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"The Asian crisis: economic analysis and market intelligence": address to the Melbourne Institute



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Speech by the

Minister for Foreign Affairs The Hon. Alexander Downer MP

to the

Melbourne Institute Conference

"The Asian Crisis: Economic Analysis and Market Intelligence"

Australia’s Future in the Asia Pacific:

Cooperation, Economic Reform and Liberalisation

The University of Melbourne

8 May 1998

(Check Against Delivery)

Australia’s Future in the Asia Pacific: Cooperation, Economic Reform and Liberalisation

Speech by the Hon Alexander Downer, MP, Minister for Foreign Affairs, to the Melbourne Institute Conference - "The Asian Crisis - Economic Analysis and Market Intelligence", The University of Melbourne, 8 May 1998.

Introduction

Thanks Peter for your introduction.Distinguished Guests. Ladies and Gentlemen.

it is pleasure to be in Melbourne, and to have the opportunity to address this Conference. I want to thank the Melbourne Institute of Applied Economics and Social Research for the invitation. The Institute is Australia’s longest standing university research institute in the field of economics.

The list of speakers for this Conference is impressive, and includes distinguished academics and commentators from Thailand, Indonesia, Korea, Singapore and Malaysia - as well as the World Bank, and, of course, Australia. I want to extend a special welcome to those who are visiting Australia from overseas. I hope you have a chance to sample some Australian hospitality beyond

the Conference sessions.

Globalisation means that no nation is an island in the world economy. Australia must make the global economy work to the advantage of its national interests, as must every other country in the region. This was one of the most important conclusions reached by the landmark White Paper on Foreign and Trade policy released by the Howard Government last year.

The Asia Pacific region has been tested thoroughly by the East Asian economic crisis, but it has held together well. The fundamental economic and security architecture of the region is in good shape. Stronger bilateral relationships, effective regional cooperation through APEC, and the implementation of IMF assistance packages, are all laying the groundwork for recovery over the longer term. ■

But sustained regional recovery depends on maintaining the momentum for economic reform and liberalisation. Countries in the Asia Pacific must continue to work together closely to ensure that the economic crisis does not de-rail this vital reform and liberalisation process.

If the reform process is de-railed or stopped, the region will not emerge from the current difficulties for a long period of time. This message is well understood by the Asia Pacific’s political leaders, but it needs to be understood more broadly in the region.

I know that several Conference speakers this morning have touched on a variety of key issues - from the economic outlook for individual countries, to broader questions of transparency and good governance. And the papers delivered this afternoon will discuss the impact on Australia and the implications for business strategy, among other topics.

My purpose today is to provide a brief overview of the Australian Government’s perspective on the economic crisis, and our practical assistance to help affected countries maintain stability and return to growth. I will also focus on the Government’s determination to push ahead with economic reform in Australia and improve the nation’s global competitiveness.

Part One: The Regional Outlook - Maintaining Economic Reform and Liberalisation

East Asia’s economic difficulties have focused the international and regional spotlight on serious underlying problems in the financial sectors of some of the regional economies. It is clear that the

development of these sectors failed to keep pace with the spectacular inflow of capital and resources which fuelled the East Asian ‘miracle’.

I have said several times in recent months that the crisis could be prolonged - and a return to prosperity delayed - if four events or factors came into play :

. If the countries subjected to IMF packages failed to fulfil their commitments;

. If the Japanese economy entered a very deep recession;

. If the Chinese Yuan is devauled significantly; and

. If there was a resurgence of protectionism in the region and the United States.

But I believe there is cause for optimism that the region can avoid these pitfalls.

First, as I said a few moments ago, the key to the region’s recovery - short and long term - lies in domestic economic reform and continued trade liberalisation, leading to freer and more open markets, and renewed investment in the region.

