Indonesia, Australia and overcoming the Asian crisis (3)

This is the third of three articles based on former Australian prime minister Paul J. Keating's lecture at the University of New South Wales in March on the impact of the Asian economic crisis on the region in his capacity as visiting professor of public policy.

SYDNEY: The current Asian economic crisis has demonstrated how central the trans-Pacific links are but they require careful tending on both sides of the ocean.

It was openness and links across the Pacific which delivered Asia's enormous growth.

Asian economies are looking at a lengthy and painful period of adjustment. It took Australia about five years to fully exploit its new competitiveness in the 1980s. We turned a huge nominal depreciation of the exchange rate in 1985/1986 into a real depreciation. That is, we captured the competitiveness.

But we did not start really seeing the longer-term results in our export performance and our import replacement performance until about four or five years later.

But I believe that the adjustment time in Asia will be shorter because the voices of so many people looking for better lives for themselves and their families will not be denied.

The underlying factors underpinning Asian growth have not changed: Young demographics, high savings rates, sensible macroeconomic policies, entrepreneurial cultures and the high value placed on education.

And if regional governments can get through this immediate period and take advantage of the reforms now being imposed on them, and the competitiveness benefits which the devaluations provide, they will have tremendous horsepower for the next stage of economic growth. The International Monetary Fund (IMF) may not have all the answers, but it has provided governments with the authority to make reforms which they could not have drawn down from their own political system.

But the long-term problems for Asia have not gone away. In a sense, the real Asian economic crisis is still out there, waiting.

This is the crisis of funding and building the infrastructure required to support more than two billion people, to feed and educate them and deal with the profound environmental consequence of that growth.

Asia's energy demand is doubling every 12 years with all the consequences that has for air quality and global warming.

In the early 1990s, around 500 million East Asians lived in towns. By 2020, this figure will have trebled to 1.5 billion. This demographic shift from the countryside to the cities will put a huge strain on basic services like water, sanitation and shelter. Only half the urban populations in developing Asian countries currently have access to safe water supplies and 42 percent to sanitation.

Food is a looming issue, too. We are already seeing across the region the consequences of unconstrained heavy use of fertilizers, irrigation and pesticides. Agricultural productivity is better, but at the expense of soil erosion, salinity and the pollution of water resources. How will the region supply itself with food without destroying the land for future generations?

These looming problems have largely been forgotten in the current turmoil. But they will require even greater attention once the current crisis has past.

Unfortunately, as we have seen over the months since last July, global and regional organizations are nowhere near ready to respond effectively to the new challenges of globalization, and the changes it is bringing to the international system.

Throughout this past year, the principal institutions we might have looked to for help have been out of breath, or behind the play, or playing the wrong game.

Many writers have commented, and all of us know intuitively anyway, that the pace of global change is quickening. It is still less than 10 years since the Soviet Union collapsed, and with it the whole post-war international order. Now, only a few years later, we are seeing an economic crisis in Asia which threatens to hobble the region which had promised to be the world's economic growth engine as we enter the 21st century.

History is made up of discontinuities. But surely one of the main lessons of the past decade is that those discontinuities are becoming more frequent and deeper.

In other words, it is not the speed of change which should concern us most but the fact that change seems to be becoming inherently more sudden and less predictable.

The reason lies in the profound impact on the international system of the information revolution in all its various forms, including the way it has made economic globalization possible and has accelerated the mobility of capital, information and ideas.

The Asian economic crisis has been an obvious example of this.

In a recent speech, Alan Greenspan, the chairman of the U.S. Federal Reserve Board, pointed to the way the new technology appears to have facilitated the transmission of financial disturbances far more effectively than ever before. Vicious cycles of ever-rising and reinforcing fears have become contagious and are emerging more often.

It is likely, he says, that the root of the sharp exchange rate changes in Asia "is a process which is neither measured nor rational, one based on a visceral, engulfing fear." And once such cycles are triggered, damage control is difficult. Once the web of confidence which supports the financial system is breached, it is difficult to restore quickly.

I think this argument can be extended to the political and strategic realm. In other words, "contagion" is not just an economic phenomenon. Change -- any change -- is being magnified by the speed and variety of the transmission mechanisms which make it known. It spreads more rapidly, is less subject to filtering by governments and less easy to control.

We saw this phenomenon clearly in the political/economic crisis which led with such startling speed to the collapse of the Soviet empire in Eastern Europe.

If that judgment about the international system is right, the practical consequence for public policy-making is that we are likely to have less warning of future crises and, therefore, fewer opportunities to avert them. And when they come, the swings they generate are likely to be larger.

I agree with Alan Greenspan's conclusion that we do not as yet fully understand the new system's dynamic and that we need to update and modify our institutions and practices to reduce the risks inherent in it.

The IMF has had a lead role in this crisis, but it is a very different, much broader, role than the sort of balance of payments crises it has had to contend with in the past. The finance ministries and the IMF have not been able to assimilate properly the political dimensions of the new sort of job they are now being asked to perform.

The momentum for changes to the processes and policies of the IMF is now probably unstoppable.

The Group of Seven (G-7) industrial countries has had a go at thinking about the crisis, but its problem in these circumstance is that the interests of its European members demonstrably do not extend to the political stability of Southeast Asia.

