CHAIRMAN —We have changed our rules a little in this committee. We do not expect you to be sworn or affirmed but I remind you that these are formal proceedings of the parliament.

Thank you very much for coming along this morning. I think it is about six months since DFAT first appeared on this inquiry. A lot of water has flowed under the bridge since then. You heard Mr Davis in the questioning refer to one or two events. We thought it would be an appropriate opportunity to get you back to outline some of these developments, not necessarily strictly related; Mr Sinclair raised the North Asian situation because it does appear to impact on the ASEAN relationship. We will ask you to make some general comments about developments since we last met. I think that is probably the best way to play it. Thank you, Michael.

Mr Potts —Thank you, Mr Chairman. The department is pleased to be here. As you say it is a very topical occasion just to take stock of what has been happening in the region. In my brief remarks I want to focus essentially on Australia and ASEAN but certainly we have a wide range of departmental expertise represented here and we are obviously open to questioning from a more general perspective.

Looking to ASEAN first I think I should highlight the expansion in ASEAN membership. Laos and Burma are now members bringing ASEAN pretty close to the vision of an ASEAN of 10. But, of course, the exception at the moment is Cambodia. It had been expected to join ASEAN in July with Burma and Laos but, following the outbreak of fighting in Phnom Penh on 5 and 6 July, there was a pretty general feeling within ASEAN that it was better to wait and to hold Cambodian membership in abeyance until the situation settled down. The thinking at the moment is that at this stage Cambodia

is likely to be admitted to ASEAN after the national elections in Cambodia next year. They are scheduled to be held in May.

For our part we have been very pleased with the role that ASEAN has taken over the events in Cambodia. It has played a leading diplomatic role through its ministerial troika, the foreign ministers of the Philippines, Thailand and Indonesia, and they have kept the international focus on the holding of free, fair and credible elections on schedule in Cambodia.

We, in Australia, have played an important part in cementing more general support for ASEAN's leading role, particularly through Mr Downer's efforts at the ASEAN ministerial meeting in Kuala Lumpur in July. That has been followed by Australian participation in the so-called Friends of Cambodia meetings. The most recent one was held in Vancouver in the margins of APEC about a week ago.

On Burma: we have also been looking to see what progress the international community can bring about in terms of moving towards better observance of human rights standards and some progress on democracy. Mr Downer has raised our concerns at the General Assembly, at ASEAN meetings, at the ARF, and also at bilateral meetings in the margins of these wider groups. In our dealings with ASEAN, we continue to make known to them, and also to the Burmese government, our strong concerns about the situation there. As you know, I think Mr Downer sent a senior officer of the department, Mr John Dauth, to Rangoon as his special envoy in September to raise our concerns directly with key government leaders in Burma. It is fair to say that since Burma joined ASEAN in July there has been some modest—and I emphasise the word modest—progress in the country. Having said that, there have also been a number of backward steps, particularly the fact that Daw Aung San Suu Kyi has not been able to attend a number of township meetings with her party activists. It is fair to say that relations between the two sides remain very testy.

Just looking for a minute at the ASEAN Post-Ministerial Conference, it is fair to say of course that Cambodia was its major focus. There was also, as I mentioned, a specific focus on Burma and Mr Downer took the opportunity to speak in some depth with the Burmese foreign minister, U Ohn Gyaw.

More widely, Mr Downer also announced a number of initiatives with regional countries. These included the establishment of bilateral security dialogues with the Philippines, with Thailand, with China and with Vietnam. With Malaysia, he established a more regular ministerial dialogue, plus increased cooperation in sports administration and in IT as well as announcing a double taxation agreement. With the Philippines, he also announced a regular ministerial dialogue involving business people and academics, and the first such dialogue has recently concluded. A survey of Australian investment in the Philippines, and an exchange of visits between foreign ministers. This sort of grab bag of announcements and initiatives testifies to the continuing utility for Australia of the

whole ASEAN process and our dialogue status with it.

You will know also that ASEAN economic ministers met in October. Among the highlights that came out of that were the AFTA council's endorsement of the CEPT package. Member countries will begin implementing that in 1998. AEM ministers approved an initial package of liberalisation of services. These are to commence no later than the end of March next year. They are focussing on five sectors: air transport, business services, maritime transport, telecommunications and tourism. Finally, looking at the AEM, it was agreed that liberalisation of services should be done on a sectoral and a subsectoral basis rather than product by product.

