MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | LARRY GREENWOOD, JR.
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | LARRY GREENWOOD, JR.
Striving for Growth
in a Challenging Environment PBEC 35th International General Meeting
Kuala Lumpur, Malaysia May 3-7, 2002 C. Lawrence Greenwood, Jr. This October Leaders from the Asia Pacific region will meet in Los Cabos Mexico for the tenth APEC summit. In the decade that has passed since APEC Leaders boarded the ferry to Blake Island, change has swept the region. When APEC held its first Leaders meeting in 1993, nearly all the region was in the midst of rapid economic expansion. The superstars were eight high-performing economies featured in the 1993 World Bank study, "The East Asian Miracle." That report described a "winning mix" of sound macroeconomic fundamentals and "disciplined" government intervention that unleashed massive investment totaling 20% of GDP per year and fueled average annual growth for the eight of 5.5% over three decades. Building on that spectacular success and buoyed by the remarkable growth in the American economy during the decade, the region as a whole grew by a third since the start of APEC in 1989 and by three-quarters for lower income APEC economies. APEC's accomplishments in promoting liberalized trade and investment was an important part of that success. When APEC was formed, most APEC economies had average tariff rates of more than 10%; today only three of the 21 economies do. By the end of the 1990's most APEC economies had doubled international trade as a percentage of GDP. The liberalization commitments made by the APEC economies in the Uruguay Round are expected to yield $114 billion a year by 2010, essentially creating new wealth in one year roughly equal to the size of the entire Thai economy. APEC's pioneer role as champion of the Information Technology Agreement helped eliminate tariffs on IT equipment both in and out of Asia, giving a boost to a sector that, despite the hyped "dot.com collapse," is a mainstay of many of the economies in the region. APEC economies have similarly made significant progress in opening services, as a wave of reform and growth has swept the region in sectors such as telecommunications, energy, and transportation. APEC again played a role here with its path-breaking Open Skies Agreement, the world's first multilateral air services agreement. Likewise, APEC's efforts to promote attractive investment climates helped spur the huge flow of private capital, peaking at $120 billion in 1996 for Asian developing economies. More trade and investment and faster economic growth has meant important advances in social indices as well, and the developing economies of APEC boast longer life spans, better health care, and higher literacy on average than other developing regions. Asia After 1997 The Asian financial crisis disrupted that string of economic successes. It did not end it, however. Economies bounced back in 1999-2000 and are poised again to climb out of the downturn of 2001. However, things have changed. Growth rates today are not as robust as before -- the IMF expects 2002 rates to be roughly half of what they averaged before the crisis. Trade flows are weak and private capital flows to the region (even counting China) have shrunk 80% compared to the peak in the mid-90s. Even more serious, private capital continues to flow OUT, on a net basis, of the so-called crisis countries of Korea, Malaysia, Thailand, the Philippines and Indonesia. The lack of foreign investment, particularly in Southeast Asia is part of a larger problem -- the collapse of domestic investment that in turn is the result of massive non-performing loans that tie up capital and unprofitable corporations that tie up assets. I believe the financial crisis was evidence not of fundamental weaknesses in Asian economies or even in the development model they employed. 30 years of progress was no fluke. Rather I believe it reflected the fact that the economies had outgrown the model they were using. In particular, government influence over capital allocation, while effective in assuring rapid mobilization of domestic savings into key sectors of the economy, resulted in inefficient use of capital. That is, the countries in the region sacrificed efficiency for speed -- a perfectly rational choice for countries in the region at the time and at their stages of development, but not appropriate today for most of the economies in the region. The Asian Development Bank makes the same point in the Bank's recent annual report on the region. The report calls for a transformation of development policy away from factor accumulation to one based on total factor productivity. Translated into plain English, that means using money, workers and land more wisely and more productively, principally through better allocation of capital, use of new management techniques, and greater application of technology, particularly information technology. This new approach calls for a greater reliance on innovation and entrepreneurship, and less on industrial policy. It means steps to promote access to and application of information technology. It means a shift away from bank lending towards greater dependence on equity financing and steps to unleash the value of assets through rapid disposal of assets underlying non-performing loans. That in turn will change the way owners and managers run their corporations, as investors demand higher levels of transparency and corporate governance. These are not small changes. They will lead to wholesale changes in financial markets, corporate executive suites, and even the political landscape of the region as elites who have benefited from the old system are forced to adjust to a new, more open, and competitive environment. APEC Adjusts How has this impacted on the work APEC is doing? What kinds of changes is APEC making to adapt to these changes in the region? Trade and investment liberalization will continue to be a central goal for the organization. APEC Ministerial meetings, such as the consultations among trade ministers last October in Shanghai, helped build the political will to launch the new trade round in