The Asia-Pacific Economic Cooperation (APEC) forum ought to have been ideally placed to respond to the region's difficulties because it is an economic organization which includes all the countries most affected.

One problem which has clearly emerged has been the absence of a strong APEC secretariat with institutional backing able to bring issues and current data to the attention of member economies.

But more basically, APEC has been hobbled by the agreement last year to add Russia to its membership.

I think this decision was an act of international vandalism. I would have opposed it to the end. It was a fundamental mistake which was made worse because it was designed in part to atone for another fundamental mistake -- the 1997 decision to expand NATO to the European borders of the old Soviet Union.

I am certainly not anti-Russian and I well understand its long-term importance as a great power. But its participation in APEC has already changed the dynamics of the organization.

Under no conceivable stretch of the imagination is Russia currently part of the Asia-Pacific economy. And its strategic and political priorities are totally different from those of APEC's other members.

Precisely because it is such an important power in its own right, its participation will make it harder to use APEC and the leader's meetings as a focused and effective forum to oversee and coordinate the various responses to the economic crisis. Russian membership makes it impossible, for example, to contemplate using APEC as the basis for a financial fund to address future balance of payments problems in the region because the potential additional demands it would generate are just too great.

The declaration which emerged from the leaders meeting in Vancouver last November described APEC as the "region's most comprehensive economic forum" and "particularly well placed to play a pivotal role in fostering dialog and cooperation." It asked APEC finance ministers and central bankers to accelerate their work. It talked about an increasing role for APEC.

Well, we haven't been swept aside in the rush.

This year's APEC meeting in Kuala Lumpur has to send firm messages that Asia remains on the path to openness. This is not just a matter of making declarations but of taking specific actions which will restore confidence within the region and in key markets that Asia can resume its growth path.

This means showing a determination to move forward on the Bogor free trade and investment agenda.

It means giving some clear support to the development of more structured cooperation between regional central banks.

But if APEC is to get anywhere, the bulk of the work to achieve it has to be going on now. It will be useless for leaders simply to turn up in Kuala Lumpur in September and expect to put something together in those couple of days.

I am not prepared to write APEC off yet. But if it does not show its relevance to the Asian economies this year, it will write itself off.

What happens to any individual international organization is not in the least important.

But APEC matters because it embodies a big idea -- that of an open Asia-Pacific region. And that idea lies at the core of how we can best overcome this mess.

On the trade front, the message has to be sent out strongly that the world is not in the business of building barriers. We need China in the World Trade Organization, and as quickly as possible, I hope this will be one of the outcomes of President Clinton's proposed visits to China in June.

More broadly, this would be an excellent moment to press ahead with the proposed Millennium Round of trade negotiations.

On the subject of Australia and Asia, I believe the changes Australia made internally in the 1980s and 1990s have prepared us well to cope with the challenges we now face. We went voluntarily through much of the painful integration into the global economy that our neighbors are experiencing.

I also believe the progress we have made in forging closer bilateral and regional ties will help both Australia and the countries around us.

And I think the current government has generally been pursuing the right policies towards the region. Its speedy contribution to the IMF packages was the right thing to do.

But I have to note that a few worrying signs about Australia's relationship with Asia are emerging. For example, I was taken to task by the Sydney Morning Herald last week.

This is not a new phenomenon, of course, or one which strikes fear in the heart. But it is worth mentioning because the criticism has broader implications.

I was criticized for a speech I made in Singapore in 1996, from which the editorial quoted. I had said that Australia's "engagement with the region around us is not just commercial. And it is not just the result of some crude economic determinism. It goes -- and must go -- much deeper than that. It goes to a genuine desire for partnership and real involvement ... Australia needs to seek its security in Asia rather than from Asia."

This view was described by the newspaper as "lightheaded".

But to assert, as those words of mine do, that Australia's engagement with Asia has a political, security and cultural dimension as well as an economic one, and requires a genuine national commitment on our part, seems to me so deeply true, so basic to Australian interests, so blindingly self-evident, that it is perhaps only a Sydney Morning Herald editorialist who could take exception to it.

But unfortunately, there are other hints of revisionism around. A sort of sotto voce whisper that the Labor government rather overdid the whole Asia and that we are now paying the price. Some of the old brigade obviously think Asia's recent economic problems mean that Australia can heave a sign of relief and head for the safety of old friends and familiar geography.

Others argue that some historically determined conflagration is coming in Indonesia and that Australia should distance itself from it by tiptoeing quietly to the side of the field in the hope that no one will notice we are there.

This is dangerous nonsense.

Australia must have a deep and continuous commitment to Asia -- and for reasons that lie at the heart of our national interests. None of that has changed as a result of recent developments.

The intrinsic economic complementarities between Australia and Asia have not changed. Australia has not suddenly developed security interests in Africa rather than Asia.

Australian engagement with Asia is not a temporary enthusiasm. Asia is not a flavor of the month. We have not been on a 10-day package tour from which we can return with a couple of T-shirts and a handful of color prints for the album. Australia cannot bolt on the Evinrude and motor off to the coast of California.

If we know anything about dealing with Asia it is the importance of building relationships for the long term.

That is the business Australia needs to be in now.