Singapore Government Press Release
Media Division, Ministry of Information and The Arts
36th Storey, PSA Building, 460 Alexandra Road, Singapore 119963.
Tel: 3757794/5
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SPEECH BY GEORGE YEO, MINISTER FOR INFORMATION & THE ARTS AND SECOND
MINISTER FOR TRADE & INDUSTRY, AT THE BUSINESS WEEK ASIA LEADERSHIP FORUM
ON 23 JUNE 98 AT 8.10PM AT CHIJMES CATHEDRAL
CRISIS AND CONFIDENCE: BUILDING A NEW ASIA
Tectonic Shifts
We meet in the midst of an economic crisis that is sweeping through the
region. From July 2 last year, a day after the return of Hong Kong to
China, the crisis started with the collapse of the Thai baht and spread
quickly from one country to another. The crisis unfolded with incredible
speed and on a scale which no one could have foreseen. Nobody can be sure
how much longer the crisis will last, nor how much worse it must get before
the outlook improves. Its effects on North America and Europe can already
be felt and there is a risk that the Asian economic crisis could lead
eventually to a world economic crisis.
Many explanations have been advanced to explain what led to the crisis but
no explanation has been entirely satisfactory, which is why it has been so
difficult to predict the course of the crisis. It may be many years before
economists are able to agree on the causes but, by that time, it will be
history. Till today, the causes of the Great Depression in the early 1930s
are still a subject of dispute among scholars. What we know is that a major
historical process is under way affecting all of Asia. This is not a normal
cycle which will lead us back to more or less where we were before. When
night becomes day again, it will be a different world. It will not be
business as usual in Asia. In some countries, the economic crisis has
become a political crisis. In the case of Indonesia, the political
situation is still unsettled despite Suharto’s resignation. All over Asia,
economic and political structures have come under great stress.
Historically speaking, this is the most important event reshaping the whole
of Asia since the Second World War.
Trying to predict the course of this crisis is like trying to predict the
occurrence of earthquakes. In reality, complex forces are at work giving
rise to chaotic outcomes. What we are seeing is akin to tectonic shifts on
the earth’s crust.
With the end of the Cold War, old certitudes are gone. The world is in
transition from one equilibrium to another in the next century whose shape
is still unclear. However, the major forces driving historical change can
be identified. If we understand these tectonic shifts, we can do some
things to prepare ourselves better for further earthquakes and their
aftershocks.
US-Japan relationship
A key driving force is the evolving US-Japan relationship. The regional
havoc wreaked by the volatility in the Dollar-Yen exchange rate is the
result of underlying tensions in this relationship. The shocks reverberate
throughout Asia. In mid-1995, US$1 was worth about 80 Yen. Today, $1 is
worth over 135 Yen. In just three years, the Yen has dropped by about 40%.
This reflects the relative weakness of the Japanese economy and Japanese
institutions, and the relative strength of the US economy. Even a highly
sophisticated system will find it difficult to adjust smoothly to such a
drastic change in the value of currency. This is like the effect of sudden
climatic change on biological species.
If we go back to an earlier period, as dramatic a shift in the opposite
direction led to an era of prosperity in Southeast Asia. The Plaza Accord
in September 1985 revalued the Yen from about 240 Yen to $1 to about 130
Yen to $1 in 1988. The result of the revalued Yen led to a massive outflow
of investments from Japan to Southeast Asia. It was accompanied by parallel
outflows from Hong Kong, Taiwan, South Korea and Singapore. This led to a
long period of boom in Malaysia, Thailand and Indonesia. After 1990, ethnic
Chinese capital in turn fuelled rapid economic development in the coastal
regions of Chinese mainland.
Unfortunately, the rapid rise of the Yen also created an asset bubble in
Japan. In the heady atmosphere of the late 1980’s, one can still remember
it being said that if the land in Tokyo on which stood the imperial palace
were sold, it could have bought the whole state of California. The asset
bubble burst in Japan hit the stock market in 1990 and the property market
in 1991. Japanese financial institutions were severely damaged by this
asset implosion, the ramifications of which still plague Japan today. At
its peak, the Nikkei almost reached 39,000. In Yen terms, prime property
prices in Tokyo today are still less than one-third of what they fetched in
1991.
