Australia: Beyond the Regional Financial Crisis

Transcript of the address by the Minister for Foreign Affairs, The Hon Alexander Downer MP
to the Royal Institute for International Affairs
Chatham House, London, England, 1 February 1999.

Can I say I am very grateful to have the opportunity to speak here today at Chatham House. It is, after all, one of the world's leading institutes for the analysis of international politics and international relations and it's also famed for its so-called Chatham House rules which are honoured in our country very much in the breach. Well here I'm taking no chances. This is entirely on record.

Can I just say as someone who's worked in the foreign policy field in a number of different capacities, I do have great respect for the Institute, in particular its efforts to promote free and frank discussions on issues which I don't think always get much discussion outside of the rather narrow confines of foreign ministries and they do need to be debated much more openly and give us as policy makers ideas that might otherwise have passed us by.

I want to talk to you today about the East Asian economic crisis, which of course is a subject much considered by economists and others around the world, and also to expand a bit on how this all relates to Australia. Reading the reams of analysis already produced about the Asian economic crisis reminds me of J K Galbraith's comments that economics is an extremely useful form of employment for economists and, as somebody who did do economics at university, I can very much relate to that type of comment.

It wasn't all that long ago, probably when I was here two years ago actually, that we were talking about the East Asian economic miracle. Yet, frankly, today the region is struggling with its most serious economic crisis in half a century.

The International Monetary Fund's December 1998 interim assessment has again revised down forecasts for growth for East Asia. And a recently released world bank report confirms this sombre view with an average contraction of 8 percent estimated for the crisis-affected economies in 1998, with virtually no growth expected in 1999.

Even if we do see a return to positive growth in the short term, it is likely to be off the very low base of 1998 economic output. Quite simply, it will take time for the region to return to pre-crisis levels of output. The historical record with similar crises, such as those experienced in Chile and Argentina in the 1980s, suggests it could take as long as five years in some economies.

A major constraint to an early recovery, not yet adequately quantified, is the extent of overcapacity in the region, particularly in the property and industrial sectors. The closure of factories and the loss of jobs as a result of the crisis will make it all the more difficult for economies to grow again quickly.

Many countries will also need to rebuild damaged banking systems. This will come at a high price and it will take considerable time. Indeed we have already seen a credit squeeze in some countries.

The outlook for the major regional economies looks clouded at best.

Japan is likely to remain in the economic doldrums for some time yet. Despite the substantial stimulation packages already announced by the Japanese Government, the economy will continue to be plagued by severe financial sector problems and, as you would know, low consumer confidence.

The IMF has estimated that the Japanese economy contracted by 2.8 percent in 1998 and expects a further contraction of 0.5 percent this year. Japan's economic planning agency has itself said that the economy could well contract for a third consecutive year.

China, which has so far appeared to resist the worst of the onslaught of the regional crisis, has also begun to suffer from its effects. Its export growth flattened out to around zero over 1998, and the collapse of a number of international trust and investment corporations may have repercussions for China's ability to continue to attract high levels of foreign investment.

While central government economic policy is certainly heading in the right direction, China's structural challenges are deep-seated. Indeed, China's finance minister said recently that there wasn't any room for optimism about the economy, and that negative implications of current problems should not be underestimated.

On a brighter note, the Korean economy has shown a number of encouraging signs that it may be stabilising. A return to positive growth could be achieved in 1999. And the Koreans themselves are suggesting they may even achieve 4 percent growth this year. The Korean Government is pushing ahead with promising reforms which will hopefully lock the economy into a sustainable growth path.

Outside the region, there is little on the horizon likely to assist a speedy Asian recovery. Continued economic expansion in the United States and Europe is probably going to be the most vital ingredient outside of Japan's economy. But while the United States did experience very strong growth in 1997 and 1998, current indicators suggest that American growth will moderate this year. And European growth now also looks to ease in 1999.

Let me stress, however, that despite this relatively gloomy picture, and indeed it's a slightly more gloomy picture than was articulated by a number of people at the Davos meeting, we do continue to believe in the underlying strength of the region. It is one of the reasons why we have been happy to invest so heavily in ensuring a recovery, something which I will talk about in greater detail in a moment.

