cause intraregional economic activity tocontract in a vicious cycle. To build stableeconomic and financial systems that will make itpossible to achieve sustainable economic growth,region-wide efforts are indispensable.
In the course of surmountingeconomic difficulties in the wake of the currencyand financial crisis, common recognition of theimportance of regional cooperation has grown amongAsian countries. Based on this common recognition,an informal ASEAN + 3 (Japan, China, Republic ofKorea) summit was held in Manila in November 1999,where a joint statement on East Asia cooperationagreed to "strengthen policy dialogue,coordination and collaboration on the financial,monetary, and fiscal issue of commoninterest." That was an extremely importantfirst step towards strengthening regionalcooperation in Asia.
| (1) | Promotion of intraregional trade and investment Companies in Asia are progressing with the building of intraregional procurement, production, and sales networks. In order to assure that the optimum allocation of industry accords with changes in comparative advantage, and to promote the chain of upgrading of industrial structures in the region, we believe that it would be effective to form a free-trade area to complement the multilateral trading system based on the WTO. Given factors such as substantial differences in the stages of economic development of Asian countries and the existence of delicate domestic political problems, in forming a free-trade area in Asia it would be both effective and realistic to adopt a multilayered and phased approach in which bilateral free trade agreements are combined with AFTA. We believe that it is necessary to vigorously pursue regional integration in concert with the strengthening of the multilateral trading system and the furtherance of regional cooperation. |
(2) |
Given the increasing degree of interdependence within Asia in the sphere of trade, the recent currency crisis has taught Asian countries to recognize the importance of developing trade-financing systems that can support sustainable economic growth. In consequence, many countries are taking steps to establish or strengthen governmental export-import banks. It is important to actively foster the development of regional trade-financing networks of this kind. |
(3) |
The development of domestic capital markets, particularly bond markets, is an important issue for Asian countries to address. However, factors such as the lack of maturity of domestic institutional investors mean that it will be some time yet before all of these countries have sophisticated bond markets, and the domestic bond markets are restricted with respect to their scale and the availability of funds. On the other hand, taking into consideration factors such as the saving surpluses in the Asian region as a whole, and the future growth of institutional investors in Asian countries, we believe that there will be growing demand for regional bond markets in which Asian investors can engage in pricing within the Asian time zone. Therefore we believe that in order to establish a mechanism to facilitate the recycling of long-term capital from countries with saving surpluses to those with shortages in the region, it is necessary to make region-wide efforts to develop regional bond markets, including by invigorating the region's international bond markets (e.g. Tokyo, Hong Kong, and Singapore). |
(4) |
In Asia, the dependence on trade of many Asian countries is considerably higher than in parts of Europe, and as referred to above, intraregional trade has grown to account for nearly 50% of total trade. In view of this, we believe that Asia is reaching the stage at which it should study a regional currency stability mechanism that will ensure that exchange rates in Asia reflect economic fundamentals, and move in a stable manner. In view of factors such as the substantial differences in the stage of economic development of the countries of Asia, when considering a regional exchange rate stability mechanism it would - as in the case of the formation of a free-trade area - be both effective and realistic to adopt a multilayered and phased approach in which bilateral agreements and regional agreements are combined. For example ASEAN countries have agreed to eliminate tariffs within the AFTA by the year 2018, thereby completing the creation of a free-trade area. Europe's experience suggests that to foster trade and investment in a free-trade area the stability of exchange rate in the area is as important as the level of tariffs, and thus a possible option for the ASEAN countries is to link their exchange rates to a common currency basket, while maintaining a sufficiently wide band. As for a common currency, monetary union was finally achieved only after a long period even in Europe where nations have relatively close economic, historical, and cultural backgrounds. Regarding a common currency in the Asian region, with its greater complexity and diversity, we believe that - setting aside the long-term possibilities - the environment at present is not conducive to proceeding with monetary union in the immediate future. On the other hand, we can foresee a considerable degree of convergence of the income levels and economic structures of Asian countries over the long term. With regard to regional cooperation in the sphere of currencies we consider it necessary that, from this long-term perspective, continuous strategic efforts be made. |
(5) |
In order to build a currency stability mechanism within Asia it is important to promote policy dialogue within the region, so as to ensure that individual countries' macroeconomic and other policies are not managed in a way that is inconsistent with the relevant exchange rate level. To foster this dialogue further, it is important to develop relationships of mutual trust and to build relationships in which frank and constructive opinions can be shared, by building networks for multilayered policy dialogue in various sectors, at various levels, and in various forms while utilizing existing frameworks. At the ASEAN + 3 summit held in Manila in November 1999, it was agreed to strengthen policy dialogue. Based upon a Japanese proposal, the ASEAN + 3 finance ministers' meeting in May 2000 began an economic review of the economic circumstances of the countries of the region. In addition, Japan, China, and the Republic of Korea have major roles to play in furthering regional cooperation in the Asian region. Policy dialogue among the three nations should be furthered by making active use of opportunities such as the Japan-China-Korea seminar on international finance. |
