Speech by Singapore Deputy Prime Minister and Minister For Finance Lee Hsien Loong at The Asia 2000 Forum Wellington, New Zealand 25 November 2003 - Seriously Asia

Prime Minister Helen Clark

Deputy Prime Minister and Finance Minister Dr Michael Cullen

Ladies and Gentlemen

Introduction

I am delighted to be in New Zealand again, and to join you tonight at the Asia 2000 Forum.

The last six years have been tumultuous ones for Asia. For two decades until 1997, East Asia enjoyed remarkable growth. Economies opened up, investments flowed in, exports grew, and prosperity was everywhere. Then the Asian Financial Crisis struck. One country after another succumbed as investors stampeded out, stock markets and currencies crashed, and economies nearly collapsed. A minor problem in Thailand rapidly developed into a panic that spread beyond East Asia to other emerging markets - Russia and Latin America - and for a while seemed to pose a real threat to the world economy.

The Asian crisis also precipitated far-reaching political changes. Thailand acquired a new constitution and a new government. In Indonesia, the Suharto regime collapsed, to be replaced by a totally different, more open and less predictable political system. In South Korea, a new government under President Kim Dae-jung embarked on economic reforms which set the country on a recovery path.

Had the Asian crisis not struck, and growth in East Asia continued unabated, I probably would not need to be here tonight to argue the case for New Zealand to take Asia seriously. Or had the crisis plunged East Asia into a decade of lost growth, as happened in Latin America after its debt crisis in the early 1980s, you probably would not have wanted to be here tonight. But the reality in Asia, six years after the Asian crisis, is an outlook that is both more complex and more promising. Asia offers many business and investment opportunities, despite the geopolitical and security uncertainties.

Salient Developments in Asia Since 1997

What are the salient features of Asia, post crisis? Let me highlight four - the recovery of the Asian economies, the continuing rise of China, the emergence of India, and the changes in Indonesia.

Economic Recovery

The first important fact about Asia is that most of the crisis-hit economies have recovered. The dire early predictions of a permanent meltdown have turned out to be unfounded. The growth is not just in Northeast Asia - China and South Korea - but also Southeast Asia, which was hardest hit by the crisis. Confidence has returned, economies are growing again, and stock markets have rallied strongly, as capital has flowed back into the region. The countries have made progress on the structural weaknesses that contributed to the crisis. Their finances are now much sounder - with balance of payments in surplus, and foreign reserves accumulating.

Thailand is doing particularly well. Malaysia and Indonesia have both maintained respectable growth rates. Vietnam escaped the Asian crisis and is now opening up and taking off. Singapore has had a difficult time. It weathered the initial storm well, but then got hit hard first by the global electronics downturn and then by SARS. Now at last Singapore's economy is picking up again.

Like the rest of the world, Asia is dependent on the US economy, and anxiously cheering on the US recovery. But Asian economies are also increasingly generating their own consumption demand. Prosperity is creating growing middle classes, eager to enjoy the good life. Like middle classes everywhere, they want consumer products, lifestyle items, tourist travel, and many high quality services. This is one reason intra-Asian trade is growing rapidly. Much of this trend is driven by the rise of China, and more recently of India.

China

In East Asia as a whole, the most dramatic change since 1997 has been the continued rapid rise of China. Not only has China sustained phenomenal rates of growth, but it has been modernising its economy and transforming the outlook of its people. It is a different China, connected up with the internet and mobile phones, aware of what is happening internationally, and determined to get ahead and take its rightful place in the world. Shanghai and Beijing are as vibrant and cosmopolitan as any Western metropolis. The Chinese are brimming with confidence, especially after winning the bid to host the 2008 Olympics and sending its first man into space. China is competing aggressively for investments by MNCs, and capturing a larger share of FDI flows. Investors are attracted by the low costs of factor inputs, a workforce that is adaptable and eager to learn, and access to the huge Chinese market.

It is easy and tempting to see China's rise as an economic threat, but it would also be wrong to do so. A rising China is a new engine of growth for the world economy. Asian countries will benefit greatly, provided they adapt fast enough to service and benefit from China's growth, and shift quickly out of activities where China enjoys a comparative advantage. Indeed, rising trade with China was one reason why many of the crisis-hit Asian economies recovered as quickly as they did.

