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JOINT STANDING COMMITTEE ON FOREIGN AFFAIRS, DEFENCE AND TRADE (Foreign Affairs Subcommittee)
Relations with ASEAN
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JOINT STANDING COMMITTEE ON FOREIGN AFFAIRS, DEFENCE AND TRADE (Foreign Affairs Subcommittee)
Relations with ASEAN
ACTING CHAIR (Mr Barry Jones)
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Table Of ContentsPrevious Fragment
JOINT STANDING COMMITTEE ON FOREIGN AFFAIRS, DEFENCE AND TRADE (Foreign Affairs Subcommittee)
- Committee front matter
- Committee witnesses
Mr BARRY JONES
- Committee witnesses
Mr BARRY JONES
ACTING CHAIR (Mr Barry Jones)
- Committee witnesses
ACTING CHAIR (Mr Barry Jones)
Content WindowJOINT STANDING COMMITTEE ON FOREIGN AFFAIRS, DEFENCE AND TRADE (Foreign Affairs Subcommittee) - 01/12/97 - Relations with ASEAN
ACTING CHAIR (Mr Barry Jones) —In the absence of the chairman, I declare this meeting resumed. This is the final public hearing of the inquiry being conducted by the Foreign Affairs Subcommittee of the Joint Standing Committee on Foreign Affairs, Defence and Trade into the development of ASEAN as a regional association and Australia's relationship with it.
We prefer that all evidence is given in public, but should you at any stage wish to give evidence in private you may ask to do so and the subcommittee will consider your request; that would mean it would not then be recorded by Hansard . It used to be the convention that the committee required people to give evidence on oath. That is no longer the case, but I still have to warn the witness that these hearings are legal proceedings of the parliament and, as you know, the parliament takes its own hearings very seriously—
Mr Hartcher —What is the value of a journalist's oath, though!
ACTING CHAIR —Anyway, they have the same status as proceedings of the House itself. Peter, thank you very much for agreeing to speak to us. If you would like to give an introductory statement, then we will have questions.
Mr Hartcher —Sure. Journalists, as you know, generally focus on the short term and the immediate, so I thought I would take the luxury of this appearance to step back from the entire regional economic circumstance—
ACTING CHAIR —Incidentally, I should have interpolated that you are currently Senior Editor (Asia-Pacific Affairs) of the Australian Financial Review and have written extensively on this area. I am sorry I did not put that in.
Mr Hartcher —That is all right. There is a big remarkable profound phenomenon that has been going on world wide that is remarkably undiscussed and unnoted—that is, the return of the former communist world into the global market economy. The return over the past decade or so of China, India, Vietnam, the Eastern bloc and Russia itself has brought a tremendous new supply of labour and productive capacity into the world market. These are blocs and areas, as you know, that were locked out of the global market economy for most of this century, and they are back.
To make their way in the global market economy, what mechanism are they using to get through? It is a heavy dependence on exports. The first chart that I have supplied gives you a look at how, particularly in the most recent couple of years, industrial production almost worldwide has been increasing faster than has real consumer spending.
In other words, we are looking at a global glut. Everyone is madly pumping out exports, yet domestic demand is not growing fast enough to keep up with that pressure. This big new surplus of global productive capacity that has come onto the market in the past 10 years has been also compounded by some of the big rich countries with their own problems of stagnation and economic reform: most notably, Japan—which despite a decade of rhetoric has been absolutely unable to do anything to stimulate domestic demand—and Europe, another tragic failure of reform that we know all too well.
As to the combination of these events, the second chart shows some IMF numbers which summarise what has happened to global trade, both in volumes of trade and in the prices of trade. If you have a look at the 10-year averages columns, you will see that in the past decade, basically in the 1990s, the average growth rate of world trade in terms of volume has increased. But the value of that trade and the rate of price increase has fallen away very sharply because, although there is a lot more trade and it is growing faster, there is also much more competition, and this is taking the inflationary urge out of the system.
This goes a long way towards explaining the deflationary or disinflationary trend that has now taken hold in economies around the world, including in our own, and it is much remarked in the US. People are still grasping to understand the cause of it, but this is a very profound trend and movement. There is a tremendous pumping out of new exports from the former communist countries, of course, in addition to the tremendous export growth that the rest of Asia and the other market economies were already producing. You have got that going on at the top level as the overarching trend.
