Australia - Stability in the Asia Pacific
Minister for Foreign Affairs
The Hon. Alexander Downer MP
New York, 8 June 1998
Thank you very much Gavin Anderson.
John McCrow, Chairman of the Australian-American Association, Perry Welch, President of the Association, other distinguished Association members, ladies and gentlemen.
Australia is in as good economic shape as it has been for a generation.
That is a fundamental message which I want to convey to you today.
Certainly the last twelve months have presented great difficulties for a number of economies in the Asia Pacific. In an era of increasing globalisation, world best practice - in communications, in trade and in finance - is increasingly the measure by which all our economies are judged.
I am very glad to be able to tell you here today that Australia, thanks in large part to reforms implemented over the last two years, has withstood the close scrutiny of the international markets in recent months. That's because Australia now has economic and financial policy settings which will steer us into the next century. We have the best set of fundamentals in Australia we've seen since the 1960s.
I'd like therefore to begin today by telling you in more detail how the Australian Government has gone about securing our future in the Asia Pacific at a time which has proved so turbulent for many regional economies. Second, I'll address why we still consider the Asia Pacific region to be likely to return to good growth in the not too distant future. Finally, I'd like to say something about Indonesia's current situation and the hope we hold for its greater stability as a key player in the region.
Part One: Australia's Stability in Troubled Times
The story of the Australian economy at the moment is one of strong fundamentals.
When the Government came to office in 1996 we were concerned that Australia, then running a considerable budget deficit, could be exposed to international shocks of exactly the kind we've witnessed in Asia over the last year. But our Government has taken the necessary action to help Australia withstand external shocks. To a large extent, our economy has been shielded from the ravages affecting several regional economies.
We've improved the Government's financial position substantially. In the space of two years we've seen a deficit of around $A10 billion turned into a surplus of $A2.7 billion for the coming financial year. And we've implemented a Charter of Fiscal Honesty which means that you can be confident that the promised surplus will be delivered.
We've also implemented an agreement with our Reserve Bank which commits them to keeping inflation within acceptable limits. Inflation now sits at around 1.5 per cent, the lowest rate in over thirty-five years. And that low inflation is underpinning what are also the lowest interest rates in a generation.
Government debt is another area where we've achieved substantial success in putting Australia's economic house in order. A program of debt reduction is well under way and we will see Government debt as a proportion of GDP fall from its level of 20 per cent in 1996 to a maximum of 10 per cent by the year 2000.
And we intend to complete the privatisation of our national telecoms carrier, Telstra, with a view to reducing that debt level to as low as only 1.5 per cent of GDP.
As a consequence of putting all of these reforms in place Australia's strong growth is continuing despite the impact on our exports of the East Asian economic crisis.
Specific exports to some Asian markets are being affected but this has been offset, at least to some extent, by increased exports to other markets.
As a result of our expected lower exports to Asia in the next financial year, we expect to be growing at around 3 per cent per annum in 1998-99, rather than continuing to grow at 3.75 per cent as we are doing in 1997-98.
We will, however, still be the fastest growing of the major OECD economies and well above the OECD average.
Nor should that come as any surprise. Sustainable low inflation and low interest rates, a sound fiscal and debt retirement strategy and our pro-business policy settings has created a very positive climate for sustainable long-term growth.
It is because Australia is in such excellent economic shape that we have been able to come to the aid of our regional neighbours in their time of need.
Australia is one of only two countries- the other being Japan - to have contributed to all three IMF packages - for Thailand, Korea and Indonesia. This is a contribution that is in Australia's national interest, but is also something we want to do as an `all-weather friend' to the region.
Australia is also providing training to economic and trade officials from Central Banks and Departments of Trade and Finance in Thailand, Malaysia, the Philippines, Indonesia and Vietnam in policies for regulation and management of financial services.
We are already doing this on a bilateral basis through our aid program. And we also will be contributing to a region-wide effort through similar training programs announced by APEC Finance Ministers in Canada last month.
Australia, so strong in the areas of finance and corporate governance, is making a real contribution to assist affected regional economies move beyond the crisis.
Part Two: The Outlook for the Region
There is no doubt that East Asia's economic difficulties have focused the international and regional spotlight on serious underlying problems in the financial sectors of some 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'.
The key to the region's recovery - short and long term - therefore lies in domestic economic reform and continued trade liberalisation, leading to freer and more open markets, and renewed investment in the region.
This is 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.
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. Indeed, the currencies of these economies have appreciated by around 20 per cent this year.
Indonesia is, of course, undergoing a much broader transformation but I will come back to that shortly.
We must all keep in mind that the economic strengths which made East Asia highly attractive to global investors in the first place over the last two decades have not vanished - high savings rates, an increasingly skilled and educated workforce and a dynamic business environment are still integral parts of the economic framework. The Government has confidence that these strengths will contribute to further strong growth once the current storms are behind us.
In addition to the challenges of implementing the IMF packages, there remain a number of hazards for the regional economy. The crisis could be prolonged - and a return to prosperity delayed - if the following events were to come into play:
But the Government believes there is cause for optimism that the region can avoid these pitfalls.
