The East Asian Economic Crisis and our Place in the Region

The Hon. Alexander Downer MP at the Sydney Stock Exchange Dinner. Australian Stock Exchange Sydney, 4 November 1998

(Check Against Delivery)

I'm always pleased to be able to meet members of the Australian Stock Exchange, but I am particularly happy to be here tonight. That is because it gives me an opportunity to talk about matters of vital importance to our future - the East Asian economic crisis and its impact on Australia's economic, political and strategic interests in the lead-up to the APEC summit to be held in Kuala Lumpur in less than two weeks from now.

Tonight I'd like to tell you what we have been doing in response to the crisis, and to outline those areas where we see the need for more work. And while this subject gives me the opportunity to discuss the region and the directions it might take, it also allows me to flag some valuable insights into our own country and its relationship with East Asia.

An uncertain outlook for regional economies

At the close of 1998 it is sometimes hard to believe that only 18 months ago the East Asian region seemed set on an economic path that was onwards and ever upwards. Decades of sustained economic growth and industrialisation had led to strong confidence both within the region and elsewhere in the prospects for continued economic expansion, and for East Asia's weight in world affairs to increase steadily.

Today the region continues to struggle with its most serious economic crisis since the Second World War, with most analysts agreeing that several years of economic downturn and dislocation still lie ahead for many East Asian economies.

The IMF's October 1998 World Economic Outlook has again revised down forecasts for growth in East Asia, with their currency and equity markets set to remain well below early 1997 levels. Some recovery is expected in 1999, but the outlook is very uncertain and depends on regaining foreign-investor confidence by addressing structural economic deficiencies and developments in the difficult external environment.

The timing of recovery will not be uniform. Economies further down the track of structural reform (such as Korea and Thailand) will probably recover ahead of economies such as Indonesia which are experiencing much deeper problems. Ongoing strength in China, albeit with rates of growth slower than those experienced earlier this decade, will also affect the timing of recovery.

The impact of East Asia's economic crisis has been felt globally, with a marked deterioration in the overall outlook for world economic growth.

The IMF's 1998 GDP growth forecasts for the global economy have now been revised downward to 2 per cent (previously 3 per cent) with growth projected at 2.5 per cent in 1999. That's far lower than the average growth of around 4 per cent over the past three years and the 3.5 per cent trend growth rate over the past two decades.

World trade has also been affected. Trade in goods and services grew by an average of 8.7 per cent from 1995 to 1997, registering a very strong growth of 9.7 per cent for 1997. The IMF now expects this to fall to 3.7 per cent in 1998 and 4.6 per cent in 1999.

As an aside, I'd note that these figures are a good answer to those who question the need for concerted international action over East Asia's problems. In the past, the global economy used to catch cold only if Europe or the United States sneezed. Clearly, a dose of the East Asian flu is now just as costly to the world's economic health.

Developments in Japan, the United States and the EU will be critical to stability and recovery in our region.

The United States experienced strong economic growth in 1997 and has continued to do so in 1998. Most analysts expect more moderate growth to occur in 1999. Importantly, continued good performance on inflation provides the Federal Reserve with substantial policy flexibility and it has twice recently cut official interest rates by 25 basis points in order to address concerns about the US financial system. However, slowing growth will have economic and political implications for the ability of the US to absorb imports in 1999 and beyond.

The major EU economies have gained momentum since early last year, more recently underpinned by strong domestic demand. The IMF expects the EU to increase aggregate growth slightly in 1998, moderating in 1999, primarily due to a slowdown in the United Kingdom.

Economic growth forecasts for Japan have been continuously revised down, with the IMF now forecasting a contraction of 2.5 per cent in 1998. Japan's Economic Planning Agency in mid-October said the economy could well contract for a third consecutive year, with the Japanese fiscal year 1999 (ending in March 2000) also experiencing negative growth.

A sustainable recovery in Japan depends on restoring domestic confidence in its economic future, which in turn calls for progress on structural reform in the economy and action on the severe bad loan problem in Japan's banking sector. October's legislation to nationalise failed Japanese banks and to recapitalise weak but viable banks is welcome and represents substantial progress, but action must be taken quickly and banks must address their bad loans seriously.

Taken together, these forecasts add up to a fairly sober outlook for the global economy over the next 18 months.

How Australia has fared

Australia's close economic interdependence with East Asia means that our trade is inevitably affected by the regional downturn.

In 1997-98, Australia's merchandise exports to East Asia - $47.2 billion - actually increased by 5.5 per cent over the previous year. But Australia's merchandise exports to the region declined sharply in the first two months of 1998, contributing to a downturn of 5 per cent in the first eight months of this calendar year compared with the same period in 1997.

The outlook remains very clouded, although since May we have seen monthly exports to the region pick up slightly, in trend terms, on the strength of good export sales to Japan, Hong Kong and Taiwan. Good sales to some smaller regional markets, like Vietnam, have also defied the downward trend. Now, the latest trade statistics for September indicate a flattening of the trend. Clearly, the continuing volatility of East Asian economies means we must remain cautious about assessing these trends.