Clearly, though, a lot of work needs to be done and some fundamental assumptions need to be re-examined. But countries such as Korea and Thailand are making good progress in the implementation of structural adjustment programs. And even Indonesia with its massive economic problems deserves praise for the way it has sought to tackle them.

At this stage, our assessment is that the economic crisis is unlikely to challenge, in any signficant way, the security and stability of the region as a whole. The likelihood of a major, region-wide conflict in our region remains low.

The crisis hasn't, in our view, brought about any significant changes in strategic relativities between the major powers. If anything, it has reaffirmed the important roles which these countries continue to play in the region.

China's decision not to devalue its currency - albeit for its own economic reasons - has helped to contain the financial contagion effect and importantly has won it considerable regional kudos.

Japan has perhaps not received the credit it deserves for its own very significant financial contributions - the recently announced Miyazwa package adds significant new assistance to the generous dollars US$43 billion already provided to the region. But the size of its economy and its security alliance with the United States will ensure continued regional pre-eminence.

The crisis has also highlighted the importance of continued us engagement in East Asia. Indeed, the main uncertainty here is whether Washington will be distracted from the region's problems by its own drawn-out domestic political crisis.

Notwithstanding these assessments, the economic crisis is altering our strategic environment in ways which will require careful maanagement to avoid misunderstandings and instability. While the strategic relativity between the major powers remains stable, other power balances in the region are changing.

For example, some countries have been more able to better insulate defence spending, while their neighbours have needed to make dramatic reductions. It is, of course, no bad thing that financial pressures are encouraging planners to think carefully about what defence assets they really need. But it clearly would not be conducive to regional stability if expenditure on defence across the region was so uneven that it contributed to distrust.

Defence budget cuts are also having a significant impact on bilateral and regional defence cooperation, which plays an important role in enhancing transparency and building trust between the countries of the region.

We have already seen in many countries the domestic impact of the regional economic downturn. The most dramatic illustration of this has been the end of the Soeharto era in Indonesia. But we've also seen new governments in Thailand and Korea, and significant political pressure placed on governments like Malaysia and Papua New Guinea. And clearly, with a recovery some way off, there remains a possibility of further internal upheaval in some parts of the region.

The strain caused by the economic crisis has seen unprecedented pressure applied to long-standing political and social structures. These internal strains have not yet had a significant strategic impact beyond the borders of the countries concerned, but they clearly contribute to an environment of uncertainty and instability.

And in a region under stress economically, we may also see an increase in the prominence of transnational issues, such as illegal migration, piracy, illegal fishing and drug smuggling, and a greater risk that these will cause friction between neighbours.

Given the far-reaching economic and political implications of the crisis, Australia became involved at an early stage in developing a well targeted and substantial response.

We were one of only two countries to contribute to all three IMF assistance packages for Korea, Thailand and Indonesia. And we successfully led efforts to lobby the International Monetary Fund for a more flexible and appropriate approach in the design and implementation of the package for Indonesia.

At the APEC leaders' meeting in Kuala Lumpur in November last year, our Prime Minister, Mr Howard, announced a three-year economic and financial management initiative to help APEC economies take practical measures to strengthen their economic and financial management.

Bilaterally, we ensured trade finance for the worst affected countries through our export finance and insurance corporation export insurance cover for Korea and Indonesia. And we boosted aid programs to countries like Thailand and Indonesia to soften the social impact of the crisis, and bolster economic management, governance and institution building programs.

Australia has also sought to encourage the further development of positive and constructive relations between the region's three major powers to ensure that the strategic implications for the crisis are minimised. In this regard, we have very much welcomed the improvement in major power relations - particularly between China and the United States - over the last couple of years.

Opportunities for security dialogue and cooperation between the countries of the region are helping to raise, or maintain anyway, levels of trust and confidence. We are currently seeing the evolution of a new security architecture for the region which incorporates complementary and mutually reinforcing security linkages at the bilateral and - through the ASEAN regional forum - multilateral levels.

Australia has expanded its network of so-called pol-mil (political/military) talks and regional security dialogues to include now ten regional countries. We also strongly support the work of the ASEAN regional forum which has been successful in helping to develop habits of dialogue and cooperation in a region which, you have to remember, has no history of multilateral cooperation in security affairs. Indeed, we are keen to see the ASEAN Regional Forum develop over time some capacity to contribute to the management of regional disputes, for example through a 'good offices' role for the ASEAN Regional Forum chair.