Then we come down to South-East Asia. Let us have a look at what has been happening there. The boom in South-East Asia, already a decade old, was starting to come under strain in the past few years. The third chart challenges the fallacy that Asian companies are inherently efficient. You can see that, for five of the eight countries in Asia, excluding Japan, for which there was a five-year history, earnings per share for corporations in those markets were actually falling or failing to keep up with the economic growth rate. In other words, the companies in these markets were not extracting value from the growth surges that they were riding; they were quite clumsy surfers on the wave of Asian economic growth, and that performance had been getting steadily worse as years went by.
Even while that was going on, while corporate returns on shareholder funds were declining, the capital kept pouring in. The fourth chart is a summary of total funding in-flows to ASEAN countries for this decade until 1996. There is far too much detail for anybody to comprehend quickly, but it shows that funding from all sources into ASEAN economies over those six years was running at an average compound annual growth rate of 19 per cent. At the same time, nominal economic growth in these countries was only 13 per cent. So there was a funding flow, year after year, which was six per cent faster than economic growth. It was no wonder you had a liquidity glut and no wonder you had all
this money swishing around in the system looking for somewhere to go. Declining investment returns on top of that produced an economic boom that was starting to look pretty tatty through its own performance and the maturity of the expansion phase in South-East Asia.
Then two things happened to put the entire show under particular duress. There was a double whammy. The first was in 1994 when China—which had been, as you know, gradually re-entering the market economy and relying very heavily on export growth to drive its economy—devalued the renminbi, and there was a de facto devaluation of 25 per cent. Chart No. 5 shows the real effect of exchange rates of China versus ASEAN over the decade since 1986. For 1994, when China devalued but the ASEANs did not, you can see quite a sharp effect: the ASEANs' exchange rates were roughly stable.
So the Chinese bought themselves a huge competitive advantage. They cranked up their export growth tremendously as a consequence of that. China was having 30 per cent export growth annually averaged over the years following that devaluation. So, at the bottom end, the cheap end of the market making cheap toys, cheap textiles, cheap electronics and all that sort of stuff, you have a big new competitive pressure from China.
The second part of the double whammy came from another devaluation, a much undernoted one, in Japan. The background to the Japan devaluation, which has turned out to be far more profound that anyone could have imagined—
ACTING CHAIR —Which year was that?
Mr Hartcher —In 1995. Japan got itself, as you know, into a combination of economic stagnation and financial system distress. In 1995, in the throes of a severe banking crisis, the Japanese went to the Americans. Specifically, the guy nicknamed `Mr Yen', Mr Sakakibara from the Ministry of Finance, went to Larry Summers at the US Treasury. They had studied together. They had a long personal relationship. And now they were interlocutors across the bargaining table.
Larry Summers said, `We are tremendously worried about your banking system, and your banks hold $US400 billion of US treasury bonds. We are worried that they are going to sell them to try to fix their tattered, battered balance sheets at home.' Sakakibara said, `Look, there is a solution. You help us to devalue the yen. The yen has been far too high, making it difficult for our exporters. If you help us to devalue the yen, we will be able to export our way back into growth. With that growth, we will use the opportunity to restructure our economy and grow our banking system back into health.'
The Americans sent a team of treasury officials to Tokyo to examine the situation, discovered that it was in fact as severe as Sakakibara had described, and launched a joint and very successful program of monetary policy and money market intervention, effectively to push the yen down quite sharply. The yen, since its peak in that period, has
now fallen almost 60 per cent. This is obviously a very big devaluation. Why is that important? Why is that significant for Asia?
Pick up the sixth chart and look at those three charts at the top of the page. They correlate movements in the yen and US dollar exchange rate with Japan's investment in the region and, below that, overall economic growth in Asia, excluding Japan. What you can see there—and this data is from Nomura Securities, by the way—is a remarkably close degree of correlation. When the yen gets stronger, Japanese companies—in order to avoid the high cost of production at home—invest more in South-East Asia and China; hence the second chart. When the yen goes up, they rush overseas and set up more factories overseas. The scale of this is almost unimaginably large. In the past decade, on average, Japan has been shifting one per cent of its manufacturing base offshore. It is the equivalent of relocating the entire economy of Singapore every year. It is the exchange rate that drives that.
