Governance In The Asia Pacific - Challenges For The 21st Century

Speech by the Hon Alexander Downer MP, Minister for Foreign Affairs, to the Asia Research Centre

Murdoch University, Perth, 18 August 1999

(Check Against Delivery)

I'm very pleased to be back in Perth and Murdoch University, and to have this opportunity to speak again at the invitation of the Asia Research Centre.

Last year I spoke at a function organised by the Research Centre on the topic Asia after the Crisis. It is now over two years since the first signs of the Asian economic crisis appeared, and I think it timely for us to consider some of its broader implications, both for the region and beyond. In my remarks today I would like to focus on just one of those issues, one that I believe to be a key to resolving the crisis, and preventing its reoccurence - the issue of governance.

Those who have studied the causes and effects of the region's crisis broadly agree that the lack of 'good governance' was a key contributing factor. But just what is good governance, and how can the international community help strengthen governance in developing countries? These questions have moved quickly to the centre of the international development debate during the last year or so. No country has been more important in bringing those issues to the fore than Australia.

More so than for most other donors, we have a direct interest in the reform of governance in our region. Within a couple of hours' flight from Australia lie seven developing countries with a total population of close to 300 million people. Add an hour or so, and the number climbs to around 1 billion. Our future depends on the success of plans to reform government in Asia, and to promote prosperity in the region.

What is governance?

Governance is a long term and multifaceted issue. It covers many sectors - economic and financial, law and justice, public sector, civil society. It has many permutations - some countries have good policies but weak institutions, others have reasonable institutions but weak policies, yet others have neither. And it is a sensitive area where one is likely to find many obstacles - reforms may threaten powerful vested interests, or be seen as a challenge to national sovereignty and nationalist sentiment. Governance is not just about government. It is about a good society. The term describes the means by which citizens and groups in any society voice their interests, mediate their differences and exercise their legal rights and obligations. It refers to the whole economic, social and political fabric of a country.

The Government's 1997 review of Australia's aid program, Better Aid for A Better Future, established governance as one of the five priorities of the Government's aid program, along with improving health, education, infrastructure and rural development. It defined 'effective governance' as 'the effective management of a country's social and economic resources in a manner that is open, transparent, accountable and equitable'.

Good governance - essential for development

Governance issues, then, are central to the development process. Developing countries that are quite similar in terms of natural resources and social structure have shown striking differences in the advancement of the welfare of their people, much of it attributable to standards of governance. We find that development inevitably suffers in countries that have corruption, poor control of public funds, lack of accountability, abuse of human rights and excessive military influence.

A recent landmark study by the World Bank - Assessing Aid: What Works, What Doesn't, and Why - has re-emphasised the crucial role of good governance for sustainable development. The study found that aid works best where there is a good policy environment and that, with sound country management, an additional one per cent of GDP in aid translates into a one percent decline in poverty and a similar decline in infant mortality. In a weak environment however, aid has much less impact; indeed, it can often be wasted.

Governance - the debate in Asia

In contributing to the debate about governance, Australia sees itself as a stable, significant power with strong democratic values. Our location makes us acutely aware of the need for countries with different values to learn to work together, but there are certain pillars of a civil society that we believe all nations should develop.

These pillars essentially reflect our commitment to liberalism that places strong emphasis on the rights of individuals. They include freedom of speech and the contestability of ideas, respect for human rights and the rule of law, accountability and transparency in public administration, and support for sensible market-oriented economic policies that make proper allowance for social goals. These principles underpin our policy dialogue and our aid programs in Asia and the Pacific.

In building on these pillars, there is room for different societies to make different choices, both in substance and in style. Australia recognises that such differences are likely to emerge - indeed, we welcome them. In the past, western donor nations too often tried, perhaps unconsciously, to mould developing countries into their own image. Such artificial homogeneity will not work.

At the same time, it is important to focus on the values we have in common with our neighbours. A shared vision of what good societies might look like in the Asia Pacific region is more likely to emerge if as a region we focus on areas of consensus rather than on conflict.

Australia's advocacy role

In our region, Australia has a central role as an advocate of good governance. We try to convince leaders in Asia that reforms will yield tangible gains, and will be in the interests of their countries. Of course, if they are not convinced, there is little incentive to incur the possible political costs of reform.