The Asian economic crisis isn't just the region's problem. In both its origins and impact, it has further underscored the interrelated nature of the global economy. Contagion effects have spread so that few countries around the world remain untouched. If we needed to be reminded of the fact, we need only look at the recent effects of Brazil's devaluation on capital markets around the world.

The crisis has seen the IMF's 1999 GDP growth forecasts for the global economy revised downward. Growth for 1998 was estimated to be 2.2 percent, far lower than the average growth of around 4 percent for the past three years and the 3.5 percent trend over the past two decades. Trade in goods and services, which grew by an average of 9 percent from 1995 to 1997, is now expected by the imf to fall to 3.3 percent in 1998 and 4.4 percent in 1999.

These figures underline the need for concerted international action over East Asia's problems. Now I welcome the contributions of the United Kingdom and the European Union, and they have made considerable contributions, especially through the ASEM trust fund and the World Bank, which is providing funds in support of financial sector reform. I also understand that the European Financial Expertise Network or EFEX is providing valuable expert advice and assistance in this sector.

But more can always be done. For this reason, I am convening a meeting, in Sydney on 5 March, of key aid donors, including the United Kingdom, and some regional ministers responsible for development, to focus on the long-term development challenges facing the region and what is required to restore growth.

It's my hope that the Sydney meeting will result in the international community confirming its commitment to support the region's recovery over the medium to long term. It will also examine mechanisms to facilitate greater coordination between donors in order to achieve the maximum effectiveness in our development interventions.

The crisis has also rightly given rise to questions about the commercial wisdom of many investment decisions in emerging markets and how we should supervise the international financial system.

In this context, Australia has been an active participant in international efforts to reform the international financial system, particularly through the so-called G22. And on a national level, a task force established by the Prime Minister, Mr Howard, published a report in December last year looking at how the reform agenda could be advanced.

Key recommendations included the establishment of two international task forces: one to examine steps to ensure adequate disclosure by hedge funds and appropriate risk management on the part of creditors dealing with them. And a second to consider improved crisis management including collective action clauses in bond agreements and arrangements for debt standfasts to minimise the likelihood of creditors rushing for the door, a practice which exacerbated the Asian Crisis.

But it's not just a question of taking practical measures such as those. The crisis has precipitated both in our region and beyond a 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.

At stake in this debate is nothing less than the liberal-market economic model. Increasingly, governments, academics and some commentators are arguing for the re-imposition of controls on capital flows, the steady re-introduction of protectionist measures, the return of more overtly nationalist economic policies.

Even in Europe, we have seen arguments put forward for the erection of barriers, for measures to quarantine the continent from international financial contagion. But in an increasingly interdependent world, no country or region is, or can be, an island.

This is, however, a debate which we in Australia relish. And this is because I firmly believe that the liberal market model offers great benefits and has great strengths. But these benefits do not come for free. Economies which are not transparent will, over time, fail to prosper. In this sense, it's not the liberal market economy which has failed. It is rather the lack of liberalism, including, in some cases, political liberalism, which has caused failure.

I believe this crisis has helped Australia to understand better the nature of its relationship with Asia. It's brought into relief our differences - our large and developed economy, our multicultural society, and mature and open political and economic institutions, and the strong ties that we have in Australia outside the region. For example, with this country.

These differences don't however, isolate us from the region. Rather, they highlight just how relevant we are to it. One reason why Australia's advice and assistance has been sought out and valued is because of these differences. We can offer fresh ideas, and we have, over the years, developed the necessary linkages with the region to deliver these ideas as friends.

I want to conclude by emphasising again that the region's problems are not just for it to deal with it, nor are the implications limited to Asia. The world's far too small and far too interconnected for us to have the luxury of detached unconcern about what is going on in other neighbourhoods. That is certainly something we in our region have always felt about developments in europe and the united states.

This crisis has helped confirm the benefits that our European and American cousins can gain from paying close attention to what happens in our neck of the woods. What you call the far east is these days only as distant as your own stock markets. Assisting Asia in its time of trouble not only requires global action, it also provides global rewards.

Thank you.

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