For all the criticism, fair or unfair, against the International Monetary Fund (IMF), Kunio Saito, the director of its regional office for Asia and the Pacific, does not hesitate to assure that the IMF prescribed stabilisation programmes for Thailand, South Korea and Indonesia have worked and are showing positive effects.

Now that the primary objective of stabilising these economies has been achieved, the next phase is to restore growth.  Saito admits that this process will be difficult, involving extensive banking and corporate sector restructuring.  Further bank closures or nationalisation may be necessary.

Banks will need to strengthen their balance sheets and management.  Nepotism or cronyism will be weeded out through governance and corporate restructuring.  "It's going to be painful and time-consuming.

But this process will have to be followed through seriously if sustainable growth is to resume," Saito said.  He cautioned the crisis-hit countries against becoming complacent with the reform process, which might be slowed down once there are some improvements in the economies.  But he warned that broad-based recovery will not take place without deepening the reform through structural adjustments, which are now being accompanied by policy flexibility on both the fiscal and monetary fronts to restore growth.

Saito believes that the crisis-hit countries should emerge stronger fundamentally since they will be operating in a new financial architecture.  Nobody at this point can tell what the new financial architecture will look like since it is an evolutionary process and is a subject of extensive international debates.

But the objective is clear that a mechanism should be designed to prevent the crisis from happening again and that contagion should be limited with the least economic and human costs.

Since the G-22 countries met in October 1998 in Washington DC to discuss the new financial architecture, there have been several proposals on how to improve the global financial system.

They centre on ways to allow the markets to function properly to prevent the crisis from knocking down entire economies, make available more timely information between the creditors and debtor countries, adopt transparency in both the public and private sectors and set international standards for accounting, auditing, disclosure, governance and accountability.

"There is still work to be done on definitions of such international standards and how to do them effectively," Saito said.  On the financial side, the crisis must be dealt with decisively at the very beginning by providing access to additional credit from different sources to countries facing market pressures.  Secondly, the private sector should be mobilised to resolve future crises.
The lesson so far is that bankers have been reluctant to bear the costs of the crisis.  In the case of Thailand, attempts had been made to negotiate roll-overs of short-term loans before Thailand secured the IMF programme in August 1997, which helped to an extent to reduce the pressure of capital outflow.  Creditors, mediated by the US, only tried to work out a debt rescheduling for South Korea in December 1997 when Seoul was on the brink of defaulting on its foreign loans.

Another important subject in the new global financial system is how countries should deal with capital flow, Saito said.  There will be growing efforts to monitor short-term capital, which creates risks to an economy when it moves out in panic.

Some have suggested that taxing capital flows or outright regulation on capital flows should be imposed to prevent the developing economies from experiencing volatility from international capital movements.  Some say restricting capital flows is the answer to the real problem of fundamental reform for if the economy or the private sector is really efficient, the market will keep the capital flow in check by itself.

No conclusion has been reached on how capital flows should be managed.  However, Saito emphasised structural reform as a key ingredient for emerging-market countries to participate in. the new global financial architecture.

Each country, he said, must have additional "policy innovation" to strengthen its system by adopting transparency, applying the best international practices, and adhering to the best systems to fit in the new architecture.  If the country sticks to this policy innovation, it will attract foreign capital to not only help in the recovery process but also strengthen future growth, he added.

He believed that Asia will bounce back due to its inherent fundamentals, ranging from high savings and investment rates, hard-working human resources, relatively low wages and good productivity.