In conclusion, there are probably three small things to mention. First, the second ASEAN informal summit will be held on 14 and 15 December in Kuala Lumpur and that will have a focus on commemorating ASEAN's 30th anniversary. The ASEAN leaders will also meet with heads of government from Japan, China and Korea at that time. The second point to mention is that there will be a meeting of the finance ministers of ASEAN and the five countries which contributed to the IMF assistance packages for Thailand and Indonesia today and tomorrow, 1 and 2 December. Mr Costello is attending from Australia.

The third point to mention is that I am pleased to highlight the fact that we were invited for the first time to participate in the meeting of the ASEAN committee on culture and information, COCI, that took place in Malaysia in July. We advanced a number of proposals at the meeting including an initiative to develop a regional ASEAN policy and strategy on cultural heritage. We have invited the chairman of ASEAN COCI, Mr Choo, to visit Australia as a guest of the department. I am happy to leave it at that and, obviously, to invite questions.

CHAIRMAN —I think you came in as I was asking Mr Davis—and I will ask you the same question—to go back to Bogor and the declaration and trade liberalisation, and in the light of everything that has happened in recent months, whether there is an indication of any backsliding. We heard Mahathir in Vancouver making some usual Mahathir comments in relation to a question mark about the liberalisation process. Is there evidence that there has been or is likely to be some backsliding by some of our ASEAN neighbours, in particular?

Ms Fayle —No, there is no indication at this stage, apart from, as you say, some public comments by certain individuals. Certainly, at the APEC ministerial meeting and the APEC leaders' meeting in Vancouver, it had in fact quite the opposite impact. There was a great desire on the part of ministers and leaders to demonstrate a reinvigorated commitment to the liberalisation process as part of the confident messages they wish to deliver to the international markets about where the region is heading.

In a sense, it has had the opposite effect. It has reinvigorated a desire to move

ahead and to maintain the momentum of liberalisation. There are certainly no specific instances, other than in the content of IMF packages where a number of tariffs have been raised—within binding commitments, though—to extract further revenue for governments as part of IMF packages. As a general result of their reactions and the policies that are being put in place, there is no indication of a desire to increase protection in the markets affected.

CHAIRMAN —Yet you see in the most recent Malaysian budget an indication of increases in tariffs.

Ms Fayle —I think those increases are within binding commitments. However, as I said, they are for revenue purposes. They tend to be on luxury items; there is no overall indication. For example, in Korea's case, they have just reduced protection on some 180 items.

Mr BARRY JONES —You will have noticed that Ms Hanson, among others, has indicated some alarm about Australian participation in financial bailouts in South-East Asia. There is obviously a broad concern to understand precisely what it involves, how far Australia is committed, whether we expect to see any of the money back and whether there are collateral benefits down the trail. In particular, in the case of Indonesia, given the rather Byzantine nature of business relationships with the government and so on—family connections and the rest—are you optimistic about the prospect of Indonesia being able to meet its international obligations and to continue on the reform process?

Mr Heseltine —I could just make a couple of comments on that. We have absolutely no reason to have any concerns about that. Indonesia in the past has always had an excellent record in paying back its loans. In the case of Singapore, which as you know participated in a very large way in the package with two tranches of $US5 billion, it was an issue that got an airing in the Singapore media in respect of whether the funds from which the Singapore package was coming were in danger. Statements from the Singapore government indicated that they had full confidence in Indonesia's willingness and capacity to repay and they made that same point—that Indonesia has had an excellent record in the past.

Mr SINCLAIR —One part of the Asian growth that really still puzzles me is that you have a very high domestic savings rate in Asia and there has always been a lot more money held within the families and not put out in the system. Much of the growth has been funded overseas rather than being funded domestically. To what extent is there, within most of the countries of ASEAN, a significant domestic pool of money that is sort of stored as cash or not in the system? They are all related, so just let me put them out, because I am interested to know what sort of answer you will give.

Secondly, much of the significant ownership of property and of business has been in expatriate Chinese hands. I am not too sure whether that is family money or where their

money comes from. Sure, they have borrowed wherever, but how significant is that expatriate Chinese link? What role is that going to play in this present financial crisis?

Thirdly—this is a bit related—most of them have fairly significant overseas surpluses. I gather that much of that is invested in areas that is not easily returned, and you have a debt on the one hand and a credit on the other. In a country like Japan, when they started having troubles with their over-valuations in the CBD properties over the last five or six years, you have seen companies starting to return their capital by selling properties wherever they are.

