SPEECH BY SINGAPORE PRIME MINISTER GOH CHOK TONG TO THE US CHAMBER OF COMMERCE, WASHINGTON D.C. ON TUESDAY, 22 SEPTEMBER 1998 AT 12.30 PM
THE ASIAN ECONOMIC CRISIS: CHALLENGES FOR THE US
The past one year has been traumatic for Asia. Its economies are still reeling from the impact of the financial crisis which erupted in July last year. Their growth has contracted even as they take painful measures to cope with the crisis. It was a rude awakening. No one had expected that the much celebrated economic prosperity in Asia could have been so fragile.
Today, I wish to share with you my views on the prospects for the Asian economies, the critical role the US can play in facilitating Asia's recovery, and the opportunities for US businesses in Asia.
Asia's Achievements And Weaknesses
Over the last thirty years, the Asian economies have achieved the single greatest spurt of economic growth in history. Real and tangible progress has resulted from the rapid industrialisation of these economies. This is reflected in their efficient infrastructure, modern factories, and various favourable socio-economic indicators.
With the striking gains in their populations' living standards, the Asian economies were widely seen as models for developing countries in other parts of the world. No one foresaw that these countries would suddenly be hit and devastated by one of the worst economic crises of the postwar period. What went wrong?
Both external and domestic factors are responsible. The external factors include the strengthening of US dollar in 1995 to 1996; the downturn in regional exports; the role of speculators in attacking the more vulnerable currencies; globalisation and free capital flows; and the herd instincts of investors, both local and foreign, who panicked and withdrew billions of dollars from the region over a short period of time. However, domestic factors were the underlying factors for the total loss of investor confidence and the depth and severity of the crisis. These problems include a weak financial sector, poor corporate governance, lack of transparency, and an excessive reliance on short-term external borrowing to finance domestic portfolio investment, long-term projects and property developments. In some countries, the institutional weaknesses were compounded by monopolies and other structural distortions in the economies. The economic damage and financial disorder were also exacerbated by policy errors. The economic crisis then led to political turmoil in some countries which in turn aggravated the economic problems and turned the whole process into a vicious cycle.
Prospects For Asia's Recovery
What are the prospects for the Asian economies? There is no doubt that the short-term economic prospects for the region are bleak. Most economies in the region are experiencing negative growth, rising unemployment, and high inflation. The question is really how much worse the economic situation will get and how long it will take for the region to recover and regain its old vigour.
I cannot give you a clear answer at this stage. The speed of recovery will depend on how quickly Asian economies come to terms with the new reality, how pragmatic their approaches are, and how resolutely they implement the necessary reforms. While favourable external conditions and financial assistance will help, the problems in Asia cannot be solved unless the affected countries take resolute measures to address the concerns of investors and give them the confidence to invest. They must also remove the uncertainty in their political situation.
In particular, the governments of these economies must adhere to sound macroeconomic policy and a deep and far-reaching structural reform program. They need to close insolvent institutions, recapitalise and restructure the financial sector, strengthen the regulatory and supervisory framework, improve corporate governance, eliminate monopolies and other economic distortions, improve transparency and restructure their external debt. All these are politically painful and difficult measures. But the bright side is that many countries in the region are determined to bite the bullet.
In Thailand and South Korea, the prospects for economic recovery have improved markedly. The Thai government is getting high marks from IMF and the investors for its commitment to economic reforms. Despite strong opposition, the government has closed insolvent finance companies, raised petrol taxes, and is in the process of restructuring the financial system. Their people have accepted the pain of adjustment. Similarly, Korea has successfully rescheduled its short-term debt, and bought itself time to reform its banks and chaebols or conglomerates. Reflecting the improvement in investor confidence, there has been a resumption of capital flows into both countries while their currencies have stabilised in recent months. Domestic interest rates have also declined significantly.
After all the sacrifices they have made, it is crucial for Thailand and Korea to succeed in restructuring and reviving their economies. They should be helped to do so, especially since the external environment is getting worse. Otherwise, they will be running on a treadmill that is moving faster and faster against them, and may just give up. Worse, there will be a negative demonstration effect on other countries in the world regarding IMF-sanctioned economic reforms.
The situation in Indonesia is far more complicated. Its problems are not just economic, but also social and political. The World Bank has estimated that the crisis will cost some 20 million Indonesians their jobs and push 50 million into poverty. The Indonesian government knows that it has to demonstrate beyond doubt to the markets that it will carry out fully both the letter and spirit of what it has undertaken to do in its IMF package. The organised riots in May and the "barbaric acts", and "sexual harassment", to use President Habibie's words, have traumatised their ethnic Chinese, and caused thousands of them to flee with their capital. The Indonesian government is grappling with the difficult task of restoring investor confidence and persuading their ethnic Chinese to return along with their capital.
