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Thomas S. Foley U.S. Ambassador to Japan Address to the Association for the Promotion of International Cooperation (APIC) Yomiuri International Symposium Tsumagoi, Kakegawa City, Shizuoka Prefecture Japan, October 31, 1998

(As prepared for delivery)

In Search of a New Path for Asia

INTRODUCTION

Thank you Ambassador Okawara, distinguished panelists and guests. It is an honor to be here with all of you. The subject we are discussing today, the search for a new path for Asia, has profound implications for the future of the region and the world. The crisis that erupted after the collapse of the Thai baht in July 1997 has since brought the rest of Asia, Russia and other emerging markets under tremendous financial pressure. We persist in calling this the "Asian financial crisis," but the crisis is no longer contained in Asia, and it has never been just financial.

In my talk today, I would like to explore the Asian dimension of the crisis, and how tough policy choices made now can help us build an economically strong, financially sound, more open and democratic Asian future. The U.S.- Japan partnership has a critical role to play in leading the region out of crisis and into a prosperous twenty-first century.

COMPLEX CHALLENGES

This is a period of complex and unprecedented challenge. The large-scale exodus of capital from Asia is contributing to a sharp contraction of economies in the region -- economies described just over a year ago as vibrant and growing. The human toll is compelling. We see it in the faces of the quarter million Thai children forced to drop out of school this year to help support their families. We see it in the millions of unemployed Indonesians in search of jobs. And perhaps most vividly, we see it in the faces of the many families who labored for decades to join the proud ranks of a growing Asian middle class reduced, in a matter of months, to selling their possessions just to survive. A protracted period of economic contraction risks the spread of social disorder and political conflict.

On the other hand, there is opportunity in this adversity. For the very reforms to Asia's financial system that are needed to respond to the crisis will not only fundamentally improve the basis for long term, sustainable economic growth, but could advance important democratic principles.

The way Thailand and South Korea have handled the crisis strikingly reflects the advantages of liberal democracy at work -- and how political freedom and accountable government can improve a nation's ability to cope effectively. In both countries, the mobilization of middle classes harmed by economic devastation produced changes in government and the election of leaders who have the confidence of their people. Such change creates a broad public mandate for reform, and underscores to politicians that economic mismanagement will not go unpunished.

Governments in the region must work harder than ever to retain public confidence and political support for reform. Policies Asian governments must Implement -- financial sector reform, structural adjustment, and trade liberalization -- will engender great sacrifice and provoke strong opposition. Promoting greater accountability and transparency in the financial sector could increase the rate of bankruptcies over the short-term and further tighten credit markets. Moreover, reducing the role of bureaucratic and political influence in the allocation of credit, and reducing trade barriers to improve competitiveness are policies guaranteed to alienate powerful vested interests. Thus, Asian governments must act to ensure the public fully grasps the need for sacrifice and work hard to retain their confidence.

FINANCIAL SECTOR REFORM

This is an appropriate moment to reflect on the causes of the crisis in Asia. It appears to have been the outcome of a combustible mix of problems that developed over many years. Inadequate supervision of financial institutions, the extension of credit based on political and bureaucratic influence (crony capitalism), and an over-reliance on short- term foreign borrowing top the list of contributing factors.

Asian businesses and financial institutions piled up short- term foreign debt, aided by investment and credit extension from foreign financial institutions that, lacking sufficient information on underlying project viability, did not adequately weigh risk due to the strong performance of Asian economies.

Both parties were derelict in their assessment of risk. Moreover, Asian financial institutions borrowed lower cost foreign currency-denominated loans, and re-lent the funds in local currency at higher interest rates, profiting from the spread but exposing themselves to exchange rate risk. Much of this capital was invested in speculative real estate deals that did not yield the expected profits, triggering bankruptcy and capital flight.

