Asian Turmoil and What’s Next

Asian Turmoil and What’s Next

William M. Daley _*
Remarks to Asia Society, New York

March 2, 1998

Speeches and Transcripts: 1998

I appreciate this opportunity to report on my recent trip to Asia. I know how important the region is to all of you. President Clinton is concerned for the people of Asia, but also about what the turmoil means to our country and to global security and prosperity. This is clearly a critical time in our relationship with Asia.

So, I took a fact-finding mission. I felt it was necessary to see the situation first-hand and to talk to people on the ground. I met with a number of government leaders in Tokyo, Seoul, and Singapore. I met with U.S. and Asian business leaders, with economists, with bankers. In Singapore, I brought together U.S. government officials from throughout the ASEAN region.

The question I heard time and again was: have we already seen the worst of the crisis, or are the most serious problems still to come?

I think one of the challenges we in government face is to avoid lumping Asia into one, broad-brushing the problems, or insisting there is one simple answer.

Nonetheless, I will start by making some general observations on the region; second, I will describe what I heard in the countries I visited; and finally I will talk about President Clinton’s policies regarding Asia.

First, some general observations. There is no doubt in my mind that there are many challenges ahead. The full impact of this economic turmoil, particularly on the people of the region, has not yet been felt. The work of the IMF and G–7 export finance agencies will help to stabilize the situation. But most everyone I talked to believed there will be some significant turbulence ahead.

My biggest impression was the magnitude of the shock suffered by the people of these countries. Almost overnight, they went from robust growth to the intensive care ward. I don’t think most people in the United States understand the depth of the situation.

Let’s imagine, for a moment, that I was giving this speech before the Asia Society in March of 1990. I suspect we would be discussing how the United States should be emulating Asia. Someone in the audience would have pointed to export-led growth, limits on foreign investment, and the intricate connections between government and the private sector as sound strategies for economic prosperity. And some would have suggested we needed our own version of keiretsu relationships and chaebol conglomerates. Instead, today, we are witnessing a challenge to the belief in the Asian miracle. It goes well beyond economics. It cuts right to the self-esteem of the people—proud people. Proud that they built their economies on their own terms, in their own unique non-Western way. This sudden plunge is a huge psychological blow, above all else, and we need to be sensitive to that.

I am especially worried about the inevitable effects of the crisis on the lives of hard-working ordinary people in some countries, who have been enjoying comfort and prosperity. In Indonesia, in particular, there is fear of widespread hunger. And remember, these countries don’t have much of a social safety net.

So how long will it go on and how bad will it be? I am an optimistic person, and—longer term—I feel the Asian economies will come back. Will we see the extraordinary growth of recent years? Probably not in my opinion, but they can come back as stable, mature economies, with impressive growth rates nonetheless.

And I am convinced the key to Asia’s future is structural change. The financial aspects are being addressed. But, in my mind, the even greater need is to correct the structural problems that led to the crisis in the first place. Increased trade liberalization, greater transparency and market access—these are the changes that will restore growth, and they are the very conditions tied to the IMF package. Looking around Asia, it’s the most open and transparent economies—like Singapore and Hong Kong—that are performing the best.

The worst thing Asian countries could do right now is throw up more barriers or fail to make good on existing commitments to open their markets. There would be no quicker way to prolong the crisis or to undermine U.S. support for Asian recovery.

The question is: does Asia have the stomach for change?

For the most part, the commitment is there. But the change will be so wrenching, so comprehensive. We should not underestimate the magnitude of what is required. We aren’t talking about just a few tweaks. We’re talking about fundamental change in the economic, and in some cases, the social fabric of these countries. They must change their whole way of doing business—and that will not be easy.

The scale isn’t the same, but you can see some similarities to the American situation in the early 1980s. Company after company closed plants; communities were devastated; we were forced to close hundreds of S & Ls and pay hundreds of billions of dollars to depositors. But we took our medicine—shrinking the deficit, downsizing and streamlining in both the public and private sectors. It was painful medicine, but today we have the strongest economy in a generation.

So recovery is possible. But it will not be easy.

Now, let me turn to some of my observations about the specific countries.

in my opinion, but they can come back as stable, mature economies, wit

First, the Korean challenge is enormous. I met with President Kim Dae Jung and I believe he is committed to reform and liberalization. These are principles he has espoused for years.

He is a remarkable man by any standard. And with an 80 percent approval rating, he has the people with him.

The challenge facing President Kim, however, is daunting. Economic growth is stalled; unemployment is on the rise; there is massive corporate debt. He will have a honeymoon, but entrenched interests will stand in the way of change—a stubborn bureaucracy, the chaebols, powerful labor unions.

But Kim Dae Jung may be just the right man at the right time. Certainly, given his background, no one is in a better position to convince the unions of the need for change.

I offered the new President encouragement and our support. He is asking his people to make historic changes in the way they do business. We can only hope he enjoys the same popular mandate after Korea feels the full pain of layoffs.

