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Introduction - the changed economic and political landscape in Asia
Its now just over a year since the significant depreciation of the Thai baht heralded the beginning of the largest challenge to economic prosperity in our region since the Second World War - the East Asian economic crisis. In some countries the economic woes have impelled political changes that are almost as significant - and it is likely that it will be some considerable time before all the consequences of the crisis, economic and political, are fully revealed.
The region has suffered seriously from a loss of international investor confidence. We saw collapses in asset markets in Thailand, Indonesia, Korea, Philippines and Malaysia, and significant capital outflows. Few countries in the region have remained immune from major currency depreciation.
The significant depreciation exacerbated pre-existing financial problems in Thailand and Indonesia, with foreign debt growing to unmanageable levels. The IMF's subsequent intervention in Thailand in August, and Indonesia in October 1997, saw the implementation of policies aimed at stabilising currencies and introducing further economic reform. In Indonesia's case, equivocal implementation of reform has led to further currency instability.
The prospects of an export-led recovery in individual countries in Asia are complicated by the region's reliance on intra-East Asian trade - which makes up around 50% of total East Asian trade - and the extent to which these countries compete with one another in other export markets.
The impact on real economies throughout the region of this turmoil is now becoming clear, with forecast growth rates falling and unemployment rising. Many of the countries in our region will see their economies shrink this year - at the lower end, Malaysia, with a decline of perhaps 3%, up to Indonesia, which may see a fall of 15%.
These difficulties are felt all the more deeply in countries that had become accustomed to high annual rates of economic growth. And perhaps that disappointment is feeding into the political arena - we've already seen the Government fall in Thailand and President Suharto resign in Indonesia. And economic problems have figured prominently in elections from the Republic of Korea, to the Philippines, and to Japan.
Clearly an event of this magnitude also has the potential to affect the security of the region. Prosperity by itself does not, of course, guarantee peace, but in many countries in our region internal stability and order have been underpinned by economic growth. And as the economies of the region have grown and become more integrated, this has helped reduce the risk of conflict. Now this virtuous cycle has been challenged. A region in stress is a region less predictable and less stable. Manageable internal problems can become unmanageable and spill over borders.
Fortunately, at this stage, there have not been any major repercussions for the security of the region flowing from the economic crisis - peace and stability have not been seriously challenged. But much will depend on the length and severity of the crisis and some small but nonetheless significant consequences can already be noticed.
For example, many countries in the region have slashed their defence spending and have deferred purchases of military hardware. While we were not concerned by the process of modernisation of military forces that was occurring in the region prior to the financial crisis, it is probably no bad thing that defence planners now are forced to think very carefully about what capital equipment they really need. On the other hand, we would not want reductions in defence capability across the region to be so uneven that they became destabilising.
Cutbacks in defence expenditure may also cause reductions in cooperative defence activities between countries, such as training and exercises. Such cooperation plays a valuable role by helping to build trust and confidence between countries and by enhancing transparency. For this reason, we are doing all we can to sustain Australia's regional defence relationships.
Economic hardship - particularly high unemployment and food shortages - can also result in the large scale movement of people within countries and across borders. This has already happened to some extent in our region and can cause tensions and be destabilising. Such events need to be handled carefully and Australia has been pleased that, to date, they have - including through the well-established habits of high-level dialogue and consultation that are increasingly a strength in our region.
In the Government's White Paper on Foreign and Trade Policy published last year, we argued that the removal of the bipolar balance between the superpowers, and the changing relativities of power and influence arising from rapid economic growth had led to a regional security outlook which was uncertain, fluid and complex. The financial crisis has accentuated the uncertainty and complexity of the regional strategic environment.
Against that background, I would like to turn to three issues that have been accentuated during the regional crisis: the emerging role of China, Japan's ability to assist the region, and the South Asian nuclear tests.
Emergence of China as a major power
The emergence of China as a major power is one of the most striking features of the international environment in the last quarter of this century.