The Plaza Accord was forced on Japan. In hindsight, it might have been
overdone. The underlying tension was Japan’s high savings rate relative to
the US. It led to persistently large current account surpluses which
resulted in US mercantile pressure on Japan. Since the US occupation of
Japan after the Second World War, Japan was basically subordinate to the US
and prospered under that regime until the breakdown of the fixed exchange
rate system in 1971. Japan is not a normal power. In some ways, because of
the terrible experiences of the last war, it does not want to be a normal
power, preferring instead to rely on the US as its big brother and for its
security umbrella.
While politically weak, Japan is economically powerful. The Japanese
economy is two-thirds of the Asian economy. Japan accounts for one-third of
the world’s total savings. With its enormous savings of about $20 trillion,
Japan has the economic wherewithal to stabilise Asia in this economic
crisis, but is unable to do so because of its economic and political
structure. In recent years, the post Second World War consensus in Japan
has broken down. Institutions which were once held in high esteem are being
called into question, like the LDP, the Finance Ministry and Tokyo
University. If Japan were a normal power with strong financial
institutions, it would have been the biggest winner in this Asian crisis.
All the countries in trouble would have sought Japan’s assistance and Japan
would have been able to reshape much of maritime Asia according to its
worldview. Fortunately or unfortunately, this is not the case. The size of
the Japanese economy, instead of being an important part of the solution,
has become a major part of the problem.
It will take some time, maybe many years, before a new consensus re-emerges
in Japan. The breakdown in the old consensus has led to the current
recession. It is in the nature of Japanese society that, while slow to
change, when it does change, it does so suddenly, decisively and
comprehensively. When that change is made, the might of the Japanese
economy will reassert itself throughout the region, not just economically
but also politically. No one knows how Japanese society will evolve and
change, but an important determinant is the evolving US-Japan relationship.
With the end of the Cold War, the US is the only superpower left in the
world. Since the Second World War, the peace in non-communist East Asia was
largely an American peace, with Japan closely allied to the US position. In
the next century, however, the strategic picture in Asia will become more
complicated. It will be a multi-polar world in which US power will be
contested. China and Japan will play bigger roles. The recent nuclear tests
in India and Pakistan demonstrated clearly the limits of US dominance in
world affairs. The economic crisis now raging through Asia can also lead to
an anti-US backlash of one kind or another.
Although the US economy is the largest in the world, it is an economy
increasingly based on debt. The problem is a persistently low savings rate.
Since the 1980’s the US has depended on large inflows of foreign capital to
keep its economy going. The US today is by far the world’s largest debtor
nation. Although the Federal budget will soon be in surplus because of
unexpectedly strong growth in revenues, the US economy on the whole is
heavily dependent on domestic and foreign debt. The deficit in the current
accounts was $166 billion last year and is expected to grow significantly
this year. In other words, to keep the US economy going, it has to suck in
some half a billion dollars a day. Wall Street has boomed not only because
of productivity growth but also because of low interest rates. Low interest
rates are only possible because of the inflow of foreign funds. Of the $1.3
trillion in outstanding Treasury securities, about one-quarter are held by
Japanese institutions. Together, Japan, Taiwan, China, Hong Kong and
Singapore hold over one-third of US Treasuries.
We thus have a situation where the greatest power on earth is also the
world’s largest debtor nation, while the world’s greatest creditor nation
is, for historical reasons, unable to lead. This creates a dangerous
faultline in world politics and economics. If Japan were part of the United
States, that faultline would disappear and a major economic problem in the
world would be solved. The Asian financial crisis would never have been
allowed to spread. But Japan is not the 51st state, and the tension between
Japan and the US is reflected in the volatility of the Dollar-Yen exchange
rate and a lack of decisive response to the Asian contagion.
