Good morning. The U.S. Chamber of Commerce appreciates the opportunity to testify on progress made to date in reforming the International Monetary Fund (IMF) and IMF programs in Brazil, Indonesia, Korea and Thailand. I am Willard A. Workman, Vice President, International of the U.S. Chamber of Commerce.
The U.S. Chamber of Commerce believes that only through meaningful reform will the emerging economies of Asia and Latin America enjoy lasting economic growth and stability. The origins of the Asian financial crisis highlight how much reform is needed. The lack of transparency, government-directed lending, crony capitalism, underdeveloped bankruptcy procedures, trade barriers to shield inefficient industries, public subsidies for Anational industries,@ and other market-distorting practices all contributed to the sudden reversal of fortune in these countries.
Progress made to date in implementing reform has been, predictably, mixed. Korea and Thailand have made substantive strides while Indonesia continues to be beset by the lack of political willpower. After a shaky start, Brazil has accelerated implementation of the fiscal measures connected to the IMF financial assistance package. Although laudable, this early progress is only a down-payment. More needs to be done.
This message must be made clear. There is a risk that some countries will declare victory over the financial crisis too soon or will allow political pressures to justify a slowdown or backtracking on reforms. There are signs of this, for example, within the Korean government, which has come under fire from Korea=s labor unions because of its stringent fiscal measures. Leaving the job of reform half finished would mean that U.S. companies will continue to face discriminatory barriers to doing business in these markets and will not fully share in their recovery.
Thanks to provisions added to last year=s IMF funding legislation by the U.S. Congress, the IMF now has the potential to be a more effective force for promoting reform in countries drawing on its facilities. In addition, the IMF itself has been directed to become a more transparent and accountable organization. The U.S. Chamber of Commerce supported the reform provisions of the legislation to ensure that American companies and workers would benefit from the increase in the U.S. quota subscription and contribution to the New Arrangements to Borrow. In June 1998, we went on record with our own package of reform proposals, many of which were incorporated in the final law.
I would like to share with you now the U.S. Chamber=s assessment of progress made to date in implementation of IMF-required reform Brazil, Indonesia, Korea and Thailand.
Brazil=s Congress has accelerated the implementation of fiscal measures connected to the IMF financial assistance package. To date, it has passed 90 percent of the package. This January, during an extraordinary session, the Brazilian Congress passed measures that will cut the equivalent of $4.8 billion off of the public sector deficit. These measures include politically painful laws that increase taxes on the social security contributions of current public workers and tax, for the first time, those currently receiving government pensions. The Brazilian Congress also passed a measure that limits state, local and municipal governments from spending over 60 percent of their budgets on personnel, a key step in reforming the public sector.
Clearly, the impact of the devaluation of the Brazilian currency on the cost of servicing Brazil=s debt will require the Brazilian government to take additional steps to slash the public sector deficit. Just last week, the Brazilian government announced a freeze on all public sector hiring and raises. The Brazilian government and the IMF are discussing additional measures right now. In addition, there is the challenge of containing inflation. Brazil=s President Cardoso has publicly recognized that open markets and competition from imports plays a large role in keeping down inflation.
Despite these positive steps, more needs to be done. The U.S. Chamber of Commerce would like to see more aggressive movement on Brazil=s privatization program. Last week, the Brazilian government announced the privatization of the government reinsurance monopoly, something which we have advocated for years. We would also like to see Brazil improve tax treatment, concessions rules, and foreign exchange rules for private investors in the Brazilian petroleum sector. In addition, Brazil is badly in need of broad-based tax reforms to lower its excessive tax burden on business and create an environment conducive to economic growth.
Of the three Asia countries, Korea has shown the greatest economic recovery to date. Real GDP is forecast to grow at least 2 percent in 1999, after shrinking by over 5 percent last year. The country=s foreign-exchange reserves have climbed from $4 billion only a year ago to $50 billion. These positive signs have encouraged foreign investors to return in increasing numbers to this market that they had abandoned not so long ago.
Much of the improvement can be attributed to the reform program of Korea President Kim Dae-Jung. When President Kim spoke at the U.S. Chamber of Commerce last year, he stated that the sweeping nature of the reform program on which his government was embarking was Aan effort to change the Korean economic system from top to bottom.@ Under President Kim, the Korean government has improved accounting rules to make business more transparent, given minority shareholders a greater say in management affairs, and made it easier for outsiders to invest in the country. President Kim also has redefined the cozy relationship that once existed between the government and Korea=s business conglomerates known as chaebol. In the past, subsidies and government-directed lending made it possible for these conglomerates to branch out into sectors that could not be supported by domestic demand. Five years ago, for example, there were five companies manufacturing automobiles in Korea. Because of rationalization in this industry, there are now only two main producers left.
Korea=s banking system continues to be a concern, but the government has made a good faith effort to implement reform. The Korea Asset Management Corporation was established to start buying up the sector=s non-performing loans. In addition, the new Financial Supervisory Commission has taken steps to eliminate the policy of government-directed lending. Some government guidance still exists to support loans to small and medium-sized businesses, but it is slated to be phased out as the economy recovers.
Korea also has taken steps to improve financial transparency, which is essential for U.S. investors to assess risk. Cross guarantees are being eliminated and internationally accepted accounting standards are being enforced.
