Asian financial crisis demonstrates need for short-term support and long-term change

Business America, July, 1998 by Todd Avery

East Asia's economic crisis risks undermining one of the most remarkable economic and social achievements in modern history. No other group of countries in the world has produced more rapid economic growth and dramatic reduction in poverty than East Asia. Korea, Malaysia, and Thailand have virtually eliminated absolute poverty, and Indonesia is within reach of that goal. Nevertheless, this financial crisis has exposed weaknesses in Asian economies that must be addressed if the region is to return to its high growth of recent years.

East Asia's economies need (and are indeed receiving) support from a broad spectrum of multilateral and bilateral agencies to address their short-term needs for financial support and trade finance as well as their long-term demand for institutional reform. The Multilateral Development Banks (MDBs), along with the International Monetary Fund (IMF), are leading the drive to stabilize the economies and promote financial reform.

The U.S. Government's Trade Promotion Coordinating Committee (TPCC)--the 20 federal agencies led by the Department of Commerce responsible for managing the U.S. Government's export promotion programs and activities--are at the forefront of bilateral trade support. The TPCC's Asia working group, chaired by the Export-Import Bank of the United States (Ex-Im Bank), has already taken a number of quick actions to mitigate the negative impact of the crisis on U.S. exports.

With a holistic approach to the crisis that includes financial support, trade finance, and institutional reform, the troubled economies of Asia will likely make a strong rebound. With the commitment of the MDBs and the TPCC, U.S. firms looking to Asia will still see short-term opportunities and reap long-term rewards.

The Multilateral Development Banks' Response

When the Asian financial crisis struck in 1997, the World Bank and Asian Development Bank (ADB) responded with large-scale, quick disbursing financial assistance to the impacted economies. Early MDB efforts have focused on the immediate crisis in the financial and corporate sectors. The banks have fielded advisory and technical support to the region to help develop improved regulatory systems and to provide for the orderly resolution of failed banks and other financial institutions. Now the banks are moving beyond this vital agenda to address the effect of the crisis on the wider real economy.

World Bank: World Bank support for East Asian governments focuses on carrying out three principal objectives:

* To build the foundation for restoring growth and raising incomes by adopting wide-ranging reforms in the financial sector, in corporate governance and competition, and in managing external debt. This builds on the IMF-led rescue efforts in the region;

* To strengthen social protection for the poor and other vulnerable groups to help cushion the impact of the crisis; and

* To improve the quality and transparency of key government institutions, including helping governments address problems of corruption and accountability.

Since July 1997, the World Bank has pledged some $16 billion to the region, almost the equivalent of an entire year's regular lending, and already disbursed nearly $4 billion in loans.

In Thailand, the bank pledged $1.5 billion in support of the $17.2 billion international effort initiated in Tokyo in August 1997. The initial emphasis of the bank program was on reforming the financial sector. This included establishing a financial restructuring agency to deal with creditors and depositors of 56 closed finance companies, setting up an asset management company to collect as much as possible from the bad portfolio, and reducing restrictions on foreign equity participation.

The bank's program in Indonesia has included a technical assistance loan of $20 million for banking sector management and preparation of several operations: a structural adjustment loan to deal with banking and corporate restructuring and an agriculture sector structural adjustment operation. Support for financial sector reforms has included backing the authorities in their efforts to deal with nonperforming portfolios and insolvent banks; auditing state banks to improve efficiency and capital adequacy; strengthening credit appraisal and risk management; improving bank supervision; and providing better laws governing bankruptcy, disclosure, and ownership.

In Korea, the bank pledged up to $10 billion as part of a $57 billion package to provide liquidity. Within two days of the crisis, the bank fielded a team of experts, and within three weeks designed and presented to its board a $3 billion economic reconstruction loan that was disbursed the same day. The loan laid out the framework for policy changes in the financial sector, corporate governance, and competition policy. As part of the adjustment program, the World Bank is working with the government on policies that will incorporate social protection and support workers temporarily displaced during the crisis. A new structural adjustment loan of $2 billion was approved by the bank's board of directors on March 27, to support the implementation of reforms in the financial and corporate sectors and competition policy.