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Asiaweek Pictures.
Stanley Fischer says Asia's performance has been impressive, though some could have done better.

An IMF Take on the Recovery
China and India are seen as providing vital stability. But Japan is still a cause for concern

As Indonesian President Abdurrahman Wahid last week unveiled his new cabinet (see THE NATIONS, page 22), analysts were digesting the gist of a leaked letter sent to him in July by the International Monetary Fund's new managing director, Horst Koehler. In it, Koehler reportedly stressed "the loss of market confidence in the ability of the government to implement the [IMF-supported] economic program with consistency and good governance." The Fund boss is also said to have referred to the arrest of Bank of Indonesia governor Syahril Sabirin on corruption charges, warning that concerns about the legal process in the case and the independence of the central bank were further eroding confidence. Asiaweek Senior Correspondent Alejandro Reyes asked Koehler's deputy, Stanley Fischer, about the situation in Indonesia, the prognosis for other Asian countries now recovering from the financial crisis and the chances of a soft landing for the U.S. economy. Excerpts:

Is Asia's recovery solid?
The recovery is impressive. We're expecting growth rates in the 6%-7% range for Asia as a whole for 2000-01. You now have pretty solid growth in the range of 6%-8% entrenched in the two developing giants — China and India. That's a very big source of stability. The Korean recovery looks set to continue. Malaysia looks to be doing pretty well. Thailand is a bit slower, while Indonesia, because of the political uncertainty, [will grow at] around 5%. In the Philippines, it is a pity that there's been fiscal slippage because it managed monetary and exchange-rate policy well during the Crisis. It's slightly disappointing that in recent years it has had difficulty keeping its budget on track. Obviously, what it takes to get consistent economic policies is political backing for them, and that has been difficult of late.

What are the potential risks?

The Japanese economy is expected to grow a little more rapidly next year than this year, but there's tremendous uncertainty about that. And then there is the lingering but declining fear of a significant slowdown in the U.S. We seem to be getting closer to a soft landing there than was thought a few months ago.

Are reforms in Asia on track?
That varies a great deal. In Korea, they have been making real progress in dealing with both corporate-debt problems and the banks. Malaysia has done well in the banking sector. Thailand moved early, but progress seemed to have flagged, particularly on the corporate side. And of course Indonesia is a bit uncertain.

What is the situation in Indonesia?

We hope the program we are supporting will continue as agreed, but it depends on the personnel in charge. With the degree of unsettlement [there is], it's a bit worrisome.

Can you comment on the concerns Mr. Koehler expressed in his letter to President Wahid?
We don't comment on supposedly leaked documents. It's very difficult for foreigners or the IMF to comment on legal issues. We don't know the details of [the governor's] case, but we are anxious — and investors are anxious — that proper legal procedures are followed. It is clear that investors have been concerned about an apparent lack of consistent follow-through on the [economic recovery] program. Indonesia is in a position where it could benefit enormously from stronger policies. There's still so much capital outside the country that, as confidence returns if economic leadership is strengthened, there will be a significant strengthening of the rupiah and the economy.

How can Indonesia get out of its hole?

Indonesia had a run of good macroeconomic policies for a pretty long time. That was in fact what lulled many investors about Indonesia. Monetary policy was stable and budget policy responsible. We see no inclination to want inflation or large budget deficits. What it would take [to pull it out of trouble] is if it got more determined about both bank and corporate-sector restructuring. We're coming off a period of 20-plus years during which investors were favorably inclined towards Indonesia. That is possible again if a strong economic team is put in place. It would not take a whole lot, though it's difficult in terms of the domestic political scene to turn the situation around.

Can Malaysia sustain its controls and fixed exchange rate?

Malaysia has been dismantling its controls pretty steadily. At this stage, the major one left is a 10% exit levy on the repatriation of portfolio profits. So they recognize the need to get rid of them. The interesting question now is how long the fixed exchange rate will continue. They came in [with the ringgit] undervalued. That gives you a leg-up for a while, but if [the Malaysians] are going to stay open to portfolio flows and foreign capital — and they obviously want to do that — then living with a fixed exchange rate is going to be quite difficult. They could consider some other framework for conducting monetary policy as they integrate more into the global system, which they are clearly doing.

How about the Bank of Japan's decision to raise interest rates?
There are two views. One being advanced is, what are 25 basis points among friends? The other is that the Japanese economy is far from near-capacity constraints. Inflation is no risk at all. If anything, it has deflation. There really was no reason for higher interest rates except that the Bank was intensely uncomfortable with zero. But it wasn't a move that was dictated by the logic of the situation. And in terms of the risks confronting the Japanese economy, an increase wasn't useful. We don't know the strength of the underlying recovery. If it is as strong as perhaps the Bank believes, [the rise] won't do serious damage. If the recovery were to falter, as it has several times, then this would turn out to be a mistake. The expectation is that Japan is in a slow recovery. There's a lot of restructuring that should be taking place. Consumer confidence is probably, but not certainly, coming back. The risk is that there could be another slowdown.

Meanwhile, the U.S. looks to be headed for a soft landing.

The data that have been coming in for practically three months now have been indicating mostly a slowing down of growth. Growth is returning to more sustainable levels and there are very few signs of inflation. The need for an interest-rate increase doesn't appear to be there and it looks like growth will continue in the range of between 3.25% and 3.75%. Nobody is absolutely sure. But [it will be] a very solid rate, much more solid than anybody would have anticipated five years ago. It looks like the U.S. could slow down without going through a recession.

Has the more positive global outlook tempered the zeal for financial reform?

It may have among finance ministers and central bank governors, but not at the level of the institutions. Our new managing director is very anxious to continue the effort. There has been a shift of focus more in the direction of debt relief. But the underlying work of reforming the system, particularly on the very difficult issue of private sector involvement in the resolution of financial crises, is still there.

What do you expect from the IMF meetings in Prague next month?
The most important single thing will be the managing director's statement of his vision. It will emphasize a more focused Fund, with more focused conditionality — structural conditions in the areas of essential interest to the Fund and elements central to macroeconomic stabilization, which could include governance.

Are you concerned about planned street protests?
We are concerned about the possibility of disruptive protests, but not about legitimate ones. Everybody has a right to get out there and say what he wants.

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