Instead of playing the blame game, the events in East Asia, and now elsewhere, should inspire our sympathy. This is not just because the number of people living on less than $1 per day in Indonesia, Malaysia, the Philippines, and Thailand is expected to double to 60 million by 2000, but also because of the extreme difficulties that their policymakers faced in trying to prevent and respond to the crisis. By pursuing rapid domestic financial liberalization and capital account liberalization without developing complementary regulatory structures, the East Asian economies put themselves in a very vulnerable position. When capital flows started surging into East Asia in the 1990s, the result of changes in worldwide conditions and the liberalization policies they had pursued, East Asia found that the standard macroeconomic policy tools were not sufficient to prevent a buildup of vulnerability. In retrospect, it is not obvious how, given their liberalized financial markets, the East Asian countries could have used the other policy instruments at their disposal to prevent the crisis without imposing other costs, such as, in the case of Thailand, cutbacks in needed education and infrastructure expenditures. One could well argue that "better" policies would not have been enough; if anything, nearly perfect policies were required to prevent the crisis.
This contains an important lesson. We cannot design policies (i.e. capital account liberalization) that only work well when other policies are functioning perfectly. Airplanes and nuclear plants always build in substantial redundancy so the failure of one part does not translate into a systematic failure. In economies parts are always failing, in part because the constraints of the political process lead to highly imperfect economic policies in rich and poor countries alike. In this case, it is even more important to design policies that are robust against a modicum of failure, rather than turning around and blaming the country every time it slips off of the knife edge into a serious problem.
There has long been a broadly shared consensus concerning some of the key ingredients in constructing less vulnerable economies and a less vulnerable international system. Some of the key ingredients are better information and stronger financial institutions – steps that are more easily said than done. Here, I want to discuss two issues which are increasingly being discussed, redefining the international architecture and designing workouts.