Korea=s government, however, has much work to do in reforming the country=s bankruptcy laws. It still takes too long and is too difficult for bankrupt companies to exit the market. In addition, the process of corporate restructuring is still in its earliest stages and will take years to complete. There will be plenty of situations in which the government will be tempted to help out an ailing corporation, especially as it privatizes several state-owned enterprises, in order to spare the pain associated with job loss. A related concern is that labor unions in Korea will likely cooperate less with the government if unemployment levels rise too much. The Kim administration thus will be challenged to improve its retraining programs in order to reallocate the surplus labor. Yet, the reforms are necessary if Korea is not to slip backwards.
The U.S. Chamber of Commerce is optimistic that Korea will stick to the path of reform. In a meeting just last week, Korea=s Minister of Trade Han Duck Soo told the U.S. Chamber that Korea would not have recovered to the extent that it has if it had not been for the IMF program and associated reforms. Minister Han acknowledged that there had been public criticism of the IMF program because of the high interest rates that had initially been imposed. Those rates, however, have dropped from 30 percent to around 8 percent. Minister Han stated that the improvements in the economy have encouraged the government to stay on the path of reform.
Like Korea, Thailand has shown signs of dramatic economic improvement. The Thai government is cautiously optimistic that GDP will grow 1 percent in 1999 after contracting 8 percent last year. It also expects a 3 to 4 percent increase in exports.
Signs of hope extend to the banking sector. The Thai government has closed down insolvent finance companies and banks and is in the process of selling off the bad loans from these institutions. Thai officials also have consolidated some of the weaker banks and are in the process of implementing recapitalization programs for them. In many respects, Thailand is ahead of Indonesia and Korea in this process.
In addition, the Ministry of Finance and the Bank of Thailand have instituted new standards and regulations to provide better monitoring and guidance of the financial institutions. This includes standards for recognizing non-performing loans. Temporary measures were passed in 1997 to allow for greater foreign ownership of financial institutions to facilitate the recapitalization of banks and finance companies. Pending legislation would further liberalize foreign investment in general. The U.S. Chamber of Commerce urges the Thai government to make the reforms permanent in order to lock in the gains of this liberalization.
The government has helped mediate the restructuring of private sector debt with respect to larger Thai companies in need of recapitalization. The process continues to be a slow one. On the positive side, state-owned enterprises also have been listed in priority sequence for privatization. Foreign consulting firms have been contracted to advise on the process. In addition, the Thai Senate is on the verge of passing strong bankruptcy and foreclosure laws.
Like in the case of Korea, the U.S. Chamber of Commerce believes that Thailand cannot afford to let up on the process of reform. The danger to Thailand clearly has not passed and American business, which has stayed with Thailand through the darkest hours, deserves further market-opening.
Indonesia has lagged the farthest behind the other three countries in implementing reform and getting its economy back on track. Although the Indonesian currency appears to have stabilized somewhat, the country is headed for a second year of stagflation with a contraction of GDP expected and inflation still high.
There are many reasons for this state of affairs but among the most prominent are the preoccupation of the government and large segments of society with the parliamentary elections in early June; the government=s inability to revive the banking sector; and the judicial system=s unwillingness to enforce many of the reforms the government has promised to implement.
Although the government set up the Indonesian Bank Restructuring Agency (IBRA) over a year ago, it has yet to live up to its name. Bank closings and recapitalization plans continue to be delayed. Ironically, the problem of government-directed lending is diminishing, since very few Indonesian banks are lending to anyone at the moment. Moreover, international audits of banks were conducted as the basis for the bank recapitalization program. This program would have closed about 40 banks, but these closures have been delayed for Atechnical@ reasons. The process of selling assets held by IBRA also seems to have slowed. The government is holding out for better prices, but the longer it waits the more the assets will likely depreciate.
Corporate restructuring also remains a fundamental problem. To date, there have been few successful large corporate restructurings. Most efforts predictably focus on the large conglomerates with small and medium-sized enterprises left to fend for themselves. There are initiatives under way to move Indonesia=s companies toward the adoption of internationally acceptable accounting standards, but these are still in the early stages and implementation will have to be monitored over time.
Perhaps one of the biggest disappointments has been the government=s attempts to reform its bankruptcy law. After obtaining help from the World Bank, Indonesia revised its bankruptcy law and set up a new commercial court. So far, however, the court has consistently ruled in favor of insolvent businesses, opening the judges up to allegations of corruption and incompetence. The lack of a judicial threat makes it almost impossible to negotiate with borrowers.
One bright spot is Indonesia=s reform of its trade and investment regime. Tariffs for many product lines have been reduced and the list of investment sectors that are off limits to foreign investors has all but been eliminated. That said, practical implementation of liberalization measures is still problematic with often unclear and conflicting government application of rules. Other positive developments include the elimination of several state-approved monopolies and the opening of Indonesia=s distribution channels.
In conclusion, the U.S. Chamber of Commerce believes that Brazil, Korea and Thailand have generally made good progress in implementing the reforms required by the IMF. Clearly, however, much work remains to be done in each country to make this progress permanent. Indonesia, on the other hand, will continue to lag behind the others until some time after parliamentary elections are held in June. The important task now is to make sure that reforms recommended by the IMF continue to be consistent with American interests.
The U.S. Chamber of Commerce looks forward to working together with the U.S. Congress to monitor IMF programs and policies to ensure that they are not at odds with American prosperity. Thank you again for the opportunity to testify on this important issue.
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