Learnings from the financial trauma should be divided into 2 parts:

I. Lessons to be drawn from the causes of trauma itself

II. Consequences of the trauma are instructive.

I. Lessons from the trauma :

When you have weaknesses in your economy, you cannot ignore market signals very long. It’s you against the world market, not just any market. Globalization implies you can ignore market forces at your own perils. It’s not easy to learn to live with and listen to the markets when they are against you. We must study the markets more deeply and keep listening to all market information, positive or negative. Don’t hurry to kill the messenger of bad news.

We have the tendency to exaggerate our success and to underestimate our problems. There was a sense of invincibility in our Asian achievements. We were on the verge of the Pacific Century. Official statistics provide over optimistic forecast. Reliable information and statistics seem to be lacking. We fended off the fallout from Mexican crisis in 1994-95 with ease. And we’ve been living with the precarious Japanese economic situation for more than 6 years. Yet we were thriving. When we had current account deficits at the level of 7-8 percent of GDP, we easily explained the problems away by indicating the substantial imports of capital goods and raw materials. When we were warned by the rising flows of short-term borrowings, we said they would always be rolled over. When we pegged our currencies to the US$ and got them overvalued, we had the wishful thinking that before long the dollar would resume the old downward trend. Even our central bankers have turned optimistic, betraying their traditional attitude of pessimism. We have lost the sense of danger.

As I represent an Asian government, I guess it’s alright to criticize governments for our macroeconomic mismanagement. We have observed fiscal discipline, successfully mobilized savings, opened up our economies but we have failed to guide our private sectors to be more self-restrained, to detect the overheating signs, and to introduce timely structural adjustments. We have been slow in adjusting our exchange rates, slow in moving industries up the technology ladder, slow in implementing productivity drive in agriculture, and reluctant in moving with consistent liberalization. We have been inept in our handling of ailing and insolvent financial institutions, and failed to tighten our supervisory standards in time to prevent wholesale misallocation of our borrowed resources. As democratically elected governments, we were adept at conceiving development projects and finding funding sources for them. But when it came down to the management of an economic downturn, we had political difficulties to reject projects, to preempt over-expenditures and to penalize economic crimes.

We admittedly had rules of law that were unfortunately not always taken seriously. Our legal framework has failed to keep up with the pace of economic modernization. So we lacked legal instrument to facilitate resolutions of economic problems, for example, legal impediments to the process of mergers and acquisition, not fully efficient foreclosure and bankruptcy procedures, and customs procedures that were meant to discourage rather than to promote international trade. Legal reforms were unheard of during the period of seemingly unending economic expansion.

II. Consequences of Trauma

Obviously we have made several mistakes, taken some wrong steps, but the total loss of confidence and the tremendous loss of assets value are not always justifiable. There seemed to be no bottom to currencies value while the asset price drop went up to 50 percent and this came on top of currency depreciation in the range of 50 to 100 percent and sometimes even higher. Good and bad projects are equally damaged. While the modern sector was the culprit in excessive foreign borrowings, the traditional sector was also the recipient of hardships from soaring interests and inflation rates.

The degree of contagion of the Asian financial trauma is unsurpassed. We are not even sure whether we have succeeded in containing the trauma. During the Mexican peso crisis of 1994-95, speculative pressures spread rapidly to a number of markets, with Argentina the most adversely affected. In the case of the Asian currency crisis, the collapse of the Thai baht spread both North and East to affect most countries in the region. With global fund managers shifting their investments rapidly among several emerging markets throughout the world, the chance of their pulling out of a bunch of emerging markets, and building up their cash position could make the crisis even more contagious. There is a case to be made that if contagion poses a serious threat to the stability of emerging-market currencies, the IMF should play a key role as a lender of last resort in the international monetary system.

