MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | SIR JOHN BOND
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | SIR JOHN BOND
Regional Vitality in the 21st Century
April 6-10, 2001 — Tokyo, Japan
Sir John Bond
Good Morning Ladies and Gentlemen. I have been asked to talk today about global economic issues and regional vitality. In addressing this wide-ranging issue, I propose to concentrate on two closely interwoven themes. Two key themes which this region needs to keep sharply in focus if it is to continue to improve the quality of life for its peoples, in what, for the foreseeable future, promises to be a challenging world economic environment. The first - as I said when I had the privilege of addressing this meeting two years' ago - is that it is the quality of government that ultimately determines economic success. My second theme is that the balance of strategic advantage generally lies with large, continental economies. Does economic success matter? Yes, because it is literally a matter of life and death. Research shows that, when a country increases its per-capita income from 500 dollars to 1,000 dollars, it increases, on average, life expectancy by nearly four years. Asia Pacific has seen hundreds of millions of people removed from poverty over the last twenty years. The economic setbacks since 1997 should not obscure the massive achievements. Economic success matters and it is governments that decide how successful their people can be. Let me be clear. Governments are not, directly at least, agents of wealth creation. There is no serious evidence that governments create wealth. Indeed, the evidence of nationalisation and planned economies is that wealth creation is almost always better done by the private sector. What politics is really about is the power to spend money. Governments redistribute, more or less efficiently, what others have earned. Which can be unfortunate because the first lesson of the commercial world is that the one sure way to know the value of what you spend is to earn it yourself! Governments may not create wealth, but, crucially, they do determine the level of economic freedom in a country. By setting the rules on, for instance, property rights, barriers to market entry, contract laws, wage controls - the whole infrastructure on which wealth creation depends, governments ultimately determine the framework for a society to create wealth. Unsurprisingly, research shows that economic freedom is positively and significantly related to growth in per capita national income. Every law, rule or regulation set by government has the potential to create or destroy wealth; to encourage or discourage. And it is the sum of a government's policies that, over time, determines a nation's ability to achieve economic success. So quality of government is key. Of course, many other things contribute. For instance, natural resources are important. But if they were the only determinant, Venezuela would be richer than Taiwan. Given good government, my second point is that the balance of advantage lies with large, continental economies. Obviously the US is the best example here. But we also see the European Union moving slowly towards a single market. The next phase of ASEAN development may include harnessing its collective economic power. All the evidence suggests that many industries are a better proposition on a regional basis than a national one. The irony here is that although good government and economic performance are interdependent, politics and economics are, in some places, actually moving in divergent directions. In parts of the world, nationalism and separatism are creating more nations, not less. However business is transcending more national boundaries every day. And the internet knows no geographic boundaries. What advantages do large economies have? Economies of scale, certainly. The ability to redistribute jobs regionally to maximise efficiency. But most importantly, a large domestic market of hundreds of millions of people provides the potential for powerful domestic consumption to create growth. In what many commentators call a borderless world, those economies which are literally borderless have the advantage of being more "friction-free" than equivalent groupings of countries, with all the trade barriers, tariffs and competitive impediments that may imply. Of course, size on its own cannot guarantee success. History is full of examples of stagnating empires. And, conversely, it is perfectly possible to be successful without these advantages. Hong Kong, for example, is very successful as a service economy, and it is now perfectly located to benefit from an ideal strategic location. And Japan, admittedly a much larger economy, built its success on exports and manufacturing excellence. Asia Pacific has the potential to benefit from two major economies in different stages of evolution. First Japan. Asia certainly needs a strong Japanese economy to complement the US; just as it needs a strong European economy. The world economy has been compared to a plane flying on one engine - US built - and it needs more engines of growth - at least, Japan and Europe - preferably more. If we are going to be subject to a dose of "American flu", then other parts of the global economy must take some of the load by stimulating demand. The last decade has been traumatic for Japan. After being seen as the economic miracle of the post-war age, growth has stalled as extensive restructuring has taken place, which is inevitably having an effect on consumer confidence. Japan has many of the preconditions for success in place; a highly-educated workforce, high savings - maybe too high - and is a world leader in many industries. An economically strong Japan would be beneficial for Asia Pacific as well as the global economy. The second economy with the potential to drive Asia Pacific is China, a large continental economy with all the advantages I have indicated. Nobody should underestimate China's progress. The Chinese government is handling the transitions in its economy with amazing skill. And, while there are some issues to be resolved before final accession to the WTO, no-one should doubt the potential for further progress. China's achievements over the last 20 years are remarkable. There is every likelihood that China will become an Asian - and probably a world - economic superpower over the next twenty years. And as a result, China will increasingly compete with many other Asia Pacific countries. But it will also provide Asia Pacific with great opportunities. Nine out of China's ten largest trading partners are members of APEC and 75 per cent of China's import and export activities - worth 270 billion US dollars in 1999 - were conducted with APEC economies. So China has the potential to become an engine for growth in Asia Pacific. And perhaps this rapid growth in trade and investment between China and Japan, and many other Asian countries, will give further impetus to regional vitality. Let me return to my first theme - quality of government - and look at it in a little more detail from an Asia Pacific perspective. I see four key ingredients for economic success in the 21st century. And all four are ultimately dependent on quality of government. First human capital. In