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East Asian transformations: challenges for Australia: Australian Institute of Exports, International Exportors' Summer School, Parliament House, Canberra, 23 February 1998: speech.


Professors Garnaut and Drysdale, Mr Long Yongtu, China's Vice-Minister, Ministry of Foreign Trade and Economic Cooperation, Dr Narongchai, Chairman, Seranee Holdings, Mr Malcolm Bush, Chairman, Australian Institute of Export, the Hon. Nick Greiner, senior business figures and other distinguished guests.

I am very pleased to be able to represent the Prime Minister here in addressing you this evening.

East Asia is undergoing a major transformation.

There can be little doubt of that given the magnitude of the changes now taking place.

However, I am convinced that what we are seeing in the region is economies being transformed for the better under the intense pressure of truly global economic forces.

There is no doubt that there is considerable pain associated with the transformation process.

But out this economic crisis should emerge a new Asia which will be more confident, more mature, and liberal and democratic.

We all the new Asia can emerge as quickly and smoothly as possible.

To do so, it will be necessary for it to avoid a number of potential stumbling blocks along the way.

Tonight I would like to address: first, the nature of the region's current economic difficulties and its long-term prospects; second, the importance of the economic reform process as well as the pitfalls the region must avoid; and third, what this all means for Australia and what the Government is doing to address the situation.

PART ONE: The Outlook for East and South Asia

Despite recent regional events, Australia remains firmly of the view that the East Asian economies will continue to be of growing importance over the next 10-15 years.

The economic strengths which made East Asia the darling of global investors over the last two decades will not disappear - high savings rates, an increasingly skilled and educated workforce and substantial infrastructure. These will all contribute to further strong growth once the current storms are behind us.

However, the financial difficulties which began last year have brought into sharp focus serious problems in some of the economies' financial sectors. Several countries had been unable or unwilling to carefully supervise their financial markets, had maintained protective barriers against international competition and had failed to break down domestic monopolies.

These arrangements contributed to imprudent lending.As a result, resources were misdirected into poorly performing sectors, and we now see high levels of corporate debt around the region - especially in Indonesia, Korea and Thailand. Difficulties in servicing that debt have, of course, been compounded by the massive asset price and currency devaluations of the last few months.

To their credit, most economies in the region have demonstrated over the past few months a preparedness to address the problems which had caused international investors to mark down their currencies and their stock exchanges.But the continuing financial instability reflects questioning in the markets about the commitment of some governments to carry forward the necessary economic reforms.There is still for example a need for Indonesia to project its reformist credentials to the market place.

I visited Jakarta last month and met senior Indonesian Government ministers and officials, including President Soeharto. This gave me a chance to observe first-hand the difficult situation they are facing and how they are dealing with the crisis.

During that visit I reiterated Australia's view that fundamental reform was vital for Indonesia's future. Implementation of these measures - which represent a substantial liberalising of the Indonesian economy - is an essential step towards restoring investor confidence and economic recovery in Indonesia. Many reforms have been made and the government in Jakarta deserves more credit than it is getting for making those reforms.

Indonesia has particular problems. Restructuring private sector debt will have to be addressed case by case because most corporate lending was direct to business not through the Indonesian banking system. Where Indonesia will have to be careful is in how it deals with the ongoing volatility of the rupiah. The proposal to establish a currency board has clearly not met with market approval. On the other hand, while Australia supports the IMF package, the IMF needs to be sensitive to the need for political stability in Indonesia. Measures which generate widespread unrest will weaken not strengthen the capacity of the Indonesian Government to reform the economy.

Thailand was prepared to take some very bitter economic medicine last year and as a result seems to be turning around some of the difficulties which it faced.

Although Thailand is facing recession and the worrying social consequences a recession brings, Thai leaders and decision makers have had some success in regaining the confidence of the market. The Thai Government is made up of many capable ministers. The expertise they are bringing to the management of the Thai economy as it shifts through this difficult period is, I believe, recognised by the markets.

South Korean President-elect Kim Dae-Jung has made a strong start in addressing his country's economic problems and in implementing the IMF program. Indeed, there is now increasing confidence that Korea is taking the difficult measures needed to restore the country to solid economic growth within the next few years.

