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"Stabilization In East Asia And The Role Of China"

June 8, 2000

Dr. Jeffrey L.S. Koo
Chairman, Chinese National Association of Industry & Commerce, Chairman & CEO, Chinatrust Commercial Bank, Taiwan

There is perhaps nothing I could say today that would be new to anyone here.But I do hope to inject in our discussions a unique perspective. Aperspective based on my own experience as a businessman and diplomat. Aperspective shaped by the recent history of my own country and its uniquepolitical situation.

Let me divide my remarks into two parts. First I want to talk about EastAsia. Then I will say some things about the role of China.

East Asia today is a region full of promise and of perils. It is full ofpromise as a region of rapidly growing economies. Even the recent financialcrisis, which brought social and political instability to some countries,only proved to be a short interruption. In 1998, GDP had fallen by 13percent in Indonesia, by 10 percent in Thailand, and by 7 percent inMalaysia and South Korea.

But things have turned around very quickly. Since 1999, the pace of EastAsia recovery has been faster than expected. Forecasts of economic growthhave been revised upward several times. Industrial production andagriculture are rapidly recovering. Exports have already exceeded pre-crisislevels.

Most governments in the region are undertaking reforms that will make theireconomies more efficient, more competitive, and more capable of withstandingcrises. For this reason, I am confident that the East Asian miracle is farfrom over.

But as we try to make that miracle continue, we also have to navigatethrough perilous waters. Our region is like a minefield, with too manyunresolved issues that could trigger conflict. The Korean Peninsula, theTaiwan Strait, and the South China Sea are some of these potentialflash-points.

Ethnic conflicts, political instability and separatism can easily spill overacross borders. Most important of all, many in our region have not yetreally overcome hostilities that date back to World War Two and evenearlier.

At the same time, there is an arms race in East Asia. Over the past tenyears, eight countries in the region were among the top twenty internationalarms buyers. During this period, East Asia purchased 36 billion dollarsworth of weapons, or one-third of the world total. And this does not yetinclude those weapons produced domestically.

There is indeed a very thin line that separates peace from conflict in ourpart of the world. But one thing that gives us hope is interdependence.Trade within the region now takes up half of East Asia's total trade,growing dramatically from merely one-third twenty years ago. In SoutheastAsia, half of total foreign direct investment already comes from the regiontoday, compared to less than ten percent in 1970. Our common interests inthese economic exchanges makes it important for everyone to avoidconflict.

Another thing that gives us hope is growing regional cooperation. ASEAN hassucceeded in promoting Southeast Asian cooperation. We have made someprogress in APEC. And more recently, we have seen several initiatives topromote financial stability in East Asia.

The success of cooperation in East Asia requires the active commitment oftwo countries. One is Japan, which represents two-thirds of the region'seconomy. The other is China, which represents two-thirds of the region'sland area and population.

Japan's commitment to East Asian cooperation is very clear. It has takenthe lead in promoting regional financial cooperation. It has assumedresponsibility for promoting economic recovery in the region through variousmeans, such as the recent Miyazawa Initiative. And it is pursuing a visionof its economic and financial role in the region through the "Big Bang"reforms and the internationalization of the yen.

The role of China, in contrast, is less clear. And this brings me to thesecond part of my remarks.

In 1968, while the Cultural Revolution was raging in China, an importantevent was happening in Eastern Europe. In what has become known as the " Prague Spring," the Communist Party of Czechoslovakia started to initiatewide-ranging reforms.

Behind this were pressures to change past policies that have damagedCzechoslovakia's once vibrant economy. These pressures did not go away evenafter Soviet tanks put an end to the "Prague Spring" in August of 1968.They continued to grow and eventually led to the "Velvet Revolution" of1989, which ended communist rule. I believe that a similar process is underway in China today.

The pressures on China's economy are growing. The leadership is facingmajor challenges.

One is the growing income inequality between rich coastal cities and poorinland provinces. Residents of Shanghai enjoy per capita incomes of morethan 3,500 US dollars. But incomes in Guizhou, the poorest province, areless than 300 dollars a year.

Unemployment is a second major problem, with the rapid downsizing of stateenterprises. This is especially true in the northeastern provinces, whereheavy industries are concentrated. In addition, an estimated 130 millionvillagers from the countryside are roaming the coastal provinces in searchof jobs.

