WORLD ECONOMY

October 6, 1998
	At the IMF and World Bank annual meeting today, President Clinton called for urgent and coordinated action to prevent a worldwide financial meltdown. Following a background report, Phil Ponce and guests discuss the world economic crisis.

Oct. 6, 1998: Background on the global financial crisis. Sept. 16, 1998: Treasury Secretary Rubin assesses the global markets Sept. 7, 1998: Economic strife in South Korea creates "IMF orphans." Aug. 26, 1998: Why is the Russian market collapsing? Aug. 11, 1998: One World, One Market: Is globalization working? June 17, 1998: The U.S. helps bailout the Yen.and Japan's troubled economy. Jan. 1, 1998: The connection between the IMF and world economies. Browse the NewsHour's coverage of economic issues, Asia, Russia, and South America.     The IMF	PHIL PONCE: Joining me now are three officials attending this week's meetings: Donald Tsang is the financial secretary of Hong Kong, now a special administrative region of China; Eduardo Aninat is the minister of finance of Chile; and Lawrence Summers is deputy U.S. treasury secretary. Gentlemen, welcome. Secretary Tsang, we just heard President Clinton say that this was the worst global economic crisis in 50 years. From the vantage point of Asia, where it all began, how does it look to you?
	Rapid globalization.
	DONALD TSANG, Financial Secretary, Hong Kong: Well, I think it is an accurate description of a situation, although last year very few of us, hardly any one, us have been able to focus on the gravity of the situation. But as the whole thing evolved, it became extremely clear to us that we are facing something very, very serious, and we not seen since World War II. The crisis, which first emerged in Thailand, has been spreading very quickly in Asia, then spreading to Russia, and now you can see in Latin America. The financial markets in the world have gone really frighteningly global in a very short space of time. In effect, because of the financial infrastructure affecting all of us, all markets, we are now literally living in the same boat. PHIL PONCE: Minister Aninat, a frightening perspective from South America? EDUARDO ANINAT, Minister of Finance, Chile: No. I will not say that. I think the speech by President Clinton is clear cut that action is needed. Coordination of policies in an enhanced way is also requested, and mainly here, I think we are facing an issue of leadership throughout the world. I think decisive actions have to be taken regarding the IMF and World Bank funding, and a better understanding of how these financial flows are proceeding throughout the markets, basically because this is an issue of expectations and confidence building. I am positive that action will come. It is necessary, but I do reckon that the crisis has globally occurred. PHIL PONCE: And Mr. Secretary, how does one fix it? LAWRENCE SUMMERS, Deputy U.S. Treasury Secretary: It's not - it's a tough situation, but it's a situation we can work our way through and come out stronger. To do that, the industrialized countries have to do their part by focusing on growth as they recognize. That means especially Japan has to get to work on its banking system and get to work on stimulating its economy, which is still the largest economy by far in Asia. Countries that are caught up in this need strong policies if they're to have the capacity to attract capital. And we in the United States need to do our part by passing the IMF legislation so that the IMF has the capacity to fight these fires. It may be that it is the case there are important changes that need to be made at the IMF. But this is not the time to take away their funding. That's like cutting off the water to the fire department at a time when there are fires burning in a number of places. And finally, and this is something the president put a lot of emphasis on his speech today, even as worry about this current crisis , we need to think about how the system operates, how we can prevent these kind of crises in the future, and how we can respond more effectively to them, because unless we have a global financial system that works for people who have been caught up in all of this, people who have reached the middle class and who have been caught up in the this and now are findings their lives shattered by what has happened. Unless we can make this start to work for them, the consequences are going to be grave, indeed. PHIL PONCE: You're talking about some the long-term plans that the president alluded to as far as getting rid of the boom and bust cycle. But sticking with the short-term for a minute, you would say that the top priority is what, spurring economic growth at this point?
	Top priorities.
