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the crash interview: stanley fischer
stanley fischer
He is First Deputy Managing Director of the International Monetary Fund. Prior to taking this position in 1994, he was the Killian Professor and the Head of the Department of Economics at MIT. He also served as Chief Economist at the World Bank. (Interview conducted in the spring of 1999.)
Is this over? This rolling crisis that we've been seeing the last 19, 20 months?

It's definitely feeling better, but it's too early to say that it's over. The Asian countries are all, except for Indonesia, coming out of the crisis and showing signs of growing in 1999, which is very positive.

Russia, of course, remains mired in a deep crisis; but Brazil, the only big country that was in deep trouble, looks like it's improving. The overall atmosphere of potential disaster, which was here six months ago, has changed favorably. So I would say we're better off than we were six months ago, but we're not out of the woods yet.

Could we be surprised again?

That's the trouble with surprise. Yes. I don't actually see precisely where that surprise would come from, but it's very hard to predict those things. The world economic growth in the last few years has been sustained by an absolutely extraordinary performance in the United States. We keep saying this can't go on forever. Of course, it goes on one year more than we expected every year, but it will change at some point and that could slow things down a bit ...

Let's go back to the early '90s when the Clinton White House, the U.S. Treasury and, to a some extent, the International Monetary Fund, were pushing for open markets around the world ... What was driving it?

Well, I wasn't here at the time, so I'm not sure what was driving it in the IMF, but it was a general view that among the industrialized countries, you really have very open capital accounts. It was something that took a long time to develop, and that they had prospered in that framework. It seems a very natural way of doing business.

This has been a terrible crisis for all the countries concerned.  But it is surprising that the depths of the social distress that it has had created is less then the critics have asserted throughout. There are theoretical reasons to think that having open capital markets, enabling countries to borrow from abroad, enabling consumers to invest in other capital markets, importing the superior financial technology of other countries.--we have very good banks--they should be allowed to operate in other countries. Allowing free trade and finance had a lot of appeal as a way of doing business. I still believe that in the long run, that's where we're going to end up, with very open global capital markets.

In retrospect, did we push too hard, too fast in these emerging market countries?

There was a recognition that opening up should be done in a particular way, which was to open up at the long end to foreign direct investment and long-term investments first, and then to gradually open up to short-term flows when the country was ready.

The mistakes that have been made, particularly in Korea and Thailand, were to open up at the short end first and not at the long end. The really massive crises in Korea and Thailand came from the fact that they've had a lot of short-term money come in which they had tried to get in, and then it turned around just as fast as it had come in, faster, in fact.

Let me tick off some of the criticisms ... The first is that once the crisis began, the policies that the Fund and the Treasury emphasized were disastrous for the populations in these countries. What's your reaction to that?

I think it's wrong. Two reasons. First, the most controversial part of these policies has been the support by the Fund for countries to try to prevent their exchange rates depreciating excessively by raising interest rates. The criticism has focused most heavily on having high interest rates at the start of these programs. The alternative was to keep interest rates low and let the exchange rates depreciate more. But, in each of those countries, exchange rates depreciated to half their value very, very quickly. When your currency loses half its value on the external side, you're going to get a domestic inflation unless you reverse it. Furthermore, in all of those countries, they were heavily indebted in dollars, so that everybody who borrowed in dollars had to pay twice as much in terms of the domestic currency as they were expected to pay before. There had been a huge number of bankruptcies on that account.

So [it] isn't as if there was one easy strategy that the interest stay low and everything will be fine. It was a trade off. How much do [you] allow the currency to devalue? How high do you raise interest rates? I think the right trade off was made for one important reason--it worked. Actually, for more than one important reason--it worked. Those currencies did stabilize, they did strengthen, and interest rates are now very low as we said they could be as soon as it stabilized.

... if there been a massive devaluation that would have meant a permanent burden in terms of the amount of dollars they had to pay abroad relative to the local value of the currency. Whereas, what happened is that they fought the devaluation and the currency regained value, they rolled down about 20-25% instead of over 50%. So that meant the high interest rates were a temporary problem; allowing the devaluation would have been a permanent problem. So that was the right strategy. I still believe it was the right strategy. I know how strongly critics feel about it, but I think that they are wrong on this one.

