"The Path To Asian Revitalisation"

June 9, 2000

The Honorable Domingo L. Siazon, Jr
Secretary of Foreign Affairs, The Philippines

The Asian crisis is behind us. Recovery is moving to firmer ground. Our task now is to ensure that the pace of recovery is maintained and its reach broadened and projected well into the future.

There are, to my mind, four key areas of action that the task of revitalizing Asia entails.

The first area concerns the development strategy that many countries in Asia so successfully pursued over the last two or three decades. One of the most distinctive features of this strategy is the region's broad engagement with the world economy, and I believe that Asia's continued success lies in a stronger, not weaker, pursuit of this approach.

Asia's Strong global engagement is evident in the substantial progress countries in the region have made in liberalizing trade and investment policy through a variety of unilateral, multilateral and regional approaches. A positive proof of this progress, in turn, was the average 11.5 percent annual real growth of exports and imports of goods and non-factor services of major economies in East Asia in 1970-95, outpacing the average world trade volume growth of 5 percent. The region's share of world trade rose from 4 percent in 1970 to 16 percent in 1995. It stood at 16 percent at the height of the Asian crisis in 1998.

Moreover, the rapid growth and structural transformation of the region's trade have also been complemented, and to a large extent, facilitated by foreign direct investment flows to, and in some cases from, countries in the region. FDI inflows to East Asia have generally kept pace with the explosive world FDI growth. The share of the region's major developing economies - China, Indonesia, Republic of Korea, Malaysia, Philippines, Singapore and Thailand - in the world's FDI inflows rose from 7 percent in 1985 to nearly 21 percent in 1994.

It should be noted, however, that other developing regions, notably Latin America and the transition economies, have made even more rapid progress in trade liberalization, particularly in the last decade. Thus, while East Asian average unweighted tariffs were about 40 percent lower than those in Latin America in the mid- to late 1980s, they were only 10 percent lower in the mid- to late 1990s. Of course, the movement towards freer trade anywhere augurs well for East Asian producers as for others. But such shifts necessarily engender growing competitive pressures in specific East Asian industries and sectors, while opening opportunities in others.

In the investment front, following a peak of 21 percent reached in 1994 - much of which went to China - East Asia's share in world FDI flows has been declining. Latin America's share meanwhile has been increasing through the 1990s. In 1998, FDI flows to Latin America exceeded those to East Asia for the first time in a decade. The share of FDI flows to the transition economies in Europe and Central Asia also flourished in the 1990s. These may indicate that policy reforms in other developing regions have lately been eroding the relative attractiveness of East Asia as an FDI location.

These developments suggest that continued Asian growth and revitalization behoove us not only to keep but to intensify and hasten trade and investment liberalization in the region.

The second key area of action concerns the global financial architecture.

There is wide agreement that the 1997-98 Asian crisis was to a large degree spawned by cyclical factors affecting particularly the prices of major East Asian exports. But worsening current account balances quickly eroded the confidence of global portfolio investors, who, in droves and with great ease, moved their funds away from the region, causing in the process tremendous pressures on East Asian currencies and financial systems. Give the region's other vulnerabilities, the financial stress rapidly infected the real sectors. Untrammeled capital flight can indeed be a loathsome scourge.

Asia, and for that matter any other region, cannot always have this sword of Damocles dangling overhead and quickly recover each time it strikes. The suffering of millions of Asians who were pushed back below the poverty line by the last crisis should be enough impetus for urgent reform of the global financial system.

In this light, we in the Philippines welcome the Chiang Mai Initiative. The envisaged network of bilateral currency swap-and-repurchase arrangements and pooled reserves that central banks could draw from when currencies come under speculative as well as the regional surveillance scheme are steps in the right direction. The possible establishment of an Asian Monetary Fund, which could play an important complementary role to that of the IMF, is another. The internationalization of the Miyazawa Initiative and the internationalization of the yen could be, too.

The third key action area proceeds directly from the first two: good governance.

The unfinished agenda of financial and corporate restructuring in Asian economies will not go away on its own accord. And any restructuring will be incomplete unless the transparency and accountability demanded by the expanding circles of corporate and public stakeholders are put in place. Freer trade and investment and strong regional and international surveillance mechanisms will see to that. Corporate and national economic weaknesses and inefficiencies, after all, will always show up in bottom-lines and those the stakeholders will demand to see.

The various international codes and standards on accounting, disclosure, bankruptcy, corporate governance and the like recently completed or under development by the World Bank, the G-8, the G-22 and other forums are important contributions to the global good governance effort. But these will only produce their desired impact if incorporated into national bodies of law and enforced as such.

