Lee Kuan Yew on East Asia's Economic Prospects
Address to Asia Society Australasia Centre Annual Dinner
"East Asia and The Pacific in C21"
A view from Singapore
Mr Morgan, thank you very much for your very generous introduction. Excellencies, ladies and gentlemen, it is my great honour and pleasure to be able to be here as a guest speaker at the Asia Society AustralAsia Centre.
My mission tonight, as I understand it, is to talk to you about how the Japanese economy is faring today, and what it will look like, and if time allows, maybe a few comments about the political situation, and if even more time is available, maybe talk about the external relationship with major trading partners, particularly China.
I'm not at all certain whether I can manage all that, so at the very beginning, at the risk of perhaps being too brief, I will just outline a couple of conclusions and as you probably noticed when our Prime Minister spoke; maybe he was different when he spoke here, but usually when he speaks in Japan, he loves to speak in simple short sentences. I'm not trying to emulate Mr Koizumi, but just a few conclusions first.
The Japanese economy is at the moment in a plateau, but I think it is going to be temporary; fundamentally because the upswing of the Japanese economy that we have been experiencing since 2002 is fundamentally based on a number of structural changes that have taken place, both in the manufacturing and service sectors. But one big question mark is that, as you all know, the economy has been helped a great deal by the very strong economies in China and the United States. So of course we all share some questions about the US economy, their twin deficits, where the dollar will go relative to the yen or euro. But, if these economies stay relatively healthy, the Japanese economy will come out of the plateau fairly quickly, and from the latter half of 2005, my sense is that economic growth will be somewhere in the range of 2-3%.
Secondly, the structural changes. We all know and you all know what was described as “the Lost Decade,” which came to Japan immediately after the burst of the bubble. We lost many things, but at the same time we learned a great deal, among which probably a lot of Japanese businesses learned how to get back to the fundamentals. The manufacturing sector has come down to a much lower break-even point. But during the course of restructuring, this is probably very important in the long run, Japanese society, including the trade unions, learned that we will never go back, at least in the foreseeable future, to the days of enjoying 2% or even lower unemployment rate. 4% is probably reasonable; we may experience probably the higher end of 4% or lower end of 5%, and that by itself will not be fatal. This is a very important lesson that the Japanese society learned during this whole process.
Also the financial sector, particularly banks, used to enjoy an almost unchallenged position in the Japanese economy. They had to go through very difficult lessons, of making their business model more viable in the international economic situation, and I think they had gone through a very difficult, harsh time of people almost looking down at banks, as if to say "they are the wrong people to deal with". But now they are back, I think their non-performing loans are almost non-existent, and they are working on the regrouping of banks in order to achieve internationally competitive, more viable business models. This will take a little more time, but I think they are on the right path. Also, something that has finally happened is the arrival of the venture capital business. They had been with the Japanese economy for a long time, but this last year was very interesting - I'm almost sure that almost every single Japanese watched the reorganizing of the professional baseball league. It ended up by having two champions of the venture capitalist game owning - one owning an old and very strong team... actually the champions of the last year, that's Mr Son of SOFTBANK, and the other one - Mr Mikitani of Rakuten - owning a brand-new baseball team out in Sendai. Now many of you probably know Miyauchi-san of Orix: he serves on my board, and we are good friends, although in some ways arguably different; but when he originally owned the baseball team, Orix, there were many shaking heads in the old establishment of the Japanese business, asking what business Orix has in owning a baseball team: this was the world of railroads, newspapers, the establishment, and Orix was just too new. But the world has changed a great deal. Now Miyauchi-san is on the side of the establishment, shaking heads about the venture capitalists coming in. I think society welcomed it. To a certain extent I'm exaggerating, but to me it was almost a symbol of the Japanese economy, Japanese society coming to accept some of the fundamental changes, like the unemployment rate, like venture capitalists coming in.
Now of course this baseball team, which is now owned by Mr Son, was previously owned by Daiei, one of the biggest supermarket chains in Japan. When Mr Nakauchi founded Daiei, it was almost a wild phenomenon that this man from nowhere was buying into the world of retail, selling everything below cost. When Daiei grew to a certain stage and his name was up for vice-presidency of the Keidanren, the head of Keidanren said "Who is he?” His business had no place in Keidanren. After that, his business went all the way up, and now his business is down and in the process of restructuring. The baseball team he loved is now going to be owned by Mr Son.
