Keynote Address by S'pore PM at the US-ASEAN Business Council 9th Annual US Ambassadors' Tour Dinner - 12 June 2001 - MANAGING STRATEGIC CHANGE IN EAST ASIA

MANAGING STRATEGIC CHANGE IN EAST ASIA

For East Asia, the financial crisis of 1997 to 1998 was the defining event of the post-Cold War era. It catalysed dramatic political and economic changes. Overnight, the East Asian miracle seemed a mirage. Southeast Asia disappeared from the radar screens of many investors.

2 This process of change, triggered off by the financial crisis, is still going on. It will be several more years before a new equilibrium is reached.

3 I want to thank the US-ASEAN Business Council for giving me the opportunity to share my thoughts on these developments in East Asia, and on the critical role the US plays in them.

4 I would like to start by placing contemporary events in East Asia in their historical context. Seen from the historical perspective, the on-going changes in East Asia are a continuum of its struggle to cope with modernity that was initiated by contacts with the West some two centuries ago.

5 My point in drawing attention to this continuity is that we must move beyond the daily negative headlines and the short-term assessments of market analysts, in order to assess the true potential of East Asia.

6 All the cataclysmic ups and downs that East Asia has experienced in its history - the overthrow of the C'hing Dynasty, Mao Zedong's revolution and Deng Xiaoping's capitalism with Chinese characteristics; the Meji Restoration, Japan's ruinous defeat in the Second World War and its phoenix-like revival; the Korean and Vietnam Wars; and the nationalist struggles against colonialism in Southeast Asia - have not deflected East Asia from its quest to modernise and develop. The general trend for East Asia has been inexorably forward and upward.

7 US' involvement has had a profound impact on this history of East Asia's development. America maintained an 'open-door' to China, twice transformed Japan, and spilt blood to hold the line against communism. The US constructed and maintained the post-World War II international order that allowed East Asia to flourish. America's victory in the Cold War and its technology driving the New Economy are continued influences.

8 In the strategic sense, the US is therefore part of East Asia. It has been, and still is, a positive force for stability and prosperity. Hence, the US should reap what it has helped to plant and grow. The harvest is the contribution to US economic growth and prosperity, from East Asia's economic emergence. East Asia offers a huge market and abundant investment opportunities. No other region provides you better long-term prospects for growth. East Asia's prosperity will enhance US growth.

9 Given the links between US and East Asia, the challenge for both is to manage and sustain the process of change currently underway in the region. I have entitled my talk "Managing Strategic Change in East Asia" to emphasize this point. The changes underway are "strategic" because they will, for better or worse, transform the East Asian countries fundamentally. They will also have profound consequences beyond East Asia.

10 I shall deal with three broad themes:

Managing political and economic changes;

Maintaining strategic stability; and

Maintaining a balance between Northeast Asia and ASEAN.

MANAGING POLITICAL AND ECONOMIC CHANGES

11 First, managing political and economic changes.

12 As countries in East Asia developed and their economies became part of the global economy, delicate internal balances of political forces, forged over decades around a strong central leader, were replaced by pluralistic politics. This has made it more difficult for the countries to undertake economic restructuring to adapt to global changes.

13 Indeed, the obstacles to economic recovery in many East Asian countries today are more political than economic. Unless these countries can provide political stability and law and order, investors will continue to stay away.

14 The problem is complicated by electorates which are weary with the pain of restructuring. In the new pluralistic politics of the region, governments can no longer just impose policies on acquiescent peoples. Playing to popularism is a constant temptation. Reforms in some East Asian countries after the financial crisis have thus faltered and, in some cases, stalled. The region's bounce back to growth in 1999 would have been more robust had the pace of reform been kept up.

15 Herein lies the current dilemma. The need to press ahead with reform is obviously urgent. But the political conditions needed to carry out these reforms are absent.

16 In dealing with this dilemma, developed countries have the advantage of established institutions, which have evolved and strengthened over centuries of history. These institutions help to maintain stability during political change. However, with a few exceptions, East Asia's institutional framework is far weaker. Its political systems, which have defined East Asian society in past decades, cannot therefore be easily replaced without chaos.

