Responding to the Asia Crisis: Charting the Way Forward

Speech by the Hon Alexander Downer, MP, Minister for Foreign Affairs, at the opening dinner of the Sydney Meeting on Development Cooperation: Responding to the Asia Crisis
Customs House, Sydney, 4 March 1999

(Check Against Delivery)

Ministers, Excellencies and other distinguished delegates.

First of all, let me welcome you to Sydney. While brief, I hope our time in Sydney will be highly productive. I also hope you take the opportunity while you are here to enjoy a small taste of what Australia's major city has to offer.

Our meeting tomorrow is the first occasion since the onset of the Asia crisis where ministers and high-level representatives from regional governments will join with senior donor and multilateral representatives to chart the way forward to sustained recovery.

My motivation in bringing you all together is that the need for concerted efforts to deal with impacts of the crisis is far from over.

There are now some early signs of recovery, but social, political and economic impacts are persisting. These impacts have fundamentally altered the medium to longer-term development outlook for the region.

Regional Environment

It is essential that we address the challenges of this changed development environment. Indeed, the rapid return of strong and sustainable growth to East Asia is arguably the most important development priority facing the world on the eve of the new millennium.

We owe it to the people of East Asia who have endured so much social and economic turmoil in the last eighteen months to ensure this priority is addressed effectively and comprehensively. It is also crucial that the international community continues to lend its weight to the reform momentum now so apparent throughout East Asia.

Early and sustainable recovery is, of course, vital to the interests of the countries of East Asia and the quarter of the world's population that lives there. But we should not under-rate its wider importance. The repercussions of the crisis have sent tremors through many national economies far from its East Asian epicentre.

Global growth is estimated by the IMF to have fallen from 4 percent per annum in the three years to 1997 to 2.2 percent in 1998 - an economic growth rate less than one percentage point higher than annual global population growth.

Attracting the longer-term and more stable capital flows offered by FDI should remain a priority in recovery strategies. Preliminary data suggests that FDI flows to the region have remained relatively stable throughout 1998. In contrast, net private capital flows reversed dramatically in 1997-98, posting a net outflow of US$18.3 billion in 1998

Even taking into account the prospect of an end to contractions in most East Asian economies during 1999, growth in global trade this year is expected to be less than half the annual average rate of 9 percent from 1995 to 1997. This makes it harder for even the most resilient economies to sustain the rates of growth they have enjoyed in recent years. It will also further constrain growth opportunities in other parts of the developing world - even regions like in Africa that are not deeply integrated with East Asia's economic fortunes.

The bottom line is that the global bottom line will be less healthy while East Asian economies remain sluggish.

Growth and Sustainable Development in East Asia

The recognition that East Asia's sustained recovery and development remains a global concern underpins the need for an unambiguous commitment by all of us to continue working together to rebuild growth and sustainable development in East Asia.

Effective cooperation is especially important in addressing the economic impacts of the crisis. To be effective, our cooperation must take place within a sound policy environment. The international financial institutions, especially, must remain at the vanguard of efforts to achieve necessary structural and policy reforms which also take due account of social implications and objectives. Along with bilateral donors, the international financial institutions must continue to back these interventions with ongoing financial support.

Among the most productive contributions the broader international community can now make to rebuilding economic strength in East Asia is to assist these countries to develop their economic and financial policy, management and governance capacities.

Last year's Australian-sponsored APEC survey of regional economic governance needs found that the strongest demand was for enhanced implementation capacities, whether in policy development or hands-on economic and financial operations. Strengthening these capacities is likely to deliver some of the most direct and enduring benefits for the future economic fortunes of East Asia.

The international community must also look at the role our own economic policies can play in nurturing sustainable growth in crisis affected countries. In particular, we must maintain open and outward looking trade and foreign investment regimes. If we resile from these goals, we may stifle the turnaround now commencing in East Asia.

We must also support further enhancement of the rules-based international trading system to underpin sustainable growth in the world economy. Australia is looking to the WTO Ministerial Meeting in November to launch a new round of trade negotiations.

The other core area where international collaboration can contribute to future economic resilience in East Asia and, indeed, globally, is through reform of the international financial system. The experience of the crisis has prompted a level of substantive debate about the problems within the international financial system not seen since the Plaza and Louvre Accord negotiations in the mid-1980s.

The combination of policy shortcomings, technological development and an increasing scale of capital flows has exposed weaknesses in the operation of the international financial system which presents risks for all economies.

But while there is a general consensus that there is scope to strengthen the international financial system and achieve greater stability in global capital markets we must confront reform challenges with caution.