The second point to make and it's a point that has to be made very carefully is that this has been a terrible crisis for all the countries concerned. But it is surprising that depths of the social distress that it has had created is less then the critics have asserted throughout. The poverty rates in Indonesia and Thailand have risen relatively little from say 11-14%, something like that, in both countries. It is nothing to be proud about, but it is not the devastation on the scale that many thought was happening at the time. I can explain why. The bulk of the poverty is rural and the rural sector has not been as badly affected as the other sectors in this crisis.

Similarly in Korea, where the crisis has been very deep--and the unemployment rate in Korea has risen sharply--is well below European unemployment rates even at this stage. So I don't want to minimize the social crisis that has been created. It is not of a scale that has been suggested by those who have been so [vociferously] critical of these programs

Isn't it true that [for] most of these countries, their real economies are still in recession?

They are probably coming out of recession. Certainly in Korea, where growth is going to be quite large. And Thailand is probably turning. Indonesia is in a recession. Philippines is probably coming out of a recession now, but they have been severely impacted, and we must understand that.

What about the criticisms that the actions of the Fund made the crisis worse in its beginning? The declaration, for example, in Indonesia that a certain number of banks needed to close. In fact, it created a bank run, that many of the policies were like feeding the fire ...

There were a variety of charges along those grounds and let me try to deal with them. On the Indonesian banks, the issue is those banks are very well known to be highly corrupt. They had to be closed if confidence in the banking system was to be restored. The closure of the banks did lead to a movement of deposits out of what were thought to be other corrupt banks and unsafe banks into state banks. With good management, that could have been handled. It was handled in Thailand. It was handled in Korea, because the same phenomena happened there. But it wasn't managed that well. The closure of the banks without the good follow up as to how to control that did create a problem there, but it was not an inevitable problem.

In the other countries, the charge is that by saying at the beginning these countries were in deep crisis, the Fund worsened the situation--that simply has no basis. On the days the program started in both Korea and Thailand, each country had essentially used up all its foreign currency reserves. They were just out of reserves. The country doesn't start from a situation where, to the surprise to everybody, it's used up all foreign exchange without being understood to be in a deep crisis. In those two cases, there is simply no basis for the charge that what the Fund did exacerbated the crisis. What the countries did, unfortunately, in delaying coming to Fund and resisting coming to the Fund was to use up all their foreign exchange and make their own crisis worse, and that it then began to turn around.

There is [another] very interesting element on the political economy of these things, which is that in each of those three countries, the economic situation began to change as the government changed. In Korea, fortunately, there was an election coming up three weeks after the start of the crisis. A new president came in. He said he wanted to carry out this program ... As soon as he took office, together with a few other things that happened. Confidence began to change.

Similarly, in Thailand, the government that got into the trouble was the government with which we signed program. When they were thrown out and the new government came in November, five months later, things began to turn. Now in Indonesia, of course, the replacement of Suharto was not done in a nice, clean, democratic way, as in the other two countries. But it is also true that the new government was the one that began to stabilize the situation. So the political economy aspect of this is very difficult. We can't say, "Well, we are only going to sign up with a new government." But it happened that once the government changed things worked much better.

The final criticism ... this is from Business Week, which a few months ago said ... that "we live in a deflationary world, that austerity policies forced upon countries in return for loans turns bad debt problems into economic debacles." This seems to be a different kind of criticism and gets to the deflation that is being seen worldwide.

This is a matter of how much money have you got to lend a country. I don't doubt that if the industrialized world had decided to give Korea a $100 billion and give Thailand huge amounts and given Indonesia that it would have been possible to encourage spending, so that they could have continued spending in the way that they have been up to that point. But there wasn't that much money to go around. And when all your creditors are pulling out, and that was what was happening the private sector, was simply massive amounts pulling money out, you cannot at that moment turn around and say this is a time to go on a spending spree, unless somebody's going to give you the money to spend.

