I am very pleased to be here to launch the East Asia Forum and the East Asian Bureau of Economic Research. It will surprise few that the ANU has played a key role in the creation of these forums given its long history of engagement with the region. I pay particular tribute to Professor Peter Drysdale whose leadership, drive and imagination has helped bring these organisations to fruition.
The East Asia Forum provides a national facility currently not available in Australia. It offers a platform for research and dialogue on Australia’s interests in East Asian regional cooperation. It will foster collaboration between policy-makers and academics from around the region, and deepen appreciation of Australia’s strong and multi-faceted linkages with the region.
The East Asian Bureau of Economic Research brings together leading researchers and research organisations in the region to address common economic policy challenges. It aims to be East Asia’s premier economic research hub, providing a single point of reference for the region’s economics, finance and statistics research communities.
Continuing growth in East Asia’s economic importance
The launch of these forums comes at a pivotal time in the region’s economic and political history. The re-emergence of China and India, burgeoning regional production and supply networks, and the ever-greater integration of global product and financial markets are reshaping the economic landscape.
These structural shifts are overwhelmingly positive, creating enormous opportunities for the people of East Asia, Australia and the rest of the world.
East Asia has emerged as a key engine of global growth, contributing 43 percent of the growth in the world economy since 2000. East Asia has also been responsible for over one‑quarter of the growth in global trade over the last five years.
These global developments are mirrored in Australia’s own economic and trading relationships.
East Asia is our main regional trading partner, taking around 58 per cent of our exports and providing around 47 per cent of our imports. Six of our 10 largest merchandise export markets are in East Asia while the major source of our imports is the East Asian group of economies.
Our interaction with East Asia is not just focused on trade. It is a key ingredient of who we are as a people. More than 1.3 Australians claim Asian ancestry. According to the 2001 Census, more Australians now describe themselves as of Asian background than of Greek, Italian and Maltese combined. While Australia has its own unique culture, we are also a people who confidently enjoy the cultures of Asia, with seven of our top 10 overseas travel destinations being in the region. And East Asians are important to Australia’s tourist industries, with some 2 million visitors coming here annually. Further, around 43 per cent of Australia’s international student enrolments — or around 146,000 people — come from China, the Republic of Korea, Malaysia and Hong Kong.
Key challenges facing East Asia
But opportunity does not automatically lead to achievement, whether for East Asian economies or for Australia.
Reforms are needed to increase the efficiency, flexibility and resilience of regional economies to enable smoother adjustment to the tectonic shifts underway. To do otherwise risks missing opportunities to improve the resilience of regional economies to the inevitable shocks that will emerge in coming years, to strengthen growth and to further boost living standards.
East Asia’s long-term growth prospects depend ultimately on the quality of member countries’ domestic institutions and economic policy frameworks.
But lifting the quality of local institutions and frameworks cannot be achieved overnight. Nor is it sensible to simply import practices and institutions from other countries if the necessary building blocks are not in place to guarantee country ownership.
Instead, a patient, staged and comprehensive approach is needed to reform.
A key issue is to be candid about the impediments to better-quality growth. Impediments can arise through: poor macroeconomic frameworks; rigid and inadequate regulatory and prudential systems; inhibitors to competition — both domestic and foreign — that distort market structures, price signals and investment decisions; insufficient investment in health and education that constrains the development of human capital; and poor governance in either or both of the public and private sectors.
Experience suggests that economies that tackle these domestic, or ‘behind-the-border’, impediments to growth are more resilient to economic shocks, achieve greater macroeconomic stability, and experience increased productivity and higher living standards in the longer term.
To ensure reforms are sustained, though, also requires building an understanding among the public, and in the political process, of the need for reform.
This is an oft-neglected part of the advice given to governments, but it is critical — reform is not a technocratic process but a battle for hearts and minds. Indeed, I regard this aspect as so important that I have scheduled a session at the forthcoming G-20 Finance Ministers and Central Bank Governors’ meeting in Melbourne on the subject of generating public support for reform.
The regional architecture
While domestic policy‑makers must take the lead on economic reforms, regional and global forums can play a strong supporting role.
Much has been written and said about the evolving regional economic architecture — the expanding network of forums, groupings and informal contacts that bring the region’s leaders, officials, researchers and business people together. Some people argue that these forums are in competition with each other, maintaining that countries must choose between them. Others complain about duplication of effort and overlapping mandates. While understandable, I believe both such views are narrow and short-sighted.
The region’s key groupings — including APEC, ASEAN+3, and the East Asia Summit — should be seen as distinctive, yet mutually-reinforcing, elements of the wider regional architecture. Each is well placed to progress important regional challenges in its own way.
If managed well, each of these processes can make a valuable contribution to the region’s economic (and political) development.
APEC’s breadth of membership, consensual style, and capacity to mobilise resources for technical assistance ensure that it is ideally placed to support members’ efforts to remove ‘behind‑the‑border’ impediments to growth — this will be a key focus of Australia’s host year in 2007. APEC is also playing a valuable role in private capital market development.
The East Asia Summit, although still at a formative stage, offers a further avenue for discussion of the region’s financial and broader economic challenges, while ASEAN+3 has assumed a lead role in the area of regional financial integration through the Chiang Mai Initiative and other activities.
East Asian financial integration
Let me spend a little time on this issue of financial integration.
East Asia’s impressive economic record over the past half century has been underpinned by three key factors: sound macroeconomic management, including a commitment to open and global trade; access to external markets for consumer goods, particularly in the US; and deepening regional trade linkages.
The development of the region’s financial markets, however, has not kept pace with trade as a driver of regional growth and integration.
Indeed, despite the considerable advances made since the 1997 financial crisis and the sophistication of some regional financial centres, financial markets in emerging East Asia are still relatively underdeveloped.
