4 November 1998
"A Personal Perspective on the Asian Financial Crisis" during the Luncheon-Lecture hosted by the Asia Society of Houston
Is the East Asian Economic Miracle Exhausted?
Ladies and Gentlemen of the Asia Society:
We meet at a time of troubles for East Asia and the world - which is also a time for the kind of whole-hearted cooperation between Asia and America that this society was organized to promote.
East Asia enjoys the dubious distinction. It is the first to experience the downside of the globalized economy created by capitalism and technology.
The financial crisis has dealt our part of the world - once the site of the "East Asian Economic Miracle" - one of the most drastic reversals of fortune in economic history.
The crisis has turned around 30 years of economic growth the world had never seen before.
Between 1965 and 1995, average incomes in Malaysia, Indonesia, and Thailand multiplied four times - doubling every seven and a half years. And, in South Korea, incomes multiplied seven times - doubling almost every four years.
By contrast, over the 150 years between 1835 and 1985, the United States doubled individual incomes only every forty-seven years.
That was how vigorous our region was - until July of 1997.
This year, Malaysia's economy is expected to decline by 3-5%; Thailand's and South Korea's economies by 7-8%; and Indonesia's by as much as 16%.
And the East Asian contagion has been spreading - to Eurasia, Western Europe, and the Americas.
Already the Russian economy has collapsed; Brazil's is impelled, and the whole of Latin America anticipates a collapse in commodity prices, on which its prosperity still depends.
Panic Follows Euphoria
Until the experts disagree on what set off this financial crisis which has so devastated not just East Asia's economies but its politics as well.
Some blame the crisis on poorly supervised financial systems - on unhedged dollar loans suck in to bubble investments - and on crony capitalism.
All of these factors are partly to blame. But I tend to agree with those who trace its basic cause to the essential volatility of financial markets.
Financial markets do not work in the way orthodox economic theory expects - because investors' perceptions of market possibilities influence what those possibilities actually become.
This is why fear and panic in financial markets sometimes take on lives of their own.
In East Asia, exaggerated optimism over three decades of high growth lulled investors into disregarding the dangers inherent in any investment. And even central bankers - who should know better - were caught up in this euphoria ofof an unending boom.
Already, the crisis has had near-revolutionary side-effects on the region's politics. It has brought down governments in Bangkok, Seoul, and Tokyo. It has even thrown out of office Indonesia's strongman of 32 years. It has set off policy differences in the Malaysian leadership whose final consequences are far from settled.
Is East Asia's Path of High Growth Over?
The immediate question is whether or not East Asia's path of high gorwth is over.
I believe East Asia will return to growth - and for two basic reasons.
First, the economic fundamentals of its countries remain rong. And there is still a lot of room for opportunity and benefit in their determined effort to catvh up with the more advanced countries.
Neither has the currency turmoil blunted East Asia's competitive edge - which lies in its skilled and adaptable workpeople; in its basic values that nurture respect for the law, individual responsibility, industriousness, and high savings rates; and in the social commitment of its governments to shared growth.
Second, the political security arrangements underpinning regional stability are still in place. In fact, they have recently been strengthened by the rapprochement between China and the United States - Between Beijing and Taipei - and between Japan and South Korea.
What is more, this security framework is increasingly bolstered by the economic independence being generated by the market system that nearly all our countries have adopted.
For these two reasons - sound fundamentals and regional stability - the economic turbulence need not signal a stop to East Asian economic growth.
East Asia's slowdown could turn out to be merely a shifting of gears in its drive toward reinvigorated growth.
Of course, the immediate future will depend on how the East Asian economies adapt individually to the turmoil - and that will depend on the quality of their economic and political management.
It is also true that structural adjustments - some of them painful - must be made in every national economy.
And it is in making these structural reforms that the quality of East Asia's national leaderships will be tested.
Structural Reform of East Asian Economies
Throughout East Asia, the financial crisis has exposed the vulnerability of the cozy relationship among politicians and businessmen, banks and private enterprises - the same corporatist arrangements that had seemed a source of East Asia's economic power during its years of high growth.
Our governments must organize more transparency in their financial systems - enforce better management and supervision of banks - and generally ensure the rule of law that, among other things, protect the security of contracts.
They must begin to dismantle monopolies, cartels, and every other form of crony capitalism.
And our economies must begin to make more efficient use of their resources of labor and capital - exalting quality above quantity - and banking on efficiencyand productivity for their export-competitiveness.
The coming to power of new governments in most of the stricken countries have made painful structural reforms much easier to carry out.
Thanks to these reforms - and to policy decisions being made in the two key economic players - the United States and Japan - the crisis may finally be bottoming out.
What the federal reserve board and the U.S. Congress have done in the recent past you are already familiar with.
For its part, Japan has offered $30 billion in loan guarantees - pledges to buy government bonds - and outright grants in aid - to Asia's most deeply affected east economies.