We tried to provide a large amount of financing. But while exchanges were depreciating so fast, you couldn't say, "This is the time to spend, this is the time to have low interest rates." You would have just got into a worse and worse spiral. You had first to stabilize; then try to revive the economy. That has been done. In every one of the countries, within six months the policies changed nature. The interest rates very low, except in Indonesia, which still has an inflation problem. The fiscal deficits are now very large, and there is a fiscal expansion on the way in those countries. That is possible because the macro economy has stabilized. Until that happened this was not possible. So I don't think those other policies desirable as they were could have been done.

... [people criticize] people who say that things are turning around in these countries, [that they] are looking only [at] the macro economy, financial indicators and not at the real economies, not at the lives most of the people who are living in these places?

What I say is the financial variables stabilized first, and there is no question that they stabilized at a time when output was still declining and things were getting worse. But we are beyond that point now and growth is evident in Korea. They do expect, they keep raising their own estimate 3% or 4% growth this year; we are not that optimistic yet. But there is no doubt at the moment about there being growth in Korea. Unemployment typically lags growth, so unemployment will continue to rise ... then it will come down after the growth has been there for awhile.

Similarly, there should be growth in Thailand. That is not to deny that a lot of people have been hurt in this process and that there is substantial social distress in those countries, which with our colleagues in the World Bank, [we're] trying to put in place social safety net measures--unemployment insurance in Indonesia and Thailand, a variety of public employment works--we're trying to mitigate those things. I don't deny, nor can anyone deny, that this crisis has brought substantial misery. But it is turning around, and we shouldn't deny that either.

It sounds like you have taken these criticisms to heart over the last year and a half or so?

Well, people always seem surprised that employees of the IMF and the management of the IMF and the governments represented here actually worry about these things. But I don't know why they are surprised--we should, we do, we have and we will.

Do you ever feel like the Fund is the whipping boy for policies that are set other places?

... if I can take a moment to explain how this place runs. There is no program of the IMF that doesn't go through our executive board on which 182 countries are represented--24 members ... the G7 basically have their own seats and then the others are grouped together into constituencies.

There is nothing we do in a program that is not approved by 182 countries. Typically, unanimously. It's not that we are the whipping [boys] for policies made elsewhere. It is that we are the whipping boys for policies which are supported by the international community and by member governments. Many member governments stand behind us and stand up and say, "We voted for it. We support these polices." Not all of them do. That comes with the territory, and you do have that feeling sometimes that it's convenient for government to let us take the heat. That is just a part of life, and it is not an abiding concern.

Let's go back briefly to Mexico in '94-'95. Some people say that the roots of the crisis in Asia in '97 really are back in Mexico. That lessons were learned in the resolution of the crisis there, and essentially, the investors who were making a lot of money and making very risky investments got off scot-free. What is your reaction to that?

I think that's wrong. The evidence that is coming, the careful work that is being done points very strongly against that and that's wrong ... What happened in Mexico was that everybody, except the investors in the government bonds, got very badly hit. If you were an equity investor, if you had any shares in any Mexican company, or you owned a mutual fund, you got hammered. I know that because my family did, and it hurt a lot.

If it was true that investors were relying on a similar risk elsewhere, what you would have seen would have been heavy investment in the sort of securities that were saved in Mexico and movement out of equities and the sort of investments that got hurt in Mexico. If you look at the evidence, it is the other way. People did not move away from equities in Asia. They actually mov[ed] into it. There are now a number of papers coming out saying, if you look carefully at the details of the relationship between the crisis, it is hard to sustain the moral hazard charge ... I think nobody in the world imagined that this extraordinary miracle would come to an end. We believed, investors believed that Asian countries had discovered the secrets of perpetual youth or perpetual growth ...

George Soros said that he or his funds would not have invested as heavily as they did in Ukraine and Russia had they not escaped in Mexico.

Russia is a different matter, I've been talking about Asia.

You're saying that it is not connected to Asia, but it could be to Russia?

No. If there was one country in the world investors could have thought that somehow that G7, the industrialized world, whatever, would not allow the country to collapse economically it was Russia. Well before the Russian crisis was recognized, I said it a few times (I'm sure many others did), that if there was one case of moral hazard it was Russia, because it was not an unreasonable supposition that, given the importance of Russia, when the crisis came a way would be found of preventing it. Well, in the end, the crisis just got too big for the available resources for it to be prevented. I do believe that, in that case, there is an element of validity to that ...

