Let me say that it is really a great pleasure to be here and I am deeply honored to be at this great university which I know plays a very important role in educating the young men and women of Thailand.
As the future business leaders of this nation, your education at the Sasin Institute will provide a strong foundation for you to help meet the great and important challenges of your country. The fact that this Institute was established as a joint venture with two great American universitiesCthe Kellogg Graduate School of Management at Northwestern University and the Wharton School of the University of PennsylvaniaCreflects the close and long ties, the great feelings of friendship between the United States and Thailand. We believe very strongly that a growing, prosperous and vibrant Thailand is important to the political stability and economic well-being of Southeast Asia, and that the economic well-being of Southeast Asia is very important to the economic well-being and national security of the United States. Our nation has strongly supported Thailand's work, with the assistance of the International Monetary Fund, to reestablish financial stability and economic growth in the wake of your financial crisis. And we greatly respect and support the courage and leadership that your government has shown in moving to confront directly the challenges this crisis has presented. More generally, we will continue to work with great intensity with the International Monetary Fund, the World Bank, the Asian Development Bank and the international community, and all of the countries in the region to help Asia recover and to reestablish its financial stability and economic health. We believe deeply that a prosperous and successful Asia is critically important to the economic well-being of the American people.
Today, I would like to offer some reflections on the Asian financial crisis, which began almost one year ago. While it is still far too early to make definitive judgments on this momentous event, let me offer a few observations. RR-2568
From the very beginning, this crisis has presented unprecedented and enormously complex challenges to the international community. For example, a number of countries have had great difficulties at the same time, and events in one country have had substantial impacts on currencies, trade and economic activities in other countries in the region, and for that matter, in countries beyond the region. Moreover, the effort to combat the crisis has been made far more difficult because the largest economy in the region by multiples, and the second largest economy in the world, Japan, was in difficulty at the beginning of the crisis, and is now in recession. Clearly, in this era of the new global economy and new global financial markets, the actions of each nation can affect other nations as never before and each nation has a responsibility to address its respective challenges. Moreover, all of this was made even more difficult by the vast flows of private capital that have gone into the region in recent years, and in fact have fueled growth that helped to lift millions out of poverty, a result of these vast flows of foreign capital, of the development of a true global financial market. One observer said recently that the Asian financial crisis is the first economic crisis of the 21st century.
In Asia, although the situations in each country with difficulties were different in some respects, there were also some deep, common problemsCweak financial sectors, noncommercial relationships amongst the banks, governments, and industrial companies, and a lack of transparency in financial transactions and government decision-making, to name a fewCand all of this eventually led to severe financial instability. These problems are not and will not be self-correcting; they require the help of the international community and a reorientation of the role of government and the political will to implement that reorientation. Governments must turn away from the kinds of interventions in the economy that helped give rise to this crisis in the first place, and turn to the action necessary for restructuring and reform that are requisite for restoring growth. In the broadest sense, governments, in our view, must adhere on a sustained basis to sound macroeconomic policy and to deep and far-reaching structural reform programs. All of this will inevitably be a difficult path, it is the best and probably the only effective route back to financial stability, a resumption of economic growth and higher living standards.
The crisis, as you know better than anyone, has led to enormous hardships for the people of Thailand and the region. However, these hardships and economic difficulties are a product of the crisis, not of the reform programs. The reform programs are a response to the crisis, and economic circumstances, in my judgment, would be vastly worse and the hardship would last for far longer without effective reform.
At the heart of the international effort has been the International Monetary Fund, the World Bank, and the multilateral development banks. These institutions have been following a strategy of strengthening financial systems, especially banks; ending directed lending between the financial systems, the industrial sector and the government, opening markets, encouraging sound macro-economic policies and improving social safety nets. There are no sure or easy answers to these vastly complex and unprecedented problems. And the reform programs that have been implemented in Thailand and elsewhere represent the best judgments of the time of the actions that will lead to recovery. Then, the programs have been adjusted as circumstances have warranted.
Much remains to be done to recover from crisis, but it's also true that much has been accomplished. For example, there was without doubt a serious risk of global contagion, of a spreading of crisis across the globe, that was avoided at the end of December in the situation in Korea. The private banking sector was on the verge of default and Korea's reserves were virtually depleted. The international community that coalescedCthis was all basically in the last week of DecemberCthe international community that coalesced the IMF and World Bank and with American leadership helped catalyze a voluntary standstill and then extension, maturity extension, of credits from the international banking sector to the banking sector of Korea. Since then, I might add, Korea has very, very substantially increased its international reserves.