There are some sceptics who say this approach doesn't have an effect on authoritarian regimes, and that stronger measures are called for. They demand that aid be conditional - tied to progress on issues like human rights, democracy and the rule of law - and that sanctions be applied to penalise poor performance by recipient countries.

But conditionality is best applied carefully. Tough talk by a Foreign Minister might win plaudits at home, but populism rarely serves national objectives well. Ill-judged conditionality can hurt the poor in recipient countries, and may well fail to achieve my policy goals. The truth is that foreign aid is usually not effective in promoting change in recipient countries unless there is strong local support - that is, a strong sense of 'ownership' - within those countries.

Recognising this, in the South Pacific region Australia has established the Pacific Policy and Management Reform (PMR) fund as an incentive-based activity designed to support public sector reform. Any South Pacific country that prepares a detailed proposal to promote good governance can to apply for assistance, and the scheme has no conditionality. The message is simple: when South Pacific countries want to introduce reform, Australia stands ready to help.

More recently, we have adopted a similar approach in Asia. With Australian support, an Asia Crisis Fund has been established that operates rather like the PMR fund. Requests from partner countries for assistance in such areas a fiscal management, economic monitoring and financial sector reform have already been funded, A genuine commitment to reform is something that money alone cannot buy. Ownership of the idea of change depends on the politics and institutions in recipient countries, their experiences, and especially local perceptions of what has worked in the past. What money and aid donors - can do, is to promote the cause of reform with effective advocacy within developing countries.

Our support for institution building

Advocacy is important, but lasting reforms are unlikely to take hold unless there are strong domestic institutions to support them. Yet the institutions of modem civil society, and of effective government, are often weak in developing countries. Donor support for institution building is therefore vital.

In our aid programs, Australia targets four main areas to advance good governance:

• economic and financial management;
• law and justice;
• public sector management; and
• the development of civil society.

Economic and financial management

The Asian crisis dramatically underlined the importance of institutions that support the good economic and financial management of modem market economies. Wealthier countries tend to take this for granted, but their development of strong and market-friendly institutions took place over hundreds of years.

In Asia, a consensus has emerged about the major or institutional reforms needed in crisis-affected countries, particularly in the financial and the corporate sectors. Australia is well placed to provide assistance in this area.

Australia's economy has shown tremendous resilience and flexibility over recent years. Restructuring and reform, though painful at times, have ensured that we have not just survived the Asian economic crisis but have actually prospered during it.

Sound economic management by our Government has provided the framework for continued economic success for Australia into the future. Business confidence is high. Australia's growth rate in 1998 was 5% of GDP, the highest rate of growth in the OECD. This is a truly remarkable performance. Tariff reduction, financial deregulation, labour market reform, and tax reform have all played a role in the creation of the current enabling environment for economic growth.

It is this experience, and this expertise, we carry into the international arena.

Australia has been active in APEC Finance Ministers Meetings and the South Pacific Forum Economic Ministers Meetings in raising awareness of economic governance reform. The Report of the Prime Minister's Task Force on International Financial Reform, published in December last year, addressed many of the global issues and has been well received.

Our Government has also drawn on Australia's private sector and regulatory experience to help build similar strengths in the region. We've done that most obviously in Indonesia, but also in many other crisis-hit countries throughout the region.

For example, we have established under the aid program a $50 million, three-year Economic and Financial Management Package for the region, as well as the Asia Crisis Fund, doubled under the last Budget to $12 million. Activities funded under the Asia Crisis Fund focus on the sectors of economic governance, financial sector reform, and employment generation.

On the bilateral front the Australian Government is working closely with those countries most affected by the crisis. For example, the $70 million Indonesia Technical Advice Management Facility enables the Indonesian Government to access specialist advice quickly to support Indonesia's economic reform agenda. In the same vein, the $25 million five-year Philippines-Australia Governance Facility project will provide technical and policy assistance to strengthen the Philippines' econornic and fiscal policy formulation, with an emphasis on pro-poor policies.

