US banker warns Asia of 'reform fatigue'
February 7, 2001
THAILAND and other Asian countries should strive to achieve long-term stability through market-based reforms, rather than pursuing short-term relief at the risk of derailing the gains made in reforms over the past three years, warned the president of the Federal Reserve Bank of New York.
Speaking at a dinner organised by the Bank of Thailand at the Oriental Hotel on Monday, William McDonough made it clear that the economic recovery in Thailand and elsewhere in the region is incomplete, saying much remains to be done.
"The restructuring and reform agenda will be challenged by slowing global and regional growth, which may contribute to already apparent signs of increasing 'reform fatigue' within the region," he said.
McDonough's comment reflected his concern that after three years of economic hardship, Thailand and other Asian countries might roll back their commitment to market reforms designed to put their economies back on track.
Although McDonough would not comment directly on Thai politics, he appeared to send an indirect message to the incoming Thai Rak Thai Party government, which, through its populist agenda, has threatened to reverse most of the reform measures initiated by the Democrat-led government.
On several occasions, Finance Minister Tarrin Nimmanahaeminda has referred to his sharing the stage at a seminar with McDonough in Seoul last year. He said he told McDonough that one of the most effective preventive measures against economic crisis was for a country to strengthen its financial system. McDonough concurred wholeheartedly.
McDonough is one of the most important players in global finance. In the summer of 1998, he engineered a bailout for the Long Term Capital Management hedge fund, effectively preventing a global financial crisis.
He has also used the Bank for International Settlements as a platform from which to design a new international financial architecture. In his hard-hitting address, McDonough advocated a textbook approach to managing a modern economy to achieve international standards.
This approach has been an article of faith for Tarrin and the Democrat government over the past three years. As a result, the Democrats have been accused of kow-towing to the International Monetary Fund, selling the country to foreigners at bargain rates and pursuing unfettered capitalism.
Given the depth of the crisis, McDonough said he was impressed with the V-shaped recovery in Asia on the back of strong performance in external accounts and an increase in domestic demand. Regional authorities have also moved to strengthen prudential financial regulations and supervision, bolstering the bankruptcy and collateral-recovery process and improving disclosure requirements, he said.
"But with the pace of growth slowing, reform fatigue represents a significant risk to sustained recovery," McDonough warned. "Crises entail wrenching change and costly solutions that are difficult to bear over a long period. The desire for a return to normalcy is strong. Under these conditions, it is human nature to overemphasise positive information, tire of reform, declare victory and move on.
"It is no wonder, therefore, that governments the world over initially tend to underestimate the size of the problems, under-fund solutions and postpone loss-recognition. It also is not surprising that, given the many obstacles involved, authorities may be tempted to prematurely mark a case closed, particularly with the advent of economic recovery."
McDonough outlined the following unfinished reforms in Asia, which he said would need to be pursued rigorously if regional economies seek sustained recovery.
lRestructuring and reform must adequately address the current stock of problem assets, as well as the potential flow of new problems attributable to deficiencies in the broader infrastructure of the financial system.
lCleanup efforts in the financial system must be sufficient to the task.
lFundamental improvements in corporate governance in the banking sector are critical.
lProtracted forbearance to preserve the appearance of solvency is not a solution.
lGovernments are not good long-term asset managers.
lGovernments are not good commercial bankers.
lGovernment-directed lending means future fiscal losses.
lForeign investment in domestic financial sectors can yield important benefits.
lFinancial sectors are only as healthy as their borrowers.
lStrong financial systems depend on a reliable and credible legal system.
lThere are no quick fixes to financial sector problems.
lUnbalanced financial systems create vulnerabilities.
The incoming government's policies appear to run counter to McDonough's prescriptions. The new government, which emphasises "Thai interests", supports state intervention in the financing of rural projects. Its policies support enhancing the government's role as asset manager, the creation of a bank to direct cheap financing to rural enterprises and small and medium-size businesses, stalling the privatisation of state banks and rolling back the legal framework for settling bankruptcies.
BY THANONG KHANTHONG