Published Date: 08 May 1998

Keynote Address by DPM Lee, at Forbes CEO Forum, Phoenix, Arizona

Date: 8 May 1998

"Economic Prospects in Asia"


1   My topic today is the economic prospects for Asia, and what Asia offers to American companies.

2   Asia's economic progress over the past three decades has amazed the world. Asian countries have enjoyed high growth rates, rapid industrialisation, and widespread improvements in standards of living. A 1993 World Bank report called it "The East Asian Miracle".

3   But last year, the mood abruptly changed. In July 97, Thailand floated its currency after several bouts of speculative attacks. The Thai baht immediately depreciated sharply. This set off a run on the currencies and domestic assets of many Asian countries. Suddenly, the whole region was engulfed in a severe economic crisis. Nobody had predicted these dramatic developments. They raised the question: was the East Asian miracle a mirage?


4   There is no question that East Asia's economic achievements were real. The socioeconomic statistics tell the story. Poverty, life expectancy, infant mortality, education, incomes, all improved year after year. Millions of lives dramatically improved. In one generation families went from poverty and illiteracy to university educations, professional careers and middle class affluence.

5   Several factors underpinned this exceptional performance. Governments pursued sound economic policies. They encouraged foreign investments and exports, and plugged their economies into the international grid. Generally market-oriented policies allowed businesses and the private sector to thrive. Fiscal discipline and prudent budgeting produced macroeconomic stability. For example, Thailand ran fiscal surpluses for nine consecutive years, before running a deficit last year.

6  . East Asian economies had high domestic savings rates - up to 40% of GDP. Most of this went into productive investments and economic infrastructure. In particular they invested heavily in education, to give their populations the skills and knowledge to be productive and to upgrade themselves. Indonesia, with its enormous and rapidly growing population of 200 million, was able to achieve universal primary education, no mean feat.

7   These policies helped to transform these economies from stagnant agricultural communities to dynamic, manufacturing-based economies. Even Paul Krugman, the provocative critic of the East Asian Miracle, acknowledges that East Asian economies are not Potemkin villages, facades with nothing behind them1.


8   Unfortunately, the rapid growth led to excesses, which were ignored in the flush of prosperity. By the early 1990s, several Asian economies were already operating at full capacity. Asian banks and companies borrowed excessively from abroad, often to invest in property and stocks. Financial institutions and investors in developed countries, egged on by enthusiastic analysts, were only too eager to lend and too willing to suspend critical judgment. Property and asset bubbles started to form, for some time unnoticed.

9   Part of Asia's problem was structural. Asia compressed into two decades economic changes that the developed countries had taken several generations to accomplish. Institutions did not always develop in step with the rapid economic growth. Business plans and regulatory mechanisms were often less than rigorous. Weak business practices, lax regulatory mechanisms and inadequate legal frameworks eventually manifested themselves. Pro-market policies co-existed with administrative and restrictive measures. This created fertile opportunities for what economists politely term rent-seeking behaviour.

10   Political factors were also at play. In some countries politicians, businesses and banks were entangled in a complex web of inter-relationships, which first fostered, and then made it difficult to acknowledge, much less to address the structural problems. Banks extended loans based on personal relations and political connections rather than the financial viability of the projects. Both locals and foreigners viewed the participation of well-connected local partners in a project as an implicit official guarantee for a loan, or an indispensable assurance that approvals and contracts would be forthcoming.

11   The financial crisis itself contained a large element of panic. Once the euphoria evaporated, foreign investors stampeded for the exits. The funds which had poured into Asia over the last 5 years, drained out over a few months. Statements and actions by some governments aggravated the problem. They rattled markets and raised profound doubts over the governments' approaches to overcoming the crisis. These mistakes helped the contagion to spread faster and further than otherwise.

12   Once confidence was lost, Indonesia, Korea and Thailand had no alternative but to call in the IMF. The IMF was the only institution which could help to design credible policies for restoring confidence, and to provide the financial assistance to back up these reforms. These countries now had to adhere to IMF conditionalities. This included addressing structural problems such as monopolies, restrictions on trade and exports, and major investment projects with uncertain economic justifications. These structural problems might or might not have been the immediate cause of the crisis. But investors now saw them, or more precisely the governments' continued tolerance of them, as evidence that government policies had not yet changed, and therefore as sufficient reason to continue to withhold confidence. There was no alternative to tackling the structural problems seriously, even if they could not be solved immediately.


13   What are the prospects for Asian economies? There is no quick, painless solution. A prolonged period of severe adjustment is inevitable, even if the governments follow textbook prescriptions and do everything right to restore soundness, confidence and growth. Reforms will be painful, but they are absolutely necessary for the countries to recover and to safeguard the real achievements they had made over the last thirty years.