The other factor that kicks in is that, when Japan's exchange rate goes up and its competitiveness therefore declines because its goods become more expensive to the rest of the world, this is a competitive fillip for its competitors in the region, most notably Korea and Taiwan, but it assists everybody directly and indirectly. It assists all of Asia to grow faster. If you look towards the end of those charts, in the final year, 1995, with the yen-dollar exchange rate, because of the deal between the ministry of finance in Japan and the treasury in the US, when the yen rate fell, it also slowed the rate of Japanese investment in the rest of Asia and punished the overall economic growth rate in Asia.
What you have got is this double whammy, with the Chinese devaluation operating to undermine the competitiveness of ASEAN exports at the lower end of the spectrum, with the Japanese devaluation operating at the same time setting up the stresses with declining foreign investment and a declining overall growth rate in the region. That is why you suddenly get this tremendous pressure on the South-East Asian economies, capital flows out, and you get de facto devaluations. We are now in the acute phase of the crisis that we have all read about in recent months. I will not bore you with the detail there because you know it far too well and, in any case, it is a short-term dislocation.
There will be continued pressure on South-East Asia because the knock-on effects that it has transmitted north will rebound back to the south. There are many interconnections. For example, South Korea, which is now, as you know, in the hands of the International Monetary Fund, accounts for around a third of all the overseas foreign debt held by Indonesian companies.
As a consequence of the problems with South Korea now, South Korean banks are going to be much less willing to refinance or even sustain that lending to Indonesia, therefore there is going to be more financial pressure on Indonesia as South Korean banks retreat, and ditto with Japanese banks. There are many of these interconnections and knock-on effects that will continue to keep South-East Asia under not just the existing
pressures, but new pressures as the crisis worsens in North Asia. The pressure is going to stay on.
The other sitter that has not really been perceived yet, but I think it is going to be in the coming months, is the pressure that South-East Asia is now putting on China. We talked before about how the 1994 devaluation from China had put pressure on South-East Asia, and now it is coming full circle. About $US40 billion worth of China's exports every year compete directly with South-East Asia's exports. Therefore, that $US40 billion in Chinese exports is now directly under pressure from the devaluation of the currencies in South-East Asia.
An autonomous slowdown has been going on in China for the last couple of years. One measure of that deflationary urge has been that corporate profits of listed Chinese companies have fallen 75 to 80 per cent over the last two years. Real interest rates have gone from zero to about nine per cent, and we have just started to see in the data from China, zero inflation—in fact, falling inflation—in the latest monthly figures, plus we have seen GDP growth falling from 9[half ] per cent to eight per cent in the last quarterly numbers. That trend will continue into next year. Chinese growth domestically will continue to slow.
At the same time, the Chinese are going to be taking pressure on their exports because of the pressure from South-East Asia. If you have a look at the seventh chart I have supplied there, you will see what the devaluations have done to affect the comparative costs of labour. This is just one other measure of the pressure that China is now applying to South-East Asia.
Until now, China's wage costs have been far cheaper than everybody else's on the chart. You will see that now it is comparable with Indonesia's. They are very much in the same league. That is a partial indicator, but it is an important one. It is another indicator of the pressure that China is going to come under. We can certainly expect a serious slowdown in China's growth next year, and possibly another devaluation of the Chinese currency next year.
The big picture consequence of what is already happening in Asia and the global consequences show up in the eighth chart I have supplied you, which accounts for where growth in the world economy has been coming from in the 1980s and the 1990s. As you can see, Asia has supplied roughly half of all growth in the global economy in the last decade. That has now been punctured. That is the global significance of what has just happened in the Asian markets. It is the puncturing of the biggest single impetus for growth in the global economy. We have mentioned some of the direct consequences of the Asian crisis. There is a big global consequence that is going to have indirect effects on everybody, including keeping further pressure on South-East Asia.
