HARD LESSONS AND RADICAL REFORMS
On the other hand, the mainland of China was cushioned from much of the impact of the contagion. Its economy grew by almost the forecast 8 per cent in 1998, a significant factor that must, in the longer term, work to Hong Kong's advantage now that we enjoy the full potential of the Mainland as our hinterland.
Meanwhile, the crisis had a profound effect on Hong Kong. The figures for 1998 tell the tale. Real GDP contracted by around 5 per cent (compared with 5.3 per cent real growth in 1997), property prices dropped by 50 per cent, and rents were down by about the same amount. Stock market prices and turnover dropped sharply. Unemployment more than doubled to 5.7 per cent, wages fell, small businesses closed and consumer demand went into reverse. Other factors compounded the distress. A liquidity crunch (caused mainly by the repatriation of tens of billions of dollars to Japan) and sustained speculative attacks on the Hong Kong currency and stock markets were just some extraordinary problems that Hong Kong dealt with during a particularly fierce 'Year of the Tiger'.
The 'flu
Why was the Asian 'flu so contagious? Global integration in trade, banking and finance carried the infection. And, when the standard IMF prescription of a floating exchange rate, plus tight monetary and fiscal policy, was applied to Asian economies, the corporate sector, with its excessive short-term foreign debt, promptly collapsed. This in turn led to bank failures, domestic and foreign capital flight and full- blown recession. The recession then cut intra-Asian imports, causing competitive devaluation in other Asian economies.
Initially, everyone thought calling in the IMF would calm the markets. But in some cases this exacerbated the problem. The series of events, together with a delay in providing new capital to the IMF, dented the assumption that it had the technology and enough resources and capacity to deal with a global crisis. All this had enormous implications for the conventional belief in the free market and the financial architecture set up at Bretton Woods 50 years ago in the aftermath of World War II. Indeed, the Asian financial crisis pinpointed the need for new rules and codes of practice for the international financial system to cope with the massive volume of funds moving about the global markets, and the speed with which those funds moved. Heeding calls for urgent global action, the world's financial leaders began to address the problem at the annual meetings of the World Bank/IMF last October. The mere fact that they focused their attention on ways to solve the problem may have helped to avoid a global recession. That first meeting tackled the most pressing issues: the overriding need for greater transparency in national and international financial systems, the requirement for stronger international supervision and regulation, and the availability of sufficient capital to tackle liquidity crises when they occur.
Developed and emerging economies need a mechanism for monitoring large international fund flows. If not, even the best-managed, best-regulated, most open and financially sound economies, like Hong Kong, will be vulnerable to attack.
The year ended with a global consensus for stronger and increasing transparency in the international financial architecture. This included developing a code of best practices for monetary and financial transparency and principles of corporate governance. An enhanced IMF facility providing short-term line of credit, to be mobilised under improved procedures for crisis prevention and resolution, became an
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