14   The problems and solutions vary from country to country. At the risk of over-simplifying, the countries have to recapitalise and restructure their financial sector, strengthening weak banks and closing insolvent ones. They have to tighten regulatory and supervisory systems to prevent a repeat of the borrowing binge of the early nineties. Countries whose bankruptcy laws are non-existent or ineffective will need new bankruptcy laws and even bankruptcy courts, so that insolvent companies can be wound up and creditors can settle their non-performing loans expeditiously. Structural problems which the market has spotlighted will have to be set right.

15   Governments have to restore investors' confidence in the soundness and integrity of their financial systems and corporate sectors, and in the governments themselves. They must release more information, make laws and regulations more transparent, and require stricter standards of accounting, corporate governance and disclosure from the corporate sector. They must show that they realise the errors of the past, and are committed to changing policies, and not to continue or repeat them.

16   Political resolve will be essential to accomplish these difficult and painful changes. The governments will have to carry the support of their populations, and persuade them that the sacrifices will eventually lead to growth and prosperity for all. Investors, both domestic and international, are watching closely.

17   Not all countries can be expected to do all this with equal despatch. Asian economies will recover at different rates, depending how soon they come to terms with the new reality, how pragmatic their approaches are, and how resolutely they implement the necessary reforms.

18   When the crisis first erupted in July last year, investors did not discriminate between the different countries in the region. Their immediate reaction was to panic and rush for the exit. They sold off their stakes all over Asia, sending markets reeling. But now that the dust is settling, investors are beginning to distinguish between economies depending on their actual circumstances, and on how their governments are responding to their difficulties.

19   Indonesia faces a grave situation. Its problems are not just economic, but also a social and political. Its ministers know that Indonesia has to demonstrate beyond doubt to the markets that it will carry out fully both the letter and spirit of what it has undertaken to do in its third IMF package.

20   Thailand and Korea, which have demonstrated the political will to change, are already beginning to see confidence return. While the previous Thai government had been overwhelmed by its problems and wavered in its economic policies, the present government of Prime Minister Chuan Leekpai has shown its commitment to the IMF reforms. It has closed insolvent finance companies, and raised petrol taxes, against fierce opposition. Similarly, Korea, also after a change of government, has successfully rescheduled its short term debt, and bought itself time to reform its banks and manufacturing conglomerates, or chaebols. Investor sentiments towards these two countries have vastly improved, even though their actual problems have not yet gone away.

21   Singapore, Hong Kong and Taiwan do not suffer from these structural and banking problems. But they too have been affected by the regional instability and uncertainty, although less seriously than their neighbours. They must learn the lessons of the crisis, lest they find themselves less lucky the next time. They have to strengthen their economies and build for the future.

22   In Singapore, the government is taking long term measures to strengthen competitiveness. We are stressing manpower development and education, because our future depends on our becoming a knowledge-based economy. We are investing heavily in school facilities, especially computers and IT. We are also making a major national effort to retrain and reskill workers, particularly the older ones who are less well educated, to make them employable in new jobs as the economy restructures and old jobs are lost.

23   In manufacturing, which has always been a pillar of Singapore's economy, we are systematically shifting into skill-intensive high-technology industries, supported by investments in an R&D infrastructure. We are also investing in economic infrastructure, to develop ourselves as a competitive business, communications, and services hub, a node from which companies can oversee and manage their operations all over the Asia Pacific. We are expanding our container port, introducing competition in telecommunication services with a second operator, and experimenting with broadband internet and electronic commerce.

24   Finally, Singapore has fundamentally changed its approach to regulating and promoting the financial sector. We are freeing up the hitherto tight control by the Monetary Authority of Singapore, to regulate the industry with a lighter touch, and allow more private sector initiative and risk taking. The industry will rely more on market forces and market discipline, and less on rules and administrative guidance from the government. Investors and financial institutions will decide for themselves what risks to accept, while the government focusses on managing systemic risk, and on enforcing transparency and integrity of the markets. In manufacturing, which has always been a pillar of Singapore's economy, we are systematically shifting into skill-intensive high-technology industries, supported by investments in an R&D infrastructure. We are also investing in economic infrastructure, to develop ourselves as a competitive business, communications, and services hub, a node from which companies can oversee and manage their operations all over the Asia Pacific. We are expanding our container port, introducing competition in telecommunication services with a second operator, and experimenting with broadband internet and electronic commerce.


25   What can the US do to help Asia to recover? The main responsibility lies with the countries themselves, to put their own houses in order. If these countries do the right thing, then outside help can be effective.