In several East Asian countries, the revitalization that will result from restructuring and good governance is tremendous, given the weight and importance of struggling state-owned enterprises in those economies.

Finally, the fourth action area in the effort to revitalize Asia concerns the knowledge and skill base of the region.

The new economy is a knowledge economy. The rapid advances in information and communications technologies influence the organization performance of manufacturers, service providers and governments as well as the way consumers live, work, learn, play and communicate. The increased use of these advances is reducing transaction costs, improving efficiency, eliminating geographical barriers, and is therefore now an important element of competitiveness.

Current trends also point to the pre-eminence of information and communications technology as a source of future productivity gains. A review of the region's weak export performance in the lead up to the 1997-98 crisis reveals that countries such as Korea, Hong Kong, Taiwan and Singapore experienced significant export market share losses in specific 'higher technology' industries like electrical machinery, telecoms equipment, office machinery, electric power machinery, and scientific instruments, among others. This export experience reinforces concerns about the region's underlying longer-term productivity growth trends. East Asia, obviously, has to act quickly.

The key element for making the most of the knowledge economy is a country's knowledge and skill base. Education and training are crucial for increasing businesses' and peoples' capacities to learn and to use information, to monitor technological trends and to use new technologies, and to produce and adapt new knowledge. Due to the rapid pace of knowledge creation today, providing opportunities for life-long learning is vital to the future competitiveness of the region. Unfortunately, these opportunities are not as widely available or well developed in most East Asian economies as in the advanced countries.

The need to push human resource development in Asia is urgent. Yet, not all governments in the region have the means to carry this through. Regional cooperation is the hope for many of us.

Happily, at the Manila summit of the ten ASEAN leaders with the leaders of China, Japan and the Republic of Korea in November last year, East Asia affirmed, in a first-ever joint declaration, the common aspiration to work as one team for regional peace and prosperity. Joint work programs are currently being drawn up on several areas, including HRD. Individual country initiatives, such as the Obuchi Plan and other Japanese programs to fast-track East Asian HRD, boost our confidence that the region is actually gearing up for the opportunities and challenges of the future.

Indeed, the path to Asia's revitalization can be traveled more successfully if the region moves as one. After all, ours is already one of the most economically integrated regions in the world.

Trade performance in our region is highly correlated. Almost in concert, economies in the region have behaved similarly in the face of common external shocks, such as a rise in the effective value of the US dollar, a slowing of the demand growth in East Asia's export markets and the impact of cyclical developments in specific industries.

East Asia's intraregional trade has also been growing faster than extraregional trade, especially in the 1980s. The share of intra-East Asian exports in the region's exports had risen from about 20 percent in 1980 to near 40 percent in1996.

Trade among ASEAN countries now accounts for nearly one-fourth of the sub-region's total trade, up from only 19.6 percent in 1993. Before the onset of the Asian crisis in mid-1997, intra-ASEAN exports had been increasing by 29.6 percent, which was significantly higher than the rate of increase of total ASEAN exports at 18.8 percent.

Also, international production networks in East Asia are prolific. In particular, the regional production alliances that Japan has built in the region in the last fifteen or so years are going strong everywhere.

Moreover, both the exchange rate and financial markets in the region are highly integrated - even the daily exchange movements are unusually parallel.

All these naturally propel us common experience of the last three years attests: our facts are intertwined with one another's.

It is in this context that we in the Philippines are particularly pleased with the heightened sense of urgency now attached to the task of giving flesh and bone to the ASEAN +3 Joint Statement on East Asia Cooperation forged in Manila last year.

At the first ASEAN +3 Economic Ministers Meeting held in Myanmar last month, nine areas for East Asian economic cooperation were identified, including cooperation in IT and e-commerce. At the first ASEAN +3 Finance Ministers Meeting held in Thailand also last month, the Chaing Mai Initiative was born. And at the first ASEAN +3 Foreign Ministers Meeting to be held in Bangkok next month, modalities and steps to advance East Asian cooperation in the social, political and security spheres will be considered. Indeed, the Leaders of the thirteen East Asian states will have their hands full when they meet in Singapore later this year.

This flurry of meetings and summits bodes well not only for the continued growth and prosperity of our region. Seen together with the improving prospects for greater regional understanding-possibly even breakthroughs in addressing time-worn irritants or simmering disputes, as those in the Korean peninsula and the South China Sea -

these high-level dialogues augur commendably will for peace and stability in East Asia. And that is extremely important, for, let us face it, no path to Asian's revitalization will work if acrimony and suspicion - if not open hostility - cloud the way.

Thank you.

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