Beyond that, the governments of Korea and Thailand, after some initial difficulties in each case, have clearly committed themselves to strong reform programs and are moving forward in all of the areas I've just mentioned. The situation in Indonesia is obviously far more complicated. Elsewhere around the world, developing and transitioning countries have intensified actions on areas that they believe will make them less vulnerable to the kind of financial instability we experience in Asia today.
In all of the Asian countries that have been experiencing difficulties, even those countries that are in the process of implementing strong reform programs, economic activity is still declining. As we go forward, there are enormous challenges to be met by the people of the countries, the governments and the international community. In order for these countries to resume financial stability and economic health, banking sectors need to be put on a sound financial basis and non-commercial lending ended. Problems of corporate indebtedness need to be effectively addressed; impediments to trade and investment need to be reduced; and the social safety net needs to be improved, to name just a few.
Moreover and very importantly, there must be a political environment that supports sustained adherence to reform programs. Pursuing policies essential to success in the global economy is a very difficult task politically. The politics of reform must keep pace with the policies of reform, and that is true in the developing nations and that is true in the developed countries, very much including our own. Effective democratic institutions that take account of the concerns of government, business, labor and all affected parties provide, in our judgment, the most conducive environment for building effective public support for the requisite reforms involved in economic growth and economic success.
Let me now turn for a moment to Japan and China, both centrally important to the economic prospects of Thailand, the region, and very likely the world. The Japanese economy is probably the greatest success story, the greatest economic success story, of the past fifty years, but in recent years Japan has had great economic difficulty. We have been deeply concerned about the weakness of the Japanese economy and the resulting weakness of the yen. It is critical to the economic health of Thailand, the region and once again perhaps the world that Japan take the steps necessary to allow its underlying strengths to once again generate a strong economy, though this time led by domestic demand and a healthy currency. The world welcomed the recent fiscal stimulus program enacted in Japan and that is an important step forward. The focus of the world now is on Japan effectively addressing the problems in its banking sector in a manner that gains the confidence of world markets.
With respect to China, which I just visited with President Clinton, in our meetings Chinese leaders once again expressed a strong understanding of the great challenges they faced as they make the transformation to a market-based economy, and a strong commitment to meeting those challenges. They also reaffirmed their judgment that maintaining the RMB exchange rate is in their self interest, a judgment with which we agree. China's success in its reform program, and more generally, China's economic success is very important for China and, we believe, very important for the rest of the world and maintaining its exchange rate has been a source of stability for the region.
When I speak at home and elsewhere in the world on the Asian crisis, I always say that it is very important to step back for a moment and remember that the countries in the region have had decades of strong growth based on great underlying strengthsCa strong work ethic, high savings rate, discipline, and an intense focus on education. I then say that over time, by addressing their problems, these countries can once again draw on those strengths and attract increased foreign investment, expand trade and return to sustained and vigorous economic growth. It will not be an easy path, but it is an accomplishment well within the reach of this region.
Let me now turn to Thailand for a moment. From the very beginning, the United States has supported a substantial and well constructed IMF program responsive to the problems that gave rise to the crisis in the first place. After the change in government, the new government in Thailand immediately committed itself to the reform program, and it worked steadily to implement its various parts.
The Thai government has pursued sound macroeconomic policies and made significant progress in beginning to restructure the banking sector. By closing 56 finance companies, requiring banks to recapitalize, and implementing stronger prudential standards, the government made a clear statement that it was breaking with past behavior and determined to put in place a financial system based on appropriate international standards. The government is moving ahead with auctions of assets of closed finance companies and is working toward necessary related improvements to the bankruptcy and liquidation laws. It is also putting in place social safety nets. About half the recent increase in the fiscal deficit target is to provide for greater spending on social welfare, training and emergency job creation programs. Moreover, all of this has been done in a regional context that is very difficult and it is likely to remain difficult for some time to come.
