The region took its medicine a decade ago and is all the stronger for it; the time is right for its emerging markets to play a bigger role in policy formation
The International Monetary Fund is like a doctor. We normally don't like to go to see a doctor, and will only do so when we're really sick. Before the 1997 Asian financial crisis, not many people in this part of the world knew about the IMF. But after the IMF stepped in with a bail-out package for Thailand, Indonesia and South Korea during the ongoing financial turmoil, it became known as an unpleasant doctor with a rude bedside manner. Tough conditions, from fiscal tightening to financial reform, were imposed on the recipient countries of the Fund's money. In Indonesia there was a social uprising as a result of the IMF prescription of social spending cutbacks. In Thailand, the government partly addressed the social needs of people at the bottom of the economic ladder by coming up with a Miyazawa spending programme.
Ever since this bad publicity, the IMF has learnt its lesson. Under the leadership of managing director Dominique Strauss-Kahn, the IMF has broadened dialogue with its members. It wants to be seen as a gentler and kinder doctor.
A two-day conference on "Asia in the 21st century", held in Daejeon, South Korea, and organized by the IMF and the government of South Korea, ended yesterday with a strong realisation of the growing role of Asia in the global economy. There was also an understanding of the IMF's willingness to take into consideration the opinions and representation of the emerging-market economies.
Currently the IMF is in the process of taking on more international staff. It is also working on its quota representation so that the emerging-market economies can have a bigger say in the direction of IMF policy.
Strauss-Khan has admitted that details need to be worked out over the criteria, or the weighting, used to determine the proportionate representation in the IMF's management structure. The organisation is not managed on a one-vote-one-country basis, but on the weighting of its members' contributions and economic situation.
The criteria to determine the economic weighting will require some time to be resolved, but Strauss-Khan expects that a spirit of cooperation will prevail so that the IMF has a final formula acceptable to all parties by the time of the G-20 Summit to be held in Korea in November. Certainly it hopes to decide the issue before the end of this year.
Obviously, with the sovereign debt crisis in Europe and the financial weakness of the US, Asia's economic and financial credibility is gaining more weight.
"In my view, the macro-economic, financial and corporate-sector reforms put in place over the last decade have played an important role in the region's resilence. So, despite being hit hard initially, Asia was able to bounce back quickly from the global financial crisis," he said.
The IMF's latest forecast for Asian growth is seven and three quarters per cent in 2010, relative to a global growth rate of four and a half per cent. As for Thailand, in spite of the political turmoil in April and May, the IMF's projection for growth in Thailand is 7 per cent, much higher than the Thai government's estimate of 5.5 per cent. This reflects the resilience of the Thai economy.
That being said, plenty of downside risks remain. Policy-makers need to stay attuned to possible further shocks. Monitoring and managing of capital inflows and the risks associated with asset and financial bubbles are the policy challenges that need to be reckoned with.