Address at the World Trade Center of New Orleans

Thank you Pat and Don for the opportunity to come down to New Orleans. Don, you and Taylor help to define the term Southern hospitality. It’s always a pleasure always to see old friends, and – coming to New Orleans… this is neat! Alright, I did go this morning for Beignets and coffee at Café du Monde. Always the tourist!

While the flare of Bourbon Street is alluring, I know I'm here for a different reason. And despite what geography may lead some to think, it is fitting that we are here, on the Gulf of Mexico, to discuss events in Asia.

Louisiana workers have great stakes in the health of Asian economies. In 1996, prior to crisis, nearly 40% of Louisiana's exports went to East Asia -- that's $8.5 billion of goods shipped.

With the advent of the financial crisis that began nearly two years ago, Asian customers haven’t been able to spend nearly that much. That’s why on Canal Street, and on main streets all across America, what is happening beyond America’s borders is important to what’s happening within our borders. Sure, our economy overall is doing well, but tell that to the farmers whose markets in Asia have cratered in the past two years, or tell it to the chemical workers along the Gulf Coast. It should be clear to all how unhealthy the world is when over ½ the 1998 world growth was accounted for by growth in the United States.

I know many who are chasing internet stocks may or may not be thinking about the global markets, but there are a lot of serious thinkers asking how sustainable the current situation is. And it is not just for economic reasons that we need to worry. The political change in Asia the past two years has been nearly tectonic. Regimes in Indonesia, Thailand and Korea have been swept out, there are serious pressures in several other countries – including the very largest. We welcomed economic change, because with it generally came greater political maturity. The middle class was the champion of liberalization, political and economic, and it’s that same middle class that is most directly affected by the prolonged economic crisis.

I don't intend to give an exhaustive discourse on the causes of the crisis -- that's for textbook writers. I would like to offer my perspective on how Asia is doing. Also, I will give some thoughts on the way forward, including in the context of my day job as Ambassador for APEC.

Factors Contributing to Crisis

There have been innumerable articles already on what caused the Asian financial crisis, who is to blame, who made it worse, and so on. Think what a crisis like this means for economists – a global financial crisis gets their juices flowing just like a good train wreck does for liability lawyers and there will be endless papers describing – on the one hand this… on the other hand that. Now don’t get me wrong, I am an economist and I am the son of a Philadelphia lawyer!

Seriously, the New York Times rightly concluded earlier this year that there was far more involved than profligate borrowing and crony capitalism. I recently heard one investment expert theorizing that, during the Cold War, the "system" restrained forces that are no longer restrained. He said officials didn't speak out about unhealthy relationships in government, banking and business. That’s not quite right. We did talk about the problems of developing sound market structures, but in fact we did not speak with the passion we did about the need to open the markets.

As liberalization unfolded, emerging markets did not put in place the regulatory and banking systems necessary to operate in a dynamic, very fast moving global marketplace. And we in the developed countries did not adequately measure – or if we measured – did not act on the risk that was building up. We went through our own domestic equivalent with our savings and loan and domestic banking crisis in the late 80’s/early 90’s. Some of the same banks were burnt by many of the same factors in Asia – though to be fair American banks, few of them had the kind of exposure one found in European, Japanese, and Korean banks.

Too many countries – and too many investors -- took the easy road and easy money. Much of the region's boom over the past years was fueled by debt - largely short-term and denominated in foreign currency. Debt filtered into all levels of society and onto business books that no lender would ever see. The result - tremendous difficulty in assessing the size of corporate debt in each country. Regulators in developed and emerging economies turned a blind eye as successes bred complacency. The end result was too many fragile national financial systems that imploded when first domestic, then foreign, confidence evaporated.

Many of the problems unveiled by the crisis are evidence of weak legal and regulatory frameworks throughout the region. APEC’s finance ministers have been working for nearly two years now on these issues. So too has Gary Burkhead, one of the three US representatives on APEC’s Business Advisory Council. Burkhead has highlighted the need to recapitalize banks, restructure financial and non-financial corporations, and mobilize private financing and he is championing specific private sector initiatives to do that in individual markets.

How Asia Is Doing

There are many encouraging – and some worrying – signs in Asia that the worst of the financial crisis may be over. Currencies have stabilized and stock markets are up. The international financial institutions are backing sweeping changes in the crisis countries, and both the World Bank and Asian Development Bank are looking much more closely at how to tie assistance to concrete measures to improve regulatory systems, apply more systematic measurement of risk, and ensure fuller and more timely disclosure. Although growth for 1999 likely will be low, current forecasts predict economic recovery in most Asian countries in the Year 2000 with growth of 3% in Thailand and Malaysia, and maybe 5% in Korea and China. That said, recovery in many of these economies is fragile, largely dependent on government spending or exports. Despite the economic rebound, unemployment remains high, and in some countries even in Korea, unemployment will continue to increase.