That is why implementation of the IMF packages in Korea, Thailand and Indonesia is so important. It will help boost international market confidence in the region’s prospects. We are already seeing positive international market reaction to the implementation of the IMF programs in Korea and Thailand. The currencies of these economies have appreciated by around 25 percent this year. This reflects an improved perception of the prospects for these economies and growing investor confidence.

This is also the clear lesson from the experiences of Latin America in the late 1980s and early 1990s and more recently the Mexican experience in 1994-95. The Latin American economies, with the help of the IMF and others, were able to put their financial systems on a sounder footing, and hasten their return to economic growth.

It is important to recognise that the economic strengths which made East Asia highly attractive to global investors over the last two decades have not vanished - high savings rates, an increasingly . skilled and educated workforce and a dynamic business environment are still part and parcel of the economic framework. I believe that these strengths will contribute to further strong growth once the current storms are behind us.

Second, Prime Minister Hashimoto’s 190 billion dollar stimulatory package should help stabilise the Japanese economy and lift it out of recession. Even modest growth in Japan - the world’s second largest economy - would be a boost for the region.

A sustained recovery in Japan will depend, however, on full implementation of the package’s additional measures - strong promotion of economic structural reform and mere rapid writing-off for bad loans. A critical issue for the region will be the extent to which the Japanese economy continues to de-regulate and open up to the region’s exports. The implementation of commitments already made by Japan in this area will be very important.

In addition, while Japan’s economic difficulties have limited its capacity to provide a growing market for Asian exports, Japan’s sizeable contribution to East Asia’s recovery - about USD 42 billion - has been a vital component of the global assistance effort. It underlines Japan’s on-going commitment to the region. I believe that Japan should get much more credit and

acknowledgement for the size and quality of its contribution to assisting regional countries affected by the economic difficulties.

Third, the Chinese Government remains strongly committed to ensuring that the Yuan is not devalued. And China is determined to achieve key market-oriented reforms in its state-owned enterprises and financial sector, including the banks.

And fourth, there has not been a resurgence of protectionist sentiment. The recent OECD Ministerial Council Meeting - where Australia was represented by the Assistant Treasurer, Senator Kemp - reaffirmed the commitment of all OECD countries to maintaining and further opening access to their markets. On the other hand, it is true that a risk remains - if the US current account deficit blows out - that protectionist forces may gain new adherents in the United States.

Significantly, APEC continues to play a very important role in maintaining the momentum for reform and liberalisation. The APEC meeting in Vancouver last year showed the way forward - it was a timely ‘vote of confidence’ in the region.

The Impact on Australia

Australia has weathered the regional economic storm relatively well. Next year, Australia will still be one of the fastest growing economies in the industrialised world. And Australian businesses are committed to the region for the long haul - they are anything but ‘fair-weather friends’.

The Australian economy’s high level of regional integration means the economic and financial instability affecting key Asian markets is affecting Australia’s export growth. Two key points emerge from the latest trade data.

First, export growth to East Asia is slowing. In the nine months to March 1998 - compared with the same period to March 1997 - Australia’s total merchandise exports increased by 13.4 percent, whereas exports to East Asia increased by only 8.7 percent. But, when considering these figures, it is worth bearing in mind the significant differences between various markets in East Asia. For example - in the same nine month period, our exports to Indonesia were down 4.6 percent, while those to Japan increased 16 percent.

Second, the impact of the crisis on Australian industry varies from sector to sector. Some sectors, like tourism and the live cattle trade have seen significant falls. Others, like mining and telecommunications have experienced continued strong growth.

This suggests that Australian exports which provide intermediate goods used in the production of exports by East Asian countries can be expected to perform better than goods which take the form of consumer products. This is because East Asian countries recognise the need to trade their way out of their current economic difficulties.

In any event, it is important to remember that East Asia still accounts for over 55 percent of Australia’s exports. Regardless of shorter-term growth prospects, the East Asian market is 18 times larger than the Australian market, and imports around USD1.4 trillion worth of merchandise each year.