As I said in an address to the Royal Institute for International Affairs in London last month, nothing less than the liberal-market economic model is at stake in this debate. We must take care to ensure our actions contribute to genuine reform of the international financial system and to improving its robustness and efficiency. We must avoid measures, whatever their short-term attractions, which are likely to be counterproductive, such as the illusory 'quick-fixes' of a re-imposition of trade barriers or excessive capital controls.

Australia is taking an active and constructive role in the international debate on the future shape of the international financial system. Last year, the Prime Minister, Mr Howard, established a task force drawing together public and private sector expertise to examine ways in which Australia could help advance the reform agenda.

The task force completed its report in December and made many suggestions for practical reform, including enhancing supervision of highly leveraged institutional investors and hedge funds, improved crisis management, and better debt management in emerging economies.

Development Impacts and Responses

Of course, the issues we will consider tomorrow have much more of a human face than the numbers on national and international balance sheets. As the great economist Alfred Marshall emphasised, economics itself is fundamentally about mankind in the ordinary business of life. We must keep in perspective the human dimension in our collective responses to the longer term impacts of the Asia crisis.

We are all well aware of the extent of the social impacts of the crisis. I do not need to catalogue them here. However, there are several issues that I wish to highlight tonight which have special relevance for our discussions tomorrow.

The East Asian miracle was not a mirage. Extraordinary progress was made in reducing poverty and raising living standards. But the crisis has highlighted the vulnerabilities that persisted despite these achievements. The most striking illustration is Indonesia. Before the crisis, almost 90 per cent of the Indonesian people had been elevated above the traditional poverty benchmark income level of 1 US dollar per day. However, almost 60 percent were still living on incomes below two US dollars per day. These people remained highly vulnerable to setbacks and, as the crisis has now shown, even many on higher income levels were by not immune from substantial reversals in living standards.

This underscores my conviction that the central issue is the tangible impacts of the crisis on living standards across the region, rather than the number of people shifted above or below any arbitrary poverty line. These welfare impacts have been substantial. In Indonesia, Thailand, the Philippines and Malaysia, GDP per capita has fallen by around 10 percent since 1997. This is a serious about turn with consequences that are being borne directly by individuals, families and communities.

It is equally important to ensure our attention is focussed on the most significant welfare issues. Unemployment and falling incomes remain the major factors in transmitting the impacts of the crisis to individuals. This means our cooperative efforts to address welfare issues will be most effective if we give priority to rehabilitation of the real, job-creating sectors of affected countries.

While short-term interventions can never be a substitute for restoring sustainable growth, there is an obvious need for ongoing direct responses to social impacts. As our understanding of the effects of the crisis has become more sophisticated, it has become clear that welfare impacts have been complex. This means national and international response measures must be carefully targeted to be effective.

It also means we cannot expect a rising economic tide to lift all boats. Structural changes may mean the circumstances of many directly affected by the crisis will not automatically improve with recovery. This complicates the challenges we face in cooperating effectively to address persisting needs and underscores the need for accurate and timely analysis of these needs.

Government, of course, has a central role in direct response measures. I applaud the efforts of regional governments to reinforce and protect social investment and welfare mechanisms. But these mechanisms have been placed under stress in many countries. The international community continue to provide support for social investment and welfare programs, not least because they have such a vital role in protecting the human capital base upon which affected countries will rebuild sustainable development.

The crisis has provoked considerable interest in the merits of establishing or extending broad-based formal safety nets, such as unemployment insurance and pensions. These systems can buffer the effects of economic downturns. However, the fiscal and administrative challenges involved in developing and implementing formal safety net mechanisms are enormous. We need to be cautious about promoting models applied in industrialised economies. Our cooperative efforts should build on systems already in place in regional countries and be closely aligned with the social circumstances of affected countries.

We must also make every effort to ensure our response efforts have maximum impact. This will depend on both the effectiveness of our coordination and the efficiency of our information. To facilitate effective cooperation at a practical level, I have proposed the establishment of a clearing-house - the Asia Crisis Information Facility- to consolidate and exchange information on crisis impacts and response activity. We shall talk further about this proposal tomorrow.

Conclusion

My concluding remarks tonight are directed at fellow members of the international donor community. It is fair to say that many of the countries of East Asia have been the champions of development in the latter quarter of this century. From Korea's entry into the OECD to Indonesia's success in poverty reduction, many of these countries have provided the benchmarks of progress to which other developing regions have aspired.

The international donor community should be proud of the role it has played in these achievements. However, the crisis has demonstrated the fragilities of these successes. It has underscored the need for the international donor community to remain engaged in the process of achieving robust development in East Asia and in maintaining the momentum of reform. History will judge us poorly if our celebration of East Asia's developmental achievements, now punctuated by the crisis, is not followed by an enduring commitment to recovery and restoring sustainable development.

Also see the Communique of the Sydney Meeting on Development Cooperation: Responding to the Asia Crisis

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