PACIFIC BASIN ECONOMIC COUNCIL
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Additional Info: Policy Statements Speeches Photos Speakers & Noted Participants Featured Biographies Registration Media Information Conference Statement Regional Vitality in the 21st Century April 6-10, 2001 — Tokyo, Japan Mr. Kenneth S. Courtis Vice Chairman Goldman Sachs Asia Thank you very much. I'd like to begin by thanking PBEC for this gracious invitation to participate in this important meeting. It's an honor to be on a panel with such distinguished speakers and I'd like to thank PBEC on behalf of my colleagues for the opportunity to engage in this exchange of ideas. Revitalizing Asia is the theme of this panel and it's also been one of the central themes of this meeting. Like Ronnie, I'd like to, in fact like Clyde as well, in a sense ask myself with you, why we're even asking ourselves this question today in 2001, when I think we probably share a broad consensus among us that the elements required for dynamic economic expansion are pretty much present in this region. So I'd like to address that issue in the first part. I'd like to remind us what it takes to grow and grow quickly and then look at this region against that. I'd like secondly to look at why we're asking this question, why we're in a position today where we're forced to address this issue and in conclusion, I'd like to look at the policies that were required to move ahead and to think with you what could happen if we don't move in the right direction and how we could move in the right direction. So I'd like to begin with the question: why are we even discussing this issue? Consider what it takes to grow. First of all, growth is a combination of demographic expansion of your labor market plus productivity. Over the long term, that's what it is. Well, all of the OECD countries with the exception of Canada and the United States will see contracting labor markets over the next 20 years. This region in the world will be the one region in the world that's growing demographically very fast. Ronnie mentioned China, let's think of China. It's likely over the next 25 years that the urban labor market in that country will increase by about 400 million people to 450 million people. And we have, with each country on its own scale in this region, that type of expansion of urban labor markets occurring. With one exception, this country where the labor market will contract annually between ¾ of 1 percent and 1 percent over the next 2 decades. If we look at a second ingredient of growth, it's capital. This region's got it. This region is the world's greatest exporter of capital. Just the central banks in the region currently manage more than $1.1 trillion dollars in foreign exchange reserves. This country constantly runs a broad current account surplus. We take the current account surplus of Japan and the rest of East Asia, this region is running a current account surplus currently of close to $325 - $330 billion annually. So capital is not the problem. In fact the problem for the rest of the world is if they don't get the capital from Asia. So we've got the people relative to the rest of the world. We've got the capital but what about the infrastructure for growth. If we look broadly at what's been going on in this region in the last 20 years, we've had the most quick expansion of growth enhancing infrastructure anywhere ever. We can think of transportation, we can think of communications, we can think of the development simply of communications in this country since the beginning of deregulation in 1993 when this country had the lowest level of cell-phone penetration in the OECD to today where it has the highest rate of penetration with the exception of Sweden and Finland. We can think of China where in 1990 there was one telephone for every 162 people where today there are 24 times more telephones per capita. And the whole process of infrastructure development of communications, transportation continues across the region to be very strong. It won't be long before you'll be able to drive on super highway from Singapore to Shanghai so quickly as the infrastructure being put in place. Three, energy infrastructure and energy. The region is a net importer of energy and the way it uses energy is on the whole inefficient and damaging for the environment. But there are vast sources of untapped energy in the region. We just heard of some of these earlier. Think of the gas fields in Siberia, more than what's already known is more than 3 times the reserves of Kuwait. Think of what we could do in regional approached energy bringing energy down from Siberia pipelined through Mongolia across China into Beijing up into Northeast China and down through North Korea and South Korea. We all know that North Korea has two huge problems apart from its government: one is energy and one is food. With some reform, they might be able to solve their food problem and certainly we have within the region the resources to solve the energy problem. That energy also would be very important for China to reduce the pollution of the cities to have much more efficient use of energy and make the energy much less dependent on the volatile gulf region. We have the energy in the South China Seas, further energy development in Australia, in Indonesia and if you look at the oil sands of Canada on the other side of the Pacific, they have more reserves than Saudi Arabia. So energy is not our problem in the region, we don't have a shortage. It's the organization of that energy, the exploitation of that energy to be used properly. Technology is another key ingredient of growth. I would submit, Mr. Chairman, that there's probably no region in the world that absorbs technology more quickly than this region does. Look at the emphasis on education which is a way to absorb that