China's exports are growing rapidly, but so are its imports. China is a voracious importer of intermediate and consumption goods from the rest of the world. Trade between China plus Hong Kong and the rest of the world more than tripled over a decade (from 1990 to 2002). China plus Hong Kong is already the largest destination for Taiwan, Korea and Singapore's exports, and the second largest destination for Japan's exports.

India

But China is not the only emerging economic giant in Asia. India too is opening up, though it is starting later than China. For decades India closed itself off from the world economy, pursued import-substitution policies, and operated a highly regulated and licence-based system. But in the last few years India has started to change. There is a political consensus in favour of liberalisation, and the business environment is becoming more favourable. More sectors of the Indian economy are being opened up, including ports, airports, telecommunications and financial services.

India has experienced periods of liberalisation and promise before, only to see them followed by political complications and reversion to the status quo. But this time the momentum has built up, and economic liberalization and market reforms seem to be taking root.

India produces some two million graduates each year. Many are skilled IT professionals and engineers. They speak English, are well qualified and hardworking, and cost a fraction of equivalent workers in developed countries. So financial institutions, accounting firms and hospitals in developed countries are outsourcing business processes and call centres to India. Cities like Bangalore and Mumbai are attracting hi-tech companies. For example, Microsoft is setting up a major R&D centre in Bangalore. And Infosys Technologies, India's largest IT company, is a truly globalised company, earning nearly all (98%) of its revenues from foreign businesses.

On the trade front, India has entered into negotiations with Singapore for a bilateral Comprehensive Economic Co-operation Agreement (CECA) which will incorporate an FTA component. Just two years ago, it would have been difficult to imagine any such negotiations with India.

Indonesia

Southeast Asia has also stabilized since 1997, both economically and politically. Indonesia, which experienced the most drastic changes following the financial crisis, is crucial to the stability of the region. Since Suharto's fall, complex questions have emerged, including the role of Islam in politics, and the relationship between Jakarta and the provinces. These sensitive issues had been suppressed and kept under strict restraint by the Suharto government. Now Indonesia has to grapple with them, while simultaneously dealing with the threats of religious extremism and terrorism.

The new dispensation in Indonesia has still not fully crystallised. Nevertheless, the country has steadily regained its bearings under President Megawati, who has brought greater stability and certainty. Ethnic and religious tensions have been significantly reduced. After the Bali bombing last year, the government has acted more firmly against the terrorist threat. Some militant groups have been disbanded and the perpetrators of the Bali bombing have been charged in court.

The Megawati government has worked hard to revive the economy. By December, Indonesia will exit its IMF loan programme. But investors will still watch the Indonesian government closely for its commitment to economic reform, and its ability to maintain economic and political stability. Restoring the confidence of the international business community will be critical. Only with confidence will foreign investments start to flow again, keeping the economy growing and creating urgently needed jobs.

Indonesia faces a critical test next year with Parliamentary and Presidential elections. At stake will be what sort of country Indonesia will be - a unitary state or a more devolved structure, one that is secular in outlook or one where Islam plays a central political role. The elections will also test whether the government can maintain a firm stance against extremist groups without alienating the Muslim ground. Ultimately, the Megawati government can only succeed with the support of the moderate Muslim majority. It is therefore important to send a clear signal - to foreign investors and governments - that Indonesia eschews extremism, and remains committed to secularism and modernization.

Geopolitical And Security Threats

These major trends in Asia bode well for the region's future. But like any other region, Asia does face several geopolitical and security risks. Let me touch on three - terrorism, North Korea, and Taiwan.

Terrorism

The threat of extremist terrorism will continue to weigh on the minds of investors and governments. Terrorism is a global problem, but Southeast Asia is one of the major theatres in this war. The Jemaah Islamiyah group, which is linked to Al Qaeda, aims to set up an Islamic caliphate in Southeast Asia through violent means. It has been active throughout Southeast Asia, but its roots are in Indonesia.

After the Bali and Marriott bombings, the Indonesian government cracked down on the JI, arresting and putting on trial those responsible. Key JI operatives were also arrested in Singapore, Malaysia, Thailand and the Philippines. These arrests have disrupted JI's network and operations, but they have by no means eliminated the threat.

Religious schools continue to turn out radical graduates, indoctrinated with a deviant form of Islam, filled with hatred and willing to die in order to kill Westerners and bring down their own secular governments. They can never succeed, not least because the vast majority of Muslims in Southeast Asia are peaceable and moderate, and do not support their violent aims. But unchecked, they can shake confidence and cause great damage. Through decisive action and close co-operation, Southeast Asian governments can keep the problem in check, and maintain a safe environment for investors and their own people.