To turn first to Japan, Prime Minister Hashimoto's stimulatory package of around USD 190 billion should provide a much-needed boost and help stabilise the Japanese economy. Even modest growth in Japan - the world's second largest economy - would be a shot in the arm 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 more 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.
Second, 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.
Finally, there has not to date been a resurgence of protectionist sentiment. However, it must be said that sympathisers and proponents of this type of sentiment lurk on the fringes of political debate feeding off the concern and discomfort some people with the short-term impact of some economic change.
We should all be encouraged by the fact that we have seen even the most affected economies continue their commitment to reform and economic liberalisation in a range of relevant forums.
The APEC meeting in Vancouver last year showed the way forward - it was a `vote of confidence' in liberalisation at a most difficult time.
Also, in April the OECD Ministerial Council Meeting 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. But we have been heartened by President Clinton's statements at the WTO Ministerial Meeting where he strongly endorsed the benefits of liberalisation and called for swift action in lowering trade barriers.
So provided regional economies can stay the course on reform and avoid the pitfalls I have outlined the Government remains confident that East Asia can return to strong sustainable growth rates. Indeed, I am confident that Asia will emerge from its current crisis a rather different place than it was a year ago: it will be more democratic, more accountable, more transparent and all in all a better political and economic partner for the rest of the world.
Part Three: Indonesia
As I have said the way forward for regional economies at this time must be through a continued commitment to economic liberalisation and by bringing about transformations in the way in which their financial sectors operate.
In Indonesia, however, we are seeing much more sweeping transformations take place as the country enters a new era.
We have seen the economic pressures brought to bear by the currency crisis interact with desires for broader political reform. Australia welcomes the resulting constitutional transfer of power from former President Suharto to President Habibie.
President Habibie's swift move to appoint a competent Cabinet, including a number of capable economists, is a very positive sign. Moreover, President Habibie has made a commitment to parliamentary elections being held by the end of 1999, with elections for the position of President to follow not too long after that.
President Habibie clearly recognises the need for political reform if Indonesia is to regain the political and economic stability which it has enjoyed for some decades now. And Australia certainly welcomes President Habibie's taking these steps, as well as the release of prisoners held purely for political reasons.
The details of how far Indonesia proceeds down the path of reform is, however, a matter for Indonesians to decide. It cannot be any other way.
The international community should be encouraging reform but not in a patronising or paternalistic way. To do so would simply derail the reform process just as it is beginning to develop its own head of steam.
The International Monetary Fund is playing a critical role in helping the Indonesians put their economy back on its feet as coordinator of the rescue package put together by the international community.
The early return of IMF representatives to Jakarta after President Habibie's succession was therefore most welcome. We believe the processes for considering further multilateral financing for Indonesia should be resumed as soon as possible. These resources are vital for Indonesia given the current state of its economy and the substantial humanitarian problems it faces.
The IMF should continue to play its central role in advising on economic reforms which will accelerate Indonesia's recovery but it should do so without setting conditions which are essentially political in nature. The IMF, it should be remembered, is an economic and not a political instrument of change. Encouraging political reform is one thing: being seen through the IMF to bully and cajole Indonesia into a particular political paradigm will not only invite a negative and lasting backlash from Indonesians; it will undermine the acceptability of the IMF to many countries and that could be a bad thing for the global economy.
Australia encourages the United States to ensure that the IMF is able to play an appropriate role in restoring Indonesia's stability.
Indonesian stability is vital to Australia's interests and I believe to the region more broadly. As a key player in ASEAN, Indonesia has substantially contributed to peace and prosperity in the South East Asian region for the last thirty years. It is important to continue to do so.
Where Indonesia needs our immediate help is in making their economy more efficient. The international community, both through the International Financial Institutions and bilaterally, should be doing all it can to help on that front.
I would like to conclude my address to you today by returning to my opening theme.
Australia is well-equipped to face the rigours of global scrutiny of its economy.
The Australian Government has turned around a huge deficit in two years, has put in place a low inflation and low interest rate regime and has begun a program of massive Government debt reduction. These reforms have built a platform which has allowed our economy to retain considerable stability during the storms which have swept Asia over the last year.
Australia therefore has been able to provide assistance when our regional neighbours needed it.
And the Australian Government remains confident that with the help of the international community economic stability will return to the region. Once again the phrases "East Asia" and "rapid growth" can be synonymous - provided the region can sustain its commitment to economic reform and liberalisation.
Indeed, as I have said, I believe Asian economies will emerge as more open, more transparent, more accountable and more democratic after coming through the current storm - after all, all storms do pass.
For that to happen, however, the international community - and here the United States has a vital role - has to stay on the case and provide help where it is most effective. But we must not seek to be too interventionist or our actions may be counterproductive.
Australia's certainly will be staying on the case. Our commitment to our region is a deep and abiding one. Australia is no "fair weather friend".
We will continue to help our neighbours in ways which will assist them to move beyond the crisis.
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