APEC at Vancouver: The Finance Summit
by C. Fred Bergsten, Peterson Institute for International Economics
Testimony before the Subcommittee on Asia and the Pacific Committee on International Relations
United States House of Representatives
November 6, 1997
At its summit meeting in Vancouver on November 25, the Asia Pacific Economic Cooperation (APEC) forum should launch new arrangements to help prevent and respond to future monetary crises in the region. There is a clear need for such arrangements and APEC is the logical institutional home for the "Asian Monetary Fund" that has been discussed so widely since the onset of the current financial problems in Southeast Asia.
The primary goal would be prevention of future crises. After Mexico exploded in early 1995, there were extensive efforts to improve the "early warning system." But that system failed again in Thailand. Moreover, the contagion to neighboring countries is far worse now than in Latin America in 1995.
The International Monetary Fund (IMF) did its job in foreseeing and warning of the impending problem. The systemic problem was that Thailand balked and no one pressed it to act.
The IMF on its own demonstrably cannot get emerging economies to adjust preemptively. It is unlikely that the industrial countries as a group, through the Group of Seven, or individual powers like the United States or Japan can do so. 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.
APEC can provide the institutional locus for such efforts. It is already developing a process of "peer pressure" or "friendly persuasion" 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 and open trade and investment in the region by 2010 (for the advanced countries) or 2020 (for the rest)," the commitment undertaken at the Bogor summit in 1994. 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, most recently during the IMF meetings in Hong Kong last month. They have already discussed the currency and related issues in depth. They should 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 further IMF programs in the region. The current cases are only the latest reminders that such crises inevitably occur from time to time. 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, including from the latest increases agreed at Hong Kong and the standby General Arrangements to Borrow and (when implemented) New Arrangements to Borrow. 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. But Japan's proposal for an Asia-only facility was rejected by all concerned, including its intended beneficiaries, on a variety of grounds. ASEAN is obviously too small. The "Six Markets Group" (or G-6) that met last spring included the United States but excluded many key Asian countries.
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, 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. As noted, its Finance Ministers have already developed an extensive cooperative relationship and discussed the relevant issues at length.
The main criticism of this proposal 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): to tie any APEC arrangements inextricably 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.
Moreover, 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.
The APEC summiteers should thus launch new preventive and funding arrangements at Vancouver. In 1993, they decided to create "a community of Asia Pacific economies"; the community now requires better mechanisms to avoid and handle future crises. In 1994, they decided to achieve "free trade in the region"; they now need comparably bold initiatives on the financial side. In 1996, they effectively applied peer pressure to achieve the ITA; they now need to use similar techniques to head off monetary disruptions. Vancouver can be the "finance summit" that will add to this chain of dramatic successes and further mark APEC as the outstanding international institutional innovation of the post-Cold War era.
August 27, 1997
|MEMORANDUM TO:||Prime Minister Chretien|
|From:||Panel of Independent Experts|
|Subject:||APEC Summit at Vancouver|
We the undersigned are a panel of independent experts, composed of close observers of APEC from most of its member economies, who are deeply committed to APEC. We applaud its impressive progress to date and believe that it has the potential to bring substantial benefits to all countries and peoples of the Asia Pacific region. Under your leadership, we are confident that this year's summit in Vancouver can make a major contribution toward realizing that potential. Drawing on some of the most experienced people from throughout the region, we have assembled a set of proposals that we commend to your personal consideration as you plan and prepare for Vancouver.
As you know so well, it is the annual summits that have propelled APEC so rapidly into a position of global as well as regional prominence. Leaders decided at Blake Island to create "a community of Asia Pacific economies." Leaders at Bogor committed to "achieve free and open trade in the region" by 2010/2020. Leaders at Osaka defined APEC's Action Agenda. Leaders at Subic last year launched the action stage and provided the critical momentum for global acceptance of the Information Technology Agreement (ITA). We believe that initiatives of similar magnitude and impact are achievable in 1997 and recommend several for your consideration. They would represent both timely responses to major economic developments of recent months and commitments to achieve APEC's fundamental long-term goals.