There is still an enormous amount of work that remains to be done in your country and because of the problems in the region and other factors, economic conditions are likely to continue to be difficult for some time. Having said that, it is worth observing that with the reform programs that Thailand that putting in place, the baht has recovered from its low of 56 to roughly 42 today and interest rates have begun to decline somewhat. The path that you are on is the best and most likely means of getting back to solid growth and financial stability. Though this will be a hard path to follow, as I said a few moment ago, failure to implement reform would lead to far worse conditions and far longer duress. And once again, let me be clear, the United States stands with you as you face these challenges. From the very beginning, we supported a well-financed IMF program appropriately geared to the issues that gave rise to the crisis in Thailand and more recently we have said we would strongly support additional IMF funding if needed. Thailand's exports to the United States remain strong and American companies continue to invest in this country.
The experiences of the past year underscore the challenges for all nations with respect to the global financial system itself. The crisis has intensified the effort by the international community, an effort begun about three years ago, to strengthen the international financial architecture to better prevent crises from happening and when crises happen, to deal with them more effectively. We look to the experience of Thailand and other nations in dealing with crisis to help inform this process and, I might add, Thailand is very actively involved in the group of 22 nations that are intensely focused on moving toward proposals which will then be put forth to win international consensus.
The activity on architectural reform has focused on three areas: strengthening financial systems; increasing transparency and disclosure; and appropriate burden sharing by private sector creditors and investors in the event of a crisis. Let me say a brief word about each of these.
First, we must strengthen financial sectors. Difficulties in the Asian nations and difficulties in recent years in all developing countries that have experienced financial instability have either begun in or have been greatly exacerbated by badly flawed financial sectors. Efforts here need to focus on sound financial sector policies, such as banking decisions being made solely on a commercial basis, implementation of recently adopted core global standards with respect to banking; the development of a strong credit culture; and the possible development of new institutional multi-lateral arrangements for international surveillance of domestic financial systems.
Second, increased transparency and disclosure of financial information from governments and from the private sector so that investors and creditors have better information with which to make good decisions. We believe governments also need to become more open about their own policy decision-making processes. Having said that, this will only work if investors and creditors use that information effectively. One of the things that has most struck us about the Asian crisis, is that after problems began to develop and we spoke to the institutions that had extended credit or invested in the region so often we found that these institutions had engaged in relatively little analysis and relatively little weighting of the risks that were appropriate to the decisions. In addition, the IMF and the World Bank need to increase their transparency regarding the operations of those institutions.
Finally, and very importantly we must create mechanisms so that creditors and investors more fully bear the consequences of their actions. This is an exceedingly complex issue, but it is one we cannot shy from tackling. Because of the size of the markets and the size of the capital flows today, at some point there will simply not be sufficient official money to deal with the crises that could develop. Furthermore, we need to reduce the risk that providing official finance shields creditors and investors from the consequences of bad decisions and therefore sows the seeds of future crisisCthe so-called, moral hazard problem.
Let me conclude by saying that after one year, much has been done but an enormous amount remains to be done in the time ahead. The situation, as I said at the beginning of my remarks, is unprecedented and enormously complex. And as we stand here today, there are indeed many complexities and uncertainties that lie ahead. I don't believe that there is any question that the best path for the countries experiencing difficulties is the path of sustained reform and of drawing on the underlying strengths that led to their great economic growth in recent decades. This will not be easy but over time it will provide the best route and perhaps the only route to renewal of stability and growth. And that is true in Thailand, and for the region as a whole. And let me say with absolute certainty that the United States stands with you in this effort. All of usCthe developing nations and developed nationsChave a tremendous stake in a successful Thailand, and a successful region.
As Thailand's future business leaders you will play a critical role in creating a prosperous future for your country. Ultimately, the private sector is central to creating opportunity and economic well being for your country, and as a consequence, you will be in the front lines of the effort to create long-term growth for your country and prosperity for the people of Thailand. You will benefit from a growing Thailand, but you also bear the responsibilities for helping make Thailand grow and for spreading the benefits of growth to all of the people in this country. I might add that I spent 26 years in the private sector and it was an extraordinary experience. But it has also been an extraordinary experience to then have the opportunity beginning five and a half years ago to come to the public sector and to use that experience to deal with the issues of the nation. I have found that to be an extraordinarily fulfilling experience. I hope that as you think about your careers, you consider the possibility of you too, bringing your education and your private sector experience to public service in Thailand. I wish you the best as you face the challenges of the years ahead, in building this great country. Thank you very much.