Asia's Choice: Open Markets or Government Control?
Keynote Address of His Excellency Joseph Ejercito Estrada, President of the Republic of the Philippines

Joseph E. Estrada

Asia's Choice: Open Markets or Government Control?

Asia Society's 10th Annual Corporate Conference
Shangri-La Hotel, Makati City
February 24-26, 1999

Asia Society

Introduction

I am pleased to welcome all of you to the Philippines on the occasion of the tenth Asia Society's Annual Corporate Conference, which is being held for the first time in Manila. I am also glad that this event marks the official launching of the Society's office in our country.

It pleases us greatly that this year you have chosen to focus on current developments and business opportunities in the Philippines. The other conference topics - international efforts to overcome Asia's economic crisis and to respond to its social implications - are just as important. Indeed, this conference underlines the fact that the fates and fortunes of Asia and America are closely tied together.

 

The Region's Thwarted Promise

It has been some twenty months since the beginning of the crisis that plunged much of East Asia into recession. Yet, not too long ago, the next one hundred years were being touted as the "Asia-Pacific Century." Recent events have, therefore, rubbed the excitement off that promise.

How times have changed! America is the world's most powerful nation, and its vibrant economy is the envy of others. Its crucial role in the maintenance of our region's peace and political stability is a given. Without it, the Asian miracle could not have happened. Without it, an Asian renaissance cannot take off.

The then-optimistic claim of Asia to the future is, of course, not unfounded. In the last quarter-century, our region's economic and social achievements had been most remarkable and unprecedented. That claim will now ring hollow if the region does not get back to the path of growth, and soon.

The East Asian miracle was little more than the region's able response to the sweeping development called globalization. Armed with high savings rates, investments in human capital, and pro-growth policies, economies in the region vigorously pursued industrialization for the world market. And in this we greatly succeeded.

Ironically, our current pains may be traced from the same root. The same globalization which facilitated our rapid growth stoked the fires of the Asian crisis.

 

The Globalization of Finance

The globalization of finance also occurred at a dizzying pace. While world trade grew by about five percent annually, private capital flows grew by nearly 30 percent per year. The volume of private capital flows to developing countries, for instance, rose more than five times - from $42 billion in 1990 to $256 billion in 1997. And the most footloose of these flows - commercial bank debt and portfolio investments - set the pace.

Naturally, East Asia's success made it very attractive to the world of finance. Like a magnet, the region attracted nearly 60 percent of all short-term capital flows to developing countries. That was before the bubble of confidence burst.

Today, the void created by that burst bubble must be filled before desperation and the flood of human suffering engulf the good things that are left standing.

 

Responding to the Crisis

Restoring our vitality does not and cannot mean going back to business-as-usual. If there is one thing the crisis has clearly taught us, it is that we - and I mean all of us - cannot afford to be complacent.

It is true that the crisis has exposed the weaknesses in the individual economies of our region. But it has also brought to light the aspects of the global system that we need to improve.

The past twenty months have indeed been a tormenting experience for all of us. Thankfully, there are signs that the worst may be over.

We in Asia have learned many lessons from this experience. We are now training our eyes on how we may speed up recovery and prepare ourselves for the opportunities of the future. We are exploring ways to restore vitality to our economies and to bolster the economic prospects of the region.

 

Three Important Lessons

One important lesson is that we all must do our national homework. The weaknesses in our financial and corporate sectors - which made our economies vulnerable to sudden shifts in international financial flows - are now being addressed. Entire financial systems are undergoing needed shake-ups. Economic restructuring, however painful, is being pursued in earnest.

The ongoing structural adjustments are mainly designed to break a vicious circle: capital outflows push currencies down and create insolvency risks for companies with foreign debts which then add momentum for further capital outflows. Complementing these adjustments are other efforts, like improving economic data, making budgets and monetary policy more transparent, and building on international standards in accounting, disclosure, bankruptcy codes, and other areas critical to the operation of private markets.

Another lesson requires urgent international cooperation. The fact that so many external creditors could pull their money out at short notice was one of the main reasons why the crisis began and spread very fast. And once the crisis started, the success of any policy response depended much on how the panicky markets reacted.

Indeed, there is need to tame the volatility of short-term capital flows and to strengthen the international financial system. In this endeavor, the experiences of countries with various approaches to the crisis should be instructive.

A third lesson from the crisis concerns its social dimensions. Since it came about, millions of Asians have been pushed back into destitution, with poverty rates rising sharply in some economies. School drop-out and malnutrition rates have also increased. Economic hardship has threatened the very social fabric of countries hit by the crisis.

We must strengthen social safety nets to ensure that the poor in our societies are adequately protected. Political support and sustainable reforms would erode if the ranks of the poor masses continued to swell. We know that a great part of East Asia's population lives just above the poverty line, so the longer this crisis lasts, the greater will be the suffering.

 

The Philippines' Choice

The Philippines is fortunate that the ravages of the Asian crisis have not been as heavy on us, compared with some of our neighbors. Our national economy still managed to post some growth for 1998.