More ominously, though, renewed economic activity has bred a kind of complacency; with the reform process is still only partially complete. If consumers in Asia don’t start spending, or if growth in the United States slows, recovery could well be short-lived. Think how much market confidence now is based on a narrow sliver of S&P 500 stocks and the internet sector.

Looking at a few key countries:

Indonesia: Some fairly dramatic things have happened during the past year. A thirty year autocratic government was unseated, decades old monopolies have been broken, the political system in general has been thrown wide open, there is political debate the likes of which has never happened before, and even amidst all that, technocrats have avoided a spiral into hyperinflation or the kind of skyrocketing impoverishment that many foresaw as inevitable 8-9 months ago. Probably we were too pessimistic then; things have improved, but there are still very few optimists.

Everything now is on hold until the elections June 7. It is essential those elections be free and fair. We are concerned about the risks of rising violence, provoked by those who would shade the elections one way or another. We have been extremely active with other countries in providing assistance to those charged with running a fair electoral process.

Beyond the election, I expect Indonesia will have difficult teething problems in its new political structure. On the political side, the winner is bound to be dependant on some kind of coalition. There is no tradition of parliamentary compromise and there is really very little civil administrative infrastructure to dampen political swings.

On the economic side, problems ranging from privatization and rationalization of the economy to a rising demand by non-Java areas for autonomy and independence. Many say much more critical than this election will be the kind of an election (and when) there is next time.

Korea: I understand you had a speaker yesterday who spoke glowingly about Korea’s recovery. Certainly, what a difference a year can make! Korea's success is in large part due to focused political management at the top. But many in the lower ranks still yearn for the old Korea Inc.

Macroeconomic indicators such as declining interest rates and increasing FOREX reserves paint a relatively positive picture. Korea has repaid $2.8 billion of its IMF loans ahead of schedule. Bond premiums are narrowing, and there is considerable optimism that President Kim will force through chaebol restructuring. Keep an eye, though on the impact of the rising unemployment. Labor stridency in Korea is legendary.

Malaysia: Malaysia is a mixed bag. Economically, it has used the breathing space capital controls have given to achieve considerable financial sector restructuring. Corporate restructuring hasn’t progressed nearly so well, and there is a continuing question how Malaysia will extricate itself from controls. But all in all, it’s moving forward. Whatever the arguments about Malaysia's experiments with controls, the country is quite sui generis (e.g.: size, percent of economy in international trade, natural resources, etc.). Beyond economics, friends of Malaysia cannot help but be concerned by tenor and direction of Malaysia's domestic political evolution.

Thailand: Thailand also has been recognized for reform progress. The Thai Government has made progress selling off finance company assets and overhauling the economic legal framework. Public support for reform measures has been key to Thailand's progress. Thai officials are the first to acknowledge that more still must be done on corporate restructuring, bank recapitalization, passing and implementing the economic reform bills and improving Thailand’s social safety net.

Japan: Far more fundamental to Asian recovery, and indeed the well-being of what happens in the international economy is what is happening, or not happening in Japan. Five straight quarters of negative growth in Japan does not meet the standards for a regional locomotive for economic recovery. Asian economies depend heavily on Japan as an export market and a source of capital.

On the plus side, there have been surprising progress in the government’s willingness to press fiscal stimulus and to begin bank restructuring. The next challenge on the financial side is disposing of the bad assets national agencies have absorbed.

But, there also is a critical need for long-term structural change in Japan, in particular deregulation and opening the marketplace to real competition. Some analysts say that deregulation of Japan's energy, telecommunications, transport, finance, and distribution industries would expand real GDP by six percent. Six percent! But deregulation, like privatization, has short-term costs -- much like the reform of the chaebol in South Korea. The make-or-break question is, is there political will?

China: I know I can't avoid questions concerning recent events. I’m not a China expert, but I do know that our bilateral relationship has been a series of peaks and troughs – and some of those troughs were deeper than this. We will get through this and we are working to get through this as quickly as possible.

For its part, China has generally avoided the direct effects of the regional turmoil -- mostly due to its closed capital accounts. It has begun substantial restructuring of virtually the entire state sponsored economy. And even as its exports have slowed, it steadfastly, and prudently, has resisted domestic exporters pressure for China to devalue its currency. Certainly this has had a calming factors in a region wrought with tremors and eruptions.

The WTO negotiations are an important part of China’s reform effort. I believe Chinese officials understand that adoption of the rule-based disciplines of the international community is a necessary part of keeping China competitive in the global marketplace.