Explain what you mean by moral hazard.

A response in the presence of insurance that makes the accident more likely to happen. So if your house is insured against fire, you may be a little bit more sloppy about guarding against fire. That's a moral hazard created by the presence of insurance.

The moral hazard in the case of, say, investment in Mexico, Russia, etc., is interpreted as being: If there's a crisis, the IMF or the world community will come to the rescue. Therefore, I don't have to ask myself so carefully--is this a good investment?--because somebody will take care of it.

There have been claims that a big part of the crisis in Asia and in Russia was because of so-called crony capitalism, that the foreign investors didn't know where their money was going ... that the foreign investors didn't do due diligence ...

Well, I think all those things are right. There was crony capitalism, and a large part of the reason the banking systems were so weak was because of so-called connected lending. That is, people either bought banks or were related to the people who owned banks and got loans which were not really done on any basis other than that they knew the owner of the bank. In Indonesia, it was possibly even more explicit. Some of the banks were definitely owned by cronies and definitely extended loans that had no commercial basis.

At the same time, it's true that many investors did not exercise due diligence in these cases. At a time when the IMF was seeking to help encourage banks to keep their money in Indonesia, an effort to talk to the banks collectively, one of them said, "Well, how do you expect us to keep lending to these people? We don't even know what their balance sheets really mean." The reaction you have, of course, is, "Well, if you don't know what their balance sheets really mean, how come you loaned to them to begin with?" So that problem was there.

Let me quote Business Week again ... this is from the same editorial, that "the IMF policies protect banks from the consequences of their mistakes."

We have presumptions in finance and in the world, namely, that contracts will be honored. Generally, countries want to honor their contracts because that way you get a reputation, and you can continue doing business. Well, we have, in a number of cases, tried very hard to involve the banks in the solution of problems It has, in fact, been done in Indonesia. It has been done in Thailand by the Japanese government. It was done in Korea ... Brazil.

So we try to encourage them to keep lending. We try to encourage them to support the stabilization of the economy. It's always a very complicated exercise. The banks have entered a contract. They have claims They have obligations to their shareholders. Nobody has the legal right to say on behalf of the international community or whatever, you don't have the right to make these claims. So you have to work in a cooperative way with the banks. In many cases, certainly the ones I've mentioned, the banks have operated in a cooperative way. It's a well-known problem of collective action. That is, the banks know that if they all act together, the situation will be better, that every individual bank knows that if it could get its money out, it would be better off.

... this is one of the areas in which the international system is feeling its way at the moment. There's a recognition that investors have to be involved in the solution of these crises, that we can't continue with a system in which, at the hint of trouble, all the private sector gets out, each doing what is rational for itself but in the process, through their individual rationality, producing an outcome that's worse for the system. We're struggling with how to deal with that ...

But I wouldn't say that we're ever going to get to a hard and fast rule. We're going to have to do this each time on a case by case basis, trying to figure out how to do it, appealing to the private sector collectively, which doesn't normally act collectively, nor do we want it to, to come together and do something that makes it more jointly better off ...

In many ways, it seems that the Fund became the architect of the transition from communism to capitalism, even though that's not traditionally a role that the Fund has played ...

Well, there were many architects, and the thinking about how to do this ranged very widely. I was an academic at the time. I was involved in those debates. Jeff Sachs certainly was involved in them, and helped set the initial approach, and many others did that. But when it came time to actually take action and embody those ideas in concrete plans, the Fund became the outside agent, together with our colleagues in the World Bank, and increasingly the European Bank for Reconstruction and Development. So we were put in that position in 1991-92, but the thinking that was implemented was part of the general consensus at the time ...

... Talk about the establishment of the short-term treasury bills in Russia, the so-called GKOs. Did we know that that was going to happen? What was the Fund's opinion of that as a funding strategy?