Doha several weeks later. Though it is still early in the process, APEC will also play a role in advancing the Doha round, just as it did in the Uruguay Round. Most importantly the APEC organization will continue to promote the view that trade liberalization is not a "concession" that one grants to trading partners in exchange for their concessions, but is a pro-growth policy that economies undertake in their own self-interest. As economies have lowered tariffs, opened up service sectors and removed restrictions on investment, emphasis in APEC is shifting towards other obstacles to fuller economic integration. Trade facilitation has become an increasingly important part of the APEC agenda. This work includes a wide range of activities in areas such as streamlining customs procedures, removing anti-competitive regulation in areas such as energy and telecommunication, promoting e-business, harmonizing standards, and developing a sound food industry that can benefit from trade and advances in biotechnology. Last year in Shanghai, Leaders pledged to cut transaction costs of trade by 5% over the next five years. We in APEC are now working to set up a plan to meet that goal. In this task, as in many APEC undertakings, direct, quantifiable benefit to the private sector is the measure of our success. In looking at the future, APEC will need to do more in areas outside the traditional ones of trade liberalization and facilitation. APEC must help provide its members new policy tools to increase productivity, attract more investment and spur growth. I would like to touch on three areas of work that will be critical to that effort:
Financial and Corporate Restructuring As we have seen, the "Asian Miracle" model of development led to the inefficient use of capital. Fixing that problem will require reallocating that capital to more effective uses and creating a better way to allocate capital. APEC has a role to play in both, in its work to promote the disposal of assets underlying non-performing loans and the creation of a more diversified debt markets to reduce over-reliance on bank lending. APEC moved quickly after the 1997-98 crisis to strengthen financial markets through training for bank supervisors, promoting better accounting standards, and improved corporate governance. It has done extensive work on the mechanics of setting up asset management corporations. ABAC has pushed for steps to build domestic bond markets in the region. Just this month, APEC agreed to conduct a region-wide study that will look at how effective disposal of under-performing assets can lead to more profitable corporations and greater productivity and growth for the economy as a whole. We will continue to look to the private sector help in this work. Already US companies are sponsoring APEC training programs in the areas of risk management and insurance. We would also look to the private sector to help implement global standards for corporate governance to adjust to the new requirements for openness resulting from the shift from bank to equity financing. APEC and the New Economy Economies at any level of development can boost productivity by greater application of information technology. In 2000, APEC Leaders held what was in effect an IT summit in Brunei, launching the Action Agenda for the New Economy that laid out policies aimed at improving total factor productivity through greater application of information technology, ranging from sound macro measures to measures aimed at boosting entrepreneurship to laws that promote e-business to training needed for all economies to benefit from the new economy. APEC followed up that work in 2001. An APEC study authored by scholars from the Institute for International Economics, Catherine Mann and Dan Rosen, based on case studies around the region, concluded that government policies to develop IT capacity and assure Internet access for its citizens were not sufficient to assure effective application of IT to boost productivity. The study found that creating a competitive innovative environment through sound finance, fiscal, competition and trade policies was the key to successful application of IT. In Shanghai, Leaders announced the e-APEC strategy that lists hundreds of individual actions, ranging from the introduction of pro-competitive regulation, to the creation of a regime for consumer trust and privacy, to the use of distance learning to train workers of the future. APEC economies are now working to implement that strategy through individual and collective action. Transparency and investment In speaking with fund managers and other investors, the single most common reason I hear for not investing in Asia is the lack of transparency, of both information and of process. If rules governing customs, investment, government procurement, standards, financial services, telecom, energy and other sectors are not clear and certain, investment will not flow into these sectors. Changing rules and regulations without public notice or comment will also undermine confidence. APEC leaders in Shanghai called for the implementation of transparency principles. APEC officials are discussing an instrument that would indicate commitment to transparency principles, including pledging a minimum level of procedural transparency. APEC has the opportunity to make an important contribution to creating norms in this critical area and to restoring investor confidence that has not yet recovered from the financial crisis. Conclusion In all these areas of work, APEC welcomes the strong role of the private sector. The APEC Business Advisory Council is playing a key part in pushing APEC's agenda of economic integration and growth. We also see PBEC as an important private sector partner in the work of APEC. We need a strong public-private partnership involving governments and corporations all across the region to help the region through the transformation that is needed to assure that Asian economies can once again produce growth that is the envy of the world. PBEC should be congratulated for this conference, which is a significant contribution to that important work. |
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