terms of human capital Asia is and remains very clearly a success story. Educational standards in many countries surpass those of OECD countries. For Asia, education will remain a key competitive strength. The investments made in primary and secondary education have produced great economic benefits for many Asian countries. And as Asian economies continue to develop, we will see the increasing importance of tertiary education to the region, particularly in engineering and science. The second factor is access to capital. Societies need capital to improve standards of living. In terms of international investment, we are not just talking about the availability of capital through the international capital markets; we need to consider the infrastructure - the markets, banks and institutions - that determine whether that capital is allocated efficiently. In the long term, savings provide funds for investment but governments are responsible for a framework to allocate funds successfully. In terms of efficient access to capital, we have seen a number of Asian economies taking steps to improve their regulatory environments. Few would argue that there is not still room for improvement. The speed of the economic recovery after the downturn has left the suspicion that structural reforms of the banking and corporate sectors have slipped as a priority. Economic reform is, in many cases, a major undertaking and that process will inevitably take time. It is important that it remains a priority in good times as well as bad. Foreign companies can play a constructive role in bringing capital to the region. Foreign Direct Investment is perhaps the best form of investment bringing a long-term commitment as well as expertise and know-how along with capital. Those governments that encourage FDI will benefit their economies. In terms of other investment, the international capital markets will slowly evolve to take advantage of Asia's structural advantages. With some of the highest savings' rates in the world, there exists the potential to create financial markets within Asia without needing to recycle the savings through New York or London and have them lent back. It was noticeable during the Asian downturn that the money needed to support those economies in difficulty was present in Asia. Because the world's top five foreign exchange reserve positions are held in Asia. What wasn't in place was the mechanism to recycle those savings, nor the political acceptance of such remedies. The IMF did it because no Asian supranational institution yet exists. The third factor is quality of life. As work becomes ever more mobile, many workers will have the ability to choose where they live. So quality of life issues in the form of education, the environment, security, taxation, art and access to recreation will become ever more important. I would point to the environment as one area where many Asian countries have room to improve. Certainly Japan has taken a lead here and perhaps others could learn from Japan's example. Japan has recognised its responsibility to improve the environmental impact of its industrial base and Japanese cities are noticeably cleaner than those of many Asian countries. On a global level, capitalism's role in the 21st century will be to get capital into the hands of those who desperately need it. You cannot have more than half the world living on less than two dollars a day and the rest with significant income. This is not sustainable. The same advances in communication and transport that make globalisation possible mean that, ultimately, if people see no chance, they will move and we will face mass migration. There will be some eight billion people on the planet in 25 years, some two billion more than today. The pressure on cities is going to be enormous. For instance, Jakarta's population may double to nearly 25 million, and, in total, almost 400 million people will live in megacities across Asia, treble the number today. The effects on the infrastructure will be profound, and we will need to address the problems that will result in terms of water supply, pollution, sanitation and so on. If not, we will see movement of people on a scale never seen before. And they will move to where they see a better quality of life. The final factor is the moral dimension of capitalism, an issue for us all, including government. Capitalism is not a perfect system and we are seeing increasing concern manifesting itself in protests like those at the WTO in Seattle. It is the duty of those who are successful whether they are individuals, companies or countries to make sure they devote some of their time and money to those who are less so. The biggest threat to the world is probably uneven development. While it is unarguable that standards of living across the globe are rising as a whole, it is also unarguable that inequality is perhaps the major issue facing us. Between 1960 and 1990, the nine most successful Asian economies - Japan, China, Hong Kong, Taiwan, Republic of Korea, Singapore, Indonesia, Malaysia and Thailand - grew three times faster than Latin America, three times faster than South Asia and five times faster than sub-Saharan Africa. On a global level the problem is this. How do you produce wealth if your government will not create the preconditions necessary? If capital rewards those with virtuous policies, does this mean abandoning those people who, through no fault of their own, are victims of their own governments? This will be one of the major debates of the next generation. And there are no simple answers. Debt forgiveness may be important - vital in some cases - but it deals with the past. In the future it will mean nothing unless developing nations can gain access to international capital by establishing a sound institutional framework in their own countries. Other parts of the world may be more affected by this debate than Asia Pacific, but the issue of inequality will be a major one for the region if growth rates falter or become uneven. Richer countries have an obligation to help the poorer and Japan should be applauded for the scale of its contribution of overseas aid. What are my conclusions? That Asia Pacific has the potential to be a powerful engine of world growth. It has already been a great success story. But there is more to come. Yes, there are challenges but there is also a great opportunity. There is not an economy in the world that is not dependent on private consumption. And private consumption depends on confidence. People will not spend unless they have confidence in their future. So it is up to government to provide confidence, by putting in place a framework for success. For that success to be enduring, government must be consistent and it must put into place the conditions that allow people to create wealth and a better life for themselves. In the final analysis, good government is about offering a vision of what the future holds. One that people are willing to invest in and build towards. Those governments that succeed in doing this will reward their peoples with a better life. And those that fail will punish them. With good government, the prospects for Asia Pacific economic vitality are very good indeed. |
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