Well, there are two elements to that. Of course, we knew if by "we" you mean the IMF, the member governments of the IMF, people who were studying the Russian situation, everybody was aware that this market was being created. It was thought to be a good thing. It's normal for countries to finance themselves in part through treasury bills, and longer term bills. I don't think that is the original sin. The original sin was the size of Russian government deficits. In that regard, the IMF was fighting the good fight from the beginning. We never managed to get the Russians to get to their deficit targets. The Fund's staff is famous for not liking large deficits, and they certainly didn't like them in Russia. We generally were trying to push them to borrow less.

It's a fact that the country was borrowing 6%, 7% of GDP in the GKO market, a little less than that, say, 5% of GDP in the GKO market year after year. They've built up this stock of debt and if the deficit had been 2%, 3%, which is what we were hoping and pushing them towards, sort of ended up perfectly normally. It was they built up these debts and then they became so big people thought they were getting too big, interest rates went up. If you have a big debt and then high interest rates, you're done for. That's what happened.

But didn't the interest rates build over time? Shouldn't that have been a signal to both the Russians and their international advisors?

Oh, there was never a point at which it was not understood that the Russians were running two large deficits and borrowing unwisely. It was just a continuing battle with the Russians to get them to obey these targets. Always, you face the choice, do we cut them off now and say you're on your own or do we work with them to try and get the deficit down, to try and improve their tax collection, to try and rationalize their government spending or say enough is enough? That's always a hard choice to make. That was the decision that was faced. Generally, we made the decision (by "we" I mean the governments that support the IMF) to try to work with the Russians.

They expressed a willingness to try to improve. The people who we were working within the government were people who wanted the same outcome as we did, the West did. The problem was that, internally, they were not sufficiently powerful to overcome, in the first instance, the people from the old regime who had taken control of a large part of the Russian economy, or later on, the nouveau riche, the bankers who, having initially supported reform, then turned against much of what the government was trying to do. So it was a very complicated political situation, in which Western countries were trying to operate and in which we had to operate. But the IMF makes agreements with governments, and that's who we worked with.

At the beginning of '98 you, among others, were public in saying that things were moving forward when, in fact, Russia had already begun to feel the effects of the Asian crisis. What was your reaction then, once you began to understand that?

We thought early in '98 ... we could see what was happening. Interest rates were much higher as a result of the Asian crisis. No less important, oil prices were coming down very fast, and both those factors hurt Russia very much. We were still hoping that the underlying source of their problem, which is the fiscal situation and which remains the fiscal situation, namely, these very large budget deficits requiring them to borrow, could be fixed ...

So in the late spring of '98 there was a new government, basically. The situation was known that they could no longer keep rolling over this short term GKO debt. Was there talk then of devaluing the ruble?

Well, let me say first something about the new government. The Kiriyenko government actually was, technically, an excellent government. We never had as good a team to work with. They really knew what had to be done, and they're really committed to that. The problem was they couldn't get stuff through the Duma when the time came to get these measures passed. But in terms of the technical quality of discussions between the IMF and a member country, they were as good as we had. So we had some hope that this group of people would turn the situation around.

When it came to the measures we asked them to pass in July of '98, they actually got eight of 10 measures through the Duma, which is far more than anybody had ever expected ... Unfortunately, one of the two they didn't get was a critical measure. So they did better than they're now given credit for. The other thing is, the amounts involved are very small. Basically, the market value of the stocks that couldn't be rolled over, the GKOs and so forth, was somewhere around $15 to $20 billion. Now, that's not small by the standards of what you and I get paid, but relative to the scale of the Russian economy, or relative to the tax effort that they should have made or could have made, those are not massive amounts. If the roll-over had not been $15 billion, but $5 billion, and they could have collected $10 billion more in taxes, the problem could have been solved.

So it wasn't clear until the massive investment pullout began that they couldn't be rolled over. It was when the investors decided it was over that it was over. Because if nobody is going to hold Treasury bills, you can't roll them over. They didn't have enough cash to pay them off.

But wasn't that market just ripe for the kind of speculation that the world had been watching roll through Asia?

It was, except that it was a risk that was out there all the time. But Russia had come through a very severe crisis just before the Yeltsin election on a similar issue. There, the fear was there'd be another government that would repudiate the debt. The total debt was smaller in '96 than it was in '98, but they held their ground very firmly. Of course, the world was getting a bit better in August ['98]. It's only after the Russian crisis that we descended to the deepest of the depths of this crisis ... there was always a belief that if only we could get the Russians to tighten up and reduce the amount they had to refinance because they're running a better budget that this situation would stabilize. It was much more knife-edge than an obvious thing that was bound to happen.

