Managing the Challenges of a Global Economy

Managing the Challenges of a Global Economy

Goh Chok Tong _*

at the Asia Society Annual Dinner
New York, September 28, 1998

Speeches and Transcripts: 1998

I am happy to be given this opportunity to share my thoughts with you. The Asia Society has always played a key role in focussing America on Asia. Recent developments have made this role all the more important.

The Asian economic crisis took everyone by surprise. When Thailand floated the Baht last July, no one foresaw the chain of events that followed. The crisis has proven more serious and resistant than anyone predicted. East Asian economies have been badly damaged. Several have slipped into recession. The Indonesian economy is expected to contract by nearly 15% this year and the Thai economy by 7%. Korea and Malaysia will see negative growth of 4% and 2% respectively. Singapore may escape negative growth this year.

Nevertheless, East Asia’s long-term prospects are still good. Over the last 30 years, East Asia achieved the single greatest spurt of economic growth in the history of mankind. Some of the gloss has worn off the miracle. But it was not a mirage. The transformations wrought by three decades of growth are real and permanent.

The fundamentals are still there: high saving rates, enterprising and hardworking peoples, increasing levels of education and a generally pro-business environment. The flaws in these countries’ financial and banking systems have been exposed but can be fixed.

Capital is beginning to flow tentatively back to Thailand and Korea, reflecting these governments’ commitment to reform. The situation in Indonesia is more complex, involving both political and economic problems. The Rupiah seems to have stabilised somewhat, rising 28% in the last few months. President Habibie is trying hard to restore investor confidence. He faces some difficulties in persuading Indonesia’s entrepreneurial and business class, the ethnic Chinese minority, to return with their capital, after the traumatic May riots in Jakarta. Foreign investors will take their cue from this business class. They will hesitate to invest in Indonesia if the Indonesian Chinese do not have the confidence to do so.

Singapore too has been hit. But we are weathering the crisis relatively well because of our sound fundamentals and strong institutions. We remain committed to further deregulation and will further open up our financial sector. We are convinced that this is in our long-term interest. We want to position ourselves to build on our status as the region’s leading financial centre when growth resumes.

But, of course, to get to the long term, we must first survive the present. It has become more difficult to predict when a general recovery will occur because the crisis has become global. What began as a localised crisis now poses an international systemic risk.

Japan is in its worst recession since the Second World War. China has stood firm on not devaluing the Renminbi, but is under great pressure with slowing growth. Russia is facing economic collapse. Latin America is feeling the heat. Investor confidence everywhere is low. Even Wall Street is jittery. Financial markets around the world have been unsettled by the East Asian economic turbulence. Four trillion dollars have been wiped off the value of shares worldwide in a few months. Commodity prices are down, by some accounts to their lowest level in real terms since the 1930s.

A vicious cycle is emerging in which the combination of real losses and collapsing confidence dampens readiness to lend and invest. This in turn means that output, employment and demand fall, slowing growth, particularly in developing countries. Latin America has revised its growth estimates downward between one and two percentage points. Even the EU has estimated that its growth will be reduced.

When the Asian crisis broke last year, conventional wisdom held that the damage would be limited. America, it was felt, was not likely to be affected. But on 4 September 1998, Federal Reserve Board Chairman Alan Greenspan disclosed that the US was prepared to cut interest rates to help calm the turmoil in global markets.

This was a tacit admission that the crisis was jeopardising the US economic boom. US growth declined to 1.4% in the second quarter of this year, down from 5.5% in the first quarter. US exports to Asia declined by 11.5% in the first quarter of 1998. Last year, almost 30% of US exports went to the Asia-Pacific. If the US economy falters, any hope of staving off a global downturn will be dashed. Nobody will be spared.

In the initial months of the Asian crisis, attention was focussed on internal political and economic weaknesses of specific Asian economies that had been overlooked during the boom years. This is still important. But the debate has now widened. As it has become clearer that the problems are global, a more fundamental questioning of free markets and the global economy is emerging. This poses a profound challenge and we are now at a cross-roads.

