Australia and the Region

"Australia and the Region"

Speech by the Hon Alexander Downer, MP, Minister for Foreign Affairs, to the MTIA Conference "How The Asian Economic Turmoil Will Impact On Your Business", Melbourne, 28 November, 1997.

Introduction

Thank you for the invitation to address you today.

As you know, Australia has a longstanding policy of commitment to the Asia-Pacific region, a policy which goes back as far as the Second World War.

In recent years we have seen the region which is our own go through a period of unprecedented growth achieving prosperity never dreamed of fifty years ago. We have ourselves done well out of the region. Last year, for example, we ran a $17 billion dollar trade surplus with East Asia.

It is hardly surprising in that environment that Australian politicians and commentators have spoken enthusiastically about the need for Australia to engage with - or even enmesh with - Asia. Indeed in recent years the rhetoric has been so strident in support of what is essentially a motherhood proposition that we have at times given the impression we are begging to be embraced by Asia. It seems to me, though, that trying to share in the fruits of our region's success was never going to be the real test of our regional credentials. It was simply an obvious and incontestable strategy.

The test has come now: as Asia wrestles with the coincidence of economic and environmental difficulties, where is Australia?

Well, the answer is, we are right in there helping, thereby proving for the first time in many years that we are no fairweather friend. In fact, proving we are a partner and a neighbour for the long haul.

The thousands of words of enthusiasm for Asia issuing from the mouths of national opinion formers are worth nothing when compared to the practical actions we have taken in recent months decisively to change Australia's image from something close to regional mendicant to a regional mate.

I have been quite struck by the positive impact among Asian ministerial colleagues of our decision to join the Thai and Indonesian IMF packages and our positive sentiment towards helping Korea. There has been a similar response to our quick and effective assistance to Indonesia and Malaysia to help deal with drought, fires and smoke and to the enormous effort we are putting in to achieving peace in Bougainville and, admittedly to a lesser extent, peace in Mindanao in the Southern Philippines. This has been a watershed period in Australian foreign policy.

Against this background today, I specifically would like to look first at the current regional economic situation, second at what that may mean for Australian business and third what regional cooperation is emerging to minimise the risk of such turbulence recurring.

PART ONE: The Current Regional Economic Situation

What we have been seeing in South East Asia and, most recently, in Korea is the financial markets' response to overheating in these economies and inadequate financial sector controls. South East Asia's slowdown in export growth in 1996 exposed the unsustainable current account positions for several of these economies and weaknesses in their financial sectors.

Currency and asset price realignments followed.

The response to these developments, while occurring at different rates, has generally been to embrace greater liberalisation and tighter financial standards as the only antidotes to financial market instability. Therefore there is a two-stage process which will help over time to lift the South East Asian economies. First, there is the immediate increase in export competitiveness which comes from lower currency values. Second, I am confident regional economies will also improve the operation of their financial markets.

The Government is heartened by the strong commitment both Indonesia and Thailand are now showing to implement the difficult measures which will restore economic health. We also welcome President Ramos making clear his commitment to liberal economic policies in Hong Kong last month.

While it is still too early to make accurate predictions about the impact of these recent financial realignments on South East Asia's real economy, there is little doubt that we will see less rapid growth in the next year or so than the 7-10 per cent per annum which we have become accustomed to in the region. The Asian Development Bank is forecasting a slow down in South East Asian growth from 7.4 per cent last year to somewhere between 4.9 and 5.7 per cent in 1997 although this of course is no guide to developments in individual countries.

The Government is also monitoring very closely recent developments in the currencies and markets of North East Asia and, in particular, Korea.

The decision by Korea at the end of last week to seek assistance from the IMF was not one taken easily by a country which has prided itself - for very good reasons - on strong economic growth for many years now. It is, however, a positive sign that the Korean Government recognises the further reforms and market liberalisation which must be put in place. It is now more important than ever that Korea takes the difficult steps necessary to ensure that its financial sector operates on an efficient and transparent basis. The failure this year of a number of the conglomerates, or chaebols, due partly to a lack of appropriate prudential controls has helped precipitate the current difficulties.

For our part, as I have already said, we stand ready to contribute to the IMF package which is being put together to assist Korea. Precise details of the package are not expected to be known for some time as an IMF team has only recently arrived in Korea and is still assessing what steps should be taken.

