New York Meetings Asian Crisis Impact, Global Economic Prospects Are Among Issues Discussed by AEA Panels

• Author: Ian S. McDonald
• Position: Editor-in-Chief, IMF Survey
• Pages: 24-26

Page 24

The impact of the Asian crisis on the global economy, the roots of financial crises, and the prospects for an economic downturn in the United States were among the topics addressed at the annual meeting of the American Economic Association (Allied Social Science Associations), held in New York January 3-5.

Asian Crisis

At a roundtable on the lessons from the financial crisis in east Asia, senior officials from the IMF and the World Bank, together with other observers, provided their views. Michael Mussa, Director of the IMF's Research Department, noted that the crisis was likely to drive world output 5 percent below its potential path by the end of 2000 and explained that there were four main issues:

- Emerging markets should adopt better macroeconomic policies, coupled with strengthened supervision and management of financial systems, to minimize vulnerability to financial crises. These should be combined with sound policies to minimize the risks created by large inflows of private capital.

- Better policy responses were needed to lessen the damage from crises, and countries should continue to resist excessive exchange market pressure.

- At the systemic level, it was not enough to leave matters to the working of the market, since the market had no quick, clean solution to the problems of countries facing the potential for systemic default. The financial assistance of the international community, including the IMF, was needed, although it could not successfully resolve all crises.

- The conditions that are a requirement of IMF lending help countries adopt appropriate policies and avoid future crises. In this respect, the new IMF Supplementary Reserve Facility would play an important role. Later, in answer to questions, Mussa said that at the national level there were a variety of mechanisms that could protect countries from the consequences of crises.At the international level, however, there were too few such mechanisms.

What went wrong in Asia? Joseph Stiglitz, Chief Economist at the World Bank, asked. Ex ante, he said, the markets did not foresee any problems. The positive elements outweighed the negative. While there had been some problems in Thailand, these were minor. In Asia as a whole the miracle had worked and growth had benefited the great majority of the people.

Also, according to the economic models, many countries that did not have financial crises appeared more vulnerable than those that did. Even in retrospect it was not obvious where the roots of the crises lay. The real problem was in the scale of borrowing by the private sector.

Moreover, Stiglitz said, there is a need to mitigate the consequences of crises. Most developing countries do not have the social safety nets of the more advanced countries, particularly in the informal sectors, such as agriculture.More attention should be paid to countries' exposure to risk and the measures that need to be taken to protect them from the consequences of such risk. In the...