The Finance Summit
by C. Fred Bergsten, Peterson Institute for International Economics
Speech before the APEC CEO Summit
November 22, 1997
This year's APEC summit takes place in the most tumultuous setting since the Leaders began meeting, down the road in Seattle, four years ago:
APEC Leaders thus face the most critical, and difficult, series of issues in the history of this young institution. Their ability to respond decisively and effectively will go far toward determining whether APEC will become a central player in resolving regional and global crises. A failure at Vancouver would confirm criticism that APEC is mainly a "talk shop" that need not be taken seriously as an action organization.
An Action Program
The APEC leaders can take decisive steps to deal with each of these problems. Fortunately, the yeoman work of their ministers and senior officials over the past year provides a strong foundation for the necessary actions. The following proposals were conveyed to Leaders last August by a panel of independent experts comprised of experienced observers of APEC from most of its member economies.
First, the Leaders should launch new regional arrangements to reinforce the efforts of the International Monetary Fund to help prevent and respond to future monetary crises in the region.
The primary goal would be prevention of future crises. The International Monetary Fund (IMF) did its job in foreseeing and warning of the impending problem. The systemic difficulty was that Thailand balked and no one pressed it to act. The IMF on its own demonstrably cannot get emerging economies to adjust preemptively. The best prospect is neighboring countries: because they are so likely to be hurt themselves by fallout from a crisis, their intervention is both legitimate and apt to be delivered forcefully. This is now particularly true in Asia in light of the contagion from Thailand that has engulfed the entire region and provided an objective lesson on the wider effects of a failure by one country to adjust responsibly.
APEC can provide the institutional locus for such efforts. It is already developing a process of "peer pressure" through which individual members encourage others to act responsibly, in the interests of the broader group as well as their own. APEC is using this approach to pursue free trade in the region by 2010. The most dramatic success came at last year's Subic summit when peer pressure persuaded a number of members to eliminate their tariffs on a wide range of high-tech products, enabling APEC to galvanize the Information Technology Agreement (ITA) on $500 billion of global trade in the World Trade Organization a few weeks later.
The APEC Finance Ministers have been meeting regularly since the Seattle summit in 1993 instructed them to do so. Their deputies have convened even more often, and have just met in Manila on this very topic. They should now begin systematically assessing national economic outlooks and pressing members to adopt good advice, from the IMF and elsewhere, that would head off future crises and thereby avoid new disruption in the region.
APEC should also create a standby funding arrangement to support future IMF programs in the region. The current cases are only the latest reminders that such crises inevitably occur from time to time and that Asia is not exempt from them. International rescue packages will be required in the future as in the past.
It is also clear that IMF lending by itself will never be adequate. The IMF has plenty of money. But IMF credits to any individual country are limited by that country's quota at the Fund; even the unprecedented multiples for Mexico (700 percent of quota) and Thailand (500 percent) produced only one-quarter to one-third of the amounts needed.
Widespread support has therefore developed for an "Asian monetary fund" to supplement the IMF. APEC is the logical institutional venue for such arrangements. It includes all the Asian countries that might need help. It includes all the potential creditors, including the United States and Canada as well as Japan, China, Hong Kong, Taiwan and Brunei. Its Latin American members would be helpful, Mexico with its crisis and dramatic recovery experience and Chile as a healthy role model. It could use the IMF's Tokyo office, as proposed by the IMF itself, to administer this phase of its activity.
The main criticism of this idea is that any standing fund would create "moral hazard," the risk that its very existence would assure future bailouts and thereby tempt countries to pursue profligate policies and private investors to continue pouring money into unsustainable situations. But there is a decisive answer to this concern (which, in any event, is often simply an excuse from those who wish to avoid putting up money): inextricable linkage of any new APEC arrangements to IMF programs. No country would put itself through the wringer of a monetary crisis and subject itself to the tender mercies of the IMF simply because rescue funds were available. Nor would private investors keep coming, with countless alternative opportunities around the world, if the Fund requires them to share the costs of adjustment programs as it must.
The alternative to standby arrangements is ad hoc bailouts as cobbled together by the United States for Mexico and Japan for Thailand. Their outcome is always highly uncertain, as when the Congress almost blocked the Mexican package. Their magnitude, sharing among donors and speed of delivery are purely fortuitous. Prepared standby funding is far preferable.
Second, the Leaders should reach agreement on liberalization of their financial services sectors. Every crisis in the region, ranging from Japan and Korea in northeast Asia to Thailand and Indonesia in southeast Asia, was caused primarily by the weaknesses of national banking and financial systems. Reform of those systems, phased in over appropriate periods of time and coupled with the installation of effective supervisory mechanisms, is an essential element in the restoration of confidence in the currencies and economies of every one of these countries.
The current negotiations in the World Trade Organization provide a fortuitous opportunity for the region to move together to implement such reform. An APEC agreement at Vancouver would assure successful conclusion of the WTO effort by its target date of December 12. Such an agreement would enable APEC countries to take a decisive step toward resolving their current difficulties. Like APEC's leadership at Subic a year ago in bringing the ITA to successful conclusion in the WTO, agreement on financial services here at Vancouver would represent another major step by APEC both toward achieving its own Bogor targets and providing effective leadership of the global trading system. Fortunately, the United States has continuing negotiating authority for this sector so its failure to achieve fast track at this point will not impede the effort.
Third, the Leaders should agree to negotiate a series of new liberalization and facilitation agreements in a series of specific sectors over the next year. APEC's Trade Ministers and officials have made enormous progress over the past six months in identifying sectors where early liberalization can maintain the momentum toward achievement of the Bogor targets. The Leaders should specify a set of sectors that balance the interests of the member economies, from different parts of the region and at different levels of development, to follow up the success of the ITA in 1996 and hopefully the financial services agreement in 1997.
Such an initiative by the Leaders would demonstrate clearly to the world that APEC would not be deterred by the current financial crisis from pursuing its trade agenda. APEC would thus stand in sharp contrast to Mercosur, which has just raised its tariffs in an effort to stave off currency pressures, and others who are contemplating similarly retrogressive steps (that would inevitably fail in any event). It would also send a clear signal to the Congress of the United States that APEC was prepared to move ahead and that the Administration must therefore be provided with full authority to participate if the United States is not to be either left behind or forced to accept responsibility for the failure of the entire program.
Vancouver can be the most successful summit in the history of APEC if the Leaders adopt these three initiatives.
In 1993, the APEC summiteers decided to create "a community of Asia Pacific economies." The community now requires new mechanisms to avoid and handle future monetary crises as well as new initiatives to sustain the momentum toward achieving the trade targets of Bogor.
In 1994, the Leaders decided to achieve "free trade in the region." They now need comparably bold initiatives on the financial side as well as continuing efforts on trade.
In 1996, the Leaders effectively applied peer pressure to achieve the ITA. They now need to use similar techniques to head off monetary disruptions and to liberalize additional key sectors.
Vancouver can be the "finance summit" that will add to this chain of dramatic successes. If the Leaders take these steps, they will further stamp APEC as the most outstanding international institutional innovation of the post-Cold War era.