While it is true that bond markets in emerging East Asia (that is, excluding Japan) have quadrupled in size since 1997, market liquidity remains low, issuer and investor bases are narrow, and derivatives markets are comparatively underdeveloped. As a percentage of GDP, emerging East Asia’s bond markets collectively are only a little over two-thirds the size of Australia’s, roughly one‑ third the size of those in the Euro area, and only one‑quarter of the size of US markets.
The situation for the market in privately-issued bonds is even more stark. As a share of GDP, emerging East Asia’s market is only 40 per cent of that in Australia or in the Euro area, and only around 15 per cent of that in the US. Equity markets are similarly small, being only roughly half the size of those in the US, UK and Australia.
The financial systems of many regional economies, therefore, remain dominated by banks. In emerging East Asia, the banking sector accounts for more than half of all financial assets — a share which has actually increased since 1997.
This issue also has a regional dimension. East Asian economies have stronger financial links with the US and Europe than with other economies in the region. At the end of 2004, for example, only 6 per cent of the region’s outward portfolio investment had been invested in other economies within East Asia. This is in contrast with the strength of intra-regional trade, with East Asian economies conducting more than half of their trade with other economies within the region.
Sound financial markets, global imbalances and long-term growth
Well-functioning financial markets are critical to the region’s long-term economic prospects. They promote economic growth and stability by channelling domestic and foreign savings into productive investment opportunities; they enable individuals and firms to manage risk; and they sharpen incentives within firms to improve governance and efficiency. And as we all know, robust, open and well-regulated financial markets can also reduce vulnerability to financial disturbances.
Financial market development in East Asia also has implications for the global economy.
Since 1997, the countries of East Asia have become net exporters of capital to the rest of the world as the region’s savings have far exceeded investment. Emerging East Asian economies, which by definition have huge untapped investment opportunities, have been exporting capital to ageing, capital-abundant developed economies.
Underdeveloped domestic financial markets are likely to have contributed to this situation in two ways. By limiting access to finance and risk management opportunities, these markets have led to high rates of precautionary savings and, in many countries, low rates of investment. Concerns about financial fragility may have caused regional policy‑makers to pursue macroeconomic polices designed to keep current accounts in surplus in order to avoid reliance on foreign capital.
I will not speak at length today about particular reforms needed to increase the flexibility, resilience and dynamism of financial systems. Instead, let me limit myself to an important observation.
Experience shows that financial sector reform can be difficult to implement smoothly. Properly sequencing, pacing and integrating the necessary regulatory, corporate governance, prudential, exchange rate and capital account changes is not an easy task. History has shown that countries with fragile domestic financial systems can find it difficult to manage the consequences of greater openness to global capital markets. None of this is meant to suggest that reforms should not be undertaken, just to underline the importance of carefully‑thought‑out, pragmatic approaches which suit local circumstances.
Australia has a strong stake in the stability and prosperity of the East Asian region. This underpins our willingness to participate in regional forums and initiatives and to assist other regional economies where we can.
Australia and Japan, as many of you would know, were the only countries to commit additional funds to support all three IMF crisis assistance programmes in Asia in 1997. Since the crisis, Australia has been a strong supporter of regional initiatives to foster the development and integration of East Asia’s financial markets.
We are already working through forums such as the Executives’ Meeting of East Asian and Pacific (EMEAP) central banks and APEC to support the development of local and regional bond markets in East Asia. Indeed, we have invested US$272 million of our international reserves as part of the Asian Bond Fund initiative — which was established by EMEAP and the Bank for International Settlements in June 2003.
And finally, let me reiterate a point I’ve made before. If invited by the ASEAN+3 members, Australia would be willing to make a financial and practical contribution to the Chiang Mai Initiative — a network of bilateral foreign exchange swap agreements among the members of the ASEAN+3 grouping. I am confident that both sides would benefit from such an association, given the close linkages that bind Australia and the region, our track-record of constructive regional engagement, and the financial sector experience and expertise we could offer.
Concluding comments
Fundamental shifts are underway regionally and globally, reflecting East Asia’s growing weight and influence in the global economy.
These shifts can be seen in the recent decision to reform IMF quotas and governance to better reflect developments in countries’ relative economic weight. While we should be careful not to characterise this in regional terms, the decisions taken in Singapore, and the second stage agenda to be implemented over the next two years, will give East Asia greater influence in the governance of a key part of the global financial architecture.
But with greater influence comes greater responsibility. I believe the world would benefit from the region utilising a stronger voice internationally — in particular, given the role of trade in East Asia’s economic development, our region could be a stronger voice in pushing for a conclusion in the Doha round.
Closer to home, while we have largely mastered the physical barriers of distance and technology, the political will and policy frameworks needed to realise the region’s potential are not yet fully in place. Greater interaction between policy‑makers and researchers, and high quality, policy-relevant research, will be critical. The East Asia Forum and the East Asian Bureau of Economic Research have huge potential to add to the momentum for reform by informing debate, identifying common objectives and building consensus.
When we consider the depth and extent of Australia’s links with the region and our shared stake in the region’s prosperity and stability, it is clear that in every real sense Australia is an integral partner in this region.
The important bodies I am launching here today embody that reality. I have no doubt that they will soon be seen as critical parts of the intellectual architecture of the region.
For the purposes of this speech when I refer to East Asia I refer to the 10 members of ASEAN (Brunei Darussalam, Cambodia, Indonesia, Laos PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) plus Japan, China, South Korea, Hong Kong and Taiwan.
Emerging East Asia is defined as East Asia (see footnote 1) excluding Japan.
In China, this has been driven by an extraordinary increase in the rate of saving (although investment rates are also very high), but for most economies the key factor has been a large fall in investment rates since the crisis.