The crisis has also highlighted the need for targeted and cost-effective social safety nets to protect the most vulnerable from the ongoing effects of the crisis. Our aid program aims to meet that need. For example, we recently funded a major study of regional social safety nets in Thailand, Philippines, Indonesia and Malaysia. More generally, we have sponsored the establishment of the Asia Recovery Information Centre (ARIC) at the Asian Development Bank in Manila to help the region analyse the long?term effects of the crisis and to assist in locating solutions to these problems.

Law and justice institutions

In addition to good economic management, a good society needs effective systems of law and justice.For societies to function well, citizens need a reasonable degree of security and knowledge that agreements freely entered into will be honoured. This applies equally to the laws that provide an effective enabling environment for commercial transactions as it does to the laws that protect citizens' rights.

An effective justice system has many elements - courts and judges, a police force, prosecutors, law firms, gaols, law schools, and so on. These institutions are expensive.

Developing countries that cannot provide clean water to children will be hard pressed to find the resources for a comprehensive legal system. Donors can therefore help with selective assistance to strengthen the key parts of the evolving legal system in Asia. Australia has been implementing targeted assistance of this type for well over a decade. For example, in PNG, Australia has long-term programs of assistance to the police and prison services, and has helped establish the PNG Ombudsman Commission to promote transparency and accountability within the public sector. And in Cambodia, over $11 million of Australian aid is being used for the Cambodia Criminal Justice Assistance Project to strengthen the processes of law enforcement and ensure adherence to international human rights instruments in the treatment of accused persons, detainees and prisoners.

Effective public sector institutions

Effective institutions of public sector management are also needed to underpin the operations of civil society. In most countries, the bureaucracy plays a central role in both helping formulate policies and delivering public services - but not so in some developing countries in Asia. There is a paradox here - on one hand, governments across the region are often perceived as too strong, and too ready to use coercion to preserve their power. And yet those same governments may in some respects be very weak. What is needed in such countries is a rebalancing of the role of the state, with a reduction in some (often political and military) central powers combined with an increase in others (such as the institutions of a modem civil state).

Markets will not work well when the enabling environment provided by public sector agencies is poor. Investors won't take risks when policies are unclear and when the rules of the game are uncertain. And public support will be lacking when the delivery of key government services (education, health, and social safety nets) is done badly. Thus one important way international donors can help strengthen the private sector in developing countries is to help the public sector to do a good job.

Australia is doing its part. For example, an Australian management team is assisting Indonesia's State Audit Agency to strengthen anti-corruption provisions and strategies, auditing techniques, and public sector accountability systems.

Fostering the development of civil society

Institutional development must also foster the development of a civil society. One of the most effective ways of doing so is by providing direct support to organisations active in promoting civil, economic and political rights. There are many organisations that can usefully be targeted, ranging from national and international human rights organisations through to local NGOs with quite specific goals, such as community mobilisation and the protection of vulnerable groups.

Last year over $60 million was spent under the aid program in support of civil society across the region. For example, we have established a $10 million Vulnerable Groups Facility in the Philippines, which provides targeted support to assist in the social and economic integration of disadvantaged groups in that country. And in PNG an Incentive Fund win, from July 2000, promote community integration by facilitating the redirection of AusAID funds to non-government organisations in that country.

An important step in Australia's support for good governance came in August 1997, with the establishment of the Centre for Democratic Institutions (CDI). I established the CDI as an institution to provide practical support for the consolidation of democratic institutions in countries where democratic structures are still evolving or yet to emerge. It exemplifies the cooperation rather than the conflict model of promoting human rights adopted by Australia.

Other important human rights initiatives include our Human Rights Fund, which increased by 30 per cent in the last Budget to $1 million. This Fund supports small-scale NGO human rights activities in developing countries. In Indonesia, the Institutional Support for Komnas HAM project ($2 million in 1998-2001) will help strengthen the work of the Indonesian National Human Rights Commission (Komnas HAM) in that country.

The exercise of political rights through free and fair elections is another key component of civil and political rights. The Australian Government, through its aid program, gave $15 million to assist the conduct of the Indonesian elections in May and June. We gave $10 million to the UN Trust Fund to support this month's referendum vote in East Timor (with further 'in-kind' logistical support now totalling about $11.5 million). And we have also provided electoral assistance to South Africa, Cambodia and Fiji.