This has enabled Korea to negotiate recently a roll-over of short term debt, thereby easing immediate liquidity problems, and has resulted in international credit rating agency, Standard and Poors, upgrading Korea's credit rating to BB+.

Looking at the three countries which have been most affected by the crisis - and which have had to call in the IMF - it is hard to escape the conclusion that political uncertainty has been a significant contributor to economic instability. As long as question mark remained over who would lead the country, in both Thailand and Korea, markets were reluctant to invest. Following resolution of these questions, however, comparative financial stability was restored.

We certainly hope, therefore, that - once elections have been held in Indonesia - a clear direction for the future leadership will have been established, encouraging a restoration of market confidence.

When we look at the region as a whole, in the short term we are clearly facing a period of instability and uncertainty.

Businesses groaning under the weight of debts incurred in a foreign currency suddenly made many times more expensive by currency depreciations, are already closing up or laying off staff. The resulting increases in unemployment will add to the pressure being experienced by regional Governments.

Certainly, the short-to-medium term growth prospects of our major regional partners will be reduced, especially Korea and the ASEAN economies. An interim IMF assessment of the world economy released last December provided some indication of the likely magnitude of this slowdown.

Growth in the ASEAN- 4 (Thailand, Malaysia, Indonesia and the Philippines) is forecast to slow from an average of 7.4 per cent in 1996, to 4.0 per cent in 1997 and 1.7 per cent in 1998. And growth in the 'Newly Industrialising' Asian economies (Hong Kong, Taiwan, Korea and Singapore) is projected to slow from 6.4 per cent in 1996 to 6.2 per cent in 1997 and 3.6 per cent in 1998.

Of course, these forecasts are highly speculative and may be subject to significant revision as developments unfold in the region. For instance, the IMF estimate for ASEAN-4 growth in 1998, has been revised downward by about 3.75 percentage points since October 1997.

We do not, however, expect the significant downturns seen in the region to flow on substantially to China or South Asia - which I know are issues this conference is also examining.

There are four reasons that point to China not being drawn into a currency spiral similar to the one we have witnessed elsewhere. They are China's strong external economic position; its heavily managed exchange rate; the non-convertibility of the yuan on the capital account; and the fact that its financial system is not deeply integrated with the region.

Moreover, China can expect its exports to hold up reasonably well because it has a more diverse range of exports than its neighbours and competitive labour costs. Only seven per cent of Chinese exports compete directly with South East Asian exports, one of a number of factors which will limit the impact of sharpened price competition from South East Asia.

The South Asian economy also has so far remained relatively insulated from East Asian financial market instability. On my visit to Pakistan and Bangladesh this month, I had a good opportunity to discuss the issues with key Ministers and officials. I was very pleased to note that these countries are very keenly aware of the need to move forward with appropriate economic reforms. I was able in Pakistan, for example, to agree to fund part of a Board of Investment study into impediments to foreign investment.

So it is our expectation that the turmoil we have seen in much of East Asia can be contained although, clearly, there will be reduced prospects in the short-to-medium term for much of the region.

The recent IMF forecasts I referred to earlier do, however, give an overall prognosis for East Asia which sees a return to sustained growth after a 2-3 year slowdown, bolstering our own view that Asia will rebound.

PART TWO: The Importance of Economic Reform and Liberalisation

There is one important fact we can be certain about - the outlook for a return to growth in particular countries will depend on governments throughout the region remaining committed to implementing economic reforms.

Staying the course on economic reform and liberalisation is important if the region's economies are to emerge stronger. Policy reforms and deregulation leading to freer and more open markets will provide the impetus for strong and sustainable growth.

There are several potential stumbling blocks for the region on its road to recovery.

I believe there are four key issues which the region must confront this year as it looks to turn around the very serious situation the regional economy faces.

First, it is vital that the broad objectives sought by the IMF support packages be put in place to shore up the currencies and markets of Indonesia, Korea and Thailand are implemented. The IMF has certainly prescribed some relatively tough measures but these aim to ensure that those three economies have appropriate and tight fiscal policies. They should ensure that the financial sectors in those economies are restructured; that the banking systems become much more transparent; and that finance sectors are subjected to much tighter supervision than has been the case in the past.