The role of the IMF in resolving the trauma may provide another traumatic experience in itself. There should be no doubt that in order to stop the total loss of confidence at the outbreak of the crisis, the IMF support package is definitely a necessity. The controversy, however, seems to revolve around the following issues : a) the IMF order to close down financial institutions, even if some of them might be suffering not from mismanagement but from the serious nature of economic slow down, b) the targeting of exchange rate level that sometimes led to an early and untimely strengthening of the currency value and c) the supporting tight monetary policy that sometimes does get out of hand as monetary authorities become over-enthusiastic.

Consequences for the rest of the world economy cannot be ignored. More than a third of exports by the United states and Japan goes to the emerging economies. This is roughly about one-fifth in the case of European Union. The financial ties are even stronger. The banking system of the US, Japan and EU has lent roughly 75 percent of their registered capital to the emerging economies, the US banks being the least effected with the lending ratio of 34 percent of their capital while EU banks having a stronger involvement of 79 percent and Japan feeling the strongest pinch with lending ratio of 178 percent.

The IMF has predicted the world’s economic growth to be around 4 percent for this year while the actual rate should be closer to a mere 2 percent. With the consequences that I just mentioned, it is most likely that the world’s economic growth rate would drop to a level between 0-1 percent. We are not talking about the worst world growth performance after the Second World War for which we must look to the year 1982 in which we saw a negative world growth, I presume, the first time after the Great Depression from the thirties. But this time we are coming close to the 1982 malaise with dire consequences on the world trading system.

Strategic Implications

1. For individual countries finding their way out of the trauma, there should be no short- cut. They must go through the painful process of slowing down and slimming down. They must pay the huge price of financial re-capitalization and reform. They must find their way back to being competitive by deregulation, upgrading human skill, and investment in new technologies. Funds should not be channeled only into economic investments but a larger portion must be set aside for social investments.

2. There is need for a collective demand management policy on a global level. Major economies of the world will have to look beyond their borders for macroeconomic policies to be better coordinated and more coherent. I would agree with Professor Sach’s recommendation for G8 to be turned into G16 by having 8 additional participants coming from the developing countries. The G16 meeting should be urgently convened to map out the preemptive measures against world slump.

3. It is not a novel idea to suggest that after 54 years of post-war world economic order, we are bound to pay some attention to an emerging international economic order. It is an order in which everything will become interconnected. I fully endorse British Prime Minister Blair in his call for the reform of the key international economic agencies. But this should not be done in the light of the present crisis but with a vision of a world economy predominated by market forces that are becoming more overpowering, gradually superseding the power of sovereign governments.

4. Work on a decent early-warning system must be pursued with utmost seriousness. An early-warning system would enable governments to adopt preemptive measures to avoid the onset of currency crisis. A wide range of symptoms might be evident prior to speculative attack on currencies. Following indicators might be subject to further study to establish certain behavioral trends that might be used as early-warning signals : real exchange rate movements, current account deterioration, overly expansionary fiscal and monetary policies, excessive increase in bank lending, declining foreign exchange reserves, excessive lending to specific sectors and sharp increase in non-performing loans.

5. The issue of inter-linkage between trade and finance should be widely discussed and studied to bring about greater understanding of the interdependence. Fund flows influence currencies which in turn have impact on trade flow. Lack of trade financing chokes international trade and drives countries into exchange control. Today, while funds are made available on the international basis to support currencies, no funds are adequately put up to finance trade on a non-tied basis.

6. The prolongation of the trauma would inevitably result in more government control and intervention in both trade and finance. It is strategically important that market access and openness be ensured by internationally concerted effort. Regional trade arrangements must be kept open and should not discriminate against third countries while trade liberalization commitments must be implemented with the least of delay.

I would like to conclude by quoting from a recent article by Professor Sach which says: “with current institutions, global capitalism will not succeed widely enough or credibly enough to create a stable world system. Giving the developing world (that is, 85% of humanity) a serious role in shaping the new global institutions is the surest way to achieve that end.” I know that Professor Sach is not referring to the institution like the World Trade Organization. But it might be applicable. I am trying to put this theory into practice by campaigning for the position of Director-General of that important institution. This is a strategy not only to deal with the trauma in Asia but also to prevent the trauma from becoming a global one