A strong domestic economy here at home, plus growing demand from the large United States and European Union markets, as well as other markets in the Middle East and South Asia - in which we are now more competitive - should help offset the impact on Australia of slower exports to East Asia.

To minimise the negative impact, the Government - in close consultation with the private sector - is refining our trade strategies in Asia and beyond. We are ensuring the availability of appropriate levels of trade credit and insurance, through the short-term National Interest insurance cover for exports to Korea and Indonesia.

The Government is also providing information and identifying opportunities through Austrade’s Asia Crisis Centre and Internet site, with alerts and advice updated weekly. We are also holding ‘exporter summits’ at which industry representatives can discuss directly with Ministers, the impacts on Australian firms and how the Government can assist.

Part Two: Australia’s Practical Commitment to the Region

For Australia, our success - the generation of jobs and investment - is tied inextricably to the region’s success. Australia can achieve a great deal in its own right, but our prosperity can only be secured in the longer term if the region we live in is dynamic and growing. That is why Australia must continue to be an active and thoughtful member of the Asia Pacific.

Australia is responding to the region’s ‘SOS call’ by demonstrating what I have called ‘regional mateship’. Over the past few months, Australia has been a resource for the region to draw on. We have deployed our assets in ways that strengthen the region.

It is a contribution that is in Australia’s national interest, but also something we want to do as an ‘all-weather friend’ to the region. And it is a contribution that is attracting the genuine support of the overwhelming majority of Australians. Australia and Japan are the only two countries to have contributed to all three IMF packages - for Thailand, the ROK and Indonesia.

Australia is also providing practical aid and assistance to individual countries to help alleviate the negative social impact of the crisis. In particular, Australia is lending a helping hand to Indonesia in its time of trouble. The financial crisis in Indonesia has been compounded by prolonged drought. This is having severe repercussions for Indonesia’s poor, who are facing unprecedented unemployment and - in some areas - serious problems with purchasing food.

Australia’s humanitarian response to help Indonesians now totals almost AUD 50 million. This is in addition to our on-going aid program, our support for Indonesia’s IMF package, and our contribution of up to AUD 900 million in trade insurance cover. With international responses mobilised, and a clear economic reform program in place, there is light at the end of the tunnel for Indonesia.

Two weeks ago, in Thailand, Prime Minister Howard announced a 25 percent increase in our aid to Thailand for the next two years, over and above the increase I announced last December. He also indicated Australia would continue to provide development assistance to Thailand beyond 2001 when it was due to be phased out. Australia is also providing ‘preventative’ assistance to other

countries in the region with a view to helping avert similar crises in the future.

As part of my most recent visit to the region last month, I announced an increased pledge for bilateral aid to Vietnam. Over the next four years, Australia will provide AUD 236 million to Vietnam. Earlier this week, I also announced an increased four year, AUD 56 million aid pledge to Laos. This will help Vietnam and Laos manage the economic and social effects of the crisis.

More broadly, I think it is fair to say that Australia’s long-standing presence in the Asia Pacific has attained a new stature and maturity as a result of the Government’s practical deeds and actions in recent months - especially our timely and well-focused assistance, and robust advocacy on the region’s behalf.

That is why I believe that future historians will view this period - the years 1996 through 98’ - as a historic turning point in Australia’s engagement with the Asia Pacific. They will see these years as the time when Australia ceased being the region’s ‘demandeur’, badgering its neighbours for attention and recognition, and became a genuinely close partner and regional friend, in good times and in bad.

The Aid Advisory Council: Harnessing Australia’s Knowledge and Expertise

In particular, the significant human impact of the economic crisis in the Asia Pacific has underlined the enduring importance of Australia’s aid program. The program is a clear expression of Australia’s strong regional and international commitment. It reflects the fundamental values which

lie at the heart of Australia’s humane and principled approach to foreign and trade policy.