When we get through the adjustment though, I would suggest to you that ASEAN is not in a dreadful position to re-establish itself and to reassert its competitive strengths.
First of all, it has had the benefit of a large currency devaluation. Secondly, some of the economies will have the benefit of getting their backside smacked by the International Monetary Fund.
The fastest growing region in the world at the moment is Latin America. The last chart I have given you compares ASEAN's economic fundamentals with Latin America's. You will see from that that on every measure, ASEAN's fundamentals are actually much better than Latin America's. In the acute phase of a financial crisis, fundamentals do not matter very much because investors only want their confidence to be massaged, and they really do not care about fundamentals. But after the acute phase passes, fundamentals do matter. You will see from that that South-East Asia ultimately is probably in a pretty strong position to make a competitive return, or a return to the competitive international marketplace.
That is all I wanted to say by way of introduction. If there is anything else you would like to know, I am happy to answer.
ACTING CHAIR —Thank you very much, Peter. If I can venture, as Tim Fischer would say, a bit of obiter dicta, it would be to say that I am sorry we did not have you at the beginning of the round rather than at the end because you have tossed up more provocative issues that we really need to pursue with many of the people who sat in that chair before you.
I will hop in first with a couple of questions. How do you feel about the IMF bail-out in Indonesia and Thailand and, in particular, Australia's involvement in it? Does it follow from what you were saying earlier that you think that the infrastructure is strong enough and the broad thrust of where they are going is strong enough to make it seem a worthwhile investment, both in the medium and long term? How do you react to the bail-out?
Mr Hartcher —Overall, I think the policy is absolutely right. Australia spent the first 150 years of white civilisation on the opposite end of the earth to the main centres of commerce and industry. The rise of Asia reverses that liability and makes it an asset. We are sitting on the cusp of the world's major growth area. In the medium term, I think that both in South-East Asia and North Asia the growth will return. Therefore, if you think that that is the case, you really have no alternative but to support these countries in times of crisis, quite apart from the fact that we happen to live in the region. I think the policy of supporting them through loans, which are after all interest bearing, is pretty hard to challenge.
—It has been said in terms of foreign aid, especially into the Asian region, that the Australian government has not been strong enough in trying to tie its aid programs with some product that we might be able to provide, as other countries do. It is not a good neighbourly thing to do. But then at the same time, the currency exchange with
Thailand and the financial bail-out of Indonesia and the possible bail-out of Korea, another very good trading partner, obviously sees us in a very good position to be a good neighbour.
Do you think that Australia and the Department of Foreign Affairs and Trade, especially the trade area, have the tenacity to go in there and really drive a hard bargain and say, `Well, we are doing all these good things and we want you to reconsider your position in terms of our trade'? As I said earlier today, for some strange reason, as few as the exports are that come out of New Zealand, New Zealand has, I suppose, more prominence in terms of what they are doing than does Australia.
Mr Hartcher —The first point is that the $US1 billion that the federal government has pledged to Thailand and to Indonesia is already supplied on IMF conditionality. The Australian funding is supplied on IMF conditionality, so there is already a fairly stringent set of guidelines and conditions attached to that. What you are suggesting, if I read you correctly, is that we go beyond that and try and attach other conditions, or at least—
Mr DONDAS —Is there a danger?
Mr Hartcher —In the acute phase of the crisis it is probably a tricky thing to try to do, to extract further concessions to go with your participation in a larger bailout. I think possibly there are other things that could be done at the same time. One small example was in the automotive sector. There was an Australian trade mission to Thailand a few months ago. As a consequence of that, of the 14 companies on the mission, six have come out with significant new business from that mission. Three are now building new manufacturing facilities in Thailand and the other three now have major distribution agreements with Thailand. Many millions of dollars worth of business are going to be generated by this. Why? Because they thought to go to a country in the middle of a crisis rather than run away from it. Secondly, taking a longer term view on the prospects for Thailand, they discovered that there was a lot to be done. Thirdly, they found that other investors and other countries and other people were running away from the place because there was a whiff of crisis.
