MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | RONNIE CHAN
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | RONNIE CHAN
Regional Vitality in the 21st Century
April 6-10, 2001 — Tokyo, Japan
Mr. Ronnie C. Chan
Thank you Clyde. The topic today is revitalizing the Asian economies, I suppose how we revitalize anything depends on our understanding of where the problem lies, what is the problem behind the Asian crisis. Here I submit to you that Asia's problem is not a cyclical one, it is not just because of the tack of the global capital flow. I submit to you that it is because of the systemic failure of society to be more blunt, Asia and I include all the way from Japan to Indonesia lack the proper social institutions. Consider the legal structure, consider the judiciary system, consider all the regulatory bodies from the banking regulation to stock market regulation to professional body regulation, almost all of them are inadequate at best. I think the burden must rest on the government rather than on the private sector. Take for example corporate governance, no companies, no businessmen including myself would do best practice unless the government creates an environment that forces us to abide by such good practices. Consider corruption, unless the government prepares an environment that corruption is being punished, nobody will get away from corruption. So East Asia, no matter what kind of political system it has from the authoritarian state such as Vietnam and Myanmar to the halfway houses I call them such as Malaysia, Indonesia to the outright democracy like The Philippines and Thailand, they all have very inadequate social institutions and they are not competitive in the global economy. Some people say in the West that democracy is what East Asia needs, I do not dispute that but do not make that into a panacea. Philippines was the richest country after Second World War, now it is one of the poorest. The question then becomes, is this problem of the lack of social institutions being addressed now that cyclically we are out of it. The answer in my opinion, as one who invest in many countries in East Asia, is that preciously little social institution building has been in place even Korea which is suppose to be ahead I believe may have done maybe 5% of all that needs to be done. Cyclical recovery may in fact impede that sense of need for structural reform. Cyclical recoveries mean little, the crisis may return. Global capital flow may just be proven to be only one among many unexpected by products of globalization. So while we are concerned with global competitiveness on the part of Asia, we better begin thinking about how to avert the next crisis. What about Japan? A lot of people, well Japan has a great benefit of being already in hell when the Asian crisis hit and when you are already in hell, more hell doesn't hurt that much. The question often time asked is why is Japan not recovering after 10 years. I believe it is the wrong question at least it is not the most important question because I believe, in spite of what Richard Koo my friend has said at lunch, Japan's problem is not a cyclical one, it is a structural one. Japan is a system that is so rigid that it impacts on social culture and the social culture in turn strengthens the rigidity of the system. And so structure and culture chase each other down and that is not a good sign. The system is also inherently resistant to outside forces and in that sense, Japan you may say is not part of the world economic system. Consider the fact, the biggest miracle to me of the 1990s is that the second largest economy, called Japan, in the world was in hell and yet the rest of us in the world don't even feel it. That is amazing. In a sense, Japan has a one way relationship with the world economy. It sells to the world but I am not sure it buys that much. Consider the fact that in the mid 90s, in the late 90s a lot of the American companies with the help of the USTR tried to press Japan to open up its doors and indeed structurally, legally it opened. But did they sell anymore, the answer probably is no. There is not only structural barriers, there is also cultural barriers. What I am trying to say is this, in one word, that is we cannot use Western economic standards to judge Japan. It is a totally different system that we have to understand it for what it is. I mean no value judgement. I hope I am merely stating the facts. After all, in the post Second World War era, the system in Japan has done it well. Japan is now one of the wealthiest country in the world. However, in the last 5-10 years, the world has changed a lot while Japan was stagnating, the world is marching forward. Globalization caused by partly technological breakthrough, partly because of breakthroughs in market opening has changed the world so much that Japan may run the risk of being left behind. So the question is when will Japan change structurally? I submit to you that only when the Japanese people begin to perceive and understand that Japan is losing global competitiveness, then Japan will change. It may take a long time because Japan is still wealthy, extremely wealthy and the economy and the society will simply chug along. It won't die neither will it be dynamic. You may say it has already been 10 years. Well, when you are talking about structures, social structures, it may take a lot longer than 10 years. Maybe another 5, another 10, another 15, another 25, whatever the number is. After all Japan moves in step functions, consider