October 16, 1997
|Contact:||C. Fred Bergsten||(202) 328-9000|
Washington, DCThe Asia Pacific Economic Cooperation (APEC) forum should create new arrangements to help prevent and respond to future monetary crises in the Asia Pacific region, such as those now afflicting Thailand and other countries in the area. They should be launched at this year's APEC summit meeting, to be attended by President Clinton and leaders of the other 18 APEC members in Vancouver on November 25. This proposal is based on several papers in a new Institute volume entitled Whither APEC? The Progress to Date and Agenda for the Future, edited by C. Fred Bergsten, and is developed in a report by a panel of independent experts from leading research institutions and universities from throughout the region that is being released simultaneously and is attached to this release.
The proposed APEC arrangements would support and reinforce the efforts of the International Monetary Fund to avoid and contain crises in the region. First, they would apply “peer pressure” in an effort to persuade member countries to deal with their economic problems in a timely manner, including per the advice of the IMF, and thereby to prevent major financial disruptions that can harm the entire area. In the current case, the IMF provided sound advice well in advance of the crisis but Thailand failed to act. Strong encouragement from other countries in the region might have translated the Fund's proposals into effective preemptive action. The proposed APEC mechanism would aim to fill this critical gap in the current “early warning system,” which failed again in Southeast Asia as it had in Mexico in 1994-95.
Second, APEC could provide supplementary funding in support of effective adjustment programs by member countries. As documented again in the case of Thailand, as with Mexico in 1995, assistance from the IMF itself is far too small to assure adjusting countries that they will be able to counter speculation and restore confidence in their currencies. It would be much better to have additional funding available on a standby basis to support IMF programs rather than having to cobble it together hastily in the face of a crisis, as Japan did for Thailand recently and the United States did for Mexico in 1995. The availability of such funding would also increase the prospects for successful exercise of APEC's proposed “peer pressure” function.
The proposed new arrangements would build on the intensive cooperation already developed by APEC Ministers of Finance, who have been meeting annually since early 1994 (with even more frequent sessions of their deputies). It would operate solely in conjunction with programs supported by the IMF, thereby avoiding the risk of “moral hazard”the concern that the creation of any such financing facility would increase the probability of future “bailouts,” thereby encouraging countries to maintain irresponsible policies and foreign capital to continue to invest in a country whose position was becoming unsustainable.
There has been widespread discussion, including at the recent Annual Meetings of the IMF and World Bank at Hong Kong, of the possible creation of such arrangements. However, no consensus has been reached on their institutional locus. Japan proposed a grouping of Asian countries that was severely criticized on a number of counts. The Association of Southeast Asian Nations (ASEAN) conferred on the matter but acknowledged that their own group was too small. The new “Six Markets Group” (or “G-6” composed of the United States, Japan, China, Australia, Hong Kong and Singapore) that met in Tokyo in early 1997 excludes a number of key countries.
APEC provides a compelling alternative. It includes all the Asian countries that have been involved in the recent crises or might suffer such problems in the future. It includes all the major potential creditor countries in the region (including the United States, Japan and Canada). Its Latin American members could make important contributions to responding to future problems: Mexico of course experienced its own crisis in 1994-95 and has achieved a remarkably rapid recovery, and Chile is a role model for many desirable policy reforms. APEC's Finance Ministers have already discussed these issues at length and have developed an effective framework for further cooperation of the type proposed.
The APEC Leaders, at their initial summit in Seattle in 1993 chaired by President Clinton, convened the initial meeting of Finance Ministers from around the region. At Vancouver, they should direct the Ministers to develop and install the proposed new arrangements as promptly as possible. Creating such arrangements could help bring the current financial crisis to a successful conclusion as well as head off future difficulties. Several of the APEC leaders have indicated their intention to raise these issues at Vancouver, and developing a forceful response to them should clearly be the centerpiece of this year's “Finance Summit.”