I also was frank in our discussions with Korean officials. I made it clear that Korea cannot use the crisis as an excuse to delay implementing long-standing market access commitments. Our companies need to be able to sell more in the Korean market. And I told them that Korea cannot export its way our of the problem by simply sending more of its goods to America.

What I heard back was that the new leadership is very strong in opposing anti-import campaigns and in pressing forward with market opening and financial sector liberalization. Again, the challenge will be to convince a bureaucracy locked into the old way of doing things.

So we will have to be vigilant to ensure that they follow through. Toward that end, I have asked our business community to help us monitor the situation in the coming months.

In Singapore, I met with Prime Minister Goh and Senior Minister Lee Kwan Yew, as well as several of our ambassadors and commercial officers from the ASEAN region. There was general agreement that with the exception of Indonesia, the situation in ASEAN seems to have stabilized, although there may be a few more bumps in the road.

Singapore seems to be doing well. Its exports will be affected by the slowing economic growth around it, but its openness and transparency are serving it well. Both Thailand and the Philippines seem to be on the road to recovery.

Indonesia clearly has the most significant problems. With a 75 percent depreciation in its currency, the fourth largest country in the world is having trouble importing even the most basic foodstuffs. El Nino-related drought is drying up domestic food supplies. The forest fires choked Southeast Asian skies last year have returned. Economic unrest is now spilling over into the political realm, with legitimate fears of widespread ethnic violence.

Finally, let me talk about Japan. Because it is the economic engine of Asia, it bears a responsibility to show some leadership role. Put simply: without Japan, the other Asian nations can’t turn it around.

The numbers say it all. Over 40 percent of Japan’s exports go to Asia—almost twice the amount Japan ships to the United States. And more than 40 percent of Japanese imports come from the rest of Asia. As Japan goes, so goes Asia.

And right now, Japan is mired in a seven-year economic slump. Over that period, American industrial production increased one-third, while Japan has show virtually no growth at all.

But there is remarkably little sense of urgency in Japan and not enough realization of the negative impact they’re having on the rest of Asia. Japan can’t try to export its way out of this crisis. It needs a strong stimulus package—tax cuts and increased domestic spending—that will stimulate domestic demand and absorb exports from the rest of Asia.

The message thus far from Japan is discouraging. With the Birmingham G–7 Summit in May on the horizon, we and the rest of the world will be watching to see what corrective actions Japan is prepared to take.

At the same time, I don’t want to leave the impression Japan has done nothing. It has already committed $30 billion to other Asian countries. But to date, its actions have fallen well short of what we and most everyone else feel are necessary. It’s not the leadership you would hope or expect from the world’s second-largest economy.

Finally, let me conclude by putting this in a policy perspective.

The financial crisis clearly has begun to affect trade. Our trade deficit will surely rise in the short term. Longer term, I think the liberalization taking place in these countries will open the door to increased U.S. exports as their economies recover.

President Clinton and Vice President Gore have worked very hard in the last five years to open markets and expand trading opportunities, and we are not turning back.

So it is very important to see a commitment to open markets to help prevent a political backlash here in the U.S. During my trip, I pushed strongly for the elimination of trade barriers in the nine sectors identified at last November’s APEC meeting in Vancouver. I am hopeful that we will see tariff cuts in eight of these nine sectors by June.

We will also be vigilant in monitoring unfair trade practices. We will be prepared to use our anti-dumping and countervailing duty laws where appropriate. In particular, we want to ensure IMF funds are not used to unfairly subsidize exports to the United States.

But this isn’t primarily about American self-interest. More importantly, it is for the benefit that will come to the people of Asia. Imports support their own exports. Imports bring in technology. Imports improve the overall competitiveness of Asian companies. Furthermore, fully 55 percent of Asia’s exports go to other Asian countries. Given that scope of inter-Asian trade, the economic health of any one country in the region has great consequences for its neighbors.

Finally there is, in my mind, no question that the United States must stay active in Asian—indeed, we must increase our involvement and leadership. We must support the IMF. We must find creative ways to reestablish export credit. We must offer political support, coaxing and prodding them toward openness and competition.

On the ground in Asia, I heard some suggest that the U.S. has done too little—other than supporting the Imo’s efforts. Hearing this bothered me. President Clinton very much believes that our future is intertwined with Asia, that a healthy and open Asia is very much in our economic and political interest. I am suggesting to the President that we need to develop additional export financing initiatives that will mitigate the sever credit constraints on importers of U.S. goods and services’ building on efforts already undertaken by the U.S. Export–Import Bank under the leadership of Jim Harmon. I am calling a meeting of the Administration’s Trade Promotion Coordinating Committee—the coordinating mechanism for our trade finance and export promotion agencies—to focus on developing to address this need.

And I think we need to explore other creative means of assisting Asia, including expanding humanitarian aid—such as food and medical assistance.

It is families and communities in Asia who are hurt by all of this. We need to remember that, and we must find ways to ease their pain.

As President Clinton said in the State of the Union, helping Asia is the right thing to do for American. And the right thing to do for a safer world.

Thank you very much.

*: William M. Daley is the U.S. Secretary of Commerce. Back.