The last two decades have seen an unprecedented expansion in the extent to which countries are tied together by instant communications, international trade, institutions and markets. On the whole, this process of globalisation has been positive. It has opened new markets, increased investments, enhanced competition, spurred innovation, provided new opportunities and lifted several hundred million people out of poverty through economic growth and trade.

Today, international trade accounts for more than 30% of the American economy, as compared to only about 13% 20 years ago. 40% of US exports are absorbed by developing countries, a huge increase over past export patterns. By the mid-1990s, the developed countries, including the US, had invested more than US$250 billion in emerging markets, compared to only roughly US$20 billion in the mid-1980s. Individuals, and not just institutions, participated through mutual funds and pension funds.

US prosperity is built on the foundation of a free and open global economy. It is this foundation that is now being questioned, not just in East Asia, but around the world.

Free markets created unprecedented prosperity. But markets are also relentless. There is no respite from their pressures. With prosperity has also come disorientation, the disruption of a settled order, new insecurities and a sense of a loss of control.

This is not a new phenomenon. Nor is it one confined to Asia or the Third World. More than thirty years ago, it was a British Prime Minister, Harold Wilson, who blamed the “Gnomes of Zurich” for the Sterling’s recurrent weakness.

Conspiracy theories die hard when they reflect real and not just imaginary insecurities. The Asian crisis has given a new and sharper edge to such feelings: a loss of faith in international institutions and a desperate search for alternatives to orthodox prescriptions. Today, these feelings are amplified by the resonance of a world economy that is far more truly global and deeply inter-dependent than in the 1960s.

When the free market system works well, everyone is a winner. But the system is now malfunctioning, with its in-built support mechanisms like the IMF looking frail. They were never meant to cope with a world in which capital sweeps across political boundaries at the speed of electrons.

Paul Keating, the former Prime Minister of Australia, recently observed that the price of implementation of IMF structural reforms is half the Indonesian population going into poverty. He asked whether this was not too high a price. Former President Soeharto was clearly unhappy with the IMF but had no intermediary to appeal on his behalf.

Even free market Hong Kong has felt compelled to intervene in its stock markets to fight off speculative trading.

Malaysia, a relatively open economy, has on 1 September, taken a bold decision to impose capital controls. Announcing the move, Prime Minister Mahathir Mohamad explained that “people can no longer stay with the so-called free market system”.

Meanwhile, other affected East Asian countries are considering “controversial” measures to make it difficult for banks to run up short-term debts to foreigners.

It would be a mistake to dismiss Prime Minister Mahathir’s stand as an idiosyncratic opinion. It has struck a chord throughout the region and beyond. It is precisely because Malaysia and other East Asian economies were so successful for so long that any turning away by them from the free market system can have a powerful contagion effect. Countries that did not open up feel vindicated. They will resist strenuously the developed world’s move to liberalise their financial and services sectors.

The temptation to move away from openness is not just an Asian aberration. Respected American economists are also arguing the virtues of capital controls to deal with the financial crisis. Debate over the downside of the global market—loss of control, undue influence of foreigners over national policies and macro-economic instabilities—was prominent in the last two US presidential elections. It is still a powerful current of opinion in Congress.

Clearly, if the real problems of global markets are not addressed, it is only natural that countries everywhere will take matters into their own hands. If questioning of an open global economy spreads, it will pose a more intractable kind of problem. A recession, even a global recession, can be dealt with or ridden out. A change of the intellectual and political framework in which economic solutions are sought will take longer to reverse.

Clearly too, a widespread retreat from free markets will damage long-term growth prospects for everybody. If the paradigm shifts, it will become difficult, if not impossible, to push for further trade and investment liberalisation. Economic regimes put in place by the WTO will be undermined. A new round of multilateral trade negotiations, particularly liberalisation in the financial and services sectors which are key components of the US economy, will not take off. If the global framework is damaged, regional efforts at trade liberalisation will also falter.

The impact will not just be economic. The prosperity that open markets created is also the foundation of global peace and stability.