But I think the point that we all need to remember is that the changes going on represent essential restructuring which had to take place at some stage. In other circumstances it might have taken place over a much longer period of time than will now be the case. But they must take place to ensure the long-term viability and strengthening of those economies.

Second, regional economies will be looking to Japan, as the largest economy in the region, to absorb much of their exports. The current downturn in the Japanese economy and the slowing down in domestic consumption over the past few months does not help overcome the economic problems in East Asia. Obviously, any measures taken by the Japanese government to further stimulate domestic growth will be important and would be most welcome.

But perhaps even more important is that Japan speeds up the process of opening and internationalising its markets by accelerating economic reform and deregulation. In the end, the extent to which Japan is able to take in competitively-priced imports will depend on the barriers confronting those imports. The connection between increased imports and liberalisation has been clearly demonstrated: over the past few years, Japanese imports have been growing at 6 to 7 times the overall rate of economic growth.

While the Japanese government's reform program has stimulated import growth, at the same time it has improved Japan's overall competitiveness and provided the basis for sustained growth in the medium term. Japan has an opportunity to show real leadership and set an example to the rest of region by taking further bold steps to open up its markets and to ensure that the operation of its financial markets is truly accountable and transparent.

The third issue I want to raise, and I am glad to be able to do so with Vice Minister Long here tonight, is the need for stability in the yuan. I recently received assurances from Vice Premier Li Lanqing, whom I met in Europe on my visit there last month, that there was no intention to devalue the yuan. This decision is extremely welcome. Were China to devalue, another round of regional depreciations might follow. This would set back further the restructuring going on in the rest of East Asia.

Fourthly - and finally - it is vital that the region 'nips in the bud' the recent signs of neo-protectionism. Of particular concern is what has been happening in the US. The Clinton administration's failure to obtain fast-track authority from Congress towards the end of last year raised fears of the US abandoning the trade-liberalising path which has served it and the region so well.

I hope the administration has more success when it makes its next attempt to obtain the authority. The regional currency devaluations could have serious implications for the US's trade deficit - the blowout could be up to $60 billion in the coming year.

A worsening trade deficit would generate political pressure to succumb to neo-protectionist arguments. Were the US to abandon liberalisation - and put in place barriers to Asian exports - we could find ourselves in a perilous spiral of protectionist manoeuvring which could only be self-defeating.

I remain confident, however, that we have enough wise and level heads in the region to avert the pitfalls I have mentioned. If regional economies can stay the course on liberalisation and economic reform, then the region's long term prospects are good. The more quickly reforms are adopted, the more quickly we will see the problems of financial and currency instability resolved.

Regional cooperation is also an important part of achieving practical solutions for East Asian instability. The APEC meeting in Vancouver last year showed the way forward on liberalisation and reform. It represented a timely 'vote of confidence' in the region. Moreover, East Asian economies' commitment - even with their current difficulties - to reform in the WTO financial services negotiations concluded in December represented an important regional response to the crisis.

Australia will also be involved in further high-level regional and international efforts to address the region's economic difficulties over the coming year. In that respect, Australia has already demonstrated that it believes in the region's future. The fact is we have contributed over $A4 billion dollars to the three IMF packages.Apart from Japan, we are the only country to be involved in all three packages.

Moreover, we have given particular help to Indonesia in its time of need. When I visited Jakarta last month I announced a new package of aid measures which, inter alia, will provide Indonesia with much-needed technical expertise in its financial sector.

By backing the region in this difficult time we've shown that Australia is no fairweather friend. We are here for the long haul.

PART THREE: What the Australian Government is Doing

Australia is able to offer assistance to its neighbours because we are better placed than others to weather regional financial instability. The Government has ensured that our economic fundamentals are in place for sustained, low inflation, job-creating growth. What's more, we have addressed what was a very significant problem. Two years ago Australia was running a budget deficit of around 10 billion dollars. Next year we will be in surplus.