its history: 1870s the major restoration, 1920s preparing for the war, 1945 after the war restructuring. Japan doesn't change gradually it seems but once in a great while Japan will leap and when that happens watch it. Japan will wake up and when that happens it will be an economic earthquake to the world. If you think that China's reform today is serious to the world, well just wait until Japan wakes up. China is significant to the world only quantitatively. When Japan wakes up, it will be both quantitatively and qualitatively. However as a final thought on Japan, the biggest impediment to change I submit to you is not economics, it's the political structure which causes political inertia. As a prerequisite to, or maybe at least concurrent with economic structural adjustment is political reform. Some people say Mr. Mori exerts no leadership, this, outside observers seem to think that maybe no leadership is possible. Look how many Prime Ministers Japan has had in the past 10 years given today's political structure. Until the country wakes up, nothing will change but I believe Japan one day will wake up as it begins to lose competitiveness in the world. What about China? Well if Japan was in hell for 10 years, China was stagnating for 30 years since 1949 and in fact China has been on the decline for past 200 years. But since 1979, under Deng Xiaoping, changes have been to the better. Here let me say this that China has tremendous amount of political reform in the last 20 years that went along with economic reform. If you don't think that China has political reform it is just because you don't know about it. The country in East Asia in my opinion that has the best chance of regulatory leapfrogging, not just technological leapfrogging may indeed be China because they start at the bottom. They are really flat out by 1979. So I believe that China has a good chance of regulatorily leapfrogging and hence lifting itself out of the present problem. After all the opening of China is not forced upon it from outside, it is out of the self-enlightenment of one man, in particular Deng Xiaoping, which has now spread to everywhere in the world. So will China's reform continue? Yes. But will it succeed? My answer is I don't know. It is like walking on a tight rope, you never know whether the man will fall down or not. China is attempting something that has never been done before both in scope and in nature. The biggest challenge must be how to balance economic development with social stability. My bet however is that, I am willing to bet that China will change and will stay on that course after all it has had 20 some years on the right track. That's why I am investing more and more in China. Finally, let me say a word about the ASEAN countries. I think the ASEAN countries maybe with the exception of Singapore is in the worst shape. I think the future is not bright. Why? Well, look at financial capital. The foreign direct investments are all going to China and South East Asia has to compete with China which is a difficult country to compete with. Consider human resource, both in terms of cheap labor, skilled labor, technological expertise, all those areas China is very competitive. The only area China lacks vis-a-vis South East Asia is in terms of management personnel. But every young man I know in China want to get an MBA so watch it. So as a final two thoughts, two suggestions which may shock a lot of you. The first one is I suggest that China in the next 10 years should help South East Asia develop economically. When you are grabbing things from others, legally you are competing for export, leave something for South East Asia, help them. It is good politics and it is good for regional stability. The second suggestion is even more drastic. I suggest that many South East Asian countries consider the following: outsource not privatize but outsource some of your social institution building. Consider judiciary systems, consider the management of the stock exchanges, how about bringing in foreign companies to help you do it. I know that there is a lot of problem with it but I see no other alternative and drastic action is necessary. And by the way, China is the country that in that regard is changing the fastest. Recently, China hired a U.S. citizen who is originally from Hong Kong, the former Vice Chairman of the Hong Kong Securities and Futures Commission to be the Vice Chairman of the CSRC, the China Security Regulatory Commission. So China is now borrowing people and institutions from the outside world. I suggest that South East Asia do something even more drastic by outsourcing its social institution building. But all that I have said, I think that in the next few years, there is one dark cloud that causes concern. That is the George Bush Administration. I think that so far it is too early to tell conclusively but so far I am very worried about the Bush Administration. I think that what it has said regarding China is not going to help China in its reform. The way it undercut Kim Dae-Jung of South Korea is certainly no way to be helpful to a friend and indeed it is getting closer to Japan. Obviously we should not fault that, there is nothing wrong with that. May, in fact not be good for Japan because after all my Japanese friends understand the need for gaiatsu, is that the word that you need some foreign pressure. So be friendly but also you need to exert some pressure. I think Japan would appreciate it. Thank you very much. |
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