In Asia, the economic downturn has already engendered domestic social pressures and tensions, leading in some cases to bloodshed. It has sparked political changes, not all of which are favourable to US interests. A prolonged economic downturn in Asia will revive latent tensions against the West and may unravel the security architecture that the US spent blood and bullion to erect over the last 50 years. Loosening commitments to open markets can destabilise the emerging equilibrium between the US, China and Japan that is the key to Asia-Pacific stability. This in turn will have an impact on global security, particularly given Russia’s precarious condition.

A return to global tensions cannot be ruled out. It is already clear that the more extravagant of post-Cold War hopes for peace has proven illusionary. And history teaches us that economic rivalries almost invariably have political and military consequences if not contained within an agreed framework. If countries cannot get access to the raw materials, goods and services they need through peaceful and open competition, they will resort to other means.

What can be done? We cannot go backwards. We cannot ignore or undo the technological advances that have created a global market. Opting out of the global economy is not a real solution for anybody. All countries, big or small, at every level of development, must plug in or be left behind. But accepting an open global economy does not mean unconditional surrender. The invisible hand of the market has always been guided, monitored and supervised.

The key requirement is global leadership. A global crisis needs a global response. The US is the only major economy that is in a position to lead such a global effort. No other country has the economic capacity or political clout to do so. Japan is struggling with its own deep-rooted problems. The EU is pre-occupied with defining a new European identity. China is not yet a super-economy. Only the US can provide the political and economic leadership. In this regard, I applaud President Bill Clinton’s recent statement to the Council on Foreign Relations that the US has “an absolutely inescapable obligation to lead” the efforts to restore the health of the international economy. President Clinton has pledged that the US would work with Japan, Europe and other industrialised nations to reform the international financial system and to spur economic growth. I have three specific suggestions.

First and most immediately, the US Administration and Congress must set aside their differences to work for new IMF funding. They must find the wisdom to recognise that what is at stake is not merely partisan advantages, but the future of the free market system. The Asian crisis has strained the IMF’s financial resources nearly to their limit. If another major crisis should occur or if the Asian crisis should prove more severe and prolonged than anticipated, the IMF might not be able to provide a credible rescue package. The resulting financial collapse could spread and destroy the international financial system with dire consequences for the US and those who believe in the existing market economy.

To be sure, the IMF has its weaknesses which must be addressed. But for now, the IMF and the World Bank are the only institutions available to deal with international financial crises. They must be reformed, not destroyed. If the IMF and the World Bank are increasingly regarded with suspicion for simplistic and doctrinaire free market solutions, this may be because of the conditions that the Administration and Congress have sought to place on IMF funding.

Second, as the world’s largest economy, the US must lead the global trade liberalisation process by example. The APEC Leaders’ Meeting in Kuala Lumpur in November will be an important occasion to do so. The US must work with Asian countries to move forward with early voluntary sectoral liberalisation. The US will host the Third WTO Ministerial Conference in 1999. The opportunity to keep up the momentum in the WTO liberalisation process should not be lost. To succeed, the US must eschew unilateral actions, and move forward with sensitivity and empathy for the concerns of other countries, especially in the developing world.

Third, the US can act as the catalyst for the creation of a new international financial architecture based on multilateralism. Last November, I met President Clinton at the APEC Leaders’ Meeting in Vancouver. We discussed the Asian financial crisis, then in its incipient stages. I suggested to him that the US should convene a meeting of Finance Ministers of the G7 countries and a few other involved parties. President Clinton understood the problem. He convened a meeting of Finance Ministers from 22 countries in April this year. Last week, he announced the convening of another meeting within the next 30 days to recommend ways to adapt the international financial architecture to the 21st century. The G22 process can be the starting point for a long-term review of the ability of international financial institutions to deal with challenges posed by the new global capital markets.

I am aware that even these modest proposals carry political costs. But there is no alternative. We stand at a critical moment in the evolution of the global economy. Fifty years ago, it was American power and economic might that led to the creation of a new international economic and financial system at Bretton Woods. The US is again in the position of being able to shape the future. And if the US acts, I am confident that it will not do so alone. Others will follow because it is in all our interests to do so. What is necessary is to take those critical first steps of leadership.

*: Goh Chok Tong is the Prime Minister of Singapore. Back.