While our exports to East Asia have declined, Australia's merchandise imports from the region have been climbing. Most of the increase has been in manufactured items, but because many of the items concerned are not produced in Australia our consumers and producers are benefiting from the lower prices - a fact reflected in the latest excellent quarterly figure for inflation. Nevertheless, in some areas, such as apparel and paper, domestic producers are facing increased competition from East Asian exporters.

Australia's overall trade performance has, despite the East Asian crisis, held up remarkably well. Our exports of goods and services in 1997-98 grew by 8.2 per cent over 1996-97. Merchandise exports grew by 9.3 per cent and services exports by 4.6 per cent. And we are maintaining modest growth this year. The figures released last Friday indicate that for the first nine months of 1998 we have registered an increase of 2.7 per cent in the export of goods and services over the same period in 1997. Abstracting from factors such as the one-off gold sale by the Reserve Bank in 1997, merchandise exports were up 6.9 per cent in the same period.

This solid performance was due to good growth in exports to the United States and EU in particular, as well as to a range of emerging markets. Overall, exports to non-East Asian markets rose by 22.9 per cent compared to the previous financial year, justifying the strong effort made by the Government since coming to office in 1996 to encourage greater market diversification by Australian businesses.

At the same time, Australians have benefited from the best economic fundamentals for a generation. Interest and inflation rates that Generation X-ers had thought were fanciful exaggerations that only their parents made. Levels of growth amongst the world's highest. A budget that is in very healthy surplus.

What we have through our example been showing the region, and the world, is that commitment to economic reform and liberalisation can help a country withstand serious economic shocks. Our ability to avoid the worst of the economic trends in our region and be in a position to offer our neighbours a helping hand is proof enough of that. It underlines the Government's commitment to reform and to keeping markets open.

Political and strategic implications of the crisis

Of course, the effects of the regional crisis - and its implications for Australia - are not limited to economic effects.

The full political impact of the crisis has still to work its way through the region, but already it is clear that long-standing political structures are coming under unprecedented pressure. That is hardly surprising, since any government can expect to come under challenge if economic circumstances turn against it. But in a region like East Asia, where parties and leaders have for so long been identified with apparently endless growth and prosperity, this fundamental political rule is likely to bite deep.

We've seen some extraordinary political events since the crisis began, perhaps the most remarkable being the end of the Soeharto era in Indonesia. But we've also seen new Governments in Thailand, Korea and Japan, and significant political developments in countries like Malaysia, PNG and New Zealand.

Strategically, the stability and security of our region remains fluid and unsettled. The possibility of prolonged economic and political instability in some of our neighbours must remain a concern.

Economic troubles have affected the ability of some nations to meet the cost of joint defence activities, the most prominent being Malaysia's decision not to participate in Five Power Defence Arrangements (FPDA) exercises in part for budgetary reasons. On the positive side of the ledger, the crisis has meant that many proposed purchases of military hardware have had to be put on hold, lessening the likelihood of a regional arms race.

The crisis may also have an impact on strategic relationships in the region.

Although its decision also has a sound domestic economic basis, China has gained standing through its very responsible policy of not devaluing its currency. And Japan has unfairly been perceived as not demonstrating sufficient regional leadership in responding to the crisis - in fact its total assistance so far to other East Asian economies is of the order of US$42Żbillion.

And all this takes place against the background of a United States preoccupied with its own domestic political crisis, which risks limiting its capacity to show global and regional leadership. For Australia's part, we are keen to see US involvement and influence in East Asian affairs continue.

The economic downturn has also badly shaken the confidence of South-East Asian countries, and ASEAN as a bloc. Within the region, individual countries who once defined their status internationally by their impressive economic development are still coming to terms with their new place in the world. Whereas some countries have chosen to remain engaged actively internationally, others have tended to turn more inwards.

As if the fallout from the crisis was not enough, other events within the region have complicated our security outlook. Nuclear tests by India and Pakistan have violated international non-proliferation regimes and introduced a major new element of insecurity in regional affairs. North Korea has caused serious concern with its most recent multi-stage missile test, which bracketed Japan - reminding us all of the sophisticated military capabilities of that unpredictable regime.

Analysts used to comment on the stability of our region, ascribing it in large part to continued high levels of economic growth. Now that the economic picture has changed so radically, we cannot take that stability for granted. We and our neighbours must work even harder to ensure that the peace and security of our region are maintained.

Australia - leading the response

Australia has been second to none in recognising the seriousness of the unfolding economic crisis in East Asia and in developing a response that has been substantial and well targeted. That is as it should be. Australia's economic and strategic future is, after all, tied to the prosperity and stability of the region in a way matched by no other nation.