I lived in Japan for a long time. I was a very bad student of the language, but one thing I did learn is that the kanji character for crisis is made up of two symbols. One of them says danger and the other says opportunity. As you are saying, this is a good time to look at the opportunity end of the equation. I do not know if there is much more that you could prudently try to extract directly and immediately through emergency credit support, but I think probably creatively and proactively there is a lot more that Australian industry could do in conjunction with Australian officialdom, which this automotive mission was actually a model for, to exploit what is going on.
—There is a perception in the electorate that says we are giving all this and we are not getting enough back for it. I suppose in another respect it is up to us,
and our ministers and our department of trade, to be sending more groups, more missions to this area almost on a weekly basis just to get the message across that we are close by and do not forget about us. That is the subtle way of doing it.
Mr Hartcher —I think so.
Mr DONDAS —In another area which I have asked some questions on this morning, the construction industry throughout Asia has been one of the mainstays in terms of its economic development. In Indonesia today, as I understand it, there are something like 2.5 million unemployed construction workers and that figure is to rise to about four and a bit million by this time next year. What is the likely impact that is going to have, not only for Indonesia but also for its neighbours?
Mr Hartcher —Are you talking about the construction sector or the general phenomenon of unemployment?
Mr DONDAS —The flow-on from the collapse of the construction industry because of the currency crisis.
Mr Hartcher —Right. As you know, if you look across international experience over some years, it is quite a regular phenomenon. Australia had its big property bust in the late 1980s. In fact, we had many of the elements of this crisis. We had a forced float of the dollar, a devaluation, a banking crisis and a property crisis, so much of this is familiar ground. For Australia, it is just a question of magnitudes. You are right. Massive surplus capacity is still coming on stream in a lot of ASEAN economies. There is a property bubble developed in Hong Kong; another one is about to burst in Shanghai. New buildings are coming on the market with only 50 per cent occupancy rates. But I think the evidence is that it is a classic cyclical thing that these things have busts and then they recover.
There is one long-term historical symbol that I like to refer to sometimes. When the Empire State Building first opened in 1932, it was nicknamed the `Empty State Building', and regarded as a national joke because it had no tenants in it. There was even a spire on the roof of the building, which was designed for balloons to tie up to, as the next big thing was balloon travel. The building was a joke but, as we all know, when the Americans recovered from the Depression, it went on to become a symbol of American strength and pre-eminence.
On the real estate industry as a particular sector, I do not think there is any long-term lesson to be drawn from it, except that in any business cycle you get a classic cluster of all the bad decisions being made at the end of the cycle when confidence is higher. I think it is just a symbol of that.
The unemployment question is a whole different kettle of fish and could be quite
serious. As you know, Indonesia needs seven per cent economic growth every year just to keep unemployment stable. They are going to get much less than seven per cent economic growth over the next couple of years. That has serious consequences for unemployment, particularly among young people. Economic rates at below that level, both for Indonesia but also for other countries in ASEAN, probably rate as a political shock and may have social and political consequences.
Mr DONDAS —It is something to watch in the next 12 months.
Mr Hartcher —Sure. If I were a leader of an ASEAN country, I would be very concerned about the unemployment consequences.
Mr PRICE —IMF packages involve, as I understand it, balancing the budget, cutting public expenditure, et cetera, which is a good budgetary approach. What are the structural changes? Are there any structural changes being imposed by the IMF package?
Mr Hartcher —They are insisting on better surveillance mechanisms and disclosure mechanisms for the financial system, which could end up being one of the better things that come out of this entire correction. Beyond that, there is not a great deal of structural repair. In terms of structural issues these economies are quite peculiar. If you look at the classic check list of warning signs applied when a country is heading into a major crisis, many of the major ones were not flashing for these countries. For example, the classic and No. 1 on the IMF list is fiscal deficit. Mexico had a fiscal deficit. Countries often have major government deficits when they fall over. These countries all had robust fiscal positions. That is simply to make the point that in some of these key structural areas there was not much repair needed.