Is that a factor which is going to have any bearing in Australia? I do not know what ASEAN investment there is in Australia. Brunei, of course, has significant investments, but I do not think Brunei is in trouble. What about others? Is that going to be a factor? In order to get their money back, are they likely to sell assets and businesses that they have in Australia? They are three different, but related, questions. That is in the first order.

Ms Fayle —I might start on that and then ask some of my colleagues to chip in. In terms of the high domestic savings rate, you partly answered your own question with the second point. A lot of the domestic savings, certainly in the expatriate Chinese families, have been used to invest in their own businesses and have driven a lot of the growth, particularly at the small and medium-sized firm level, in a large part of the region.

However, it has been a factor of growth in South-East Asia over past decades that they have been fairly largely dependent on international capital, originally in the form of development assistance programs and then, increasingly, as they opened to foreign investment and put in place certain structures, they were inviting a lot of foreign direct investment. Certainly, you are right in saying that foreign direct investment has played a large role in the development of those economies and a substantially larger role in the savings levels that are there.

In terms of the role of the expat Chinese families, it would differ in different economies. It is a substantially different role in, say, Indonesia, to what it is in Thailand, to what it is in Malaysia. It is very different in different economies. There is no doubt that they play a very strong role in key parts of industry and in key export industries which are going to bear the brunt of some of the recovery over the next few years. I would imagine that they will play a substantial role in pulling these countries back to stronger growth paths.

In terms of the Japanese issue that you spoke of and pulling money back—I will ask John Richardson to follow this up—certainly there has been a history in the past—we have experienced it in Australia as well—of the Japanese pulling out of investment in real estate or other forms of investment that is relatively easy to cash out in order to bring the money back home to help when there is trouble at home. There are certainly expectations

that that may be a factor that we look at over the next 12 months to two years as Japan tries to deal with what is essentially for them a domestically driven financial crisis rather than one imposed by regional developments.

Mr Richardson —I certainly agree with the comments on Japan. There is no doubt that, given the very high debt equity ratios of a number of Japanese institutions, they will try to improve their balance books, and that will also be the case in Korea. To that extent, you would expect that they would seek to rebalance their financial assets. I think your question was directed to whether that would occur amongst South-East Asian institutions. Logically, you would expect it to as part of an overall financial restructuring.

I suppose one key question is whether it will lead to the sell-off of existing assets or simply a reduction in outward investment. I suspect, in the case of Japan, it is more likely to be a reduction in the flow of outward investment rather than necessarily a sell-off of existing assets, except of the assets which are non-core assets.

Mr Potts —I should comment also on Mr Sinclair's question on South-East Asian investment in Australia and what knock-on effect that might have here. The level of investment from South-East Asia is reasonable, but not huge. The three big investors among the ASEANs would be Malaysia, Singapore and Brunei. I think it would be Singapore first, Malaysia second and then Brunei. Only one of those countries really has been knocked around all that much in the currency problems up until now. Indonesia has some investment in Australia, but I think it is only in the region of 20 million or thereabouts.

Mr BARRY JONES —How much?

Mr Potts —About 20 million. Thai and Philippine investments are close to negligible. There will be some effect certainly from Malaysia. Historically, Malaysian investment in Australia has concentrated on property, although not exclusively. There has been some investment in the mining sector in particular and some in industry. I would imagine, nonetheless, that Malaysians would be pretty cautious for the moment.

Ms Fayle —While those investment figures are generally termed official investment figures, we have known for some time that official investment statistics tend to understate the flow of investment from particular countries. That is simply because of the way the transactions occur. For example, a lot of the so-called Singaporean investment in Australia may in fact originate in Indonesia or some of the other ASEANs because it goes through financial institutions there.

Mr SINCLAIR —The second question relates to directions of spending in these countries. Obviously, if you go to Bangkok, every crane is standing idle and there is a demonstrable termination of work effort on major buildings. But the secret of the growth of many of the countries has been their infrastructure development. If infrastructure is

stalled, it is going to have a far greater ongoing consequence than if you just stop building. Buildings are buildings. You can either restart the building when demand takes up or set it aside or whatever. Infrastructure is different. Much of the infrastructure has been funded by World Bank and the Asian Development Bank, and by multilateral rather than bilateral funds. What is the state of play across ASEAN in terms of infrastructure spending? Is it also stalled or has it been maintained? What is happening to it?

Ms Fayle —It is a little difficult to ascertain at this stage. Certainly, some major infrastructure projects are being put on hold in the region. There is also an overriding trend in the region, however, towards greater private sector investment and funding of infrastructure projects. That tends to reduce the weight on the government sector in those countries to fund these projects. The government sectors have been putting on hold a number of projects in an effort to constrain government spending as part of the steps that they are taking to deal with the crisis.