At the same time, we have been improving the competitiveness of the Australian economy. We have implemented reforms in the financial sector, industrial relations, business regulation, telecommunications, and the transport and energy sectors. The outlook for economic growth in Australia in 1997-98 remains as forecast in the 97-98 budget - 3.75 percent. And growth for 1998-99 is forecast at 3.25 percent.

The reduction in the 98-99 forecast is due largely to the impact the Asian slowdown will have on our exports, but our domestic economy is growing strongly. With over 60 per cent of Australian exports going to the region it's hardly surprising that we will see some adverse impact, but the full impact on our exports is not expected until well into 1998 due to the nature of trade and financial contracts.

But, as I have said, we have already factored that in to our 1998-99 growth estimate. We are already seeing some softening of overseas demand for Australian services such as construction, tourism and education, and exports of live animals and horticulture. Some Australian companies are already feeling the effects of cancelled or deferred business deals in South East Asia.

The trends will become more visible as markets settle down but I am pleased to say that several factors are likely to soften the impact on Australia. For example: continued strong growth in the US; an expected pick-up in Europe; and continuing strong domestic growth and demand. The appreciation of other currencies against the Australian dollar gives Australian exporters an advantage over their US and some European counterparts.

I should also mention the positive aspects of recent developments for Australian business.

Market entry is generally cheaper during a downturn - due to less competition and lower establishment costs. The expected falls in asset prices will offer significant investment opportunities either in new ventures or expansion of equity in existing joint ventures. In addition, the ongoing market liberalisation will create new opportunities for Australian business.

The Government nevertheless recognises that it has to act to support exporters in what will clearly be a difficult time. Asia will remain our most important market despite slower import growth. The Government has already begun implementing a number of measures to assist Australian companies improve sales to Asian markets in more difficult circumstances.

The Government aims to ensure that appropriate levels of trade credit and insurance are available to assist Australian firms maintain our vital trade with the region. We have enhanced EFIC's capacity to provide insurance cover for Australian exports to Indonesia and Korea - setting aside $300 million for Korea and looking at Indonesia on a case-by- case basis.

The Government's strong focus on facilitating the best trade outcomes for Australia exporters extends well beyond East Asia For example - during my visit to South Asia which I mentioned a few minutes ago - I found that the prospects for improved trade and investment are good.

In Pakistan, I launched the new Australia-Pakistan business forum - and opened the Australian Honorary Consulate in Karachi - two developments which will help Australian exporters in practical ways to take up new opportunities in Pakistan.

In Bangladesh, one of the most immediate and tangible outcomes from my visit was the signing of an agreement between the Government of Bangladesh and an Australian Company - Asia Energy Corporation - to take over BHP's license to a coal deposit in the north of the country.


Let me conclude by reinforcing an important message which I believe Australian business should heed at this difficult time.

At first glance, the immediate future for certain Asian economies looks somewhat gloomy, but the world would be foolish to write Asia off.

The extraordinary skills and qualities which people in the region have worked hard to acquire - including their strong savings habits, their emphasis on education, and the upgraded infrastructure which has been put in place over the last two decades - will help bring about the recovery as appropriate economic and financial policies are put in place.

Recent events herald a genuine transformation which should in the long term be beneficial for the region, and for Australian business.

I want to emphasise that there are unprecedented opportunities now for Australian business in the Asia Pacific as markets are liberalised and institutions reformed.

That is why it is important that Australian business not walk away from the region when the going gets tough.

The businesses that take advantage of these opportunities now, and remain committed to the region, will reap the greatest and most enduring rewards - better market share and new profits - when the markets improve and Asia recovers.

Those businesses will be far better placed than their competitors and colleagues who chose to walk away from the Asia Pacific and then had to battle their way back into the market.

Long term goals - and the courage and creativity to work those goals in practical ways - are as indispensable in business as they are in government.

I want to assure you that the Australian Government will continue to keep its eye on long term outcomes while implementing realistic and tightly focused policies to meet short-to-medium term challenges.

As the record clearly shows, we will continue to be deeply engaged with the development of the Asia Pacific.

It is in Australia's most profound national interests to do so, and this engagement is vital to Australia's future.