North Korea

The situation in Korea continues to pose a threat. An impoverished and isolated North Korea endangers stability in the region. Its nuclear ambitions gravely alarm its neighbours, and could set off an arms race in Northeast Asia. The US and China share a common interest in preventing Pyongyang from going nuclear. So the two are working together - and with Japan, South Korea and Russia - to contain and manage the situation. The problem will not be easy to solve, as the interests of all these countries are not identical, but armed conflict is not imminent, and there is no reason to think that it is inevitable.

Taiwan

Cross straits relations between China and Taiwan are a potential flash point. Taiwan's economy is becoming more integrated with China's with every passing day, but domestic political dynamics are emphasizing Taiwan's separateness and drawing it further apart from China. With Presidential elections approaching next year, the ruling Democratic Progressive Party is pushing for a referendum on a new constitution. The opposition Kuomintang, which initially opposed this, have been forced to follow with their own referendum proposal in order not to lose votes. This has raised the temperature of cross-straits relations, and could lead to rough weather ahead. China has already come out strongly to warn Taiwan not to cross the line on independence.

The key to cross-strait relations is the US. Taiwan is the most important issue between the US and China. President Bush has stated clearly that the US does not support Taiwan's independence, and will adhere to its One China policy. So long as the US maintains this position, there is nothing pro-independence forces in Taiwan can do.

US-China relations will continue to be a key determinant of the growth and stability of Asia. Currently these relations are, in the words of Secretary Colin Powell, at their best since the establishment of diplomatic ties. All of Asia hopes that this will continue, so that there will be a stable and tranquil strategic environment within which all countries can grow and prosper.

Assessment of Asia's Outlook

I believe that over the next two decades, Asia will be the most vibrant and dynamic region in the world. Apart from having a sizeable market of 2.8 billion people, which is over half the world's population, three key factors give confidence in Asia's future growth.

First, the economic fundamentals are improving. Before the Asian crisis, warnings about the lack of transparency, weak corporate governance, inadequate bank regulation, excessive government intervention and corruption went unheeded. The crisis gave governments in the region the impetus to implement or speed up reforms. In some instances, the reforms were forced upon them as part of the IMF assistance. As a result, most of the countries are now in a stronger position to compete, and deal with future economic shocks.

Second, the desire of the East Asians to acquire knowledge and master new technologies continues as strong as ever. The determination of the governments and peoples to learn from others and improve themselves is palpable. Tens of thousands of Indian and Chinese students are studying abroad in Western universities.

Increasingly, Chinese and Indian engineers, entrepreneurs and professionals in the West are returning home to take advantage of the new opportunities. They will bring back not only technological know how, but also a different view of the world, and what their countries must do to catch up.

Third, Asian countries are making more progress in economic integration. ASEAN has been actively promoting economic integration over the past two years, both among themselves and with key trading partners. This October, the Leaders committed to an ASEAN Economic Community by 2020. This will create a single market for goods, services, capital and professional labour. ASEAN is also negotiating FTAs with China, India, and Japan. ASEAN's trading partners have also been active. The US already has an FTA with Singapore, it has launched FTA negotiations with Thailand, and it has also signed Trade & Investment Framework Agreements with several other ASEAN members.

While these initiatives make economic sense in themselves, they are also driven by larger strategic considerations. For example, the US trade initiatives in Southeast Asia stem from its greater interest, post September 11, in engaging more deeply a region containing one of the largest Muslim populations in the world. China's proposed FTA with ASEAN will strengthen its influence in Southeast Asia, and the central position of its economy in Asia. Weeks after China made its proposal, Japan tabled a similar proposal for a Japan-ASEAN FTA. It did not want to be left out.

The Closer Economic Relations group, comprising Australia and New Zealand, has also proposed an AFTA-CER agreement. Economic analysis clearly shows the value of an AFTA-CER agreement, but political factors have hampered a faster pace of progress. A deepening of political relations will help accelerate the pace, and it is now opportune for us to do so. In Singapore's view, this is in the strategic interest of both regions. Decisions in ASEAN are made by consensus among its ten members, but Singapore has and will continue to strongly support the realisation of an AFTA-CER agreement.