technology. There are what 50,000 Chinese students in America today, 30,000 Taiwanese students in America, 7,000 Chinese students from Hong Kong in America. You have from this country 42,000 people in the U.S. studying. You have similar numbers relatively for countries like Thailand and Singapore. And all of those people become great carriers of technology and culture and many more of them are returning home to get involved in the development of their countries and those that don't return home, a large portion have somehow become related to activities that end up having an impact on their country of origin. Education is a broader issue in this region for some countries particularly in South East Asia with the brilliant exception of Singapore where you just haven't had enough investment in education. And that will have to change or these countries as we move increasingly to embrace the new technologies, these countries will be increasingly marginalized. So we've got the people, we've got the capital, we've got increasingly the infrastructure, the energy is there, we've got technology transfer happens, the trade is occurring, the role of education is recognized and there is a large emphasis on it particularly Northeast Asia. So why is it that everything is there for dynamic growth but we are today raising the question why the region doesn't have any vitality or how do we restore the vitality? I submit, Mr. Chairman, that in part we are dealing with the legacy of inadequate policies for the present and the future that are the heritage of the past: inadequate policies and inadequate structure and the consequences of those policies and structure. The first issue across this entire region: we have a vast debt over hang hobbling the financial sector in virtually every economy with the exceptions of Singapore and Hong Kong. I include, Mr. Chairman, in that statement the United States and Canada, and of course Latin America. Because in the 1990s while the government sector debt in the U.S. has come down, you've had a frightening explosion in the debt of the household and corporate sector that's much greater than the decrease in government debt so the net financial position of America's even more precarious today than it was in 1990. And now we have a President who says he's going to take all of that money, that surplus that has been built up and throw it into consumption and we'll have to see what the implications of that could be in mid-term. So the only way to move ahead on this debt situation that's hobbling the region is one way or another for government to socialize a part of it and force the corporate sector to swallow the rest. The longer we carry that debt, the more difficult it's going to be because it's cancerous. Let me take this country as an example. The government debt by the end of next year will be close to 150 percent of GNP. That's the on balance sheet government debt and even the most conservative estimates of off balance sheet government claims on the state, the most conservative estimates are 150 percent of GNP. Now I could shoot that down very quickly and show you how the numbers are much higher but let's take that. Total bank loans at the end of December were 141percent of GNP and if you add in corporate bonds, corporate commercial paper, warrant bonds and convertible bonds, this country is carrying a debt load in excess of 5 times GNP. It's Himalayan in proportion and that doesn't include any contingencies and you know there are always contingencies in the financial sector. Now let's say that your debt is that big, what does that mean? Well, in my position at Goldman Sachs, not only do I have a wonderful team that helps me with research but I am very much involved in the corporate advisory and government advisory work. In particular I've been very much involved in the work of a number of the financial institutions that you've read about in the press. What we're seeing is that some of these companies, take the life insurance companies and they aren't small, the smallest one to go bankrupt so far had a balance sheet of $18.7 billion. We are seeing write-offs of those companies of 35, 40 indeed an excess of 40% of the assets on their balance sheets. So you can see the knock on effect of a debt that is that high. In a world where we are living in a mark to market period, just imagine what happens if your debt is 5 times GNP, and asset prices fall 3% and you've got a mark to market. 3% of 5 times GNP is 15% of GNP, that's twice the equity of the entire banking system. So we've got in place a structure at the moment in many countries in the region and I take Japan as an example, the biggest example, the biggest problem in the world economy to show you that actually by not resolving this problem, we've created a structure, we've allowed to be created a structure that today is generating more bad debt in financial institutions even with interest rate at 0% are able to write off. So you've got a cycle on the down side and the only thing that's holding it up has been this incredible government spending but with this much debt obviously governments are going to have to retrace on fiscal policy. But Japan's not unique in this situation, this has been the issue that's been at the center of recent Thai elections. This has to be one of the number one objectives on the desk of the Prime Minister of China. This is what the President of Korea is grappling with permanently at the moment. This is what is at the center of the economic and political agenda in Taiwan. Malaysians tried to insulate itself from dealing with these questions but it finds itself today, with everyone around it devaluing their currency and they're going to be forced to a brutal readjustment. Second legacy from the past is the policies and institutions with which we manage our economy. They were good