Significantly we should be careful to keep recent developments in perspective and give due weight to the medium to long term outlook.

In that context I want to use this forum to reaffirm unequivocally that the Government retains its confidence in East Asia's fundamental strengths. We cannot overlook its strong resource and population base; high savings levels - extraordinarily high by global standards; investment in human capital; and commitment to budgetary rectitude.

The Government's judgement is therefore that the region will weather these storms. The White Paper on Foreign Affairs and Trade concludes that East Asia, representing over a quarter of the world's economy, will remain a regional and global economic powerhouse.

It was a judgment which took into account the broader picture over the next fifteen years and it was a judgment which emphasises that policy must be directed towards the medium term rather than responding to the swings of a day's markets.

Over the next fifteen years the abundance of investment opportunities created by an industrialising region will mean relatively high levels of growth will continue.

The challenges that recent currency developments pose for East Asian economies are the challenges of managing success and growth. The globalisation of financial and business markets has offered huge opportunities for internationally competitive economies. It has enabled massive capital flows to assist in countries' rapid development. But equally, economies have come under increased global scrutiny and reputations are no guard against the rapid-fire decisions of the market. If financial markets are unhappy with the policy settings and decisions of national governments then investment capital can be withdrawn quickly.

Australia has fared well in this environment. We have put our fiscal house in order and have inflation and interest rates in as good shape as they have been for decades. This puts us in a good position to weather any short term economic slowdown of our regional neighbours. Indeed were we still running a $10 billion budget deficit then there can be no doubt that the Australian economy would be less well equipped to deal with the current developments within the region.

PART TWO: Potential Impact on Australian Business

There will inevitably be, however, some impact on Australian trade and investment interests. But it is too early to reach sensible conclusions about its magnitude.

It is important to note that some two-thirds of our exports to East Asian economies are unprocessed primary and intermediate capital goods which go into Asia's exports. Further, ASEAN's and Korea's currency devaluations should, before too long, lead to increased demand for their exports. But we can expect to see some negative effects at the other end of Australia's product scale - for example, luxury and other value-added exports - although our goods will have become even more competitive against some other countries' goods as our own currency has now depreciated against the US dollar.

I am aware that some Australian exporters have suffered a decline in orders. However in overall terms, I am encouraged by what I have been hearing from the Australian business community.

Like the Government, the private sector takes a medium to long term view of the region and its markets. Successful business plans always take into account alternative scenarios, and not even the most pessimistic forecasters are expecting less than a healthy return to robust growth in the medium term. Indeed, the recent round of devaluations has made entry for investors in the region far less expensive and we are hearing from a number of businesses that they are considering setting up representative offices at this time.

There are also other positives for Australian business. For a start, Australian companies currently importing essential items such as business and office equipment from East Asia can expect a windfall cut in costs. Moreover, there are a number of benefits likely to flow on from the moves in the wake of the currency realignments to deregulate economies further.

In Indonesia in particular, the package of measures agreed to with the IMF is likely to have some direct benefits for Australian business.

In broad terms, the proposed regulations and guidelines covering private sector involvement in the Indonesian economy can be expected to create a simpler operating environment which should benefit Australian traders and investors. In addition, lower tariffs and the removal of non-tariff barriers, together with the commitment to reduce Indonesia's export taxes and barriers may benefit Australian suppliers of intermediate goods.

Moreover, the relaxation of restrictions on product distribution and - from 2003 - the permission for direct retailing by foreign companies could benefit Australian industry. There should be efficiency gains from the simplification of distribution, and companies exporting to Indonesia should have greater opportunities to establish their own distribution networks.

Also in Thailand, the opening up of the financial sector to greater foreign investment can be expected to yield benefits for Australia's world class financial institutions.

Last week in Korea we also saw some very positive developments for Australian business as an unexpected spin-off of Korea's need to ensure that its exports become as competitive as possible.

On 19 November the Korean National Assembly approved 182 tariff reductions - unilateral cuts which contribute to Korea's meeting its APEC commitments - and these will become effective from 1 January next year.

