APEC Finance Ministers' Findings

Capital inflows supported by sound economic policies along with financial and capital market development have contributed significantly to overall regional economic growth.

There are macroeconomic and financial risks associated with large and abnormal capital inflows, especially if these flows reflect distorted incentives or unsustainable imbalances.

If properly managed, such risks need not diminish the substantial benefits that come with increased access to international capital in any significant way.

It is important that every effort be made to ensure that sound economic conditions prevail. A set of economic conditions which each APEC member economy would aspire to achieve or maintain includes: non-inflationary growth, fiscal prudence, sustainable external balance and appropriately valued exchange rate, and deep and broad financial and capital markets.

Managing the macroeconomic effects of large capital inflows requires flexible implementation of appropriate and feasible mix of several policy options: including intervention with sterilization, other forms of monetary control, fiscal restraint, and suitable exchange rate regime.

High savings rates and restraints on public sector borrowing have been critical factors in successful debt management in much of the region.

Further capital market development must be a priority to intermediate these domestic savings effectively and to expand the array of investment options available to both domestic and foreign investors, including assets with longer maturities.

Effective prudential regulation and supervision can play an important role in promoting business behavior which avoids banks' balance sheets at risk, for example, during periods of large and abnormal capital inflows.

The regional experience with capital controls is too diverse to provide definitive assessment. But in any case, controls impose economic costs, and should not be viewed as a substitute for sound macroeconomic policies, strong prudential regulation and supervision, and an active effort to promote capital market development. Limiting the duration of controls and acceleration of liberalization efforts are generally desirable.

Active and healthy financial and capital markets need to be developed for further advancement of APEC economies. Toward this end, market-oriented policies which promote domestic savings and expand domestic investor base should be pursued.

In determining how to promote the development of domestic markets, policymakers can benefit from communication with the private sector and with officials from other APEC economies.

The International Financial Institutions (IFIs) including the International Finance Corporation and the Asian Development Bank have been actively involved in capital market development in developing economies in the region. They can continue to play an important role in fostering sound growth of capital markets of the APEC region.

Policymakers should consider: establishing a legal and regulatory framework which fosters disclosure and competition based on market conditions, and clearly defines the roles of various institutions; taking actions which promote both the demand for, and supply of, assets for investment, especially institutional investment; educating the public about savings options and necessary points for consideration; and enabling expertise and developing human resources.

Regulatory and supervisory policies should be pursued to ensure fairness, efficiency and investor protection in the markets. Liberalization and prudential regulations complement each other.

There is a compelling need to mobilize private resources. The public sector has increasingly assumed a role as facilitator, whereas the private sector has assumed a more prominent role in provision of infrastructure services.

In exploring areas where the private sector could play further role, such factors need to be considered: technological advances, advancements in knowledge and experience, sensitivity to the potential macroeconomic consequences of public financing, and the efficiency and dynamism of the private sector.

Private resources often have the advantage of increased efficiency. It is desirable to mobilize private resources in fields where the market mechanism can better achieve efficient provision and operation of infrastructure.

The development of financing techniques which channel private savings to investment in infrastructure is critically important.

Particularly noteworthy is the need to deepen and broaden domestic capital markets, in order to improve the mobilization of domestic savings and better accommodate huge infrastructure investment requirements in the APEC region.

Prudent macroeconomic management and, in many cases, regulatory and institutional changes are necessary to attract private investments in infrastructure development.

The authorities of recipient economies have a responsibility for improving the domestic business environment through, inter alia, improving infrastructure planning and coordination, establishing simplified and more transparent procedures for private sector participation, privatizing or restructuring state-owned firms, promoting domestic financial markets, and providing the appropriate regulatory and legal frameworks. An improved business environment will facilitate promotion of private sector investments including foreign direct investments.

The IFIs are expected to play a vital role in catalyzing sectoral reforms and private investment by providing technical assistance to host economies, and through complementary financing schemes and guarantee facilities. The IFIs should be provided with necessary support and adequate resources to enable them to fulfill their roles.