To rectify these problems, Asian governments must create a rules-based environment for financial sector activity. Respect for the rule of law and good governance are the fundaments which enable a nation to respond quickly and effectively to financial instability. That means putting in place new standards and principles for corporate governance, bank restructuring, deposit insurance, and foreign exchange and interest rate risk management.

It also means installing a strong, transparent legal and regulatory infrastructure. Governments simply cannot work out the debt problems of banks and corporations without effective bankruptcy laws. And, in today's highly interdependent global economy, the price of not having strong regulatory practices is no longer paid by a single nation, but also by societies far removed from the scene. Government regulation must be transparent, and efforts must also be made to make market information more widely available and more reliable.

IMF STRUCTURAL ADJUSTMENT

While building the legal framework for systematic scrutiny of risk, countries undergoing IMF-sponsored economic restructuring must stay the course of reform, in order to restore investor confidence and economic growth. Difficult questions of balance have arisen: over the need to stabilize exchange rates against the risks of raising interest rates when the financial sector is seriously strained; over the need to fix structural defects associated with crony capitalism against the need to avoid a backlash opposing large scale restructuring.

As we debate these issues, we should remember not to confuse the doctor with the disease. The distress in Asia is not a result of IMF policies, but of attempts to address the cause of crisis: namely, the withdrawal of private capital and the decline in confidence that led to that withdrawal. Moreover, if we look at countries like Korea, Thailand and the Philippines, which are following IMF-endorsed policies, we are seeing signs of stabilization.

STRONG SOCIAL SAFETY NET

The social dislocation produced by the crisis and by the solutions to the crisis must also be managed. Social programs are needed to maintain stability during this intense period of change. That is why President Clinton has called for a doubling of World Bank and Asian Development Bank efforts to strengthen the social safety net.

In addition, we believe more must be done to aid viable businesses caught in the downdraft, so they can get back on their feet and contribute to growth and job creation. We are encouraging the U.S. Ex-Im Bank to intensify efforts to generate economic activity, and the International Finance Corporation also has an important role to play in that regard.

TRADE LIBERALIZATION

Trade will be an essential element to the solution of the Asian financial crisis. Only through increased exports will the emerging Asian economies restore growth. At a recent meeting in Manila, ASEAN countries recommitted themselves to the ASEAN Free Trade Area. They also stood firm on their agreement at the 1997 APEC Economic Leaders' Meeting to put nine industrial sectors worth $1.5 trillion in trade on a fast track to tariff reduction.

Unfortunately, Japan alone has said it cannot fully participate in two of the sectors: forest products and fisheries. But, if Japan, which accounts for two thirds of Asia's economy, opts out, the credibility of the region's commitment to trade liberalization is at risk. APEC members stand ready to work with Japan to find a way to address Japan's sensitivities as it undertakes tariff reduction. We hope Japan will find a way to eliminate its tariffs on fish and forest products so that it can join the APEC consensus and permit this important trade initiative to go forward.

WHAT JAPAN MUST DO

Japan, moreover, has a special role to play, as the economic powerhouse of the region and the world's second largest economy. Japanese recovery is one key to resolving the crisis in Asia and to halting the slide towards a global recession. Its $4 trillion economy is more than six times the size of China's and in 1996 generated new wealth equal to Malaysia's GNP. With $10 trillion in savings and $220 billion in foreign reserves, Japan has tremendous capacity to lead the Asian recovery.

Fiscal stimulus, deregulation, domestic demand led growth, and clearing up banking sector problems are the key ingredients-to a more rapid Japanese recovery. Based on our own experience, we believe a comprehensive approach is necessary to resolve the kind of banking sector problem Japan faces. This includes moving quickly to:

(1) inject capital into weak but viable banks with appropriate conditions and based on a full and accurate accounting of the banks' underlying position;

(2) resolve non-viable institutions;

(3) take an aggressive approach toward the disposition of non-performing assets;

(4) improve confidence through enhanced disclosure; and

(5) strengthen bank supervision.