Infrastructure, the financial sector and the level of skills have been three watch points that the department has had identified for a number of years now as possible areas that might impede the progress of growth in the region. We have seen the financial sector one come to fruition, I guess. In terms of infrastructure, I do expect that there would be some impact and some slowing down in infrastructure development and that that would also play through into some slowing of growth paths in the region.

Mr Potts —A comment on detail would be to contrast Thailand with Malaysia and Indonesia. In Malaysia and Indonesia, the governments there have announced the deferral of a number of significant infrastructure projects. In the case of Thailand, the impact seems more to have been on the property market rather than infrastructure development, for the moment at least. I am aware in Thailand of only one major infrastructure project that has been deferred, and that has been because of internal financing problems rather than external problems.

Mr SINCLAIR —In their five-year plans there has been an ongoing series of new infrastructure programs. Are they still ongoing, apart from the one that you mentioned? Have there been any new ones started? Has only one stopped or are they all now stalled?

Mr Potts —Certainly, historically, they have been ongoing. In Malaysia the government has a series of 15 to 20 very large national projects and a proportion, maybe a third, has been deferred. There are obviously no new projects being brought on to compensate for that for the moment; there has just been a run down in government spending. I imagine the intention is to try to pick it up in the second half of the five-year cycle but, even so, there are definite constraints on how much growth you can engineer down the track.

Mr Heseltine —It is early days yet and the picture is a little patchy. Certainly in the case of Indonesia it is relatively early on. During the currency crisis they did announce

the postponement of 15 infrastructure projects, but they were subsequently reinstated. The problem for the Indonesian government is that of all the difficulties they face, unemployment is the biggest single one that they are focussing on at this moment. They are obviously very mindful of the employment effects.

As far as Malaysia is concerned, I am not aware of any curtailment of infrastructure projects. They announced the week before last the establishment of a National Economic Action Council, which is a fairly unusual move on the Malaysian government's part—setting up a body like that. Over the coming weeks we will see the results of their deliberations.

Mr SINCLAIR —Dr Mahathir made some announcement over the weekend allowing a greater measure of overseas investment in projects too, which seems to be indicative of change. On another matter, is China now attracting more overseas investment than the ASEAN countries, or is it still too early to say?

Mr Richardson —It is too early to predict any trend in that respect. China has always been a very large recipient of FDI over the last few years. It will become more apparent over the coming months as to whether there is a redirection, but it is too early to make any real judgment on that at this point.

Mr SINCLAIR —We have seen some quite reasonable growth in trade between the countries of ASEAN. Part of it is AFTA related and part of it is naturally the growth of their economies and the fact that they have ways by which they can do business with each other. Has that been affected by the drop in currency values? Is there any stalling of that growth in trade between the countries of ASEAN? Is it still too early to gauge what the effect of the falling currency is going to be on trade with Australia, with trade out of the ASEAN region, as well as trade within the ASEAN region?

Mr Garner —Whilst it is still a bit too early to determine whether trade within the different regions will be hit in a significant way, over the past few years it is apparent that ASEAN trade to North-East Asia has been increasing along with North-East Asian trade to ASEAN.

Mr BARRY JONES —Which has been?

Mr Garner —ASEAN trade to North-East Asia—

Mr BARRY JONES —Has been increasing?

Mr Garner —Trade has been growing stronly between ASEAN and North[hyphen]East Asia, with North[hyphen]East Asia exports to ASEAN growing at a slightly faster rate than ASEAN exports to North[hyphen]East Asia. But, in terms of the overall levels of trade, one of the reasons at the moment that you have got significant falls in equity markets is that there is

a view that companies' profits will be lower in the region because of lower levels of trade. So the markets are viewing it as saying that there will be lower levels of trade within the region for the short term.

Mr SINCLAIR —Why is the level of trade from ASEAN to North Asia falling? I would have thought, with currency devaluation, their commodities would be cheaper and therefore there would be an increase.

Mr Garner —At this stage we have not seen the impact of the currency depreciations on the levels of trade. It has been a longer-term pattern.

Mr SINCLAIR —Is that because of the components of the trade?

Mr Garner —Yes, that is right.

Mr SINCLAIR —What do they sell to North Asia?

Mr Garner —Electronic equipment and capital intensive products. Also there is commodities trade.

Mr SINCLAIR —Maybe towards manufacture: so it would be silicon chips towards producing TV sets, et cetera.

Mr Garner —That is right.

