INTERVIEW: STANLEY FISCHER An Economic Insider's View
Few people are ever privy to how world leaders try to cope with their economic woes. But from his position at the IMF, Stanley Fischer certainly was
INTERNATIONAL MONETARY FUND former deputy chief Stanley Fischer's first day as vice-chairman of Citibank in New York earlier this month was spent sorting out his computer connections and finding his bearings in the nation's financial capital, where he has been a presence but never a resident. The former Massachusetts Institute of Technology economist, whose last job at the IMF was special adviser to the managing director, also found time to talk to REVIEW editor Michael Vatikiotis. His comments ranged across Asia's economic landscape from the perspective of someone who has just left the IMF and is about to launch himself into the uncertain world of private banking. However, the main focus of the interview was on China and Japan, and the likely fallout of a weaker yen on the region's currencies:
WHAT ARE YOUR THOUGHTS ON JAPAN? We should be worried about Japan. Part of the 1997 crisis was related to Japan. In particular, Japanese banks were bringing money back. That was related to balance-sheet problems in Japan. If the Japanese economy continues to decline, that's a very negative influence on global growth. Now if the banking system gets significantly weaker it's much less important in Southeast Asia than it used to be, but it's still a major factor. So you'd have the transmission through weakening of demand in Japan, and you'd have transmission through the weak financial system.
WHAT SHOULD BE DONE? My guess is that there are very high-quality people and they know what's going on. Probably, as was true in the IMF, there are strong internal arguments but you present a united face to the outside. I would bet that the bureaucrats are pretty well informed. The question is what will move the political system. The IMF has had a series of disputes with the Japanese authorities over the extent of nonperforming loans. There is an official estimate, but when year after year the unofficial estimates turn out to be more accurate than the official estimates, that loses credibility. And of course, the quality of the loans is dependent on what happens to the economy. So what may have been true at one moment when they expected 2%-3% growth the following year is not true after another year of recession. The difficulty is grasping the nettle. Everyone thought [Prime Minister Junichiro] Koizumi would do it. The question is, if he can't do it who will be able to do it?
WHAT'S THE SINGLE MOST IMPORTANT MEASURE THAT COULD BE TAKEN? First, an accounting of the current situation that is more credible. There is a remote possibility that the official estimates are correct and the analysts' estimates are wrong, and if that is the case it would be nice to find a way of establishing it. But I don't think that's the situation. And then once that is done, a programme, whatever it is, [is needed] that is more determined. In some cases that will involve bankruptcies. I think the image of bankruptcies is wrong in Asia. Here in the United States people think of bankruptcy as a way to get on with business, mostly. The distinction between bankruptcy and liquidation is well understood. In Japan, their view is that if you need a procedure, or that somebody must go bankrupt, that you're advocating a close-down of Japan, which I doubt would be the outcome.
WHAT ARE YOUR VIEWS ON CHINA'S ECONOMY? The dynamism in that economy is phenomenal. We've had a couple of economies like [South] Korea go through sustained 35-year bursts of 7% to 8% to 9% economic growth. China's been doing it for 25 years. It has not had a big crisis like Korea had in 1982. In 1982 when you looked at the numbers you couldn't tell that Korea would do better than Latin American countries during the debt crisis, but of course Korea was so much more capable of taking hard, dramatic action. I suspect that China is more like that in terms of the political system and the determination of the team when they see things coming.
Remember [the 1989] Tiananmen [Massacre] was politically awful but that was the period in which they dealt with inflation-they just dealt with it. My guess is they would move pretty fast on the banks and on the exchange rate if they had to. So I'm judging a lot on people and the political system. They've had superb economic leadership with Zhu Rongji. He's not going to be there forever. But one man cannot do what he's done. He must have had a team, so I assume there's a whole apparatus in place that will help if there's a deep crisis. If the growth rate comes down 3%-4%, that's a lot, though, for China.
IS THE FINANCIAL SYSTEM CHINA'S ACHILLES HEEL? If there is going to be an Achilles heel, that looks like it will be it. What one does, nonetheless, not know for sure, is that it will happen. It's mainly because they have managed an incredibly difficult process of transformation so well so far. Now, the American phrase, which no doubt has a Chinese equivalent, is that trees don't grow from the sky. You can't keep doing that, except that the Chinese have kept on doing that. Furthermore they appear analytically to have grasped what needs to be done with the banks by putting these assets in asset-management companies and spinning them off for others to deal with. So they've got the essence of the framework; now actually getting all that done will be politically very hard. So I would say the financial system is the weakest point.
IS CHINA'S GROWTH A THREAT TO THE REST OF ASIA? It's very hard to imagine that China could have an absolute advantage in everything. There are still formidable problems investing in China. In most cases having a prosperous neighbour helps the countries on the periphery. I have not seen a lot of cases where it is a bad thing to be next to a rapidly growing economy.
WHAT DO YOU THINK OF THE REGIONAL CURRENCY SITUATION? The natural thing to think is that the yen will weaken because Japan is weak. But actually, a weak Japan bringing back money from the rest of the world could see a strengthening of the yen, which we've seen on previous occasions. The yen strengthened as the economy weakened because capital flows reversed and Japanese companies started bringing financing home. I suppose more likely is a weakening of the yen that would lead to a weakening of Asian currencies, that would be very difficult for China.
If the yen weakens, the other Asian currencies will weaken. Korea is clearly not pegging but is intervening. If you look at what happens to the won, it moves according to some weighting of the dollar and the yen. And if the yen goes, the won will go, somewhat, not 100%. And I'm sure the Thais will see devaluation. Malaysia is stuck, but Malaysia is undervalued, so is immune until a yen weakening has a big impact. The Philippines is being very pragmatic on its exchange-rate policy. So that would leave China very exposed. Would it match Japan? That would be a very big change in policy to what is happening now, which is that China is playing more and more an important role as a source of stability, which is politically important to them. So I guess they'd be reluctant to do it. Then there's the question of the rest of the Group of Seven. My sense is that if the yen moves much beyond 135-140 to the U.S. dollar, the other countries will react quite vociferously.