The major reductions of benefit to Australia include reductions from 5 to 3 per cent on raw sugar, reductions from 2 to 1 per cent on wool and wool tops, and one percentage point reductions on a range of non-ferrous materials. The reduction for sugar alone, our largest agricultural export to Korea in 1996/97, will be worth around $6 million to Australian cane growers. For wool and wool tops, the tariff reduction to 1 per cent will benefit the Australian wool industry by around $1.5 million.

In short, while there are clearly some negative effects for Australian business flowing from the region's current turbulence, there will be some opportunities thrown up in these circumstances. I know that Australian business will make the most of these.

PART THREE: Regional Cooperation to Address the Problem

I have said that the region's return to robust economic growth will depend on governments putting in place liberalising economic policies. And that the Government has been heartened by the way in which regional economies are now approaching economic reform.

Another heartening development is the commitment by APEC Leaders to cooperating on a regional basis to try to minimise the risk of such turbulence recurring. This week at the APEC leaders' meetings - the region's premier economic forum - we have pledged ourselves together with a number of our neighbours to examine ways in which Asia Pacific economies could further strengthen regional cooperation and surveillance to enhance financial stability. This would add to APEC's ongoing work program promoting stronger, deeper and more efficient domestic financial systems.

The agreement to explore further avenues for cooperation followed on from the statement of the Asian and Finance Central Bank Deputies in Manila last week which included a number of useful recommendations on ways to do this while recognising the central role of the IMF in the international monetary system.

The APEC Leaders' meeting also sent a clear message to the global community about the underlying strength of the region's economies and APEC's commitment to push ahead with economic reform in line with Bogor targets.

In particular, APEC leaders endorsed the decision by Ministers to accelerate trade liberalisation in fifteen sectors, many of which will bring tangible benefits for Australian exporters.

Of particular importance for Australian industry are proposals in the food, chemicals and energy sectors. Australian exports of food products to APEC covered by our proposal amount to around $A3.4 billion. The energy and chemicals sector will provide particularly early benefits for Australia as these are two of nine sectors where implementation is expected to begin in 1999. These are major items in Australia's trade, with export of coal and natural gas - two sectors targeted for liberalisation under our energy proposal - worth around $A5.9 billion. Even in the case of coal where trade is relatively open, tariffs on some regional economies are still as high as 20% and Australian exporters can be expected to achieve greater sales in the region once they are removed.

Indeed, we are well placed to benefit significantly from liberalisation in a number of the 15 targeted sectors - these include, in addition to those I have already mentioned, fish and fish products, gems and jewellery and environmental goods and services.

The success of last week's meetings underlines the important role APEC has played and continues to play in encouraging regional economies to continue to pursue the mutually beneficial path of economic liberalisation. The currency instability of recent months has, in fact, underscored the need to continue to pursue appropriate financial and economic policies.

The AFTA-CER linkage is another important regional economic forum contributing to the regional economy by strengthening commercial and economic ties and reducing impediments to increased trade and investment flows. The Ministerial consultations held in Kuala Lumpur on 17 October 1997 were valuable in further strengthening and expanding the trade facilitation agenda and dialogue process.

I would like to take the opportunity today to applaud the MTIA's clearly demonstrated enthusiasm and commitment to the AFTA-CER linkage. The MTIA has been actively bringing together a very impressive and broadly representative group of industry associations and business councils to identify and further Australian interests. I certainly encourage the MTIA to continue its considerable efforts to engage ASEAN business leaders in this process.

Conclusion

I would like to conclude today by reiterating the Government's confidence in the region's medium to long term growth prospects. The Government's White Paper on Foreign and Trade Policy - Australia's first ever - released in August this year, identified the ongoing rise of East Asia as an economic and political force as one of two key trends shaping Australia's regional and global future. That assessment stands.

The magnitude of the impact of financial movements is significant but it needs to be kept in perspective. Clearly there is a message for East Asian governments. It is equally clear, however, that the prospects for our regional neighbours remain strong and it would be a mistake to underestimate their resilience.

Australia's commitment to East Asia and its future is unequivocal. Our participation in IMF packages for Thailand, Indonesia and now, possibly, Korea, is hard evidence of that commitment.

Our participation is in the region's interests.

It will also help open markets for Australian business.

It will help bring greater transparency to the region's finance sector.

And it will help Australia's standing as a stable regional leader.

It is therefore squarely in our own interests.