17 This may seem an obvious point. But it was not one that was well understood at the time of the financial crisis or even now.

18 Indonesia is a case in point. A senior official from the previous US Administration told Singapore leaders in 1998 that what Indonesia needed was a "discontinuity" in the way its government was run.

19 Singapore leaders responded that it was best to bring about change gradually. No successor president would be as strong as Soeharto to enforce the tough conditions that the IMF required.

20 Indonesia is now living with the consequences of "discontinuity".

21 The most important issue in Indonesian politics today is the nature of the new political order. Fundamental questions about the relationship between the parliament and the presidency, the role of the military, the place of religion and minorities in the polity, separatist tendencies in some provinces, and the relationship of the provinces to the centre, are now on the political agenda. It will take many years before these questions can be answered, and a new balance amongst all political groups is established.

22 The process of political change is continuing. A consensus has emerged among the Indonesian elite that this is necessary if growth and stability are to be restored.

23 The expectation is not that a new government will immediately solve all the problems. Given the complexity of Indonesia's problems, the hope is that a modicum of stability will be restored at the centre. This would at least allow a start at addressing Indonesia's problems in a coherent manner and at regaining investors' confidence.

24 Indonesia is a country of 210 million people. Its length stretches a distance of 5,000 km, about the same as from Washington DC to Ecuador. Indonesia's neighbours do not want to see a country of this size indefinitely bogged down in its present condition.

25 Instability in Indonesia will also have ramifications for US allies like Australia, Japan and South Korea. An unstable and resentful Indonesia, sitting astride vital sealanes, will not be just an East Asian but a global problem.

26 The US must therefore remain engaged with Indonesia. When the political situation in Indonesia stabilizes, the US, with its friends and allies, must help Indonesia regain international confidence. We must help it improve its relations with the World Bank and IMF, and encourage investors to revisit Indonesia.

27 Fortunately, Indonesia is unique. No other major East Asian economy has such a brittle system or is likely to face a crisis of such magnitude and complexity. Conditions in all other countries are very different from Indonesia.

28 Nevertheless, they are also confronting a similar challenge, of how to establish favourable political conditions to pursue economic reform.

29 Each East Asian country has its own political dynamics. Each country is now searching for its own distinctive balance between market, state and society. Each country must evolve a system that is best suited to its circumstances and which will enable it to preserve political stability, manage social change and implement the reforms needed to resume and sustain economic growth.

30 But because of globalization and the increasing interdependence of economies, their search for a way forward cannot be a purely domestic affair.

31 America, in particular, is a vitally important market and source of technology and investments for East Asian countries. The US exercises great influence in international financial institutions. US policies move capital markets. The sheer weight of the US economy and its pre-eminent strategic position, among other factors, ensure that the US will have a primary influence on the overall environment in which East Asia evolves.

32 I hope that the US will continue to exercise this
influence with an appreciation of the complexities of East Asian societies. Peoples across the region have been disoriented by the events of the last few years. The multiple pressures of globalization have created an undercurrent of disquiet. They fear a loss of identity and control over their destiny. Economic openness is being questioned. Nationalism runs high. And because globalization is largely an American-led phenomenon, this is a mood that could all too easily turn against the US.

33 This is why the region quietly cheered when in his foreign policy speech on 19 November 1999, then Presidential candidate George W Bush pledged that while America would "propose our principles, we must not impose our culture", and spoke of the need for patience and modesty when dealing with the world.
MAINTAINING STRATEGIC STABILITY

34 This brings me to my next theme - managing strategic stability.

35 No relationship is more crucial for stability in East Asia than US relations with China.

36 In the last 20 years, China has grown by a compound annual rate of almost 10%. China's foreign trade has grown even faster at a compound annual rate of 15%. China is now a major trading partner of the US, Japan, Korea, the EU and the ASEAN countries. It is also a major investment destination.

37 In the post-Cold War era, a corollary of strong economic growth is strengthened strategic weight.

38 Some reconfiguration of the regional order therefore seems inevitable. What role will a stronger China play regionally and internationally?