	LAWRENCE SUMMERS: Global market, strong policies in the emerging markets, IMF funding, strong IMF support to counter the bank run that's coming from contagion on many of these countries. PHIL PONCE: Secretary Tsang, Secretary Summers just alluded to something the president said, and if I can quote the president, he said, the health of Asia and, indeed, the world depends on Japan. Japan is that big of a lynchpin, in your opinion? DONALD TSANG: It is true, because it is at least in terms of total size of economy, it is about 60 percent of entire Asian economy, providing a lot of liquidity in the market. So if the Japanese economy is sick, every one of us will be in serious illness. So what we have seen so far is the drying up of liquidity, the money in the rest of Asia because Japanese is in trouble. It is important, as Larry said, and we have to a much more active, a much more lively Japanese economy to revive the whole of Asian economy. But at the same time we have to deal with a fire. There are fires that we need to tackle. And IMF is equipped to do it, and I agree with Larry too, we must deal with the question, the problem in Brazil, we must deal with a problem in Russia, and I think IMF should be equipped to do those things. PHIL PONCE: Secretary Tsang, following up on the issue of Japan, there's some suggestion that there simply is not the political will in Japan to do the kinds of things that need to be done. What's your assessment of that? DONALD TSANG: Well, let's be fair. They've begun to do it. Even the last prime minister, Mr. Hashimoto, produced a very - I think a decent banking, a viable plan whereby the U.S. produced bridge banks, which would buy off the non-performing assets of the banks - introducing general liquidity into the system, and I think that was a good start. And I hope I have just heard that the Japanese Diet is going to deal with this very effectively, I hope before the coming recess in November. If that's the case, that's the beginning of a sign of light in the end of a tunnel. PHIL PONCE: Minister Aninat, what Japan may be to Asia, some people say Brazil is to South America, and right now Brazil is going through its own woes. How do you assess what's happening with Brazil and what needs to be done?
	Brazil: a Latin American barometer.
	EDUARDO ANINAT: Well, there has been a major event in Brazil, which is Sunday's election. President Cardoso has had a landslide victory and I think that is crucial to the continuity of the reforms that the present team have been developing in Brazil. Brazil represents 40 percent of the Latin American economies, and, therefore, it's a big player that has to be observed, analyzed, promoted, and supported. I have an optimistic view of Brazil. They have been privatizing all public enterprises. They have started a lot of reforms in the financial arena. They are opening up the economy. So I think that the support from the multilateral agencies come, if the new team puts in place a fiscal policy package like they're planning to do, and designing to do, I think that there is a chance that things can become better. PHIL PONCE: Secretary Summers, there are reports that Brazil is in the process of lining up anywhere from 30 billion to 60 billion dollars' worth of assistance. What can you tell us about that? LAWRENCE SUMMERS: Well, the Brazilians are charting their course. President Cardoso has made clear his determination to pursue strong economic reforms, and certainly it's clear from what the president has said , what Secretary Rubin has said, what Manager Camdessus at the IMF has said, that the international community wants very much to be supportive of Brazil, because Brazil's economic destiny is very important for Latin America, and, indeed, important for emerging markets generally, and for the global economy. We'll just have to see how that evolves, but it's certainly an intense area of focus. PHIL PONCE: Secretary Tsang, you talked about leadership in dealing with this problem. Do you sense that someone is in charge, that someone is coming up with a plan to deal with the situation in Asia, in South America, in Russia? DONALD TSANG: Well, it's - we do not talk about problems in regional terms. What we are facing is a global issue. I think we have a common problem. We have a common purpose, and we need a common strategy. PHIL PONCE: Is there a common strategy right now?
	Making a concerted effort.