Government finances is the third problem. The government's liabilities havebeen growing, with the ballooning of outstanding debt and state banks'non-performing loans, and the transfer of the future bill for urban workers ' pensions from state enterprises to the government.

Corruption is the fourth major problem. The party's own newspaper, thePeople's Daily, estimates that about 14.4 billion US dollars of state fundswere misused in the first half of 1999 alone. This figure is already 20percent of the central government's tax revenues.

China's entry into the WTO will put greater pressure on the failing stateenterprise sector, which in the past provided not only jobs, but alsohousing, health care, education, pension and other social services tomillions of families. As state enterprises downsize or close down, theseburdens will be passed on to the government.

As a result of all these, the government is under pressure to undertakereforms in order to build up the private sector. But these reforms couldeventually change the system in a radical, though non-violent, way.

Just recently, China undertook a very important measure, following thefifteenth Communist Party Congress. In the spring of last year, guaranteesthat acknowledged private ownership for the first time were written into theconstitution. This, I think, is a measure that Deng Xiaoping was trying tointroduce for many years, but could not, due to strong opposition from partyconservatives.

You may remember that the recognition of private ownership had been thefirst step in the economic and political transition of communist regimes inEastern Europe and the Soviet Union. That is why I think it is a sign of anew spring in China, which could bring a lot of changes in the next fewyears.

How this process will play out is of great importance to East Asia, becauseChina is important for the region's political stability and futureprosperity. Although still a developing country, China is becomingeconomically more important to East Asia. How it uses its growing militarypower and political influence will also affect all of us.

I believe that China today is at a crossroads, and its leaders have achoice. They can choose to bring China along the path of economic openingand political reform, which is not easy. Or they can delay these reforms andbring China down the path of further economic stagnation. They can choose tofocus on regional cooperation, or they can choose to focus on militarypower.

I think we all agree which the right choices are. And I am hopeful thatChina's leaders will be wise to make the right choices and pursue them withcourage and determination.

China's future and its role in East Asia will depend very much on thesechoices. In the modern world, military power and territorial control are notanymore the most effective means for becoming a great power. Iraq haslearned this in the Gulf. Serbia has learned this in Kosovo. China canbecome a true leader in East Asia only if it is able to make and keep itsown citizens prosperous and free.

Before I end, let me just say a few words about cross-strait relations. Somepeople were worried that the change of government in Taiwan would have anadverse impact on regional stability. These worries have now been dispelled.I think President Chen Shui-Bian expressed Taiwan's cross-strait policyvery clearly in his inaugural speech.

There will be no declaration of independence, no change in the nationaltitle, no "state-to-state" description in the Constitution, no referendumon independence, and no abolition of the National Reunification Council andGuidelines, as long as the PRC has no intention to use military forceagainst Taiwan.

Our vision of cross-strait relations is very simple. A happy marriage isbased on true love. A marriage that is based on force is only bound to endin disaster. For reunification to happen, China must win the hearts andminds of the people of Taiwan.

We have a saying that the one who wants to rest in a shade looks for theshade of a bigger tree. If China succeeds in providing a vibrant economy anda free and stable society for its people -- the shade of a bigger tree -- Iam sure Taiwan will be the one begging for reunification with themainland.

The entry of China and Taiwan into the WTO could open a new chapter incross-strait relations. Greater contacts between both sides are important inpromoting mutual understanding and progress in our relations. The WTOprovides a non-political and purely economic umbrella for both sides toengage in dialogue. And I hope that this dialogue could lead to substantialimprovement in cross-strait relations.

In the meantime, it is important for both China and Taiwan to co-existpeacefully and promote each other's prosperity. It is also important forboth sides to be patient. It took more than twenty years after 1968 for thereal spring to finally come to Czechoslovakia. I hope and believe it willtake less time for the real spring to finally come to China and Taiwan.

The twenty-first century would most likely see the consolidation of a unitedEurope and the emergence in the Western Hemisphere of a Free Trade Area ofthe Americas. Regional cooperation in East Asia is essential, whether it beto ensure our prosperity, or to provide a third leg beside Europe andAmerica -- as a foundation for a strong and stable global economicarchitecture.

The destiny of East Asia is closely tied to that of China. China could playa positive role by closely following the path of reform. Its leaders couldmake this road less difficult by fully embracing the cause of regional peaceand cooperation. All of us in this region will either have to swim togetheror sink together. I believe the choice is clear.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.