Of course China's sheer size, both in terms of territory and population, has always given it a prominent place at world councils. And during the Cold War decades, China acquired a particular influence as a function of its international alignment - first as a member of the Soviet Bloc, and after the Sino-Soviet split as something of a balance against the Soviet Union.
But the real, lasting growth in China's prominence has been as a function of its own spectacular economic development in just the two decades since 1978. In 1997 China's GDP totalled US$900 billion, more than four times its 1978 level, making it the seventh largest economy in the world.
Concomitant with China's rise - and, not coincidentally, with the disappearance of the old "evil empire" of the Soviet Union - has come a trend for some commentators to assert a so-called "China threat". I have consistently rejected such a proposition.
In economic terms, for example, China's impressive performance has been a positive development for itself, the region and the world.
Furthermore, China's international behaviour in its process of modernisation and economic reform has largely been constructive and positive. For China - as for any other nation, including Australia - a stable and peaceful regional and international environment provides the necessary climate for continued growth in trade and economic activity generally.
Australia is therefore encouraged by, and supportive of, China's growing engagement with the region and the world. Engagement is, of course, a two-way process. It must be anchored in the constructive pursuit of common interests and a strong commitment to enhanced cooperation.
China is already an active participant in the growing web of relationships between countries at the bilateral and regional level, including better regional security dialogues and exchanges. China's enhanced involvement in regional forums such as the ASEAN Regional Forum (ARF) and APEC helps build trust and confidence which are essential building blocks for the promotion of regional stability and security.
China's constructive involvement in the affairs of the region has been highlighted during the economic crisis by its undertaking not to devalue the renminbi, reaffirmed by Premier Zhu Rongji during the recent visit to China by President Clinton. While practical economic considerations no doubt lie behind this decision, it should be acknowledged as a very positive contribution towards stabilising the region's economy.
Can Japan lead other Asian economies out of the crisis?
There is no doubt that the performance of Japan - with the world's second largest economy and accounting for around 70 per cent of East Asia's output - will be a key determinant in how the regional economic crisis plays out in the coming months. And I should also note that Japan has provided extensive and timely assistance to economies in East Asia, contributing US$42 billion to the global assistance effort. Along with Australia, Japan is the only country to have contributed to all three IMF assistance packages.
I've already referred to the high levels of reliance by East Asian countries on intra-regional trade. Japan's current recession is limiting its capacity to absorb exports from the region - according to Japanese government statistics, Japan's imports from Indonesia, Thailand, the Republic of Korea and China fell in the first four months of 1998, compared with the same period a year earlier, by 25%, 9%, 6% and 3% respectively. Any further weakening of the yen could again reduce Japan's ability to import regional goods, and place further pressure on regional currencies. And there is also evidence that Japanese investments throughout the region have been scaled back as Japanese companies and financial institutions concentrate on solving domestic problems.
Of course, the Japanese economy has been in the doldrums for much longer than the period of the current crisis - perhaps for the best part of the decade. The Japanese Government has been moving towards radical structural reform to boost domestic demand and open itself more to international competitive forces.
The good news for Japan is that its economic strengths - the world's largest creditor nation, a low-inflation economy, a powerful work ethic, a strong manufacturing sector and a remarkable export performance - should provide the basis for stronger economic growth beyond the short-term. But the current task before the Japanese Government is formidable. Its problems are essentially structural in nature and long standing, overlaid by major macroeconomic imbalances associated with weak domestic demand.
The key structural impediments to growth include Japan's financial sector, plagued with bad loans since the "bubble economy" burst in late 1989, and continued protection of a range of goods and services markets - including agriculture, telecommunications, construction, electricity and transport - from new domestic and international competition. Further reform of Japan's bureaucracy and taxation system would also remove serious structural impediments to stronger economic growth.
The program of economic reform already implemented in Japan has already yielded significant benefits - estimated at an annual average of almost ¥ 8 trillion (AUD92 billion, or 1.6% of GDP) of additional demand and reduced prices for consumers equivalent to 1% of GDP during the first half of the 1990s.
