Navigating the crisis But overall Singapore was less affected than most of the region. The banks were unshaken, and Singapore companies did not keel over. Why was this the case? Firstly our economic fundamentals were sound. We had pursued pro-business and pro-development economic policies for many years, and maintained consistently low inflation.5 We had kept our economy open, and had taken a market-oriented approach towards economic development. So 4 5  Keynote Address, Meeting on Good Governance for Financial Institutions, Bangkok, 10 June 2000. Singapore’s inflation averaged 2.1% between 1981 and 1999 while the average figure for the Group of Seven developed countries over the same period was just over 4%. 5  BIS Review 76/2000  investments did not go into industries in which we lack competitive advantage, and Singapore companies were generally efficient. Secondly, the Government had a strong financial position. Indeed it continued to register a budget surplus throughout the crisis. We had no foreign debt, much less short-term debt. Foreign exchange reserves were comfortable. Thirdly, our response to the crisis was to reduce business costs directly, to help businesses stay viable and so preserve jobs. No company was bailed out by the Government; no creditor was prevailed upon to maintain a loan to a failing borrower. Instead we granted rebates in taxes and government charges across the board, and reduced employers’ monthly contributions to employees’ retirement fund – effectively a wage cut. Fortunately union leaders understood the gravity of the crisis, and helped to persuade workers to accept this unpalatable prescription.

External institutions like the IMF and the World Bank are also important, providing advice and applying pressure to do what is painful but necessary. This means that IMF and World Bank loans and assistance have to come with strict conditionality. But the line between essential conditionality and excessive intervention is a fine one. In Indonesia, the IMF pushed the Suharto government hard, not just to deal with the immediate crisis, but to implement sweeping structural reforms. President Suharto interpreted this as a threat to his own position, and treated the IMF as an opponent rather than an ally. This contributed to a collapse of confidence, political turbulence, and finally Suharto’s resignation in May 1998. Whether or not the IMF intended this outcome, it helped to precipitate a decisive and momentous change in Indonesia, the consequences of which are still unfolding. Singapore’s approach Let me now turn to Singapore’s experience in navigating through the crisis and preparing itself to meet the challenges of globalisation, especially in the financial sector. Singapore is not entirely typical of the region. We are a small, open economy, about half the size of the Swiss economy, and heavily reliant on foreign trade. We are also a financial centre in Asia, and therefore highly exposed to disturbances in the international financial system. So it is not surprising that Singapore was affected by the Asian crisis. Our GDP growth plunged from 8.4% in 1997 to 0.4% in 1998. Retrenchments went up sharply. Our stock market fell, in line with regional markets.