26   The US must take the lead in mobilising international support to help tackle the Asian crisis. It played a key role in the restructuring of Korea's short-term debt. Recently it initiated discussions on improving the architecture of the global financial system, to reduce the risk of such crises recurring.

27   A favourable external environment will help. Asian countries need to export more to markets in the developed countries, in order to recover. The US and Europe are currently the two major locomotives of growth for the world economy. They must keep their markets open to Asian exports. American consumers will benefit from competitively priced products, while US industry can take advantage of cheaper intermediate goods to boost their competitiveness.

28   This is not a one way street. Asia has become a major export market for US products and services, one which is growing significantly faster than the European market. The problems in Asia have already caused a sharp fall in US agricultural exports. When Asian economies recover, their imports will grow again, and US exporters will benefit.

29   The US should support the efforts of multilateral institutions such as the IMF and World Bank. The IMF has been strongly criticised in the US, where Congress is holding up US$18 bn in additional funding for the institution. The IMF is certainly not infallible, but it is the only international institution which can respond swiftly and effectively to a financial crisis. Even without the IMF, crises will still arise from time to time. These will then have to be dealt with bilaterally, which will be harder and more contentious. If it happens to a country which is important to the US, the US will not be able to stand by and do nothing. This is why the neutral multilateral mechanism of the IMF deserves US support.

30   Prospects for American business in Asia depend on the long term outlook for the region. I believe the Asian economies will eventually recover, provided they pursue reforms consistently, and the external environment remains favourable. In some countries, a recovery within 2-3 years is possible. In others it may take 4-5 years, depending on how thoroughly and resolutely reforms are carried out.

31   Asian countries still have high savings rates, an abundant, well-educated and disciplined labour force that is willing to work hard for higher living standards, and governments which are pro-business and welcome foreign investments. These underlying fundamentals have not changed. Asian countries may be in financial distress, but they cannot be counted out.

32   In a broader regional perspective, one negative factor is Japan's persistent deep systemic problems, which are the aftermath of its bubble economy. These weaknesses will prevent Japan from playing as active a role as it should in restoring the region to economic health. Japan has been a major source of foreign direct investments in Asia. The sooner Japan recovers, the faster this investment flow will pick up, and the more an expanding Japanese economy can absorb imports from the region.

33   In contrast to Japan, China's economic outlook is more positive. China's economic liberalisation and growth will continue. The new Chinese leadership is strongly committed to the economic reforms which have already transformed China. This is a key factor for the stability and prosperity of the region.

34   China's road ahead will not be easy. China has major problems with its state-owned enterprises and its banks. But the Chinese government has seen how structural weaknesses in other Asian countries precipitated a crisis, and they are tackling SOE and banking reform with renewed zeal and urgency. As Premier Zhu Rongji said: "China's reform will be intensified continuously, without a halt."

35   Short term prospects for US businesses vary across the Asian economies. Not all of Asia will prosper together, but neither is the whole region bereft of possibilities. Asia offers discriminating investors attractive opportunities. As Asian countries reform and liberalise their economies after this crisis, they will create more opportunities for foreign participation and investments. For example, Thailand has loosened limits on foreign ownership of banks, to allow foreigners to own up to 100% of Thai banks, for up to 10 years.

36   Not all the possible investment opportunities will lead to successful deals. After the major upheavals of the last year, it will take some time for investors and sellers to reach a consensus on fair and realistic values of assets in the new economic circumstances. But US companies which start looking for opportunities now will be well positioned to strike win-win deals, and reap the benefits as the region recovers.

37   US MNCs have made their Asian operations an integral part of their global business. They have invested in Asia not just to service the regional markets, but to export worldwide, to Europe and the US. They have spread their activities across many countries, wherever it makes the most economic sense to locate each particular operation. This global strategy has made US MNCs among the most competitive in the world, and helped them to stay ahead of European and Japanese rivals.

38   The difficulties which the Asian countries now face do not invalidate this strategy, since such MNC investments do not depend on the domestic markets of their host countries. Indeed, other things being equal, the depreciation of the Asian currencies against the US dollar should lower the costs of operating in these countries, and make it more attractive for MNCs to invest there than before.


39   The regional crisis does not spell the end of East Asia's growth and progress. Fierce though the financial storm has been, it has not swept away the fundamentals that made Asia a powerful economic dynamo, and an attractive investment destination for MNCs. In time, the reforms now being adopted in most countries will lay the foundations for a stronger and leaner Asia. US companies that take a long term view of the region and its potential will position themselves to share in Asia's prosperity when Asia recovers.

1 Paul Krugman "Will Asia Bounce Back?" - speech delivered at a Credit Suisse Conference in Hong Kong in Mar 98.