There is no substitute for US leadership in the foreseeable future. The US
remains the most creative society on earth and continues to attract some of
the best and brightest from Asia to its shores. Without the continuing
strategic engagement of the US in East Asia, the future will be troublesome.
China
Another major tectonic shift is the emergence of the Chinese behemoth.
Barring a major catastrophe, it is a fair bet that, some time in the first
half of the next century, China would become the world’s largest economy,
as it was for most of human history. When we talk about China, it is
important to remember its relative homogeneity and population size. With
1.2 billion people, China’s population is almost four times that of the
European Union and almost twice that of the rest of East Asia combined.
It is not possible for the incorporation of China into the global economy
to be smooth or easy because of its sheer size. In the last hundred plus
years, the emergence of Germany in Europe from the time of Bismarck, and of
Japan in Asia since the Meiji Reformation, created great tensions in the
world. The emergence of China is on a much larger scale and will have a
correspondingly huge impact on world economics and politics. This complex
historical process of incorporating China will take place over many decades
and will be punctuated by upheavals in the global system. The cycles of
China’s history have always spread tidal waves throughout the region. In
one such cycle, modern Singapore was created as millions of Chinese sought
a better life in Southeast Asia. All it took was for the Governor of
China’s Central Bank to hint elliptically that the renminbi might have to
be devalued for financial markets throughout the region to tumble. This is
in 1998 when the Chinese economy is only one-tenth that of Japan. China’s
decision not to devalue the renminbi despite the loss of export
competitiveness has helped to stabilise the economic situation in Asia.
China is willing to pay the price for this decision because of its concern
for Hong Kong and its sense of regional responsibility. An expensive
renminbi makes it more difficult for China to restructure its state-owned
enterprises and bureaucracy, and to create jobs for a growing number of
urban unemployed. It is a game of high stakes.
The triangular relationship between the US, Japan and China will be of
decisive importance to peace and prosperity in the region. The Asian crisis
today is partly the result of tensions in that relationship. The European
Union will also play an important role in the region. The Euro will become
an alternative reserve currency to the US dollar in the next century.
Together with the European Union, the US and Japan will have to manage
carefully and strategically China’s incorporation into the global system.
The alternative is global conflict. President Clinton’s present China
policy recognises this necessity. An early entry of China into the WTO is
good for the whole world. It is also important for China to be gradually
brought into the G-8 or G-9. China’s economic role in the world cannot be
less than that of Russia.
Disintermediation
Another tectonic shift in the world is the disintermediation brought about
by the IT revolution. The IT revolution has undermined traditional
hierarchies and weakened government monopolies all over the world.
Disintermediation of old financial structures are well known. It has forced
the restructuring of the international financial system. International
financial markets are now beyond the control of any particular national
authority. It started with the growth of the Euro dollar market in the
1960’s in response to attempts by the US government to restrict movements
of the US dollar. The growth of the ACU market in Singapore continued that
process in Asia. Today, national governments which try to fight the
international financial markets cannot win.
The disintermediation goes beyond financial institutions. Economic and
political structures are also being disintermediated. Inefficient
state-owned enterprises like those in China and huge government-supported
enterprises like the chaebols in Korea can no longer rely on cheap
financing. Everywhere in Asia, these privileged entities are in crisis.
Political structures are also being disintermediated. The ability of
national governments to tax, to divert investments and redistribute incomes
is weakening everywhere. Rapid urbanisation in East Asia is shifting
political power from the countryside to the major cities. Urban dwellers
resent the heavy subsidy of the agricultural sector which provides the
political base for many ruling parties. In Southeast Asia, the ability of
national governments to tax and confine ethnic Chinese capital has also
been undermined. Old economic and political institutions are breaking down
before new institutions are in place. The present Asian crisis is very much
an institutional crisis.
Responses
The evolving US-Japan relationship, the emergence of China and the
disintermediation of economic and political structures by IT are tectonic
shifts which will cause earthquakes throughout the region for many years to
come. These are faultlines which cannot be wished away. Our strategy for
survival must take them into account at three different levels.