Australia’s aid program already draws upon the remarkable reservoir of ideas and insights available in the wider Australian community. However, .1 believe there is ample room to expand the discussion of aid and development issues among Australians with diverse backgrounds and a wide experience of life - as recommended by the Simon’s review of the aid program last year. This will benefit the planning and delivery of Australia’s aid, and make it even more effective and results-oriented.

That is why I am delighted today to announce the establishment of the Aid Advisory Council. This new Council will comprise a panel of distinguished and highly qualified Australians working in the business world, academic life and community agencies. It will advise me on a wide range of issues affecting Australia’s aid program.

I see the Council as a significant and practical innovation in Australia’s aid policy. It will complement and strengthen the work undertaken by two other key Councils established by the Government - the Foreign Affairs Council and the Trade Policy Advisory Council.

The Aid Advisory Council will harness the extraordinary knowledge and expertise possessed by Australians from all walks of life, and put this national resource to work in the service of our national interests.

Part Three: Lifting Australia’s World Competitiveness: Waterfront Reform

Finally, I want to emphasise that Australia has been in a position to help the region only because the Government took the necessary steps to put our domestic economic house in order.

Over the past two years, the Government has undertaken major reform of the Australian economy. This has improved Australia’s ability to assist the region from a position of strength. And this national strength is widely recognised throughout the regional and world economy.

The Australian Government’s disciplined economic management over the past two years - including its concerted attack on Labor’s budget deficits - has led to the lowest interest rates in Australia since the 1960s, and continuing good economic growth.

The Government is maintaining the momentum of economic reform in Australia. We are pushing aside inflexible and inefficient work and business practices, reforming the labour market, reducing the burden of regulation and paperwork for business, and improving efficiency in infrastructure services. We are committed to reforming Australia’s increasingly outmoded and ramshackle taxation system.

We want to see Australia become, after Tokyo, the second great financial centre of the Asia Pacific region. We are building on our policy framework to develop Australian industry, as outlined in last year’s Investing for Growth industry statement. And we are the first Government to have appointed a Minister for the Information Economy.

The results of this comprehensive and sharply-focused reform effort are already clear. Australia has moved up from 18th to 15th in the annual world competitiveness ranking released two weeks ago by the International Institute for Management Development in Switzerland.

The survey found that Australia’s best competitiveness gains have been made in government and finance, including public sector efficiency and stock market dynamism.

The Director of the Survey, Professor Garelli, said -- Australia is seeing the results of reform of its government structure and development of its Asian strategy. We are seeing business confidence that the Government is more efficient and realistic. It is a kind of awakening of Australia. It has triggered new -

strengths for the Government and we are seeing the results.

One key factor in enhancing Australia’s global competitiveness is to ensure that its ports - the gateways to the nation’s trade - are operating at internationally competitive standards.

This is vital to realising the direct economic benefits that flow from improving our trading potential, and also has a real impact on the overseas perception of Australia as a reliable supplier.

We only have to look around the region to see that there is significant scope for improvement in the performance of Australia’s waterfront. Our stevedoring sector, in particular, is characterised by higher charges, lower productivity and less reliable service delivery than comparable operations at overseas ports.

The Australian Government is committed to reforming the waterfront by addressing the need for greater competition in the industry, and more flexible workplace arrangements. It is essential for Australia to have productive, efficient and reliable ports that contribute to economic growth, job

creation, reduction in foreign debt and greater opportunities for small business.

Conclusion

I want to conclude with the thought that the last eight-to-nine months has been a watershed period for the Asia Pacific, coming after many years of unprecedented economic growth and increasing regional confidence.

But - with a strong commitment to follow through on economic reform and liberalisation - the region will return to an impressive growth track, and the fundamental strengths of the Asia Pacific will drive new gains in productivity and competitiveness.

I am convinced that - 40 to 50 years hence - our successors in government, business and academic life will look back on the late 1990s as a period when the closer regional relationships and deeper mutual understanding forged in adversity laid the basis for renewed regional dynamism and vitality in the new millennium - the Asia Pacific century.