39 I believe it is in everyone's interest if East Asia remains in balance even as China grows. The US can help to provide this balance.

40 Balance does not mean confrontation. It means that as China grows and becomes stronger, other countries in Asia too should grow and become stronger, buttressed by a strong US presence. It does not mean conscribing China's growth or containing its power. It means mutually beneficial growth.

41 Despite its rapid growth and enormous potential, overall, China is, at the present stage, still a poor economy with structural problems. China's current preoccupations are domestic. Its decision to accede to the WTO will have a tremendous impact on its economy. The pressure on state-owned enterprises and the agricultural and financial sectors will be intense. Unemployment will rise in the short term, and bring with it the risk of social instability. Managing these domestic political and economic consequences of WTO membership will be a major priority for China's leaders for many years to come.

42 The Chinese leadership knows this. Their decision to seek WTO membership is therefore a profound, strategic choice. It is a powerful signal of their resolve to integrate China with the world economy.

43 China needs a stable external environment, in order to be able to concentrate on these urgent internal problems. It appreciates that US policies can have an impact on China's future, and that how it plays its hand will affect US policies towards it.

44 For example, the EP-3 surveillance aircraft incident will colour US-China relations for some time. But it will not be and should not be the defining factor in US-China relations during this Administration. The Bush Administration is staffed with tough-minded individuals with ample experience of East Asia. I am confident that they will manage relations with China with a sound understanding of the complexities.

45 They will no doubt factor in the generational leadership change in China. The Long March generation has all but passed from the scene. Without the towering credentials of their predecessors and as Chinese society modernizes and becomes more aware of democratic practices elsewhere, the new leaders will, of necessity, have to increasingly take into account popular sentiments in policy making.

46 Moreover, communist ideology has lost its appeal. So the leaders will turn to nationalism to unite their people. Nationalism has been a strong force in China since the 1930s. They know that their citizens will see China's economic growth as redressing the historical humiliations of the last 150 years.

47 This is why issues that impinge on China's sovereignty and pride provoke strong nationalistic reactions. Not just from China's leaders, but also from its people regardless of their attitudes towards their government.

48 The leaders who will succeed President Jiang Zemin and Premier Zhu Rongji will be in their 50s and 60s. Below them is a younger generation that is less set in their ways.

49 This younger generation does not have a communist mindset. They have taken to heart Deng Xiao Ping's dictum: "To get rich is glorious." They are less apprehensive about change. They are more exposed to the West and the world. They have absorbed new ideas and values and have seen what works and does not work in other countries. They are China's future.

50 As the US grapples with the kind of strategic relationship it wants with China, it must take the long view. How it distinguishes between the policies of the present Chinese leaders and the legitimate interests and aspirations of the younger generations in China will determine whether China will become a constructive player or a strategic competitor in 20 to 30 years' time.

51 If China grows, and plays by international rules on such issues as weapons proliferation, international trade, freedom of navigation and environmental protection, it can become a constructive player. This is what the rest of East Asia hopes and supports. It makes no sense to mortgage East Asia's future by causing the Chinese people to conclude that its neighbours and the US want to keep them down.
MAINTAINING A BALANCE BETWEEN NORTHEAST ASIA
AND ASEAN

52 My third and final theme is the need for the US to maintain a balance in its approach towards Northeast Asia and ASEAN.

53 After the financial crisis, ASEAN was seen as ineffective. Of course, the larger and more developed economies of China, Japan and Korea will always command interest. Any US Administration must pay close attention to its relations with China and with allies like Japan and Korea, and to the still potentially dangerous situation on the Korean Peninsula.

54 But there are cogent geo-political reasons why ASEAN deserves as much attention from the US.

55 ASEAN provides a unique framework for containing centrifugal forces that could otherwise destabilize the region.

56 For example, AFTA, the ASEAN Free Trade Area, AIA, the ASEAN Investment Area, and other ASEAN economic integration initiatives, have a political as well as economic significance. These initiatives are critically important because they establish clear and firm parameters in favour of openness. Given the trauma of the Asian financial crisis, it is remarkable that there has been little backtracking in AFTA and other integration initiatives.