I think I am simplifying the whole issue, but the message is: the Japanese economy and Japanese society are going through a very important and very interesting changing process. My feeling is, compared to the beginning of the 90s when the bubble burst, the Japanese economy is stronger, more flexible, and I think there's a lot of opportunities for Australian capital among other non-Japanese companies to come in and explore. I must say our Prime Minister has played a very major role in real and symbolic terms, in making changes in the Japanese economy. Professor Takenaka, who has stayed close to his wing, not only in advising but in spearheading the restructuring process, has also played a very important role. Mr Koizumi will leave the Prime Ministership if he completes the term in about two years, and what he has done in making this restructuring stick in Japanese society is something that he can be proud of the rest of his political life.
Now, our two countries, as Mr Morgan mentioned, have enjoyed a long and mutually beneficial relationship, and also not just beneficial bilaterally, I think we have played on many occasions a very proud role of making our region more productive and interactive with the others. And Australia has played a very, very important role in taking the leadership in many of these developments. We have come a long way, and we very much look forward to the visit of Prime Minister John Howard in April on the occasion of the 2005 World Exposition in Aichi, and next year, 2006, is designated as the year of exchange to commemorate the 30th anniversary of the signing of the Basic Treaty of Friendship and Cooperation in 1976. The responsibilities that Australia and Japan commonly share as two leading democratic nations in the Asia-Pacific region have not really lessened, but I'm sure they will simply continue to increase and bear greater importance.
I mentioned China as being one of the subjects to be addressed. China has become a very important part of not only this region but the world, and as I said earlier, the Japanese economic recovery and very strong performance in the last couple of years would not have been possible without a very healthy Chinese economy, both in terms of their healthy domestic economy, but also their ability to provide opportunities, for instance to the Japanese manufacturers, to be a better, more effective value-added player in the global market. Yes, in the meantime we have suffered what you might call the hollowing-out effects, but the total net has been the big plus for the Japanese economy. But you are also aware of the sensitive bilateral relationship between China and Japan, largely because of our past history, but partly because of a number of speculations as to what China might become or do, not only to Japan but also to the rest of the world.
Quite recently I was interested to read a remark by the Chairman of Intel, Mr Grove. A Japanese journalist was interviewing him about the future of China. He made two very interesting, important comments. First, he said: I have no doubt that China has passed the point of no return, it has become a very important part of the world, and it will be more important in the future; this is something we have to accept. It is not a question of liking or not liking it, it is going to be a fact. But the second comment was more interesting to me: this was in answer to a question that because China is not a democratic country, they just cannot encourage creativity and imagination. In the future the competition will be decided on how effective your R & D will be, how imaginative, how creative your people will be in responding to the challenges. The gentleman said: nonsense, the political system has nothing to do with how imaginative people can be. Look back at what Germany in the Nazis' time did; they were at the height of technology.
That was an interesting comment, and I was quickly reminded; the Chairman introduced me as having attended the Wharton School, part of the University of Pennsylvania. I was in the States in 1957, and when Sputnik was put up, I still remember the front page of the New York Times. Dr Braun, who had been brought in, maybe from Germany, was being interviewed, and he was talking about what was wrong with the American education system. Why did they beat us, the Soviets? Of course it was at the height of the Communist Party's dominance. Now we don't have to agree with these remarks made by the Chairman of Intel, but certainly it is a mistake, number one, to develop very wishful thinking that some day, some time, China will stumble or tumble conveniently to their knees. Secondly, seriously speaking, whether this is the Communist regime or the democratic system or whatever, the importance of people driven to be more creative, more imaginative, certainly continues to be probably the most important theme: number one, for the world as a whole to be a better world, but for any nation, any corporation or region to be more competitive. In the long term, this is going to be the number one theme, to become more imaginative, more creative in a very positive manner.
This is where Japan has to think very carefully. Now I just brushed through the economic aspect, maybe too simply, but my feeling is that we will do all right. I think in what we all call "the market", some of the market forces we don't like, some of the market forces favour some of the people more than the others, but the Japanese economy has become almost an inseparable, integral part of the global economy, and with its size, I really have no major concern in the short term about the performance of the Japanese economy. But in the long run, when we ask ourselves if we are up to the challenge of being more creative and more imaginative in a substantive sense, this is where I'm not as optimistic as I am on the purely economic and business side. And this has something to do with education. We have come through very major educational changes after 1945, some good, and some bad. On the positive side, we have developed a system in which we probably are the best in terms of developing youngsters almost from kindergarten all the way up to graduate school, who will be able to solve the problems once the problems are given. So we have developed a couple of generations of world-class "how-to" oriented people, but failing in developing at the same time the people who can think what and why. Again some of you may know the current debate that's going on in Japan on the education system. Fundamentally, this debate is how to re-arm our students with better knowledge in specific areas of disciplines to do better in an international context. The other thing is, even at the risk, skills-wise, of doing not as well as we want them to do, developing youngsters who will be willing to think and speak out even if their ideas may be wrong. We would like to develop children who are aggressive and forward-looking enough to form their own opinions. And in the last several years, we have been trying to design programs where students can work together with people from corporations, together with bureaucracy, both central and local, so they can really feel what they learn, what they can read in textbooks. And they can actually ask rather embarrassing questions to their parents, simplistic but very fundamental. Now we are going through that difficult stage, but on top of this whole program is at the higher education level, we have almost totally neglected the very important liberal arts education which is absolutely necessary to develop people who can think.