Malaysia has just introduced capital controls and fixed its exchange rate. The controls have bought the Malaysians time to pursue an easier monetary and fiscal policy to jump-start the economy without having to worry about speculative attacks on their currency. However, the measures also contain great risks for the economy in the long term, especially if the authorities do not take this opportunity to restructure the economy.
Singapore, Hong Kong and Taiwan have relatively stronger economic fundamentals. However, they too have been affected by the financial turmoil, albeit less seriously than their neighbours. Growth for these economies will be sharply lower this year, owing to weak consumer sentiments, and shrinking Asian demand for their exports.
In Singapore, the government has taken measures to cushion the external shock to the economy and bring down costs sharply. We are also taking steps to strengthen our long-term competitiveness. For example, we are doing more to train our workers and educate our young. We are also promoting new investments, which can bring in new technologies, markets and jobs in the next few years. And we are pressing ahead with our strategy to liberalise Singapore's financial sector and to sustain its competitive position as a leading financial centre in the Asian time zone.
In the short term, economic prospects for Asia will also depend critically on developments in the United States and Europe. Fortunately, these two economies are expected to remain relatively robust, notwithstanding the Asian economic crisis.
As the largest economy in the region, Japan is key to Asia's recovery. Japan is a major source of investments and export market for the region. With its enormous savings of about US$20 trillion, Japan has the economic wherewithal to stabilise Asia in this economic crisis, but is unable to do so because of its own economic and political problems.
The Obuchi government has announced plans to implement major tax cuts, which are expected to help boost consumer sentiment. However, it is still too early to judge if this is sufficient to kick-start Japan's economy and make Japanese growth a source of confidence rather than gloom for the region.
China has grown at an impressive rate in recent years and has become an increasingly important market for Asian exports and overseas investments. It has run large current account surpluses, maintain strict control over the capital account, and accumulated foreign reserves holdings of US$140 billion. However, the economy is slowing, with GDP growth in the first half of 1998 at 7%, below the government's target of 8% for the year. Chinese Premier Zhu Rongji has admitted the threat of deflation and has pledged to tackle it through increased spending on infrastructure.
Of critical importance is China's ability to maintain the value of the renminbi. The Chinese leadership has repeatedly affirmed its stand not to devalue the renminbi. This has been a stabilising influence on financial markets in the region. However, the slowing Chinese economy and the weakening Japanese yen have caused financial markets to remain concerned about a possible devaluation of the renminbi and its impact on the Hong Kong dollar peg. The pressure on the Hong Kong dollar peg has caused the Hong Kong authorities to depart from its laissez-faire philosophy to intervene heavily in the stock market and adopted measures to curb speculation. Worse, the Asian economic crisis is beginning to affect countries outside the region. The Russian rouble has collapsed and currencies in Latin America are in a flutter.
Impact on the US Economy
In this increasingly globalised economy, countries are more tightly linked than ever before to each other's economic fortunes. The US, for example, has much at stake in the economic performance of Asian countries. Asia includes some of the best customers for US products and services. In fact, US exports more to Asia than it does to Europe. In 1997, exports to Asia (including Japan) accounted for 28% of total US exports. I understand that for some US states, such as California and Washington, more than 50% of their exports are destined for Asia. The economic slowdown in Asia has already affected the performance of US exporters. The US current account deficit soared by another US$10 billion to a record $56.5 billion in the second quarter this year. According to a study by the Institute of International Finance, the Asian economic crisis is estimated to result in a US$35 billion increase in America's trade deficit and shave 0.7 percentage points off the US economic growth.
Not only is Asia a major customer for your products; it is also an important destination for your investments. US companies have over US$130 billion of investments at stake in our region. An increasing number of your largest companies derive a significant part of their profits and earnings from overseas sales and operations in Asia. Because of your large investment, the economic turmoil in Asia will have an important bearing on the outlook for US corporate earnings. Intel, Hewlett-Packard, 3M and Citicorp have recently announced poor earnings as a result of their exposure to Asia and other emerging markets. A further weakening of the corporate sector's performance will hit the Wall Street, which has already shown signs of anxiety.