Mr DONDAS —Live cattle exports out of the Territory have been very positive in the past few years. Is there likely to be any great impact on that now with the currency crisis that we are facing in Asia?

Ms Fayle —There already has been an impact with some reduction in the shipments of live cattle to Indonesia. The cattle people expect that that will continue probably for some time. That is simply because beef is a luxury item to an extent in Indonesia, and so it is one of the products that is likely to be affected soonest by any reduction in levels of growth in the market. Similar products—tourism, and education services—are also likely to be affected more than our exports of inputs to production of exports in those markets. There has already been a bit of a downturn, but there is a seasonal downturn anyway at this time of year in our exports. However, the figures do show that it is a greater downturn than would have been expected due to seasonal factors alone.

Mr DONDAS —I asked the ACCI representative this morning about the construction industry in Asia and more so in Indonesia. At the current time, there are about 2[half ] million unemployed construction workers in Indonesia. That figure is likely to blow out by this time next year to about four million. What likely impact is that going to have on our region—hypothetically?

Mr Heseltine —Obviously, the construction sector in Indonesia has been the first and most heavily hit, and that is, as you say, already showing up and will continue to. It is obviously of great concern to the Indonesian government. As I mentioned before, the unemployment problem will be most seriously and immediately affected in that sector.

In terms of what it is going to mean for the region as a whole, it is a bit hard to tell at this stage. I would imagine, and I think it is already showing, that companies, including Australian companies, in the building materials business are probably in for a fairly tight time. Similarly, companies involved in property—and there are a number of Australian companies and other regional companies in that sector—will also be affected.

Mr DONDAS —So we are monitoring it?

Mr Heseltine —We are.

Mr BARRY JONES —Given the depreciation of the currencies of many of the countries of ASEAN, what are your projections about what effect it would have on their trade with us? Presumably it is going to make it harder for us to sell to them and much easier for them to sell to us. Have you done any quantitative estimates about what impact there is likely to be?

Ms Fayle —We have not done quantitative estimates at this stage, because the volatility is still there. We have done some qualitative examination of the situation. It is a fairly complex mix. Certainly, South-East Asian exports will be cheaper for us to buy, but it is a little difficult to assess to what extent that will involve replacing our imports from other countries. We may perhaps switch from a Korean product to an Indonesian product or from a Chinese product to an Indonesian product, if the devaluation suggests that it is a cheaper product. That may then have nothing other than a positive effect on Australia in the sense that our imports are cheaper overall. However, there is also likely to be some increased importing from the region, I suspect, particularly given that domestic demand in Australia is particularly strong at the current period of time. Most expectations from Treasury and ourselves are that we are likely to suck in a few more imports as a result of the devaluations.

Mr BARRY JONES —So the Indonesian car industry might come good after all?

Ms Fayle —I do not know about that. I would not go quite as far as saying that. In terms of our exports, yes, they will be more expensive in these markets. That may not necessarily affect all exports. As I said earlier, it is most likely to affect the sorts of things that are considered to be luxury items, where there is a choice of whether to spend the money or not on things such as beef, education services and tourism services.

It is less likely to affect products that are seen as essential inputs into their own production capacity such as intermediate manufactured items, parts, raw commodities and

primary products. Staple food products are less likely to be affected where there is no obvious substitute within those markets. It is a very complex picture, with some products affected and others not. Some could even be affected in a positive way if, given Australia's own devaluation, we are seen as a more competitive supplier than, say, the United States or a European supplier. Given the complexity of that sort of picture, we do not have any accurate quantitative assessment at this stage.

CHAIRMAN —Could I just change tack a little and perhaps hear some comments about the ARF? Would it be reasonable to say that there has already been a changing face to the ARF? How much do you see of the ARF changing in the short to medium term?

Mr Potts —I think it is fair to say that it has already changed in many ways. It has gone past that initial skittishness and reluctance to talk about issues that were seen as sensitive by the neighbours. I think that comfort level has already been created. The big question, I guess, is now how long will it take before they go a little further down the agenda and move into the very hardest of issues. I suppose we are probably talking half a decade to a decade, perhaps, before you get to that next threshold. That is a very impressionistic sort of read-out because these things are influenced by mood, I think, and by a lot of intangibles. That is probably our sense.

Mr SINCLAIR —There have been general talks that perhaps some link between AFTA and CER would be a good thing. That has not got off the ground at all, has it?