The "Finance Summit"
Recent developments suggest that Vancouver should focus on achieving financial security for the region. Our proposals would in fact enable APEC to make a major contribution to resolving some of the most pressing problems facing the world financial system as well as the region itself—replicating in the monetary area APEC's success in simultaneously pursuing its regional and global trade objectives.
APEC Ministers have already agreed to make a major push to achieve worldwide agreement on liberalization of financial services in the WTO. An APEC agreement on the issue in November would almost certainly galvanize a global accord by the target date of December 12. Successful APEC leadership on financial services in 1997 would thus replicate its role on the ITA in 1996. This achievement alone would assure a positive worldwide reaction to Vancouver.
As with the ITA, however, success can be achieved only with skillful negotiation of an agreement that meets the interests of all major APEC members. In particular, several of the key Asian developing countries must commit to more extensive opening and modernization of their financial markets. While they recognize that such movement is necessary to achieve the agreed goal of financing growth, their willingness to do so has been jeopardized by the currency crises in the region. These crises have thus jeopardized the core of the liberalization strategy for 1997, based on bringing the financial services talks to a successful conclusion, and they therefore threaten the success of the Vancouver summit itself.
We believe that Leaders can take two steps that will simultaneously save the financial services effort and, more importantly, launch a major new avenue of APEC cooperation. First, Leaders must articulate the reality that the currency crises increase, rather than detract from, the need for reform of financial sectors in affected countries and others that might be hit in the future. Weak financial sectors are a central cause of the present currency problems, as they were in Mexico and elsewhere in Latin America in 1995. No country can restore market and worldwide confidence unless it greatly strengthens that sector. The United States was forced to learn that lesson in the 1980s, Japan is pursuing its own "big bang" liberalization program today, Korea is struggling to launch one, and the rest of the region from Mexico to Indonesia must do so as well.
Liberalization and deregulation, as called for in the WTO negotiations, are thus essential to the restoration of stability and economic growth in the region — the ultimate goals of APEC cooperation. However, adequate supervisory regimes must accompany these reforms. This will take both time and technical assistance. The United States and others must therefore accept longer phase-in periods for the reforms. In addition, they must help the liberalizing countries install effective systems of prudential regulation and supervision. An APEC agreement on financial services should thus include a generous component of economic and technical cooperation (ecotech in APEC terminology), as well as liberalization, thereby strengthening the most neglected dimension of the APEC process and adding to the case for a major APEC initiative on the issue.
A second, even bolder, financial initiative could complement the national sectoral reforms and assure that Vancouver would rank as the most innovative APEC summit since Bogor. We believe that APEC should respond to the deep concerns experienced throughout the region over the current currency turmoil, including Prime Minister Mahathir's public indication that he intends to raise the issue at Vancouver and President Suharto's renewed call for APEC "to create a common safety network" in his National Day speech on August 16, by creating new mechanisms to supplement those of the International Monetary Fund to help prevent such crises in the future and provide additional funding for those that do occur.
In response to initiatives that you launched at the G-7 summit in Halifax, the IMF has improved both its "early warning" and financing capabilities. However, the preventive system failed again in Thailand. Contagion again spread to other countries. The new IMF financing arrangements did not prove usable so the support package once again had to be cobbled together on an ad hoc basis.
APEC could provide two crucial complements to the IMF procedures. First, it could deploy its evolving system of "peer pressure" or "positive encouragement" to help persuade countries to take preemptive action. Countries in trouble might be more inclined to accept unwelcome advice from community neighbors than from the IMF (let alone the G-7 or one or two large powers acting alone). The neighbors would have a legitimate case for providing such advice because, as recent events indicate, they can be severely injured if timely action is not taken. The APEC Finance Ministers have already discussed these issues and would be a natural venue for such an effort.