According to several studies, the continued application of reforms would allow growth of 2-3% per annum beyond 2000. Such growth would be an enormous boost to the region's economic prospects and would contribute greatly to restoring confidence in the region.
By reducing distortions within the economy, reform will also improve the efficiency with which Japanese savings are allocated - an increasingly important consideration as the ageing population puts downward pressure on Japan's savings rate. And comprehensive liberalisation of the economy would reduce the volatility of the yen, a critical problem in the 1990s, by reducing Japan's need to be overly reliant on the exchange rate's role as an adjustment mechanism.
The case for continued reform is, therefore, compelling. I am encouraged by remarks the new Japanese Prime Minister, Keizo Obuchi, has made concerning his commitment to stimulating domestic demand in Japan and continuing the process of structural reform, including in the financial sector. Domestic and international markets have already sent strong signals to the Japanese leadership on the need for it to stay the course with reform. And any turning back on the program already initiated could have dire consequences for Japan, and the region.
Effect of South Asian nuclear tests on the region's security
The recent nuclear tests by India and Pakistan challenge the foundations of the nuclear non-proliferation structure (of which the Nuclear Non-proliferation Treaty, or NPT, is the cornerstone).
The South Asian tests have global implications, as they may lead countries of high proliferation risk to reconsider their commitment to the NPT and raise the possibility of withdrawals from the treaty. They could touch off a nuclear arms race in South Asia with serious implications for regional security. And it is also possible that a weakening of the nuclear non-proliferation regime could threaten other global mechanisms for the control of weapons of mass destruction, such as chemical and biological weapons.
Any of these outcomes would be disastrous for Australia and for the region. Bilaterally, we made our displeasure clear to both countries by recalling our Ambassadors for consultations, by suspending our defence relations with the two countries, by cancelling all visits by Ministers and senior officials, and by suspending non-humanitarian aid.
Countries of the region, ASEANs and non-ASEANs alike, were intensely critical of the nuclear tests at the July ARF meeting. In the ARF Chairman's statement, Ministers "expressed grave concern and strongly deplored the recent nuclear tests in South Asia", and called on the countries concerned to sign the NPT and the Comprehensive Test Ban Treaty (CTBT) without delay, conditions or reservations. Overall, the language was very much stronger than that used in 1995 in relation to French testing.
This outcome was important for two reasons. First, it was significant for the ARF's credibility as a body able to address serious security issues. Second, it indicated the depth of regional dissatisfaction with the South Asian tests, and the recognition that, unchallenged, they could lead the region - and the world - down some very murky paths.
With our colleagues in the region, we will be pushing ahead with our efforts to respond effectively to the challenge posed by South Asian nuclear testing. Above all, we want to make it clear that the international nuclear non-proliferation regime is still in business, notably by consolidating the anti-testing norm embodied in the CTBT and securing the early launch of new negotiations on a fissile material cut-off treaty.
Conclusion - Australia well equipped to meet the challenges
After enumerating the problems faced by the region in the wake of the economic crisis, you may be forgiven for wondering whether Australia could ever meet the challenge. The fact is that we are uniquely placed in our region to not only pass the tests that confront us, but to ride the crest of the wave of economic resurgence that will inevitably come to the region.
The most fundamental asset we have as a nation in the face of the regional troubles is an economy with strong fundamentals and a firm foundation.
We've achieved the lowest inflation rate in the OECD. Forecasts indicate we will be one of the fastest growing OECD nations in 1998 and possibly also 1999. We've got the lowest interest rates for more than 30 years. And we've turned around a budget deficit of $10.5 billion we inherited in 1996 to a budget surplus.