	DONALD TSANG: Well, at least we will have global ones. I am hopeful - the fact that, for instance, yesterday when President Clinton rounded up 20 odd countries, large and small, sitting together, talking very frankly informally what needs to be done, setting out the short-term, short-term strategy, the medium-term strategy, and the longer-term ones. And I'm hopeful - it won't be easy - it is tough - but I think we can work things out together. PHIL PONCE: Mr. Minister Aninat, do you sense that there is the kind of leadership that Secretary Tsang says is needed? EDUARDO ANINAT: Well, I think I would call more forcefully, perhaps to some of the European leaders as well. We have to speak of Europe here in terms of the leadership to grow. If Europe, the U.S., and Canada do not grow persistently next year and the other year, then this term can last longer, so basically, what we need here is responses to the crisis as it is evolving in this day. Time is running out, but I do see a will for more coordination. I do see a common diagnosis of the problem, and I am positive about the outlook, although I reckon that the timing issue is crucial. PHIL PONCE: Secretary Summers, is everybody on the same page? LAWRENCE SUMMERS: I think we've seen some important consensuses emerge in the last few days. We've seen a very clear consensus now that the priority in the world right now isn't fighting inflation. It's achieving growth. I think we've seen an important recognition that this is importantly a problem of confidence and that we all need to take steps to restore confidence. I think we've seen an important recognition that this is a global problem and that we all need to pursue solutions that are in the global interest, not protectionist strategies, not "better thy neighbor" strategies. I think that's an important understanding. I think we've seen a recognition that this is a problem that's going to require the public and the private sectors to work together to do things like restructuring the large problems of over-leveraged chaebols in Korea where banks that are in serious trouble in Thailand, and I think that's a consensus on - that is a significant one as well. So I think we're seeing a framework evolve in which we can all, working together, work our way through these problems. But these problems weren't made in a week or a month or a year. And they're not going to be solved overnight. But I think what's important is that we begin the process of making ourselves stronger and cooperating better. And I think that's where you saw some of the elements start to come into place this week. PHIL PONCE: Secretary Summers, one of the elements to spurring growth in a lot of people's minds is the reduction of interest rates. Is that sort of a nuts and bolts kind of thing that you'd like to see different countries do? LAWRENCE SUMMERS: We don't comment on our own independent central bank, or the central banks of others, but I do think that it's - I will say this - it's important to remember that growth is the priority now, rather than fighting inflation.
	Moderating the free flow of capital.
	PHIL PONCE: How about something else Secretary Summers just raised, Secretary Tsang, the issue of a backlash, are some economies taking steps to sort of protect themselves, maybe at the expense of the free flow of investment, the free flow of capital? DONALD TSANG: Well, I have some sympathy what individual soften economy which to do to protect itself but this is a consequence of not having an opportunity to work together as a team, and I think we have to focus on the issue at hand, and work together, then we will see a lot less of this closing up economies so that we can work together. PHIL PONCE: Minister Aninat, one of the things President Clinton talked about was orchestrating things - a new architecture for the next century - economic architecture -- so that there is still a free flow of capital, and yet, there's not the boom and bust. How can you have the free flow of capital, markets operating with relative freedom and at the same time protecting capital from going where it wants to go? EDUARDO ANINAT: Well, I think here the crucial thing is very strong bank supervision. The moratorium of the financial system, the early warnings, the transparency in the data, the screening of all that in a global basis is one of the crucial things. Perhaps in some of the Asian experiences there was some part of a problem there. There is a consensus in that sense, and what we need is to have these multilateral agencies, the big agencies, the sort of coordinators of the financial system, tackle this much more decisively, as they have had. PHIL PONCE: Secretary Summers, one of the things Secretary Tsang said earlier, this all happened very quickly. Are the current institutions -- is the current system, was it up to all the new things happened? LAWRENCE SUMMERS: I think we've got a lot of work to do to modernize that architecture. That's something that President Clinton has been stressing since the Naples summit. One crucial area is one Minister Aninat mentioned, which is working to make sure that bank supervision functions better. Another very important one is transparency and fighting corruption. PHIL PONCE: And by change, what do you mean? LAWRENCE SUMMERS: I mean this. I mean accounting statements. I mean knowing how big your country's reserves are. I mean knowing what a company's accounts are when you ask people to invest in. I mean knowing where a bank's assets are invested before it's able to take deposits. You know, if you look at the history of the development of the American capital market, I don't think there's any single idea that was as important as the idea of generally accepted accounting principles. And we have to do much, much more of that internationally. PHIL PONCE: Gentlemen, I'm afraid that's all the time we have. I thank you all very much.

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