Ms Fayle —No, it is not accurate to say that. There has been an ongoing dialogue between AFTA and CER. If you are talking about turning it into a preferential trade arrangement, then that has not got off the ground. But we have actually had some successful outcomes from the dialogue, particularly in the area of standards and customs. In the customs area, a big outcome recently was the publishing of a handbook on customs procedures of all the ASEAN and CER countries. The focus has been on trade facilitation issues and there has been considerable progress there. Quite frankly, it has also provided an extra area of dialogue on issues that affect the ASEAN countries, Australia and New Zealand that we did not have before. It has been extremely beneficial in that sense.

Mr SINCLAIR —I do not know where the devil it comes from, but we have got a review of ASEAN's political, security, economic and functional cooperation and external relations since the 29th AMM/PMC in July 1996. Was that prepared by your department, do you know? Where did that come from?

Mr Potts —Off the Internet.

Mr SINCLAIR —Off the AFTA web site? I see. I just noted that one of the things that hits you—it is off the AFTA web site, so obviously it has to be right—that what was being progressively developed was the frequency of meetings at all levels through ASEAN. How are they getting on? Are they still meeting frequently? Are the new

members, particularly Myanmar and Laos, playing a part? What are they doing with Cambodia? Is Cambodia coming in as an observer? What is happening?

Mr Potts —Essentially, Cambodia is being treated as an observer for the moment. I think with new members, you have already got a first tier and a second tier in the sense that you have the original five plus Brunei. Vietnam has become a fairly active member. It services most of the meetings—we are talking about basically 300 meetings a year—out of Hanoi, although it uses its embassies in the region to some extent.

Mr SINCLAIR —Do they meet all round the region?

Mr Potts —Yes, all round. With Laos and Myanmar, what you see is essentially the local embassies generally servicing meetings. It is being done on an incremental basis for them as they build up the number of ASEAN literate bureaucrats in their own governments.

Mr SINCLAIR —What about the obvious problems with the IMF? Are they all being dealt with in a bilateral basis or is ASEAN looking at the deals with Thailand, Indonesia and so on?

Mr Potts —Not in a structural sense, I don't think. But it is obviously the case that when their finance ministers, especially, meet they would be swapping notes. I imagine also that as a particular country considers whether it needs to come to an arrangement with the IMF, it calls on one or two of their neighbours that have already had dealings with it for a second opinion.

Mr SINCLAIR —How do we find out what goes on? Do we rely on the place where the meeting takes place or just the rapport that develops between our second secretaries and others across the divide? How do we find out what happens in those meetings?

Mr Potts —There are a whole range of monitoring devices. Some are simply by our embassies keeping a very close eye on the ASEAN calendar. The second element is liaison with the ASEAN secretariat in Jakarta. We have a very good dialogue with them. Thirdly, in a number of specialised areas, the habit of consultation between Australia and its ASEAN neighbours has developed very strongly. People now tend to get on the phone quite a lot to their colleagues when an issue is live.

I will give you one or two examples. We have had a longstanding officials exchange program with the Indonesian government. The result is that we have secondments of three to six months in particular ministries. That has led to our having easy points of access to their particular ministries. For instance, when we have a regional problem like the haze problem or something like that, we will have contacts within their department of environment who can be contacted directly from Australia.

Ms Fayle —In terms of the IMF issue that you mention, there are also a number of other dialogue fora in which Australia is involved. At the financial minister's level of course there is an APEC financial minister's meeting. But at the finance deputy's level, the secretary to treasuries and finance departments levels and also the deputy governor of the central bank levels, there are a number of existing meetings that occur. Those individuals are in fairly close contact anyway on an ad hoc basis between meetings. Also, in the case of Indonesia, one of our Reserve Bank officials is part of the IMF team that is in Indonesia. So we have the capacity to have fairly extensive information on what is going on there.

Mr Heseltine —I was about to make much the same point. But I might just add—it has already been mentioned, but it is very significant—that the ASEAN plus six finance ministers are meeting today and tomorrow, which involves the IMF on the first day and then it goes into other meetings the second day. So there is an example where Australia has actually got a seat at the table, as it were.

Mr SINCLAIR —Has Australia decided to change its attitude towards, for example, the Mekong project and so on or are we still letting things run as they are?

Mr Potts —I would not say that we are letting things run as they are, because that is just too much permissiveness—laissez faire. What we are trying to do, first of all, is to get a sense of where it is headed now that several of their key economies are inwardly focused. We have been talking especially to the ASEAN secretariat and to the Mekong committee in Bangkok to see what their sense of the evolution of their projects—in particular their infrastructure of projects—is likely to be. It is too early to get much of a sensible read out from them, but you would have to think that there would be some fall off in momentum at least.