A lot of the other structural change that is going to be needed has to come from governments and industries themselves. One of the encouraging things about the outlook for ASEAN is that the countries in the region realised, even before this happened, that their competitiveness was under strain. The ASEAN secretariat commissioned a major study, which has not been published, on the competitiveness of member economies. Mari Pangestu at the Centre for Strategic International Studies coordinated it. It was quite interesting. It found that each country in ASEAN had to do more to trade its way up the value-added food chain. This work was all being done before the crisis broke out. That is where the burden of structural change is going to have to come from. The IMF will make some structural improvements and repairs but, at the end of the day, it is going to fall on these governments to do it themselves.
Mr PRICE —What is your relatively short- to medium-term view of the impact of this crisis on the Australian economy?
—Over the next couple of years, it just has to be a considerable negative. Of all new Australian exports over the decade to 1995, 77 per cent went to Asia.
That made Australia uniquely dependent on Asian exports. Australia was more dependent on our exports to Asia than any country in the world, including the countries of Asia. When you are uniquely dependent on something, then you become uniquely—
Mr PRICE —Hooked.
Mr Hartcher —Hooked, exactly. Even though growth in our economy at the moment is being driven from the domestic side rather than the export side, there have to be consequences for our balance of payments next year and probably early in the year after, and that has to be a negative. There are just no two ways about that. As you know, Australian officialdom has been desperately trying to avoid acknowledging that there are any serious negative consequences through a remarkable series of bureaucratic constructs in the way that they have defined the problem.
ACTING CHAIR —Yes, we heard some this morning.
Mr Hartcher —Did you?
ACTING CHAIR —Yes.
Mr Hartcher —It is just a nonsense to put the problem in a little box and say, `But only 10.7 per cent of our exports go to the four ASEANs, therefore that is the maximum consequence.' As one of those last charts I showed you demonstrates, having punctured the main source of global growth, you cannot walk away from that and pretend nothing is wrong. Directly and indirectly, there are going to be consequences for our balance of payments next year.
The overarching problem is going to be that all of these economies are depending on exports to pull them out of their difficulties. If there is a future devaluation in China, they are going to be looking to exports to pull them out of their difficulties. The big question then is where the exports will go. There is really only one strong demand spot in the world economy to keep buying all this stuff, and that is the US.
The question then becomes: what is the tolerance in the US for massive increases in trade deficits over the next one or two years? You then hit a political question about the tolerance of the Congress, essentially. I hope that the congressional outlook is more enlightened than what we saw on the fast-track vote the other day, because the mood is obviously pretty ugly based on Clinton's failure to get fast track.
I was there a couple of months ago and NAFTA was such an unpopular concept and the concept of free trade had been so badly damaged by NAFTA that it has done a lot to discredit the concept of free trade. The global economy is going to be looking to the Americans to mop up all these exports and help absorb the output that is supposed to lift these economies back into growth. A key question globally is: how big will the American
trade deficit get and how much will the Congress tolerate?
Mr PRICE —We are called the lucky country. As you say, we are sitting on the cusp of the greatest growth area in the world, yet we get economic hardening of the arteries every time we bounce a bit higher than 3[half ] per cent or 4[half ] per cent growth. I know the Financial Review has its own economic agenda in terms of micro-economic reform and cheaper wages, but do you see that it is impossible for Australia to get beyond that level of growth? What is your view on that and how would you go about it? If not, why not?
Mr Hartcher —The problem I have with this subject is that it is not my subject, and I have no particular expertise in it, so I would rather leave that to the people who do. I know something about the Asia Pacific, but—
Mr PRICE —Okay. Part of the inquiry is looking at Australia's relationship with ASEAN and the way ASEAN is developing as an institution. You have given us the economic interlinking points, but probably not more of the social links. Could you offer a view there? Your audience has walked out by the way. I am just showing you how loyal I am.
Mr Hartcher —I think the unemployment consequences and the possible social unrest that may result in South-East Asia are a liability for regimes in the region. I had a Malaysian politician trying to explain to me recently that anything below five per cent economic growth for Malaysia was a serious political problem if it lasted for anything longer than about 12 months.
The next sort of threshold of disruption in these economies is just how much those economic effects turn into politico-social effects. I think it depends on how long their problems go on. If it is a one to two-year phenomenon, as most economists think it is, then they can probably escape with minimal damage to the regimes everywhere, perhaps except Thailand. If we are talking about a five[hyphen] or six-year adjustment, then I imagine there would be political upheaval everywhere.