Second, APEC governments and central banks could provide a new financing facility to augment IMF programs in the region. As with Thailand now and Mexico in 1995, the IMF itself cannot supply nearly enough funding to enable countries to effectively defend their new (and politically difficult) adjustment programs. An APEC Supplementary Financing Facility would strengthen the ability of the IMF to persuade countries to adopt needed reforms, enhance the confidence of troubled countries that they could sustain the needed reforms, and provide a dramatic indicator of regional solidity.
Such a "Chretien Fund" could make a major contribution to both international financial stability and to APEC. It would also greatly strengthen the prospect for successful completion of the negotiations on financial sector reform by assuring countries in the region of additional help if such reform were to trigger future problems (as some of them fear). It would stamp Vancouver as the "finance summit." Leaders at Vancouver could direct their Finance Ministers to work out the details, as you and your G-7 colleagues did at Halifax in beginning to erect the essential (but still inadequate) improvements in the IMF system to deal with "future Mexicos".
Trade liberalization and reform continue to be central objectives of APEC. The Bogor targets and the ITA, on which Leaders played the decisive role, are the organization's most notable achievements. It is essential to maintain the movement toward realizing the free trade commitments; the Bogor targets will quickly lose credibility once any APEC summit fails to do so, and the world will be quick to criticize any such outcome.
Sectoral liberalization now appears a most promising route to rapid progress. Financial services liberalization, as described above, would represent a further major step in this direction. In addition, your Trade Ministers and officials have been developing a list of additional candidates for sectoral reform and the member countries have already nominated a rich list of possibilities.
We recommend that leaders make a commitment at Vancouver to achieve agreements in three or four additional sectors over the next year or two, thereby assuring sustained momentum toward achieving the Bogor targets and providing convincing evidence of APEC's willingness to fulfill its pledges. It will not be enough to simply designate one or two sectors for exploratory negotiations. Firm commitments to actually reach new agreements are required, as with the Bogor targets themselves. The nature of the agreements will of course differ from sector to sector: some, like the ITA, may include elimination of all tariffs; some may go further, to address nontariff measures as well; while some may only, at least in an initial stage, harmonize standards and other facilitation steps.
Four criteria could govern the selection of specific sectors. One is of course their economic significance; it would be advantageous to liberalize sectors that will bring sizable benefits to APEC economies. A second is the risk they pose of future trade conflict; APEC should make every effort to prevent future disputes by anticipatory liberalization and facilitation. A third criterion is the balance of members' interests; it will be especially important to include sectors of benefit to developing member countries. A final key variable is the existence of industry support; as demonstrated in the case of the ITA, this greatly smoothes the intergovernmental effort and subsequent domestic approval of APEC agreements. Attached is an illustrative list of eleven sectoral candidates that seem to meet these tests, though we would not claim to have yet had time to subject them (or other nominated sectors) to any rigorous analysis or screening process.
APEC can also now consolidate its leadership of the global trading system. In addition to galvanizing additional sectoral agreements, it should promote globalization of the Bogor commitments by starting to seek agreement in the WTO on a goal of global free trade by 2010/2020. Such an "APEC challenge" would promote achievement of the region's own liberalization goals in a manner fully consistent with its multilateral trade objectives. The goal could be pursued by APEC Trade Ministers at the WTO Ministerial Conferences in 1998 and/or 2000 for progress toward a new "APEC Round".
Leaders should also agree to order a comprehensive review of the first decade of APEC achievements in 1999. This review would assess progress to date on trade liberalization, facilitation, and economic and technical cooperation and point the way for future action. The review could give substance to the "APEC challenge" to nonmembers on trade liberalization and other APEC agenda issues. To assure its objectivity and utility for Leaders, an independent task force from outside official circles should be commissioned to conduct the review.