In Latin America, stock prices have plummeted. Investors are concerned about the high exposure of US banks to Latin America. This exacerbated the nervousness in Wall Street. Two weeks ago, the Dow recorded one of the biggest falls in its history, tumbling 345 points at one point. Recently, Federal Reserve Chairman Alan Greenspan has warned about the uncertainties posed by the pervasive interconnections of virtually all economies and financial systems in the world today. In his words, "It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress." Therefore, the US cannot afford to be indifferent to the Asian crisis. Recognising this, President Bill Clinton has pledged that the US would work with Japan, Europe and other industrialised countries and lead the effort to restore the health of the international economy. What can the US do to help Asia to recover?
What Can the US Do?
As the world's only economic superpower, the US must take the lead in mobilising international support to tackle the Asian crisis. It played a key role in the restructuring of Korea's short-term debt which was an important element of the economic restructuring program. It also took the initiative to convene a meeting of 22 finance ministers from key industrial and developing countries to discuss ways on how to improve the architecture of the global financial system in order to reduce the risk of such crises recurring in the future. I am encouraged to note that the US will be convening another meeting of the group within the next 30 days. The Asian economic crisis is no longer a local problem. It is the result of a systemic weakness manifested in volatile massive capital flows which will hurl economies like cars in a tornado.
The US should support the efforts of multilateral institutions such as the IMF and World Bank. The IMF has been strongly criticised in the US Congress which is holding up additional funding for the institution. Some critics have attacked the IMF for bailing out the creditor banks while others claimed that the IMF is providing support to corrupt governments. Still others have claimed that the IMF programs were ineffective or poorly designed, and had exacerbated the crisis. The IMF is not perfect and it should learn from its mistakes and become more transparent and accountable to its members. Indeed, it may be necessary for the international community to review the recent performance of the IMF and see how it can be improved. Indeed, it may be necessary for the international community to review the recent performance of the IMF and see how it can be improved. However, the IMF is still the only international institution that can respond swiftly and effectively to a financial crisis and it is only fair that the IMF should be provided with the necessary resources for it to perform its functions.
Regions such as Central Europe and Latin America, whose economies have made great strides in recent years, are watching the international community's response to Asia with great concern. This is not the time to disavow the IMF and stand aside, letting the chips fall where they may. This is the opportunity for the US to take the lead in minimising the depth and duration of the crisis and provide its share of the resources required by the IMF in order to discharge its duties. Without the necessary funding, the IMF might not have the capacity to respond effectively if the Asian crisis were to deepen. This will boomerang on the US economy. It is simply not a risk one should take in this critical period.
Over the last few decades, the US has worked hard to establish an economic order based on a laissez-faire philosophy. By maintaining a free and open market, the US has provided the impetus for growth in many of the Asian economies. Until now, the protectionists have remained quiet. But they will surely become more vocal if America dips into recession or its current account deficit widens further. Herein lies one of the biggest risks today - a wholesale retreat from free markets. That was the huge policy error committed in June 1930 when Herbert Hoover signed the Smoot-Hawley Act, which prompted other countries to retaliate. The US and Europe must not succumb to this temptation but keep their markets open to Asian exports. Trade is not a one way street. When Asian economies recover, their imports will grow again, and US exporters will benefit.
As an influential global community, US businesses have a special role to play in rebuilding Asia. Your investments have been an important source of capital and technology transfer for the Asian economies. US MNCs have made their Asian operations an integral part of their global business. They have invested in Asia not just to service the regional markets, but to export worldwide, to Europe and the US. They have spread their activities across many countries, wherever it makes the most economic sense to locate each particular operation. This global strategy has made US MNCs among the most competitive in the world, and helped them to stay ahead of European and Japanese rivals.
The difficulties which the Asian countries now face do not invalidate this strategy, since such MNC investments do not depend solely on the domestic markets of their host countries. Indeed, other things being equal, the depreciation of the Asian currencies against the US dollar should lower the costs of operating in these countries, and make it more attractive than before for MNCs to invest there.
The regional crisis does not spell the end of Asia's progress, nor has it swept away the factors that have contributed to the region's phenomenal growth over the past three decades. These fundamental strengths include high rate of savings, heavy investments in education, a hard working labour force, an enterprising business climate, and a good infrastructure. In time, the reforms now being adopted in most countries will lay the foundations for a stronger and leaner Asia. The US business community should thus take a long view of the prospects of Asia. It would be a grave mistake to take Asia out of your computer screen at a time when your participation is most needed. Instead, you should position yourselves to take advantage of the rebound in Asia.
There is a Chinese saying which says, "you can't catch a cub without going into the tiger's den." . Fierce though the economic crisis has been, this is not the time for US businesses to back out. The tiger economies may look like cub economies now, but they will roar again one day. That I am certain.