Challenges and Opportunities For Small States

The changing economic and strategic landscape in Asia creates new challenges and opportunities for countries in the region, and also for their economic partners elsewhere. Small states like New Zealand and Singapore face the most acute challenges. Lacking large domestic markets, we have no choice but to meet the competition head on and join in the global economy. Without abundant natural resources or a large workforce, we have to rely on our knowledge and creativity to provide value-added services and make ourselves relevant to the world.

Riding the Region's Growth

But with resolve and creativity, small states can turn the challenges into significant opportunities. If we are more nimble and flexible than bigger states, we can benefit greatly from the growth of the region. I mentioned earlier the rising middle class in Asia, especially in China and India. This presents a great opportunity for us to grow our services industries, such as tourism, education, financial services and healthcare. For example, China is already a major source of tourists for many Asian countries. It is projected (by the World Tourism Organisation) to become the fourth largest tourism-generating country in the world by 2020. During the Asian crisis, tourist arrivals to Singapore from all countries declined, except for tourist arrivals from China, which continued to grow at double-digit rates.

Restructuring our economy

To adapt to the changed external conditions, small states also need to restructure our economies. This is the only way to remain competitive, anticipate changes, and overcome our limitations. New Zealand has developed the Growth and Innovation Framework (GIF) to chart its way forward. Singapore carried out extensive deliberations in the Economic Review Committee, to work out strategies to take us forward.

In Singapore, we have decided that we must keep our taxes and low to attract new investments, and minimize wage and labour rigidities so that companies can expand and contract flexibly as business conditions change. We are also upgrading our manufacturing industries, to emphasise higher value-added activities with greater knowledge and R&D contents.

In this regard, New Zealand has some successes that Singapore is studying closely. You have gone into biotechnology and the creative industries. Millions of Tolkien fans around the world looking forward to the final episode of the 'Lord of the Rings' Trilogy, and still more flocking to New Zealand to visit Middle Earth, and your beautiful country.

Singapore is also promoting innovation, creativity, and entrepreneurship. This means deregulating and liberalizing the economy. It means emphasising private enterprise as an engine of growth. It means encouraging Singapore companies to venture into the region, to develop new markets and tap the opportunities around us.

The most fundamental and difficult change needed is in the mindsets of our people. Singaporeans must accept change as a way of life, and continue learning new skills throughout their careers. They must become more self-reliant, depending less on the state and more on themselves. They must spark fresh ideas, seize new opportunities, take risks, and enjoy the rewards of success.

These structural changes are not painless. Lower taxes mean smaller social safety nets; more flexible wage structures mean less certainty for workers. The reality of globalization and global competition forces countries to rethink their social compacts and the protection that the state can offer citizens. But if we hold back from restructuring because we fear the adjustment pains, our economy will become uncompetitive, and ultimately we will undermine the livelihood and welfare of our people. So in Singapore we have decided to go for growth, by plugging into the many opportunities in Asia and in the global economy. This way we will maximise the resources we have to deal with the social consequences of globalization.

Conclusions- Strong New Zealand - Singapore Relations

Singapore and New Zealand are small states sharing similar outlooks, and working together to improve our chances in an uncertain world. We started the first agreement on Closer Economic Partnership (CEP) in Asia, which as we had hoped has triggered off the present flurry of trade initiatives. The CEP has raised Singapore's profile in the New Zealand market and vice versa. It has stimulated interest among our business communities to explore new opportunities for trade and investments.

With the CEP, Singapore's bilateral trade with New Zealand is growing much faster than our trade with the world. Singapore investments in New Zealand have increased, especially in hotels and resorts. Our companies are collaborating more. One example is the iGlobe Fund, a joint venture between a Singapore VC fund and the New Zealand Venture Investment Fund, which has raised NZ$30 million to support the commercialization of New Zealand innovations and start-ups through Singapore. New Zealand has set up the New Zealand Technology Centre in Singapore, its first such centre overseas. In the arts and culture, our museums and our National Library have had a fruitful relationship working with Creative Capital of Wellington to conceptualize and design four recent exhibitions.

Most importantly, the CEP has cemented and strengthened what has always been a very close relationship. As Prime Minister Clark has put it, Singapore has historically been the window through which many New Zealanders got their first glimpse of Asia. The CEP helps Singapore to continue to be New Zealand's window, into and beyond Southeast Asia.

The next two decades promise to be an exciting period of growth for Asia. New trade and investment opportunities are opening up in Southeast Asia, China and India. Singapore takes Asia seriously. This forum shows that your government also takes Asia seriously. We look forward to partnering you as you strengthen your linkages with Asia, and so prosper together with the region.

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