Tokyo's political leaders have also agreed to use as much as $500 billion in taxpayer money to rescue Japan's distressed banks. There is a great deal else that Japan must do - if it is once again to provide economic leadership to East Asia. It must dismantle its obsolete financial system still dominated by narrow interest groups.
Anticipating the end of the crisis, the East Asian governments are bustling to prepare their economies for the next round of growth.
The Philippine Experience
In the Philippines, ten years of deregulation, liberalization and democratization have enabled our economy to withstand better than our neighbors the full impact of the crisis. While our economy has not escaped being caught up in East Asia's turmoil, it has been one of the least hurt by it.
Let me take a few minutes to discuss the Philippine experience - to show why my country still is a good destination for your investments.
We Chose to Respond Positively
First of all, we Filipinos chose to respond to the crisis positively - to take to the heart the lesson it teaches - which is that global interdependence is a fact of life, and that global markets punish policy mistakes severely.
The crisis may have induced one of our neighbors to close its financial markets to migratory capital. But we ourselves are keeping our own economy open to the world.
We believe the remedy lies not in returning to protectionism but in strengthening our economy's competitiveness: in greater productivity, in a more transparent financial system, in our maintaining political stability, and in our preserving our solidarity as a people.
President Joseph Estrada (who was my vice-president from 1992 until 1998) is committed to continuing the reforms instituted over these last 10 years by the Aquino and Ramos administrators - to keeping the economy open - and to continuing to welcome foreign trade and investment.
In dealing with the currency crisis, we in the Philippines are helped along by the openness of national society. That public policy is made so publicly - and subjected to sharp popular scrutiny - results in a transparency of governance which inhibits the kind of crony capitalism that flourishes under authoritarian rule.
In Southeast Asia, even high-flying Singapore is struggling to avert recession. But our own economy continues to grow - though at a slower pace - by a projected 1.5% for 1998.
Our exports, although slowing down - as the crisis spreads to the rich countries - still enjoy the highest growth rates in East Asia.
Our merchandise exports of electronic components, textiles, garments, furniture and others over January to September this year grew by 21% over those of the same period last year. So is foreign direct investment still higher than in other Asian countries.
In our home market, consumer spending is still up - reflecting popular confidence that growth will continue. Joblessness has risen only marginally, and our peso has been holding steady: it is currently trading at around 40 pesos to the U.S. dollar.
Our central bank - whose policy independence is written into the 1987 constitution - holds reserves equivalent to almost three months' imports.
Our country enjoys steady source of foreign exchange none of our neighbors have - remittances averaging $6-7 billion a year from our overseas workers and from Filipino migrants here in the United States.
The I.M.F. has just allowed the central bank to draw the first tranche of $280 million from a $1.4 billion standby loan package set up after the Philippines exited from 35 years of I.M.F. supervision last March.
The improved tax regime my administration was able to establish - through reforms in value-added and excise taxes - also enables the Philippine government to improve its tax yield at a time of declining customs revenues.
Keeping Our Economies Open to the World
The Estrada Administration - which took office at the end of June - plans basically to pump-prime the economy through judicious deficit spending - focusing on public investment on agricultural modernization and rural infrastructure.
Those priorities I believe to be sound. Not only because agriculture still employs the bulk of all our workpeople - but also because the typical Filipino family still spends 50% of all its income on food.
Thus, keeping the food supply up - and food prices down - must be government's highest priority. Fortunately, inflation is under control, holding steady at about 9.4% a an average for 1998, and the prolonged droughts caused by the El Nino weather phenomenon are now behind us.
Both agricultural modernization and public-works spending are labor-extensive programs that will offset any loss of jobs in industry if the crisis worsens.
The new government has also announced it would carry on the privatization program began by the Aquino administration and intensified by the Ramos administration over 1992-98.
The 100 big-ticket items that remain include a copper smelter, a phosphate and fertilizer plant, a large chunk of the Philippine National Bank, the Luzon Railway, and the entire postal system.
The largest and most complex of these public companies is the National Power Corporation. Privatizing it will also enhance the long-term competitiveness of our industries - by reducing national power rates that, in East Asia, are second only to Japan in their costs.
Climbing the Value-Added Ladder
The Philippines should return to the growth mode beginning next year at three to four percent in GNP - if we focus on climbing up the value-added ladder in out export drive.
And this we can do by improving the delivery of basic social services of promary helath care and basic education to our poorest communities -and by training or workpeople of 46 countries surveryed by the International Institute of Management Development in Switzerland for its 1998 World Competitive report.
And Filipino corporate managers are ranked within the top ten among those 46 countries for their competence and international experience.
For all these reasons, I am confident out home economy can return to the growth mode beginning in 1999.
Let me now turn to the global implications of the East Asian crisis.
What to Do to Resolve the Crisis
In this larger picture, one thing is clear. The financial crisis is no longer East Asia's problem alone. It has become a problem for the whole of the world community. Thus the measures to deal with it must also be global and international.
