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Rubin cool on warning flag
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January 30, 1999: 7:25 a.m. ET
Treasury Sec. says early warning system may do more harm than good
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DAVOS, Switzerland (CNNfn) - U.S. Treasury Secretary Robert Rubin Saturday said the best way for developing countries to avoid financial crisis is to have sound policies for fiscal management and transparent government and markets so investors can make informed decisions about where to put their money.
In a speech to political, business and finance leaders at the World Economic Forum here, Rubin dismissed suggestions for an early-warning system that would flag impending financial problems, saying such a system could do more harm than good.
"Nothing in my 26 years on Wall Street or my six years in government suggests that there is any predictive capability even remotely reliable enough for such a system," Rubin said. "In addition, the early warning itself could create precisely the instability and even panic that such a system is designed to prevent."
Robert Rubin & Lawrence Summers addressing reporters Saturday
Rubin said the best way to avoid the types of financial land mines that have roiled markets over the past two years is for developing countries to adhere to strong and sound economic policies.
"As we look back over the experience of this crisis, we can see that the absolute key to financial stability and economic growth is consistent adherence to strong macroeconomic and structural policy,'' he said in the text of prepared remarks.
At the same time, investors and lenders must do a better job analyzing risk, adding when South Korea's economy stumbled in 1997, he was "appalled, though not surprised, to learn how little some creditors seemed to know about the country and its banks to which so much had been lent."
Europe and Japan need to help out
Rubin called on other industrial nations to share more of the burden by stimulating domestic demand and opening their borders to imports.
"It is almost impossible...to avoid the conclusion that the United States has simply been more open to absorbing the exports of countries seeking to recover from crisis," he said.
While the U.S. economy has thus far been able to absorb the flow of goods, he said the United States cannot continue to remain the importer of last resort and he called on Europe and Japan to help out.
"The other industrialized countries can contribute by acting to achieve higher rates of domestic demand led growth and by greatly reducing formal and informal barriers to trade," he said.
On Friday, Vice President Al Gore urged Japan to accelerate its reforms and get its economy back on track. However, Rubin steered clear of offering specific suggestions to Japan.
Washington has long called on Japan, the world's number two economy that is stuck in a deep slump, to do more to lift itself out of recession. Europe, too, has come under pressure from Washington to promote more growth-oriented policies and become more open to imports from abroad.
Rubin warned "large imbalances" created by the disparities in growth and openness between the United States and its major trading partners would need to be resolved -- but not by way of manipulating currencies. "One thing that we will not do is use our currency as an instrument of trade policy," he said.
Rubin also opposed recent calls -- particularly from some European financial leaders -- to limit the volatility of major currencies in the world's free-wheeling foreign exchange markets. A sensible exchange rate regime for major currencies ''means floating rates supported by sound policies,'' he said.
Rubin added that targeting specific currency levels or even target ranges would risk deflecting from the need for sound underlying policies while exacerbating economic cycles.
"The floating exchange rate system is the worst possible system, except for all the others," he said.
Rubin said the concept of a pre-qualification process at the International Monetary Fund, which would allow countries which meet certain criteria to have swift access to contingency funding in the event of financial crisis, should be examined. But he warned there are a number of questions that need to be addressed.
For example, he said officials would need to establish reliable criteria so countries that do not qualify aren't then plunged into crisis by the IMF's refusal. 
-- from staff and wire reports
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