So even though the interest rates then were over 100%, you didn't consider that the risk was just written all over?

No, we knew the risk was there, and we discussed with the Russians the possibilities of devaluation and whether they should devalue. The problem at that stage, and it's still true, was that they were, at that point in the situation where devaluation would have precipitated the crisis that we saw in August '98--that by that stage many people had built up positions in which they had borrowed in dollars. If Russia had devalued, then a lot of companies and banks would have got into severe difficulties. That would have caused the foreign investors to pull out.

We actually discussed this with the Russians in August of '98 and said, "You could seek to in a consensual way refinance your debt or you could devalue, or both, or neither. We don't think you'll come through if you do neither." They said, "It's either both or neither because if we devalue, everybody is going to lose confidence, and they're going to pull their money out, and then we'll not be able to service the debt. But if we try to in a consensual way meet with our creditors and refinance this debt or restructure this debt, all the people who are not involved in that debt will see that they're going to be the next ones and they're going to pull out, and then we'll have to devalue." So they realized that they were caught at that point.

And they were right ...

They were right, yes.

Why did Russia's default, devaluation basically have such an effect on the rest of the world?

Well, that certainly is one of the critical questions, as we rethink the structure of the international system. The reasons, I think, are two-fold. One is leverage.


Meaning investors had borrowed very heavily. They had borrowed against the value of collateral, which was their ownership of securities in other countries. I'll come back to leverage. The second issue was a fear that if Russia was allowed to fail, then possibly other countries would be allowed to fail. But on the leverage issue, the Russia markets are fairly small. The Russian economy pre-crisis is, say, smaller than the Brazilian economy, smaller than the Canadian economy. About $600 billion was the value of GDP pre-crisis, and now about $300 billion or $250 billion. That's the value of the production of the Russian economy. The total value of these GKOs, the treasury bills, was not very large. But what had happened had been that people borrowed heavily to invest in these securities, and you have to give some collateral against that ...

So all around the system, there were other investments which ostensibly had not much to do with Russia. But once the value of the Russian investments collapsed, people who are supposed to pay back the amounts they're borrowing, had to go out and sell their securities elsewhere. We had the paradoxical situation in which, say, Mexico, which has one of the most liquid, and the best international emerging market financial systems, was hit very hard. Why? Because that was a place where you could sell pretty quickly without taking big losses. So it spread around in a very complicated way. I think it was made worse by the understanding that if Russia was allowed to go, then investors had to reappraise what the situation could be in other countries.

And then, possibly on the leverage front, to go back a little bit, we know the Long Term Capital issue came up a bit later. Some of the hedge funds--you mentioned George Soros--must have been among those who were quite badly hurt in that case, and who needed to realize their collateral. They also had some investments in the United States. You probably have been told that there were problems in even the world's largest and most liquid government security markets, namely, the United States, after the Russian collapse. It was that same linkage. That's part of the amazement of this whole thing, just how deeply interconnected the system was.

I knew on the day Russia was going to devalue that there were going to be repercussions all over the developing world and the emerging markets. But I didn't think it would be so deep as to come back to the United States and cause elements of instability close to panic for a few weeks in this market. But that's what happened.

So in this global discussion, what are the kinds of changes that people are advocating?

Well, there's a huge agenda going on under the unfortunate title of "Changes in the International Financial Architecture." A lot of things are being discussed, and it's going to be very useful, provided we follow through.

One of the items following on the Russian point is considerable concern about the activities of what are called highly leveraged institutions, which invest very large amounts on the basis of relatively small capital. But huge amounts of borrowing--what better controls can there be to reduce the levels of risk they take? The system is grappling with that. One answer is they are always borrowing from banks, and others to put a lot of the responsibility on the people who lend to them.