ACTING CHAIR (Mr Barry Jones) —I was interested in your comment that we are now against laissez-faire.

Mr DONDAS —In terms of the discussions that are going on with the IMF and the bail-out, it is all very pleasing to know that we are getting involved in high levels of discussion and can pick up phones and talk to people. But in terms of the currency swap with Thailand and the bail-out with Indonesia and possibly now further financial considerations going to Korea, are we placing ourselves in a position where we can pick up all these good things we are doing as good neighbours at some future date and at least expand our areas for further trade?

Because as I move around Asia I always get a distinct feeling that, while Australia is doing all the good neighbourly stuff, New Zealand is knocking us off for the trade. I know what I am saying. We seem to be behind the eight ball all the time and New Zealand seems to be in the forefront in terms of its distribution of produce throughout the region. Are we going to use this catalyst of being a good neighbour to get in there and

drive a harder bargain for us? That is DFAT's job—not hypothetically.

Ms Fayle —Certainly Australia has received a lot of kudos from its willingness to participate in the packages and that has been recognised by counterpart ministers in their conversations with our ministers. It has been recognised at the highest levels. Obviously you have to be very subtle about how you use something like that as a mechanism for pushing ahead in a commercial trade sense, but it will certainly be part of the positive baggage that we take with us into our dealings with the region from here on in.

It has always been our aim to demonstrate that we are engaged with the region and this has been one way that we have done that. So, yes, we will use it positively, albeit subtly from here on in. I think you have to be realistic in looking at New Zealand. I would certainly stress that the absolute level of our trade with the region is much greater than New Zealand's. So you need to be carefully listening to the positive rhetoric coming from the New Zealanders on this issue.

Mr DONDAS —I get a bit tired when I go to the Sheraton group or the Hyatt group throughout Malaysia and every time I get a butter patty it is always a bloody New Zealand butter patty.

Mr SINCLAIR —I notice you are all linked together here today, yet really within the department we essentially focus on a bilateral basis, do we ? Do you talk ASEAN? When you are preparing for ARF—which is probably one of the more significant of the groups and we have not spoken about ARF—do you meet and look at where you are bilaterally and what you want to get out of ARF? How do you determine what your policies are going to be towards ARF or do you look at the issues that you know are coming up and try to do it the other way? Within the department how do you structure your policy towards particularly an ASEAN regional forum meeting?

Mr Potts —The best way of answering that in a sense is to say that the year has an annual rhythm and it really comes to the fore in July for PM&C and the ARF meetings. Typically, what you have over the three months before is a huge amount of consultation. I was going to say intra-departmental consultation, but it is wider than that, especially on questions like the ARF. That would involve Defence obviously, but also PM&C and Treasury to the extent that some issues have economic dimensions and so on. There is a reasonable discipline to the approach that we bring and it is done on a fairly hard-nosed and forensic basis, especially given the way that the year develops.

Mr SINCLAIR —Who sponsors that? Is it done by DFAT or does PM&C say, `We've got an ARF meeting.' Will these departments meet together? Do they have an inter-departmental committee that gives their input? Is that the way it is done?

Mr Potts —It is certainly a DFAT responsibility and within DFAT it is the South and South-East Asia division that has the prime carriage and my branch in particular.

Mr SINCLAIR —There are issues at the moment in, for example, the migration field. We always have worries about what is happening with a few of the minority groups in Myanmar, where they are and what is happening to them. Do you get migration in? Who makes those decisions, or do you worry about your own people with UNHCR who tell you what is going on? How do you handle those issues that are not perhaps directly involved, but are very much behind the security concerns we have?

Mr Potts —We try to do it on a whole of government approach, especially when we are doing the annual briefs for PM&C and the ARF. We seek briefing contributions from a wide range of departments. It goes beyond that in a sense. If we do detect that there is a thematic issue which goes across most of the region, we will call ad hoc meetings and so on with, for example in this case, the department of immigration to talk through how we approach a particular issue. In fact, probably in most areas of DFAT we spend a lot of time on consultation with our colleagues in other departments.

Mr SINCLAIR —I have two other questions. Firstly, ASEM, the Asia[hyphen]Europe Meeting, has slipped to the back burner because of Europe's attitude towards Myanmar. What is your current position on ASEM?

Mr Potts —It is probably a little unfair, at least from the way the Australian government approaches it, to characterise it as slipping a bit onto the back burner. The position remains the same from our perspective: that we are very interested. We have applied to join on the Asian side of ASEM and that remains our wish. It is subject to a consensus and there is not yet a consensus. We take suitable opportunities of reminding the existing membership on both sides of our view, including those that we sense are not 100 per cent convinced of our claims.