57 The present difficulties of ASEAN should therefore not distract Americans from ASEAN's continued relevance and potential.

58 Moreover, ASEAN's fate cannot be desegregated from Northeast Asia either economically or politically.

59 Southeast Asia has become increasingly integrated with Japan's economy. Japan has located different parts of its production chain in different ASEAN countries. The total exposure at the end of 2000 of Japanese banks in Southeast Asia, minus Singapore, was nearly US$30 billion.

60 If the ASEAN economies go down, it will have an impact on Japan's already fragile financial sector. A severe shock on the Japanese financial system may not only derail the movement towards economic reform, but can have implications for global financial stability as well.

61 Beyond economics, Northeast Asia and ASEAN are also pulling together politically. One of the effects of the financial crisis was to catalyze and stimulate a nascent sense of East Asian regionalism. It brought Northeast and Southeast Asia closer.

62 Recently, thirteen Northeast and Southeast Asian countries agreed to a series of currency swap arrangements to help insulate the region from further financial crises. Leaders of the ten ASEAN countries already hold annual summit level meetings with the leaders of China, Japan and Korea in the ASEAN Plus Three process. Preliminary studies have started on an East Asian community, and on a China-ASEAN FTA.

63 These fledgling steps point to East Asia finding its own voice.

64 This is a stabilizing trend that ought to be encouraged. Yet the very sensitivity of their current relationships means that China, Japan and Korea could only come together in the context of ASEAN. But ASEAN alone has insufficient strategic weight to indefinitely maintain this equilibrium. Particularly as it tries to renew itself, it needs the help of friends and partners. If US attention on Northeast Asia causes Washington to neglect Southeast Asia, sooner or later, the centre of gravity of the ASEAN Plus Three process will shift northwards.

65 This is neither in ASEAN's nor US' interests. Herein lies the strategic importance of the US to ASEAN and ASEAN to the US. No other ASEAN dialogue partner has the strategic weight to maintain equilibrium between the two component parts of East Asia.

66 America's status as a key ASEAN dialogue partner entrenches US presence in the region. It allows the US to maintain good ties with the region, irrespective of the state of US' bilateral relationship with any individual member of ASEAN.

67 Less obviously, but no less importantly, ASEAN has changed the political context of US engagement in Southeast Asia. The Post-Ministerial Conference, in which the US Secretary of State regularly participates, and the ASEAN Regional Forum (ARF) are forums created and sustained by ASEAN. The Southeast Asian countries have exercised their sovereign prerogative to invite the US to join them in discussing the affairs of Southeast Asia. As long as this is so, no matter what other shifts may occur in the region, no one can argue that the US presence in Southeast Asia is illegitimate or an intrusion into the region.

68 The ARF, in particular, has fundamentally changed the framework within which Southeast Asia defines its own security. In the 1960s, through the 1970s and even to the early 1990s, many Southeast Asian countries sought security by trying to exclude major powers from the region. The ARF represents a paradigm shift. Security is now acknowledged to reside in the engagement of all major powers in the region.

69 Given the strategic weight that America deploys, if the US regards ASEAN less seriously, it could become a self-fulfilling prophecy. This will compromise ASEAN's economic recovery. If ASEAN does not recover, the instability in Southeast Asia will have broader implications for East Asia as a whole.

70 And sooner or later, the US will be drawn in to restore equilibrium, but at a higher cost. It is far better to prevent such a situation from occurring in the first place.

71 I can understand the frustrations occasioned by the slow pace of reform in ASEAN. But the region is evolving in the right direction, one that America has long desired. In keeping faith with ASEAN, America also acts in accordance with its own values and national interests. It is therefore of vital importance that America devote more attention to ASEAN.

CONCLUSION

72 In conclusion, let me say that East Asia is riding the train of change. It wants to head for the destination of stability and prosperity. The destination is worth the ride, though there will be rough patches and frequent stops. I hope all of you will help East Asia reach its destination.