Yet the global community must do more than merely contain this specific crisis. It must try to compensate for the impact of technological change on the global financial system.
What must be done to ease the crisis?
Certainly the G-7 countries have a responsibility to take the lead in pulling the global economy out of recession.
In the search for a solution, not just the rich industrial countries but the developing ones as well must be heard.
The developing countries must not be made to feel that - once again - crucial decisions that affect them are being made above their heads. Their voices must be heard - or else globalization will seem to them merely a new form of dependency or neo-colonialism they have endured for centuries.
Some restriction of the flow of portfolio capital now seems unavoidable. We cannot keep treating capital -account convertibility as we do free merchandise trade - because (as the crisis has shown) capital flows (unlike merchandise trade) are subject to panics, crashes, and collapses.
Even the I.M.F. now conceded that some carefully-thought-out controls on inward capital flows are necessary to prevent any recurrences of the crisis.
The difficulty is of course how to distinguish between portfolio and direct investments - because developing countries continue to need foreign direct investments (FDI) that root themselves more deeply in the economy that 'hot money' ever does.
Certainly, future arrangements must also ensure that private-sector creditors share in losses resulting from and financial crisis.
All too often, I.M.F. bailouts become bailouts - not of the afflicted countries - but of foreign lenders and investors who take unwarranted risks because they believe the I.M.F. World Bank and/or other multilateral institutions will bail them out if they get deeply into trouble.
Among the East Asian economies most badly hit - that of Indonesia for one - some debt-restructuring is both urgent and vital. The political transition from the Suharto Era will be difficult enough - even without its successor government being weighed down by a crushing burden of debt.
However if the restructuring of debts is done, it should include the overhaul of inadequately supervised financial system. It must include the imposition of effective banking that builds strong financial institutions.
A Time for Us to Help One Another
Now, let me summarize and conclude.
A global economy is being created - irreversibly - by the spread of the revolution in communications and information technologies.
Economic turmoil has joined the hazards of modern-day society. And conventional remedies to economic crisis no longer seem to work.
This is the time when the temptation to go it alone becomes almost irresistible for any country.
But this is also a time for us to help one another.
East Asia has become the largest trading partner of the entire West Coast of the United States.
And Texas itself has begun to look westward across the Pacific for business opportunities. Many of Houston's great corporations have a substantial presence in my country.
Your own Alcorn International was the first to discover oil in our offshore fields. Brown and Root operates among us. Enron generates power for our homes and industries. Continental Airline flies Philippine Airspace. Southern Bell is even negotiating to buy into our largest telecommunications company. And Texas Instruments has been manufacturing electronic components in the Philippines for some time now.
Perhaps, the largest presence of Texas in the Philippines is that of Coastal Corporations, not only because of its substantial stake in the Philippines, but also because of its retired long-time chairman is the new Philippine Honorary Consul-General in the Southwestern United States - the indestructible and highly respected Oscar Wyatt.
Thus we share an interest in finding the right solutions.
Caring for Those Most Badly Hurt by the Crisis
It will take a great deal of determined and concerted effort to ease the unfairness and inequity in the global economic system.
But the effort must be made.
In this effort to reform the way economic society works, open markets and strong states must work together.
Our immediate need is to restore investor confidence - and restoring confidence begins at home.
There is no substitute for creating strong financial institutions - efficient banking supervision - and transparent procedures - to prevent external instability from weakening the domestic economy.
Our societies must cleanse themselves of the unholy alliance between politicians and big business. And this is apparently as true of any East Asian country.
We must get government out of the business of choosing winners and losers in the economy. And we must get government off the backs of business people.
For the moment, 'globalization' has been put under question - not just in East Asia but in other parts of the globe as well.
But its long-term effects are likely to be overwhelmingly beneficial.
Not only are corporate cultures converging in the direction of more transparency and greater efficiency.
Across differences in history and culture, globalization is compelling states to establish their authority less and less on coercion - and, more and more on social consensus.
And for a simple reason: as the example of the Soviet Union tells us, government whose political authority is based on coercion cannot run an economy that must operate accordingly to world-class standards.
The Challenge for the World Community
Finally, what is the challenge these events we have just surveyed pose for the global community?
To my mind, the challenge for us is to find a way to correct the growing mismatch between global capital markets and the increasingly inadequate national institutions that support and regulate them.
To my mind, the challenge is for us to grasp the opportunities globalization presents - while minimizing our shared vulnerability to its risks.
To my mind, the challenge for us is to reconcile market forces with social cohesion - and capitalism with a greater measure of social justice in the global community.
This to me means that, beyond the crisis, we will be needing more sophisticated and more pervasive international coordination than our countries has been accustomed to.
This could mean that each individual state cede some of its precious independence to some supranational authority.
And this will be hard to do - so deeply embedded is nationalistic feeling among us.
But if we stay together - if we reason together - if we strive together - I believe it can be done and we will overcome.