Mr. Greenspan gives a testimony on the global financial system and the role of
Testimony of the Chairman of the Board of Governors of the US
the IMF in the Asian crisis
Federal Reserve, Mr. Alan Greenspan, before the Committee on Agriculture of the US House of
Representatives on 21/5/98.
The global financial system has been evolving rapidly in recent years. New
technology has radically reduced the costs of borrowing and lending across traditional national
borders, facilitating the development of new instruments and drawing in new players. Information is
transmitted instantaneously around the world, and huge shifts in the supply and demand for funds
naturally follow, resulting in a massive increase in capital flows.
This burgeoning global system has been demonstrated to be a highly efficient
structure that has significantly facilitated cross-border trade in goods and services and, accordingly,
has made a substantial contribution to standards of living worldwide. Its efficiency exposes and
punishes underlying economic imprudence swiftly and decisively. Regrettably, it also appears to
have facilitated the transmission of financial disturbances far more effectively than ever before.
Three years ago, the Mexican crisis was the first episode associated with our new
high-tech international financial system. The current Asian crisis is the second.
We do not as yet fully understand the new system's dynamics. We are learning fast,
and need to update and modify our institutions and practices to reduce the risks inherent in the new
regime. Meanwhile, we have had to confront the current crisis with the institutions and techniques
we have.
Many argued that the Asian crisis should be allowed to run its course without support
from the International Monetary Fund or the bilateral financial backing of other nations. They
asserted that allowing this crisis to play out, while doubtless having additional negative effects on
growth in Asia, and engendering greater spill-overs onto the rest of the world, would not likely have
a large or lasting impact on the United States and the world economy.
They may well have been correct in their judgment, and some would argue that
events over the past six months have proved them right; we have so far avoided the type of
continuing downward spiral that some feared. There was and is, however, a small but not negligible
probability that the upset in East Asia could have unexpectedly large negative effects on Japan, Latin
America, and eastern and central Europe that, in turn, could have repercussions elsewhere, including
the United States. Thus, while the probability of such an outcome may be small, its consequences, in
my judgment, should not have been left solely to chance. We have observed that global financial
markets, as currently organized, do not always achieve an appropriate equilibrium, or at least require
time to stabilize. Moreover, the effects of the Asian crisis on the real economies of the immediately
affected countries, as well as on our own economy, are only now just being felt.
Opponents of IMF support for member countries facing international financial
difficulties also argued that such substantial financial backing, by cushioning the losses of imprudent
investors, encourages excessive risk-taking. There doubtless is some truth in that, though arguably it
has been the expectation of governments' support of their financial systems that has been the more
obvious culprit, at least in the Asian case. In any event, any expectations of broad bailouts have
turned out to have been disappointed. Many if not most investors in Asian economies have to date
suffered substantial losses.
Moreover, the policy conditionality, associated principally with IMF lending, which
dictates economic and financial discipline and structural change, helps to mitigate some of the
inappropriate risk-taking on the part of governmental authorities. At the root of the problems has
been poor public policy that has resulted in misguided investments and very weak financial sectors.
Convincing a sovereign nation to alter destructive policies that impair its own performance and
threaten contagion to its neighbors is best handled by an international financial institution, such as
the IMF. What we have in place today to respond to crises should be supported even as we work to
improve those mechanisms and institutions. Some observers have also expressed concern about
whether we can be confident that IMF programs for countries, in particular the countries of East
Asia, are likely to alter their economies significantly and permanently. My sense is that one
consequence of this Asian crisis is an increasing awareness in the region that market capitalism, as
practiced in the West, especially in the United States, is the superior model; that is, it provides
greater promise of producing rising standards of living and continuous growth.
Although East Asian economies have exhibited considerable adherence to many
aspects of free-market capitalism, there has, nonetheless, been a pronounced tendency toward
government-directed investment, using the banking system to finance that investment. Given a
record of real growth rates of close to 10 percent per annum over an extended period of time, it is not
surprising that it has been difficult to convince anyone that the economic system practiced in East
Asia could not continue to produce positive results indefinitely. Following the breakdown, an
increasing awareness, bordering in some cases on shock, that their economic model was incomplete,
or worse, has arguably emerged in the region.
As a consequence, many of the leaders of these countries and their economic advisors
are endeavoring to move their economies much more rapidly toward the type of economic system
that we have in the United States. The IMF, whatever one might say about its policy advice in the
past, has played an important role in this process, providing advice and incentives that promote
sound money and long-term stability. The IMF's current approach in Asia is fully supportive of the
views of those in the West who understand the importance of greater reliance on market forces,
reduced government controls, scaling back of government-directed investment, and embracing
greater transparency -- the publication of all the data that are relevant to the activities of the central
bank, the government, financial institutions, and private companies.
It is a reasonable question to ask how long this conversion to embracing market
capitalism in all its details will last in countries once temporary IMF financial support has come to
an end. We are, after all, dealing with sovereign nations with long traditions, not always consonant
with market capitalism. But my sense is that there is a growing understanding and appreciation of
the benefits of market capitalism as we practice it, and that what is being prescribed in
IMF-supported programs fosters their own interests.
Similarly, it is a reasonable question to ask whether the US authorities should not
seek greater assurance that the ongoing process of reform in the IMF's policies and operations will
produce additional concrete results before we agree to augment the IMF's resources. I have reason to
believe that the management and staff of the IMF are committed to a process of change. We face a
somewhat more difficult task in convincing the IMF's membership as a whole of the need for
change. However, I am confident that our leverage in this regard would be reduced if the United
States failed to agree promptly to the proposed increases in the IMF's resources.
Accordingly, I continue fully to back the Administration's request to augment the
financial resources of the IMF by approving as quickly as possible US participation in the New
Arrangements to Borrow and an increase in the US quota in the IMF. Hopefully, neither will turn out
to be needed, and no funds will be drawn. Although the tendency in recent months toward
stabilization in the East Asian economies is encouraging, clearly those economies are not out of the
woods as recent events attest. Moreover, we have not yet put in place the strengthening of the
international financial architecture that would enable us in the future to place less reliance on the
IMF to deal with potential systemic crises. Thus it is better to have the IMF fully equipped if a quick
response to a pending crisis is essential.