ACTING CHAIR —Unfortunately, we will have to wrap it up. It has been extraordinarily interesting. Could I just put one question to you? I was in Japan a couple of months ago and I noticed that there was some extreme scepticism in Japan—and this was before the Japanese economy was looking a bit more shaky—about whether the Chinese economy would continue to effortlessly grow and grow. They thought there were too many inherent structural problems in it. The idea that by the year 2010 it would be the world's leading economy, really was not likely to be met. If the Japanese view is correct—and I would be interested in your view on that—and if the Chinese economy starts to overreach itself and those structural problems occur, does that give a fresh chance for ASEAN to expand?
Mr Hartcher —Because of that overlap in productive output between the two regions, yes, any deterioration in Chinese competitiveness does assist ASEAN competitiveness. What is the medium-term outlook for the Chinese economy? As I mentioned earlier, in the short term they are going to have a serious growth slowdown. I would not be surprised if this time next year that people were not talking about three, four or five per cent growth for China, which is a halving or more of China's recent growth.
That will probably crystallise other problems they have. The biggest potential problem they have is their banking system where, even by the admission of the People's Bank of China, there is a 20 per cent non-performing loan ratio in the banking system. Even Thailand only has 15 per cent non-performing loans. So there is a massive problem in the banking system waiting to happen. When growth gets sufficiently low, that threatens to crystallise those problems in the banking system and then you have a credit crisis.
What happens if you have a credit crisis? As you know, it is the equivalent of an economic heart attack and credit cannot circulate. That would exacerbate the whole thing and you would probably get a one- or two-year dislocation in the Chinese economy. If it did move beyond that to become a political or social issue, then all bets would be off and you would have to have a thorough re-examination. Prima facie, you have to say that China will have a slowdown, an adjustment and perhaps a banking crisis but then move beyond it.
It maybe gives ASEAN a couple of years breathing space, but it still does not absolve ASEAN from the need in the medium term—as their own studies have shown them—to restructure and move up the value added chain. Singapore did exactly that 10 years ago when the last recession hit ASEAN. It was the first time they had negative growth in 20 years. It was an opportunity for them to sit down and say, `Hell, we have completely overlooked issues like productivity and value added technology, so let's do more about it.' If the rest of ASEAN draws the same conclusions from this slowdown, then it will serve them well.
Mr PRICE —Do you see institutionally—not as individual member countries, but the institution—ASEAN changing in any way in the next 10 or 15 years?
Mr Hartcher —In ASEAN or China?
Mr PRICE —In ASEAN.
Mr Hartcher —That is an extremely good question. At the moment, institution building is a catchcry in several of the ASEAN countries, particularly Indonesia, where institutions are perhaps weaker than they are anywhere else. The only two national institutions, as you know, are the army and the Muslim groups, and you need more than that to run a country.
ACTING CHAIR —And the family.
Mr Hartcher —And the family, that is right. I do not know what sort of outlook there is for the family as an institution beyond the longevity of the head of the clan. There the cry for institution building and institution strengthening—which is obviously necessary for the country—has become identified with opposition to the regime. It is an unfortunate blockage to the development of institutions. Elsewhere in the region, in the countries that need it most, such as Malaysia, Thailand and the Philippines, it is difficult to see any immediate progress in institution building occurring in any of those countries for a different set of reasons.
ACTING CHAIR —It has been extraordinarily interesting. As I say, my only regret is that we did not have you right at the start rather than at the end, because it might have had a serious effect on some of the lines that we pursued.
Mr Hartcher —I got here as soon as I could.
ACTING CHAIR —You will be sent a transcript of your evidence on which you can make corrections of grammar, fact and spelling.
Mr Hartcher —I will leave that to the Hansard reporters.
ACTING CHAIR —Thank you very much to Hansard and to the thousands of witnesses who have appeared before us.
Resolved (on motion by Mr Price):
That, pursuant to the power conferred by section 2(2) of the Parliamentary Papers Act 1908, this subcommittee authorises publication of the evidence given before it at public hearing this day.
Subcommittee adjourned at 1.16 p.m