There would be another major benefit from the creation of new APEC financial arrangements. As described in several chapters in Whither APEC? and in the report by the panel of independent experts, the Vancouver summit could play a crucial role in sustaining APEC's progress toward achieving its goal of “free and open trade and investment in the region” by spurring successful conclusion of the negotiations in the World Trade Organization (WTO) to liberalize financial services sectors around the world. These negotiations are targeted for completion by December 12. An APEC agreement on them at its summit on November 25 could galvanize a successful conclusion, just as agreement on the Information Technology Agreement (ITA) at last year's APEC summit at Subic catalyzed the global concord shortly thereafter that eliminated tariffs throughout the world in that crucial and dynamic sector.
Liberalization and deregulation of financial services are essential to sustain economic development throughout the APEC region (as elsewhere). In addition, weak financial sectors have been a central cause of the current financial crisis. Their reform, phased in over reasonable periods of time and supported by the installation of effective supervisory systems, is thus a necessary element in the restoration of confidence in the economies of Thailand, Indonesia and other countries in the area.
However, some of these countries have hesitated to proceed with financial reform because of fears that further opening of their markets to foreign institutions might increase their exposure to future attacks on their currencies. Creation of the proposed new APEC financial arrangements, to prevent and deal with such events, would help reassure these countries that they would be protected against such adverse repercussions from new liberalization. Initiating the new financial arrangements at Vancouver would thereby support APEC's major trade initiative for 1997 as well as address the most urgent economic problems facing the region.
The new volume Whither APEC? includes several chapters that provide the foundation for these proposals. Wendy Dobson, Director of the Centre for International Business at the University of Toronto and former Associate Deputy Minister of Finance of Canada, addresses the relevant issues in “Whither APEC's Ministers of Finance? Macroeconomic Policy, Exchange Rates and Financing Growth.” The financial topics are also covered in the overview chapter “APEC in 1997: Prospects and Possible Strategies” by C. Fred Bergsten, Director of the Institute for International Economics and editor of the volume, and by Lawrence B. Krause, Professor of Economics at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego, in his summary chapter “The Agenda for the Future.”
On trade, Mari Pangestu, Executive Director of the Centre for Strategic and International Studies in Indonesia, analyzes in “Assessing APEC Trade Liberalization” the extent to which APEC is on course toward meeting its ambitious goal of achieving free trade in the region. She compares each member's tariff cuts to this point with their ultimate APEC commitments in a series of charts on pp. 30-32. Several key trade sectors are also addressed: civil aviation by Michael Whitaker, environmental issues by Andre Dua and Daniel Esty (whose new book on the topic is also being released by the Institute on October 16), food by Robbin S. Johnson, and investment by Bijit Bora and Edward M. Graham.
One of APEC's major goals is to promote global trade liberalization, as with the ITA in 1996 and potentially with the financial services sector in the coming months. This topic is covered by Ippei Yamazawa, Professor of Economics at Hitotsubashi University in Japan in “APEC and the WTO in Trade Liberalization,” and by Bergsten in both his overview chapter (which, on page 7, suggests a possible series of sectoral liberalization agreements over the next few years) and in a separate contribution on “Open Regionalism.”
Other key recommendations in Whither APEC? include:
The financial proposals are also based on the unanimous report of a new panel of independent experts, all of whom are close and experienced observers of APEC, from leading research institutions and universities throughout the Asia Pacific region. The group has forwarded its analyses and recommendations for Vancouver to Prime Minister Chretien of Canada, the chairman of this year's summit, and to other APEC leaders. The panel met in Washington in April, when its members (along with a number of other experts) participated in the conference on which the volume Whither APEC? is based. It met again, and developed its report, in Singapore in August as guests of the Institute for Southeast Asian Studies in that city. The panel has established a nongovernmental network for ongoing consultations that hopes to make occasional contributions to the APEC process. Its report and a complete list of the panel's membership are attached.