There are political and practical difficulties involved in using large amounts of public money to rectify the mistakes of private business. However, based on our experience, this must be done, it must be done quickly, and it must be done well the first time around, to avoid the need for repeated assistance to banks.

At the same time, in the current international economic and financial environment, it is absolutely vital that Japan provide sufficient fiscal stimulus to achieve a sustained, domestic demand-led recovery. Recent indications that the Diet will convene a second extraordinary session at the end of November to deal with fiscal policy are therefore welcome.

Economic policy can also sharpen competition and promote a more sustainable recovery through deregulation and market- opening. This will restore Japan to its role of market of first resort for the region, while improving Japanese efficiency and global competitiveness. Japan needs a strong economic base to support the fastest growing retirement population in the world. One out of four Japanese will be over 65 by the year 2015. Without sustainable, long-term growth, Japan could see a decline in living standards in the next century when it assumes an enormous social security burden. Sustainable long-term growth is what deregulation can provide.

U.S.-JAPAN PARTNERSHIP

There has never been a greater need for an active U.S.-Japan partnership to address the challenges in Asia. In his September 14 speech to the Council on Foreign Relations, President Clinton called for joint steps to address the immediate crisis such as concerted action to spur Asian growth -- and steps to prevent future economic instability, including modifying financial and trading institutions to match the realities of the new global economy.

Our two countries, at a meeting in Manila last year, helped launch a process to identify measures to restore growth and underpin stability in the region. That effort led to agreement this month by the finance ministers and central bankers of the G-22 on specific recommendations to increase transparency and disclosure, strengthen domestic financial systems, and promote fairer burden-sharing between public and private sectors.

Moreover, the U.S. and Japan share the view that the international financial institutions, which have been so effective in fostering the unprecedented prosperity of the past five decades, are key to the solution of current problems.

We are working on ways to update and equip these institutions to handle the challenges of a liberalized, 24- hour global financial market, to prevent crises, and to better address crises when they do arise. We are working to strengthen them, and make them more transparent. And, I am proud to say that with the recent passage of our budget, the U.S. will fully meet its funding obligations to the IMF.

NGOs

It is not only our two governments that have a role to play in creating a new Asian era. Business, NGOs, and local community groups in both countries must help resolve the problems we face in the region. As a starting point, we must try to learn enough about our neighborhood and our neighbors to know one another not as crude stereotypes, but as people, with apprehensions and aspirations comparable to our own. Exchange programs are a wonderful way to do that. The Japan Exchange and Teaching program, for instance, brings Americans to Japan to teach and work. The Mansfield Program gives American government officials a taste of working in the Japanese government. And the Fulbright Exchange gives American and Japanese scholars the chance to share ideas and experiences.

These are but a few of the mechanisms for building people- to-people contacts. There are also many issue-areas ripe for joint cooperation, including health, population and the environment. Under the U.S.-Japan Common Agenda, public- private partnerships and business-supported NGOs are sponsoring initiatives such as coral reef protection, water cleanup, and reforestation. Worldwide, the U.S. and Japan finance corporate-NGO partnerships engaged in activities ranging from family planning to agricultural research.

CONCLUSION

Some say the entire Asian economic miracle based on free enterprise and open markets has been called into question by the current crisis. I say the crisis in Asia today is an opportunity to build an even stronger and enduring basis for the next stage in the region's remarkable advance toward prosperity. This next stage should witness enhanced cooperation within the region, better economic governance and more open political systems. Whether we exploit or squander this opportunity will determine the shape of the next century.

Despite the grave challenges ahead, I have great optimism. Asia's highly skilled and hard-working labor force -- one that has experienced, in varying degrees, the benefits of political freedom and choice -- is the underlying strength of the region, and will underpin an Asian reconstruction and renaissance. But there is no time to waste. Let us roll up our sleeves today, and work together to plant the seeds of hopeful change.

Thank you.

[end of document]