We were one of only two countries to contribute to all three IMF assistance packages for Korea, Thailand and Indonesia (Japan being the other)

We led efforts to lobby the IMF for a more flexible and appropriate approach in the design and implementation of the package for Indonesia

We're working hard in APEC - on trade liberalisation through the Early Voluntary Sectoral Liberalisation (EVSL) package, on an initiative to communicate the benefits of freer trade to the broader public in APEC economies, on an economic good governance initiative to help regional countries improve their economic governance mechanisms, and on progressing consideration of international financial issues

Bilaterally, we ensured trade finance for the worst affected countries through EFIC's export insurance cover for Korea and Indonesia, and boosted aid programs to countries like Thailand and Indonesia to mitigate the social impact of the crisis, and bolster economic management and governance and institution-building programs

And we continue to work actively on a number of bilateral trade issues to place Australian businesses on a more equal footing with their international competitors

The Government has also actively pursued its market diversification strategies, which as I mentioned earlier have already begun to show encouraging results.

But the Government's agenda must look beyond bilateral and regional responses to the East Asia crisis. The wider ramifications of the crisis - for example in Russia and Latin America - are leading more and more people to conclude that some shortcomings of the international financial system must be addressed.

Our determination to seek practical solutions for the problems that face us was signalled by the Prime Minister's decision to establish a task force to advise the Government on how Australia should contribute to an effective international response to the challenge of financial volatility.

Let me make this clear - we are not seeking to change horses in midstream. The policies of reform and liberalisation have brought this country, and the world, enormous benefits, and we do not intend to turn our backs on them. But when we identify aspects of our financial and economic systems that are in need of some adjustment, we would be equally foolish not to seek to remedy them.

Joining the battle of ideas

The debate over the resolution of the problems facing our region and the reform of the international financial system is not just over practical measures that governments, individually or collectively, might adopt. In many ways we are seeing the beginnings of a fundamental contest of ideas.

East Asia has become the focus of intense debate about how to establish sustained economic growth and how to position one's own economy in managing the risks inherently involved in the global financial system. And the outcome of that debate is no mere academic exercise for us.

On it hinges some fundamental questions for our region - will it be more or less welcoming of foreign investment and trade, more or less antagonistic to Western influences, and more or less confident in its own future.

One of the Government's great challenges over the next couple of years will be to fight in the international market place of ideas for the liberal-market economic model. It is difficult enough to fight that battle at home: to do so on the world stage is a mighty challenge.

More and more governments, academics and commentators are emerging to argue for the re-imposition of controls on capital flows, the steady re-introduction of protectionist measures, the return of more overtly nationalist economic policies. Some have gone so far as to argue that the Asian economic crisis demonstrates the weakness of the market-based economic system and that somehow the world would be better-off marching backwards in time.

Yet, these same critics fail to understand that the liberal market economy offers great benefits - but not for free. Economies which are not "transparent" - to use a delightful neoligism - which lack effective prudential supervision, or, in a phrase, are run poorly, will over time fail to prosper. It is not the liberal market economy which has failed: it is the lack of liberalism, including in some cases political liberalism, which has caused failure.

I strongly believe that Australia's influence, and our own example, must be used to encourage the maintenance of an open and outward-looking spirit in our region.

That is why Australia must remain active in the G22 and any other forum that is contributing to the development of solutions for the global financial system. That is why Australia will go to the APEC meetings next week determined to resist the illusory "quick-fix" of a reimposition of trade barriers.

As we do this we will continue to work hard to ensure that our interests in the East Asian region, especially South-East Asia, are kept on the agendas of North American and European countries and international institutions. As I can personally attest, part of the problem originally lay in simply getting Euro- and US-centric decision makers to focus on issues in our part of the globe. Due in no small part to Australia's efforts, we don't have that problem now.

Australia redefined?

Australia's standing, both in our region and further afield, has been enhanced as a result of the East Asian crisis. The nature and effectiveness of our response to the crisis was important. So was the strong contrast between the region's problems and own economic strength and growth prospects, as well as the relative resilience of our national financial and political institutions in the face of the formidable economic storms that seemed to surround us.

I believe that this crisis has also helped us to understand better the nature of Australia's relationship with Asia.

It has brought into relief how we are different - our large and developed economy; our multicultural society with its strong Western democratic values, and mature and open political and economic institutions; and the significant ties we have outside the region.

At the same time it has shown how relevant we are to the region, and has highlighted the close economic interdependence between ourselves and the countries of East Asia. Importantly, it has allowed us to demonstrate in practical ways our long-term commitment to political, strategic and economic engagement with our neighbours.

One reason why Australia's advice and assistance has been sought out and valued during the crisis was for the very fact that we are different, and could offer a fresh perspective. At the same time, the myriad of our official, commercial, defence and people-to-people links with East Asian countries meant that we could speak as friends who were familiar with the problems facing the region.

The substance of our relationships and of our close involvement in the search for solutions to East Asia's problems have defined, as no amount of words could ever do, our role in the region. I have always felt that the endless arguments about Australia's so-called "proper" role in the region and whether we are part of Asia have been quite unproductive - a contemporary equivalent to debate on how many angels could dance on the head of a pin.

The plain fact is our regional interests are strong and abiding. They are our strongest answer to any attempt to set up artificial tests of our credentials as a player in the region. We have played, and will continue to play, a prominent role in finding solutions to our region's difficulties. We do so because our actions count, and because our neighbours seek our assistance. We do so for our region, and for the world. And above all, we do so for our own future.

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