Strengthening the media can also foster the development of civil society by encouraging open, accountable and effective government, giving communities a forum to debate government policies. On this point, I would like to congratulate the Asia Research Centre on the successful media workshop it held for our Indonesian counterparts in May this year. This is just the kind of innovative project, provided in cooperation with the CDI, that our aid program should support.

Governance challenges for the region in the 21st Century

Obviously countries in our region are grappling with a variety of serious problems and I don't intend to canvass all of these in this speech. But there are two key governance challenges that to my mind are particularly critical.

The first challenge is to return investment and growth to Asia. The second is the need for political reform to allow conflict within societies - including ethnic conflicts - to be resolved peacefully. I have discussed the impact of the crisis in stalling and at worst reversing development in the region. Recently however, there are encouraging signs that a slow upturn is under way. The challenge for the region is to continue the reform process, so as to attract and maintain investment into the 21st Century.

Attracting foreign direct investment (FDI) needs to remain a priority in the recovery strategies of the Asian economies. Other crucial reforms include improved regulation of financial markets, as well as efforts to expand capital markets. Corporate and financial governance needs to be strengthened. Most importantly, as we saw earlier, the best way to encourage foreign direct investment is to promote good governance. This includes implementing sound economic policies aimed at ensuring private sector-led growth. It also means being transparent and consistent in the implementation of policy decisions.

We are also witnessing a rise in the level of unrest throughout parts of the region that may affect growth and stability in the Asia Pacific in the twenty-first century. How we manage these tensions and how we peacefully resolve the differences underpinning them is one of the most profound challenges the Asia Pacific will face in the next century.

Political reform through civil society

The development of civil society institutions will provide a democratic opening for people's dissatisfaction, and their aspirations. When individuals have confidence that their voices will be heard, and they know there are effective mechanisms through which to seek redress for wrongs, there is a better chance that people will live peacefully with each other.

The growing influence of civil society in the Asia Pacific is one of the great success stories of recent decades. We saw it in the Philippines in 1986, when Cory Aquino forced Ferdinand Marcos from office. We see it today in places as diverse as Cambodia and Fiji, where civil society groups are active in lobbying for electoral reform. We've seen it most prominently in Indonesia's national elections in June, which resulted in a process that most observers have judged to have been free and fair.

But civil society across the region is still fragile and badly needs international support. For example, in Cambodia, so enormous was the damage was done to the institutions of civil society during the Pol Pot years that the healing process has barely yet begun. The encouragement of good governance and democratic processes has also come to provide an enabling environment for peace and stability at the regional level. The world is a better place when it is full of functioning democracies. Democracies rarely have famines, do not declare war on each other and are less likely to have to suffer civil war.

The nurturing of institutions that support good governance in the region is a long-term incremental method of maintaining and strengthening peace and security. It is a 'soft' approach to conflict prevention that may not attract media headlines in the way that eleventh-hour military intervention does, but in the long term it may be just as important in preventing conflict and ensuring security.

Conclusion

Ladies and gentlemen, fashions in thought about development priorities come and go.

In one sense, the recent emphasis on the need for better governance in Asia is merely a reformulation of ideas on democracy, the rule of law, the role of the state and transparency in government that have been debated across our region for much of the 20th Century. There are still differences between donors and recipients on issues of governance. But far more important is the fact that there are significant areas of agreement.

Some aid donors do not always see the commonality of approach, preferring instead to focus on issues that play to their own domestic audiences. That is not the Australian way. We make these points of consensus the starting point for our relations with partner countries. We are also keen to encourage the peoples of the region in, finding local solutions to their challenges. Change will happen, but only if we can engender a strong local ownership of reform programs which fully recognises the size of the task ahead.

It would be arrogant to suggest that we, in Australia, have all the solutions. We do not. But I am confident in saying that we have settled on the best approach to find them. This is an approach many other donors in the West could usefully consider. For these reasons, I face our region's future with some confidence. While I recognise that significant problems remain, I am heartened. I'm heartened by the progress that has already been made. I'm heartened by our neighbours' determination to meet their difficulties head-on. And, most of all, I'm heartened by Australia's ability to help, through our actions and by our example, to build the kinds of institutions in our region that will overcome the causes and effects of the economic crisis.

ENDS

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