For individuals and corporations, we must go back to the basics. In a
sense, we have always understood this in Singapore because of our
precarious circumstances. There is no free lunch in the world. If you don’t
work, you don’t eat, that is all. The most important asset is the human
being and the culture which enables human beings to work together for
common purposes. There is no substitute for good education and hard work.
This crisis has reminded us that too much greed destroys itself and to be
suspicious of short cuts. Old-fashioned values like thrift, honesty and
strong families should never be given up. Far from being weakened, these
aspects of Asian values are being reinforced by the present crisis.
In these uncertain times, leadership and good government are particularly
important. Until old economic and political institutions are reconstructed,
it is difficult for some Asian economies to recover. This is a huge
challenge which affects as much the present government in Indonesia as it
does the LDP in Japan and the Communist Party in China. While there will be
a plurality of political systems in Asia, building on the history, culture
and traditions of different Asian societies, all of them must meet the test
of good leadership, good government and wider political participation.
Democracy can help to bring about good government, but is no guarantee of
it. One way or another, the problem of corruption and lack of transparency
must be tackled head on. We are likely to see a new generation of Asian
leaders emerging in the coming years, either by smooth succession or by
revolt. Their worldviews, including their attitudes towards the West, are
being forged in the heat of the present crisis.
The third response is the most difficult to achieve. This concerns the
problem of world governance. During the Cold War, world governance was
broadly achieved in the non-communist world by the US and by international
institutions created after the Second World War, like the UN, the IMF and
the World Bank. Right up to the mid-1950’s, the US economy was some 40% of
the world economy. Today it is about 25%. In the next century, the US
economy will still be dominant but not as much as in the past. Furthermore,
the international institutions created at the end of Second World War are
becoming less relevant to new situations. New power centres in the world
have to be accommodated. We are entering a different era. IT has unleashed
forces in the world which are beyond anybody’s control. The international
financial markets which are capable of unsettling the world like an El Nino
must somehow be tamed. No one knows how this can be achieved but there is a
growing view that something must be done to create greater stability. When
exchange rates fluctuate wildly, the real economy cannot operate properly.
Volatile exchange rates can debase the meaning of hard work for ordinary
human beings.
We are entering a dangerous period in world history. Federal Reserves
Chairman Alan Greenspan has said that there is a small but not
insignificant chance that the Asian crisis will reach America. If it does,
the whole world can plunge into recession. A prolonged recession in the
world will in turn unleash dark forces of reaction against globalisation
and the free market. The last Great Depression led to the rise of fascism,
anti-Semitism and the Second World War. Another world depression will take
humanity down a different path from the one which we have all been looking
forward to. It took the calamity of the Second World War to create the UN,
the IMF and the World Bank. We should not wait for another such calamity
before rising to the challenge of world governance.
At a time like this, we need points of stability in the world. Singapore
can be one small point of relative stability in the region. We have no
external debt. Our banks and financial institutions are among the strongest
in Asia. However, we are exposed to the regional crisis. Preliminary
figures from the second quarter show that growth momentum continues to slow
down. The expected growth rate for this year will have to be revised
downwards, although it is still not likely to be negative. Next Monday, on
29 June, the Finance Minister will announce in Parliament a package of
off-budget measures to ameliorate the economic slowdown. The focus will be
to reduce business costs, and help businesses to cope with this difficult
period, rather than to pump-prime the economy or stimulate consumption. But
whatever the Government does, Singapore cannot be fully insulated from the
regional crisis. Unlike 1985-86, the causes of this economic downturn are
largely external to us and beyond our control.
What we hope for are leaders in the world who can see far. Too many
national leaders today are preoccupied by domestic concerns. Without the
US, Japan and China acting decisively, the Asian crisis can get much worse.
If there is one thing good coming out of this crisis, it is the renewed
awareness of the importance of global leadership. The success of President
Clinton’s visit to China in the next two weeks is very important for this
reason.
Like all crises, this Asian crisis will either strengthen or weaken us. If
there is sufficient global leadership, the promise of the Pacific century
will eventually be realised. If not, Asia will still emerge, but it will be
a troubled world.
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