Economic and Technical Cooperation (ecotech)
APEC places high priority on ecotech and its central role in building an Asia Pacific community. The principles for successful ecotech were laid out at Manila but implementation to date has been highly fragmented and largely ineffectual. Better management is needed but devising a clear strategic focus is far more important.
One approach is to aggressively employ ecotech in support of APEC's trade liberalization and facilitation agenda by improving administrative cooperation and transferring technology and best practices. At the same time, liberalization and facilitation will open areas conventionally earmarked for the public sector to the private sector, with incentives, as in the building of public infrastructure.
In many sectors, ecotech is in fact an essential complement of liberalization if the benefits of the latter are to be maximized. For example:
We thus recommend that the Vancouver summit stress the potential benefits of ecotech, note that it can greatly enhance the gains from trade liberalization and facilitation, and direct Ministers and officials to develop projects that will take full advantage of such linkages.
Both the developed and developing economies within APEC have a deep interest in efficient solutions to global environment problems.
An essential element in a solution to the problem of greenhouse gas emissions must be the efficient location of energy industries and efficient specialization in energy trade within the APEC region, consistent with APEC economies realizing their full development potential without damage to the global environment.
The European proposals for uniform reductions of carbon emissions by all Annex I countries run counter to this APEC objective.
In the leadup to the Kyoto Conference, APEC leaders could usefully underline their commitment to solutions to the environment problem caused by greenhouse gas emissions and call for solutions which encourage efficient reduction of carbon emissions by (1) eliminating existing distortions in energy markets, (2) calling for the formulation of a system which achieves reductions while minimizing economic costs and (3) transferring technologies that promote clean and efficient energy use.
The potential agenda for Vancouver is very rich. We believe that some combination of the suggested initiatives could make it the most successful APEC summit to date. We commend them to you attention and would be delighted to elaborate or discuss them further if you would like to do so.
C. Fred Bergsten, United States
Chia Siow Yue, Singapore
Wendy Dobson, Canada
Peter Drysdale, Australia
Jesus Estanislao, Philippines
Ralph Lattimore, New Zealand
Suhadi Mankusuwondo, Indonesia
Luis Rubio, Mexico
Suthiphand Chirathivat, Thailand
Rong-I Wu, Chinese Taipei
Ippei Yamazawa, Japan
Soogil Young, Korea
Zhang Yunling, China
SECTORAL AGREEMENT CANDIDATES FOR VANCOUVER
|Sector (country sponsors)||Comments|
|1. Agriculture (Australia)||WTO negotiations to resume 2000; APEC could catalyze as with ITA 1996 and financial services 1997. Oilseeds could represent first installment in 1998. Agreement to immediately replace all nontariff measures with tariffs and bind agricultural protection would be useful first steps.|
|2. Automobiles and parts (US)||World's largest manufacturing sector. Huge inefficiencies exist throughout Asia due to high protection. Major disputes. Could start by harmonizing emissions and noise abatement standards.|
|3. Chemicals (Korea, US)||Basic industrial building block (like ITA). Many national industries want liberalization and have jointly developed a four-stage program.|
|4. Civil aviation||Build on expanding number of bilateral agreements to promote regional "open skies" accord.|
|5. Energy/energy equipment
(Australia, New Zealand, Thailand)
|Basic commodities with major economy-wide and environmental implications.|
|6. Environmental goods/services
(Canada, Japan, Taiwan, US)
|Would help support more efficient environmental policies.|
|7. Fish/ fish products (Brunei, Canada, Thailand, New Zealand)||Major export interest of several smaller countries.|
|8. Medical equipment
(Singapore, Thailand, US)
|Upgrade medical care and reduce costs.|
|9. Textiles and apparel (Indonesia)||Chief manufactured export of many developing countries.|
|10. Toys (China and Hong Kong)||Key Chinese interest. Almost agreed in Uruguay Round.|
|11. Steel (Korea)||Basic industrial building block. A nondiscriminatory APEC steel agreement could include technical assistance, raw materials supply assurances and new financing facilities.|