There are many things that I'm thankful for the education in the United States, I got an MBA, which has been a very effective passport for me to open many doors. America has continued to maintain a very strong liberal education system. When I was brought in to the world of Xerox, back in 1963, I immediately met the man who was the head of Xerox then. His name was Joseph C. Wilson, who introduced me to the Aspen Institute in Aspen, Colorado. This was when I challenged Mr Wilson, for the typical American shortsightedness, quarterly profit orientation, and disregarding long-term investment. “Mr Wilson, America would lose competition to Japan for sure, maybe even to China and Korea.” But Mr Wilson, in his warm, fatherly manner, said, "You are right in that aspect, we are very short-term profit oriented, but that's part of the reality. This is what the market wants us to be but that is not everything about America, that's not everything about American business, and that is not everything about American business people. Go on and visit Aspen, and let's have another discussion after your visit.” To make a long story short, I went to Aspen for the executive seminar. It was two weeks at that time - it's been shortened to ten days now. I felt so ashamed. Unfortunately Mr Wilson had died a few years before. Aspen had been created in 1950, with the urge from the leaders in the United States, and some from Europe. Robert Hutchinson, the president of the University of Chicago, told the people that - this is back in 1950 - we, the Americans, and many of the other developed nations, suffer from our world being run by narrow-minded specialists. They don't know how to talk to each other. So, they went on to create the Aspen Institute, connecting classics with the modern happenings. I told myself, who is shortsighted? It is not Americans or Europeans. No, we Japanese are the ones who should be blamed for shortsightedness, we have become totally how-to oriented, forgetting about the fundamental objectives of why people live. Fundamental objectives of why corporations exist, the roles of corporations in society. We had a chance to think about it. We started the Japan Aspen Institute six years ago, and it is doing well. It is ironical that it was created in the middle of the time when the general air in the Japanese business climate of the last 10 years was that the global business model is the Anglo-Saxon American business model, a sort of misunderstood Anglo-American business model, which was to put the market cap maximisation at any cost, at the top of the list of priorities. This is the name of the game - in other words, this is a shareholder's game. Pardon my extreme language. Stakeholders - nonsense! That is too complicated. You have to run a simple game, you have to please shareholders, in the short-term and long-term: unless you do it, you are lost.
But we have had, around the world, repercussions, rebounds, from this extreme focusing on one stakeholder, and particularly, even including the short-term professional orientation, the pendulum is being swung - hopefully to the centre, we could go to the other extreme as well. Now in Japan, before this took place, I must admit, Japan had been at the other extreme. We were talking about the whole - help the community to be run for the benefits of employees. Maybe customers and employees at the top, and investors were told - please wait. In the long run, you'll be paid. But except for those bubble years, when of course there were capital gains, and particularly after the bubble burst, many investors and shareholders found out that not only had they lost a great deal of their investment, but they also had no idea how to be paid for the investment from the corporations they had invested in. So in a way it was natural for them to really go to the other extreme and say “pay us, maximise our investment returns, and otherwise you're fired”.