(6) |
Considering factors such as the growing interdependence in the Asian region and the possibility of the contagion of currency and financial crises within the region, we believe it to be indispensable to have a regional financial arrangement to complement existing international financial cooperation mechanisms, including the IMF. Such a framework for regional cooperation between monetary authorities would also contribute to the stability of exchange rates within the Asian region. There are already a number of cooperative relationships between monetary authorities in the Asian region, for example swap agreements between Japan and the Republic of Korea, and between Japan and Malaysia under the New Miyazawa Initiative, dollar repurchase agreement facilities between various Asian countries, including Japan, and a swap arrangement within ASEAN. In view of factors such as the diversity of Asian nations, in strengthening the framework for regional cooperation between monetary authorities it would be both effective and realistic to build networks for multilayered financial cooperation by expanding and combining the bilateral and multilateral cooperation. At the ASEAN + 3 meeting of finance ministers held in Chiang Mai in May 2000, agreement was reached on the following matters, based on the agreements at the November summit.
The official reserves of the ASEAN + 3 countries total more than US$700 billion (at the end of 1999). In our view it would be highly meaningful for the stability of the region's currency and financial markets if the countries participating in this framework were to engage in closer monetary cooperation by using a portion of their official reserves. With regard to currency swaps using Asian currencies and repurchase agreements using Asian government bonds, if these are carried out in conjunction with steps such as the development of direct foreign exchange markets between Asian currencies and the building of settlement systems, they may have favorable consequences such as the expansion of transactions between Asian currencies. |
4. TheRole Japan Should Play
| (1) | The stable growth of the Japanese economy, and the further opening of the Japanese market The stable growth of the Japanese economy is of very great importance to the economy of Asia, and Japan is exerting every effort in bringing about its own economic recovery. Asian countries have particularly high hopes and expectations with regard to the increase of Japan's imports. |
(2) |
It is expected that Japanese companies would step up progress in making technology transfers and building industrial networks within Asia with a long-term perspective. It is also expected for Japanese financial institutions to complete the improvement of their financial condition as soon as possible and, based on their respective medium to long-term strategies, to contribute to the restoration and strengthening of financial intermediation functions in Asia. |
(3) |
Institutional development and human-resource development are the keys for success of efforts being made domestically in Asian countries to reform their financial and corporate sectors and develop social safety nets. Accordingly, Japan should actively assist those countries in their efforts by providing technical assistance through the dispatch of experts in various fields, especially for the staff of financial authorities and other institutions, and also by providing assistance for human-resource development. |
(4) |
The role of technical and other assistance by the IMF, World Bank, and ADB will continue to be of very great importance to Asian countries in carrying out policy management in conformity with international standards and codes, and carrying out such steps as the reform of their financial and corporate sectors. Japan should continue to give active support to the activities of international financial institutions in these areas. |
(5) |
Japan should actively put forward initiatives to the strengthening of cooperation within the region, such as the promotion of trade and investment, the development of trade-financing networks, the development of bond markets, the promotion of policy dialogue, and the building of financial cooperation networks. It is also necessary for Japan to strengthen its technical and financial assistance for regional efforts of this kind. As policy dialogue will be the most important key to fostering regional cooperation in Asia, Japan should actively provide assistance to promote it. In addition, it is important to provide assistance for projects being undertaken as a result of regional cooperation by Asian countries, for example the development of the Greater Mekong Subregion. |
(6) |
With regard to the internationalization of the yen, in April last year a report by the Council on Foreign Exchange and Other Transactions pointed out that strengthening the role of the yen as an international currency would be conducive to the stability of foreign exchange markets, particularly those in Asia, and in turn to the economic stability of Asian countries. Participants from Asia pointed out that it is necessary to increase the convenience of investing and raising funds in yen to increase the weighting of the yen in currency-basket systems operated by Asian countries. In compliance with the wishes of Asian countries, further steps must be taken to expedite the internationalization of the yen, including fostering the improvement of Japanese financial and capital markets and the development of settlement systems. |