China faces the same challenges but in a much tougher regional and domestic environment. What President Jiang and Premier Zhu are trying to accomplish really is dramatic. Reducing the size of the bureaucracy, getting the military out of business, reducing the scale of the SOE’s, revamping the banking system, inducing modern technologies, these all will cause wrenching, but necessary, change, and the process is underway. How far can Beijing push this, and can they push it to a logical conclusion without fundamental change in political governance? Big questions but questions whose answers will have a big impact all through Asia.

Looking Ahead

So let's look forward. What does it take to sustain the emerging recovery and build the region's economies on sound footing? There needs to be work on restructuring corporations, including rationalizing debt, bolstering national and international financial institutions, and addressing the social impact of the crisis and subsequent restructuring. Transparency, in economic and political governance, will be important to maintaining and sustaining the people’s confidence. This is not just work for another few months then all will be well.

Developed countries for their part need to ensure the macro and micro conditions for sustainable growth. And, across the international financial system, we all need to move on the fixes that can help our global financial architecture handle safely and manage the risks that come with the vast financial flows of a global marketplace.

Much of this work is about building markets. In the various trade fora we work in -- including APEC – it is profoundly reassuring that most countries recognize that the path forward still must be one of progressively opened markets, not new trade and financial restrictions. In APEC last year, we took heat for our effort to advance an accelerated tariff liberalization initiative – an effort to cut tariffs on $1.5 trillion on products like chemicals, energy products, and forest products. The idea then was to get agreement in Asia, then move to bind talks in the WTO. We made progress – though thanks to Japanese stubbornness on fish and forest products not as much as we wanted.

Now, we’re working in Geneva to get WTO acceptance of results by the time of the trade ministers meeting this November in Seattle. It would be fair to say that European Union receptivity has been guarded – they want to know how this will score in the coming round. Good point; we intend to answer – we need businesses here to press businesses in Europe – and they need to reinforce with the Commission that lower tariffs lower costs.

Looking forward, multilateral fora like the Asia-Pacific Economic Cooperation forum are going to need to reengineer themselves. It’s not enough just to open markets; we need to build those markets. It’s not going to be done with a lot of public aid money. The model can’t be one just of government to government cooperation. Success depends on putting in place policies and practices to attract the foreign investment needed to build infrastructure and safe and efficient capital markets, eliminate the welter of regulatory barriers for instance in customs administration, or streamline the regulations that limit construction of cross-border energy infrastructure. APEC offers a model where public and private sectors can work together to ensure not only that we’re aimed at the right impediments, but that we’re doing it (whatever it is) in a way that helps economic efficiency.

This year's APEC host -- New Zealand -- has made this kind of work one of its three key themes. They have a different term -- Strengthening Markets -- but it works equally well. They want a competition based set of principles on deregulation, and privatization, and a solid forward looking work program to ensure the principals are applied. For our part, a number of private sector firms in the US, led by General Electric, General Motors, and Transparency International are advancing a project based initiative to increase transparency and foster improved public and corporate governance. This is another of those initiatives where there is lots of room for more companies to get involved. If you want more details, send me an e-mail at wolfjs@ibm.net; I’ll be sure to forward the message to the sponsors.

To give you an idea of how the theme of strengthening markets can play out, I'd like to talk for just a moment about APEC’s initiative to develop an integrated Natural Gas Infrastructure in Asia. Last year the Leaders embraced the gas infrastructure vision – the idea of promoting an integrated gas infrastructure to tap and transport the enormous resources of gas in Southeast and Northeast Asia, and use this abundant natural resource to stimulate economic growth within and across borders of most of APEC's economies.

An integrated gas infrastructure system's potential economic impact on the region is astounding. Tens of billions of dollars could flow into the region's economies. New business opportunities would develop throughout the region, creating new jobs for many. It would ensure an efficient input, not just for electric power generation, but also as feedstock for a host of ancillary industrial applications. And it would be the kind of tangible confidence building measure that promotes greater political cooperation in a region where it has not just been the geography that has earned the title "rim of fire."

I know that here in an energy center like New Orleans many will wonder so what’s the role of government in this – leave it to the markets. And that’s kind of the heart of our vision. While market factors and market players will determine the development of the infrastructure, it is more likely to happen when governments have created a business environment that fosters transparency, and the regulatory environment that fosters competition and allows an economically justifiable rate of return.

Conclusion

The crisis has traveled quite a path since July 1997. It has left in its wake crumbled governments, teetering financial institutions, crippled businesses, and dashed hopes. But as a Thai official has said, it also has given governments the opportunity to address serious fundamental weaknesses in their economies that otherwise would have gone unnoticed or unchanged. This kind of attitude is part of what has brought a semblance of stability back to the region. It is what investors are looking at as they reassess their exposure and even now begin to re-engage in the region.