"Asia is Moving Forward: Ten Years after the Crisis"
Speech by
President Haruhiko Kuroda
Asian Development Bank
At the International Symposium
2 July 2007
ADB Headquarters, Mandaluyong City
I. Introduction
Minister Chalongphob, Minister Chung, Minister Dorodjatun, Minister de Ocampo, Governor Zeti, distinguished guests, ladies and gentlemen:
It is a great pleasure for me to welcome you to ADB and to this Symposium. It was ten years ago today, 2 July 1997, that the Asian financial crisis began to manifest itself, first in Thailand. As foreign portfolio investors withdrew, the baht began to fall. And because many of these overseas investors managed their "emerging market" portfolios together, contagion rapidly spread its shock-to Indonesia, Korea, Malaysia, and the Philippines.
The decade that has passed since then has many lessons to teach us about the Asian recovery. In this respect, I would like to acknowledge our distinguished panel members, who together represent a good part of that recovery. I have no doubt that today's discussion will put us another step closer to ensuring that the region's future remains one of hope and ever greater prosperity.
To set the stage for this discussion, I would first like to very briefly lay out the salient points of the economic reform, restructuring, and regional integration that helped the region emerge from the quagmire after the crisis. Then, given this background, I will touch on some of the risks and challenges ahead-specifically, those associated with large capital flows in potentially volatile markets and Asia's somewhat excessive and continually growing international reserves. Before concluding, I will offer a few thoughts on enhancing regional cooperation and integration.
II. The Recovery and Enhanced Regional Cooperation and Integration
As we know, the crisis-affected countries have fortified their economic foundations and have been-step-by-step-regaining economic buoyancy and dynamism. Asian leaders took the crisis as an opportunity for reforms and restructuring, and with restructuring came recovery. Banking sector reform is a good example, where consolidation, revamped ownership, new business lines, and greater prudential oversight combined to reduce financial vulnerabilities. More needs to be done, of course, as reform in an increasingly integrated and dynamic global economy is a continuous process, rather than a one-off effort.
The crisis also quickly developed into an opportunity to accelerate emerging economic regionalism. Regional policy dialogue and economic surveillance at the highest levels-mostly led by the region's finance ministers and central bank governors-has become the hallmark of the expanded regionalism we have seen over the past decade. Reserve pooling (the Chiang Mai Initiative) from a multilateral perspective is now in progress by the ASEAN+3 Finance Ministers. And capital market development, via the Asian Bond Markets Initiative, for example, is enhancing financing alternatives for the region's large investment requirements. The evolving regional economic environment, cross-border production networks, and the advances in information technology helped leaders recognize the need to work together to build better resilience to potential shocks-both external and internal.
Since the crisis, we have seen the trend of expanding market-led regional integration lead to greater cooperation between governments. Timelines for the ASEAN Economic Community have been set, and then accelerated; and discussions of an East Asian Community have moved forward. The region is gradually constructing a common agenda to guide it forward - an agenda based on a shared commitment to adaptation, reform, and preparedness. This is happening not merely in consonance with individual economic situations, but increasingly through a growing consciousness of joint interests-particularly that of fending off future external shocks-or responding collectively if and when they do occur.
It is notable that the economic and structural reforms undertaken on the road to recovery continued despite the effects of external shocks, such as the "dot.com" slowdown in the US, the political turmoil caused by terrorism, and the steady, and sometimes volatile, rise in oil prices. The resilience of the recovery despite these challenges only reinforces and magnifies the value of regional economic cooperation and integration.
It is also important to point out that while the crisis was affecting millions of people in the affected economies, other countries in the region maintained their economic expansion. Most obvious, of course, is China, where investment continued, and at the height of the crisis in 1998, GDP growth remained at a healthy 8%. This growth trend benefited the region's recovery, as it led to greater intraregional trade, investment, and financing, thus enhancing opportunities for regionalism. This aided recovery, as did continued global demand for Asian products-particularly from the United States and the expanding European Union.
III. Risks and Challenges: Financial Market Volatility and Reserve Management
Today, of course, the question on many minds is: are there underlying risks lurking as there were in 1997? And if so, what can be done during this period of relative stability to guard against a reoccurrence of the crisis?
For example, we have the potential for more bouts of financial market volatility. Capital flows have ramped up significantly over the past several years, as increased global liquidity, Asia's economic resurgence and dynamism, along with the search for yield has drawn in-and out-large amounts of investment capital. Gross capital inflows and outflows, for instance, have reached an historical high among the six large emerging Asian economies of about 8% of GDP, exceeding the level of the early 1990s.
While Asia has done well to recover from the crisis and post robust growth in recent years, several challenges remain. In the near future, the prospects of economic growth in the US and the world, global payments imbalance, and pace of unwinding of global liquidity pose risks and challenges to the Asian economic outlook. Against this backdrop, what should be done now in terms of regional monetary and financial cooperation?
Another area of concern is the region's accelerating reserve accumulation and how to manage it efficiently and effectively to help meet our own needs for increased infrastructure investment.
Some tend to view the region's alleged exchange rate rigidity as a problem. In this context, it is important to emphasize, however, that barring a few exceptions, most countries in the region are following increasingly-flexible exchange rate regimes, using inflation targeting as an anchor for monetary policy.
But with ever expanding intraregional trade and investment, how best should intraregional exchange rate stability be maintained in the case of extreme exogenous shocks? How do we move forward in developing capital markets to channel the rapidly accumulating reserves to serve the growing demand for regional investment? What should be the most appropriate and effective way that Asia can use its huge reserves? And finally, how can the region protect its savings, much of which is invested in US Treasuries, should a sudden correction in the global balance-of-payment imbalance threaten their underlying value?
There are no cut and dried answers to these questions, of course. But it is my hope that we can find some guidance in the wisdom and experiences of our panelists.
IV. Conclusion: Are We on the Right Path?
One thing that does seem clear is that regional approaches are vital to keep Asian economies strong in the face of such threats - and to take advantage of new opportunities. In the decade since the crisis, we have come to accept a pragmatic, step-by-step, bottom-up approach to regionalism-rather than the comprehensive pan-Asian "vision" as was done in Europe. A "multi-speed," "multi-track" approach to integration seems best, whereby a few countries start working together on selected common issues, with the option for other countries to join later, or appropriate new issues added. Our experience tells us that the only logical way to move forward is to use subregional cooperation as the building block of an eventual wider and more broad-based regional integration-given the extreme diversity and sheer size of Asia and the Pacific.
Is this indeed the best path to take? And what further steps can help the region secure and build upon the gains of the last decade?
On trade, is there merit in working to consolidate the so-called "Noodle Bowl" of free trade agreements? In monetary and financial integration, what are the next steps beyond regional reserve pooling and building up local currency and regional bond markets? Are new mechanisms needed to ensure regional exchange rate stability?
Ten years after the crisis, the affected countries - and the region as a whole - have surely come a long way. But most exciting are the challenges ahead. With reforms well in hand and progressing, and with an increasingly regional mindset, I believe these challenges can be met in a way that contributes to Asia's growing prosperity as well as to the world's economic well-being.
Thank you.
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