Our banking sector remains in good health. Our export sector rode the turbulence well and registered a very respectable growth of 17 percent last year. For the first time in 12 years, our current account balance turned positive in 1998, registering, as of November, a surplus of nearly a billion dollars. And we are confident that our economy will be among the first to start recovery this year.

Our optimism, as a French credit rating agency noted, is borne by our economy's fundamental strengths. Often cited are the dynamism of our special economic zones, the healthier state of our banking sector, our highly-trained and productive manpower, and the smaller debt in foreign currency of our private sector.

But we are not out of the woods yet. Our homework list is full.

 

We are for Global Partnership

The poor performance of our agricultural sector, largely due to last year's adverse climatic conditions, must be addressed urgently. Agriculture is still the main source of livelihood for the majority of our people, so any improvement in this sector will be significant. Thus, countryside development has become the centerpiece of my administration's economic development thrust.

Infrastructure bottlenecks, particularly in transportation and communications, are another obstacle to our growth. The same is true with our low savings rate.

We are pointing out these weaknesses to you because these are opportunities for doing business with our country. And we are moving to provide more avenues for partnership with foreign investors.

We are pushing legislation aimed at developing our capital market to meet our growth financing needs, while ensuring that investors who put their trust in us are amply protected. The powers of our securities and exchange commission are to be strengthened to secure a level-playing field. Amendments to the general banking act will be pursued to enhance competition and ensure greater transparency in the banking system.

Other priority bills my administration is pushing will open up the retail business to foreigners, make our special economic zones more attractive, rationalize our power sector, and resolve the remaining issues in the development of our mining resources. We also want to attract more regional headquarters to our shores.

The Philippines is steadily moving towards greater economic freedoms. In 1995, we were ranked among the "mostly unfree" nations, the 66th out of 101 countries listed by the Heritage Foundation and Wall Street Journal. Today, we are in the "mostly free" category and ranked 48th out of 161 countries. That is, we were in the top 67 percent in 1995. Now we are in the top 33 percent.

In other words, the Philippines has made its choice. We are for free and open markets. We are for interdependence. We are for global partnership in development.

 

Our Choice for Asia

Those too are our wishes for Asia. We want to see an Asia that is open and competitive. An Asia with sound macro-economic policies, robust financial systems and open capital markets. An Asia that saves judiciously and invests efficiently. An Asia that promotes an independent competitive private sector and the highest standards of public sector governance and transparency. An Asia that enhances social welfare and environmental protection.

I strongly believe that these are all attainable, if we grab the opportunity now - to deepen our reform, accelerate innovation, further our commitment to social justice, and advance our integration.

To stay at the forefront of the global economy in the next century, our region must do business using the highest standards of transparency, accountability and corporate behavior.

In the past, leaky financial and banking systems were not serious obstacles to economic development. Neither were some uncompetitive practices our businessmen had acquired during periods of rapid growth. But ours is a changed world, and inefficiency anywhere will exact a high price.

Of course, I refer to the unproductive, unfair and unconscionable excesses of crony capitalism. The damage wrought by collusion between greed in business and abuse of power in government cannot be hidden. It shows in the abject and hopeless misery of the poor masses. It shows in the lost morale of small business and the apathy, if not corruption, of civil servants. It shows in the hulking, empty shells of white elephant projects.

The reforms now being undertaken throughout the region must be deeply institutionalized. We need to reinforce sound policy stance with robust institutions and market-based instruments.

Alongside deeper reform, we need to accelerate innovation. Now we must shift to higher productivity sectors. We need to promote efficiency gains through a competitive environment and a culture of seeking technological progress.

By themselves, however, reform and innovation cannot do the whole job of ensuring sustainable growth. As I emphasized in last year's APEC summit in Kuala Lumpur, economic progress cannot be sustained unless it addresses the concerns of the poor.

Our war against poverty is far from over. Our region is still one of stark contrasts between the rich and the poor. The ripples of economic distress now permeating the region are more troublesome than the initial shock. Concrete manifestations range from children having to work to families selling possessions just to buy food. In some instances, marked anger and frustration have given way to social unrest.

In these trying times, a new social partnership among government, labor and business is in order. Industrial peace could be an important linchpin for recovery.

And corruption must be banished. I repeat: corruption must be banished.

Over the longer run, there will be greater insistence on more socially responsible governance. People will want both social improvement and security, and they will support governments that give these to them. This will be the major political fact for most of the region in the next century.

Finally, long-tem growth calls for deeper interdependence and more linkages within the region and with rest of the world. Asia-Pacific's economic integration will proceed, but we count on advanced economies like America to help us keep global trade and investment open and free.

 

Closing

For much of the '70's and 80's, it was America, not Asia, that was grappling with the issues that face us today. The American economic landscape then was one of lost jobs, idled factories, bankrupt companies, and communities in distress. That was when the debate was on whether America should close its markets or enter new regional and international trade agreements that would open its markets further.

America made its choice. It undertook the necessary adjustments to deal with globalization. It braced itself for the changing international economic environment. It moved in the direction of more openness and freedoms in its economy. And it happens to be doing well today.

Now, the time for Asia to make its choice has come. America's choice then can be Asia's choice now. It is up to this corporate conference to say that this is so.

Thank you, and I hope you will all have a pleasant stay in the Philippines.