for a certain period but they don't reflect the new global economy: an everyday more intensely global economy, everyday more intensely rapid economy that we live in. Mr. Chairman, I would argue that it's in addressing these areas, these areas of economic management, in particular financial management, that we can restore the vitality that's there in this region. That we can realize the potential of this region and fundamentally, these are issues of leadership. This region's problem if they were only economic and financial would have been solved long ago. They are fundamentally today problems of politics, problems of society. But if we see what has to be done, you can see very closely clearly how they are so political. Clean up of the financial sector inevitably means socialization of the debt and so how is it going to be shared politically, socially. When we open to more competition, which is part of the agenda, because those people who open themselves to competition are the ones that gain because they are the ones who are forced to become more competitive. That also is a hugely political issue. Tax reform, we know what the tax structure is across the region. In this country, you have vast parts of the population that pay no tax. Country like China, the government has trouble collecting enough tax to be a normal state to function. That's an even bigger problem in a country like Russia. Countries across this region will have to privatize vast amounts of their activity that they still have in order to bring down their debt after they've restored health to the financial sector. Some countries will have to make very difficult choices about education. We'll have to continue this momentum ahead on infrastructure but the political issue here is not continuing to build infrastructure but to build it increasingly on a regionalized integrated basis. That's what's behind our Russian colleagues' comments on the energy industry. That also has to be the way we develop communications and transportation as we flow ahead. If we move ahead on this type of agenda, capital will start to flow to those efficient parts of the economy, the excesses, the misallocations will be quickly purged and this end will allow the top dynamic forceful resources for growth in this region to be mobilized most efficiently. This would also restore vitality to the region. In addition, by working on these very concrete economic issues regionally, we'll be able to put in place a broader political form of cooperation which we need to manage increasingly the region's economy. Think Mr. Chairman of the downside, if we don't move ahead on this type of agenda. Well, let me start with Tokyo because this is where we are. If Japan does not move ahead with this type of agenda, the likely course ahead, the course of least resistance would be that the government will monitize the build-up of debt. What does that mean? Well, it means it would print money at the speed that debt is expanding or even faster. What does that mean? That means over the mid-term, the yen would get dramatically weak and since the Asian crisis in 1997 many countries in this region have sliced their relationship with the dollar and today shadow the yen. The yen goes up, the Korean won goes up. If it goes down, the Korean won goes down. Same with the Thai baht, the Taiwanese dollar, the Singapore dollar, some countries are still tied to the dollar but should the Japanese yen get very weak below levels we've seen in the last few years, below level that we've seen since the Plaza Accord which I think could easily happen if this government doesn't move ahead to address these issues, it would only be a matter of time before Hong Kong and Malaysia and China would be forced also to reconsider their currency positions. This could well happen at the same time that the US is gone into a huge tax cut and dramatically cut interest rates and the US economy would be boiling again. Imagine the current account situation we would have in that environment. We'd look back to the year 2001 and say, "Wow, wasn't it nice when the current account deficit of the US was only four and a half percent of GNP." These are some of the issues that are out there and you can imagine the vast financial instability and economic instability and politic tensions that would result if we let something like this happen. And yet, Mr. Chairman, I would argue that this is almost inevitable if we don't quickly change course. And that's the tragedy of us having to address these issues today because this is the region that has everything in hand to have another future than that one. The real issue in closing, Mr. Chairman, then is political. It's a leadership issue. The role of leadership is to represent the future to the present, to help people understand that if we don't change course where we're going to end up and what's the cost of that and where there is a different horizon for a better tomorrow and what policies we have to assume and how we can all join hands together to put those policies in place and how the government will put in measures to help people assume the risks of that transition. That's the type of political leadership that we require but don't wait for the politicians to bring it to you. I think each one of us has the responsibility to move on that agenda in our companies, in our associations and in pressuring, cajoling and encouraging the political process to move ahead. If we can demonstrate that type of leadership in our companies, in our associations of which this is a most important one, then I think that we can start to liberate those vast forces for growth and vitality that are there in this region that are in our hands and if we don't, we'll see them wasted and slip through our fingers. That's the dimension of the challenge. That's also the dimension of the opportunity.