So we are now right in the middle of finding our own business models. Number one: accepting some of those extremes of so-called American ways, but the Japanese economy has been helped by that direction, manufacturers have been more productivity/profitability-oriented, they have forced their excesses to come down, and they are in that sense more competitive. At the same time, this whole question and debate about corporate social responsibility, that sort of started in Europe and is going around the world. Particularly in Japan, it's like a fad. If you're a business leader, unless you say something about CSR, you are not invited to speak, or you're not invited even to important meetings. Now corporate social responsibility, or corporate societal responsibility, which I prefer it to be called: we all know that all good business either here or in Japan, America, Europe - many of those corporations that have weathered generations of challenges and who prosper today, have grounded their businesses, placing their stakeholders in their views. Not just one stakeholder, not just shareholders, not just employees: stakeholders in balance. But I guess when this CSR drive developed in Europe and caught the imagination of people around the world, partly because it really came in the midst of corporate scandals. In some ways compliance plays the biggest role in the whole of CSR. But in Japan, at least, we think this is probably a golden time. Firstly, to let a more competitive business model say to our people: yes, we are now a more mature economy, we will not go back to the unemployment rate of 2% or lower, but we will develop the system where we will have a more flexible labour market and therefore just a high unemployment rate does not signify poor economic conditions; after all, we are experiencing a very low birth rate and will become, among the developed nations, one of the more aged in the next couple of decades. So we do need to develop a system to make much better use of a slowing flattening population, particularly the working population that we have. Labour mobility is going to be a very important part of it. But also, if labour mobility is important, it is also important to again emphasise productivity in the larger sense, not just physical, of every single working person: men, women, old, young. And this is where that factor I mentioned earlier is relevant: how creative, how imaginative a man can be, not just accepting the challenges and questions and just trying to find the answers. We do need people who will develop a new set of questions, a new set of challenges, in order to develop the world that corporations can develop their new business and new challenges. As I said, education is not just teaching them to count things better, to memorize things better, but to let people develop their ability to think better about whats and whys, and this is going to be the most important challenge if we are going to go up against the challenges of creating more imaginative and more creative people.
Again for this to happen, interaction with our neighbours, not only trade partners in Asia, but the United States, Australia, and the other nations are crucial. Exchange of people as well as ideas will be very important. Going back to Prime Minister Nakasone and Prime Minister Koizumi, leaders have been talking about the need for a sizeable increase in the exchange of young people and students. It is true between our two countries, and it is true between China and Japan and in other parts of Asia as well. The outcomes certainly will not only be a better understanding on the part of our respective young generations about the cultures of other people, but the chemistry that will come out of such exchanges. I'm hopeful this will also result in a lot of new questions to be asked, global or in the region, and that will help develop tremendous opportunities for the younger generation to tackle. The regional groupings, like the East Asian community: I remember vividly when Prime Minister Mahathir talked about EAEC - there are a couple of versions, I don't remember everything - but it's interesting that EAEC, after many years, is sort of acting in substance as ASEAN plus three. We talked about ASEAN plus four, but all indicating the importance of this region. Not really coming together, but developing a common sense of aspirations and hopefully common sense belief in our ability to achieve such aspirations, and most importantly developing concrete plans to achieve such goals. Now for a region as versatile and rich in cultural and religious belief and stages of developments, it is not easy to come up with simplified goals and aspirations, but I think that the whole process of developing aspirations itself is an extremely effective and useful tool by which to develop a commonsense community. In Japan, largely because of the fear and dislike towards China - which is unjustified, anyway, but some people have some personal beliefs - there are a lot of people who believe it is just too premature at best to think about the East Asian community. I may be wrong, I am always an optimist, but for a single human being or group of human beings, whether it's a corporation or a country, I just cannot think of people being able to develop further without any goals or aspirations.
Now I think it is wrong to hope that someone with a superb capability, or some country with a perceived superb power, will come out and press upon us: 'This is our vision'. I think that is wrong. I don't think we are there, we will never be there, but I think a common effort to develop such aspirations, which we can all share, that process is going to be important. And I think this richness that we all enjoy in this mission, deserves such effort. And here again I'm going back to our proud record, your proud record, of being the ones who have taken the initiative, many initiatives, some of which have come to realisation, things like APEC, ABAC and so forth, and because of the states of our economies, it is not just that we are coming into a rather advanced stage of economic development, technology-wise, I think we both have a very important role to play, in encouraging that dialogue of trying to develop common aspirations and even common beliefs and of course eventually common plans.
I am no China expert, but I have no doubt that China will grow; they will have ups and downs but not the kind that will take them all the way back to before Christ. I think we have to live with China, and I think I say this not in the negative, passive way, I think China has a great deal to offer. The younger generation of Chinese are more worldly, more global than their seniors, like our youngsters are, and I have a great deal of hope that China certainly will be a very important part in that development of aspirations, beliefs, and plans, but particularly here, I'm speaking in Sydney with the very proud history that our two countries have, both at the public level and the private level, that we will be able to play, and we must play, a singularly important role in helping the others develop this East Asia - no matter what you call it - but I think the community that we can share and that will help the region and the world as a whole.
Be assured the Japanese economy is OK. Thank you.