We see it as a process that may not yield fruit next year at London, although that has been our short-term objective. But certainly we see it as an important national interest, one that we are going to continue to promote, but at the same time it is not one that we are going to put at the top of every foreign policy agenda.

Mr SINCLAIR —It was suggested that we got some support from a few countries, and Japan in particular, but that Mahathir might even accept our joining ASEM, providing the East Asia Economic Caucus concept was allowed to proceed. Is that still on the drawing board, or is that just waiting in the wings?

Mr Potts —It is certainly the case that we have had some very valued support from good friends—mainly in the existing ASEM membership—and they have been helpful, and in many cases assiduous, in reiterating our case to their colleagues in their meetings within ASEM.

As regards Malaysia, I do not know that it has ever been put in the sense of, `We will be more accommodating towards you, if you are more accommodating on EAEC.' We

certainly do not have that sense at all. Rather, what the Malaysians have been saying to us is, `We understand where you are coming from and in our minds, it is not a question of if, but when.' We are waiting, in a sense, for them to try and cross that mental barrier from the `if' to the `when' stage.

Mr SINCLAIR —I know Barry was always very keen on forward planning, but has the department sat back and thought, `Twenty-five years hence do we want to belong to ASEAN? What relationship will be there be between the South Pacific forum and ASEAN? Where is Papua New Guinea going to be?' Have you sat there and had a bit of a navel gaze? If so, could you enlighten us on what you reached?

Mr Potts —I do not know that we have done it in more than an overall conceptual basis. The starting point for looking ahead in our foreign policy and the way we see the white paper, that looks 10 to 15 years out. We certainly do have informal brainstormings with the department from time to time. But, because of their imprecision and because you are dealing with a very volatile environment in the zero to 25 range, I am not sure that the results of those brainstorming sessions give much to inform current policy options.

Mr SINCLAIR —Surely, that is what you do with your strategic bases paper, and you have just completed it.

Mr Potts —Yes, that is certainly the case.

Mr SINCLAIR —Why can't you tell us where you are at in your non-strategic area? Somebody needs to look and say, `If this happens, this will happen.' You have got all sorts of predictions; we all know those. I just wanted to get an idea of where all of you saw it happening.

Mr Potts —Your problem in this is where you say, `That one thing might happen and then this will happen,' but, when you are looking at the probability for the first thing happening, you only give it a relative possibility and the more imprecisely you go out from there the less you have something on which you can base much in the way of hard-edged forward planning.

We do have a policy planning unit, which operates within the executive secretariat of the department. They spent a lot of time in the formulation of the white paper in particular. The other area of the department which does a fair amount of forward planning is the strategic assessments branch in the defence area. They obviously work very closely with the Department of Defence.

ACTING CHAIR —You would remember the celebrated remarks of Dr Mahathir about George Soros and the extent to which the decline of the Malaysian economy had been as a result of his direct speculation. Nevertheless, one could imagine that, given the circumstances, there could be people who stand to benefit by the deterioration of and also

by a rapid appreciation of the various currencies. Is there much evidence since the decline and since the deprecation that speculators are interested in driving the rates down, looking towards a recovery later on? Has much work been done on it?

Ms Fayle —I think you probably have to ask Treasury officials. That is moving a little bit more into their area than ours. Certainly there has been a feeling that the markets have overly punished some economies when you look at the whole range of macro-economic fundamentals, as well as the finance sectors in those economies. There are a number of published articles and papers around to suggest that the markets have overshot and there will be some coming back. I would imagine that speculators have played a role in that to the extent that it is true, but we do not have any detailed information on that sort of activity.

Mr Heseltine —Indeed, what to do about that kind of situation is on the agenda at the meeting in Kuala Lumpur today and tomorrow. There is a sense that what you are talking about is happening and that there is a lack of transparency about how all these things occur.

Mr Richardson —A critical role of anyone investing in any market is when to sell out and buy back in. That is a perfectly normal function and that is quite separate from what I think you might have been implying in your question.

ACTING CHAIR —Okay. We have been told that Mr Hartcher has been delayed. He was going to follow at 11.30. We can either keep on talking or we could adjourn for half an hour or thereabouts unless people are bursting to ask anything more. We might adjourn and I think we will probably have to have a ring-around when Mr Hartcher arrives. Thank you very much and I look forward to our continuing.

[12.32 p.m.]