Our export performance has also gone strongly against the regional trend. Our total exports for 1997-98 were $114 billion , up 8.2% over the previous year. Australia has seen some downturn in trade with our immediate region in the wake of the financial crisis, but rises in some regional countries like Japan, and a substantial jump in exports to the EU and the United States (up 22% and 40% respectively), have kept total exports increasing. While we must, of course, never become complacent about our trading situation, this is a solid performance in our regional circumstances, and bodes well for the future.
Australian exporters are, I'm pleased to say, demonstrating their commitment to markets in Asia despite the downturn. And they are also gaining through diversification into other markets. In both cases, they are reaping the benefits of the increased attention our Government has paid to bilateral relationships.
Now there are some who argue that the apparent upswing of isolationist views in Australia, supposedly exemplified by the recent electoral success of the One Nation Party, signals the end for globalisation and Australia's engagement with our region. Those in our society who are uneasy about change - and, in particular, the economic impact of increasing globalisation - have turned to "quick-fix" solutions that involve raising barriers to trade, investment and migration.
These are apparently simple solutions to the complexities of modern life. But, like most such solutions, they are unworkable.
They ignore the fact that Australia, with a small population and distant from natural trade routes, cannot hope to sustain an advanced, equitable and technologically sophisticated society if it puts up the shutters to the rest of the world. The costs would be enormous - both in terms of increased prices that Australian consumers would have to pay for tariff-protected goods and services, and in the tens of thousands of jobs that would be lost as trading partners inevitably retaliated by putting up barriers to our exports. How many thousands of dollars per year would be taken from average families, how many more Australians would be thrown out of work, to pay for knee-jerk protectionist policies that would not last for more than a few years before they broke down?
Most Australians recognise that if something sounds too good to be true, it usually is. Protectionist argument is like a Nigerian banking scam - the same "something for nothing" promise, the same vanishing of both the alleged benefit, and your original investment. Australia has reaped far greater benefit from confident engagement with the world that it could ever hope to gain from hiding itself away, and our Government will ensure that all Australians continue to benefit from that active involvement.
Since the beginning of the crisis, I and my colleagues have been urging Australian business to maintain their commercial links with the region. All downturns must come to an end, and when this one does we need to be in a position to benefit from the resurgence in Asia's fortunes.
The Government has been showing the lead. We have contributed to all three IMF packages for the region - $US1 billion to Thailand and up to $US1 billion for each of ROK and Indonesia. And we ensured that export credit insurance to the ROK and Indonesia was available.
We have also responded substantially to humanitarian needs in the region, as evidenced by our commitment of over $50 million in humanitarian assistance to Indonesia to help alleviate the combined impact of the economic crisis and the drought, and the extension of our aid program to Thailand beyond 2001, when it was due to cease. More generally , the aid program is providing technical assistance in economic governance to assist crisis-hit countries in their recovery process.
Australia has played a key role in coordinating the response of the donor community. For example, the Consultative Group on Indonesia last week pledged almost US$8 billion in assistance, a figure that will be crucial to Indonesia's recovery. This outcome was due in no small part to Australia's role in raising awareness amongst donors about the importance of assisting Indonesia during this difficult time.
In addition, we are committed to continuing Australia's bilateral programs of assistance with Indonesia, Vietnam, the Philippines, China, Cambodia, Thailand, Laos, Mongolia, and Malaysia. In this year, estimated total aid flows to these countries will exceed $400 million. Our aim is to address long-standing development needs, but also to respond flexibly and imaginatively to the economic and social effects of the economic crisis.
We are continuing discussions with our neighbours on the economic, political and security implications of the crisis, both in our bilateral dialogues and multilaterally. I was struck by the honest, open and very constructive debates we had on all these issues at the recent ARF and ASEAN PMC meetings I attended in Manila last week. In all these areas, Australia is leading the debate, looking for imaginative solutions.
Australia is demonstrating that its commitment to Asia can stand the most severe tests. We are all weather, not fair weather, friends. When recovery comes, our commitment and contributions will be remembered - and we, not having pulled out at the first sign of trouble, will share from the beginning in the region's renewed prosperity.
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