That's part of the answer. There's a debate as to whether they should be required to publish much more information about what they do and whether they should be supervised more directly. That's ongoing. That's one element in this. There's another element which says we have to find ways of preventing countries like Russia, Thailand, and Korea [from] getting into the situation where the only way out is a crisis. So there's much more surveillance, that is, our watching, much more of an effort to improve the standards in their financial systems, their corporate systems, their accounting systems. And that's a very large effort which I think is very important.

It sounds a bit dull, to tell the truth, but it can make a very big difference. If we ask why these things don't happen in the United States now, they happened 60 years ago. It's partly because we have much more information, much better regulatory systems around. Some of that will certainly be done. There are ideas around about changing the way the IMF operates, allowing it to play much more the role of a preventive lender than a crisis lender. We, until now, practically only had the ability to lend to countries and to work very closely with them after they've gotten into a crisis.

But there is evidence in this crisis that involvement with the IMF can be useful earlier because the Philippines was in an IMF program when the crisis in East Asia hit and we have stayed closely involved with them. We've been able to lend them more money. They were actually in a precautionary arrangement with us. They were not borrowing. They had the right to borrow. And they emerged from the Asian crisis least badly affected of all. Obviously, it's not all because they were in an IMF program, but in large part because their policies were very cautious, and we were able to lend to them as the need arose.

We hope to adjust our lending instruments so we can do much more in the way of precautionary contingency lending. That debate is very much ongoing at this very minute. There is an active discussion on how to involve the private sector in the solution of these problems. And, as I said a bit earlier, we are working on a case-by-case basis and have done it in many of the most recent cases successfully.

There's a very active debate on whether countries should use fixed exchange rates. Most of the crises we have seen have taken place in countries that were defending a fixed exchange rate. Countries that would have undoubtedly have had a crisis, like Turkey or South Africa or Mexico, if they had had a fixed exchange rate, have avoided it this time. So there's much more thinking about whether we should not be encouraging. In fact, it's concluded we should be encouraging countries to move away from fixed exchange rates much sooner than they have been.

After Mexico, there was a debate, and it led to some action. We have improved the availability of data a great deal. But we didn't follow through to the extent we should have, and I mean the whole system. Everybody is aware of that now. I'm pretty sure that this time this effort is going to be sustained, and that we are going to change the system very substantially. I've seen it happen in the last nine months, and I see our staff working at full speed on these architecture issues. So it's going to change.

What about the question of allowing countries to reestablish some kinds of controls?

Well, this is another actively debated question. We are very much aware of the problems created by short term in-flows, and short term out-flows and have been supportive for countries that don't yet have a strong enough financial system or strong enough macro policies, having controls on in-flows. These are always referred to as Chilean-style controls. We support those for countries that need them, and I think they have played a very useful role. We shouldn't exaggerate what they can do. Mexico had such controls, and they can't prevent all crises. But they are useful and we're supportive of those. When it comes to controls on out-flows, our general line has been if you have them, be very careful as you remove them. Once you have removed them, it's very hard to bring them back.

Who is in charge of the global economy?

Well, it's like asking who's in charge of the United States economy. One of the benefits of a free enterprise system is that nobody really is in charge. The system works despite that fact, although the broad policy parameters are set by governments. That's what's going to happen now. The reforms in the system will take place through agreements among countries that operate in this system. It's happening in many forum-it's happening in G-7, G-8 meetings. It happens in IMF interim committee meetings. It happens in the work we do, our colleagues in the World Bank. There are so many forums expressing views, doing research, private sectors, academic colleagues are doing that. Somehow the international system gets together and makes these changes. But it's hard to think that there's any single person in charge. The G-7 governments are bound to take the lead, but it's a much more joint effort than that.

What about the people who say that, in fact, it's the markets that are now in control?

Well, that's true. There's an interaction between the markets and the governments, and that's just as in every private economy. Who's in charge in the United States economy? ... One of the most interesting things that has come out of this crisis is that despite everything that was feared, very few countries have tried to pull out of the international system or cut themselves off from the global capital markets. It's extraordinary that despite all these strains, despite everything academics and others are saying about countries wanting to withdraw from the system, that really only Malaysia did that in a very big way, and even they are coming back from it. I think countries recognize, political leaders, economic leaders, recognize that the solution is not to withdraw but to make the system operate better, and that's what we're trying to do.

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