Australia and Asia - Traders and Partners

Speech by the Hon. Alexander Downer MP
Minister for Foreign Affairs
Asia Society AustralAsia Centre

Perth, 19 August 1999

Introduction

It is a great pleasure to be back in Perth, and to be able to address this meeting of the Asia Society. The Society has played a valuable role in keeping Australians up to date on developments in our region, and nowhere more so than in Perth - a place which itself has the reputation of being one of the most Asia-attuned cities in Australia.

My topic today is Asia and Australia's relationship with it. I thought I might take this opportunity to outline my views on where the region is heading economically, two years after the onset of the East Asian economic crisis. I'd like to address one positive aspect of the crisis - the way in which it has precipitated genuine attempts at reform in the region. And finally I will look at how Australia has been coping with the economic effects of the crisis.

But before I touch on those themes, I want to focus briefly on one regional issue that has been in the news in the past week or so - East Timor and the forthcoming vote on its future status.

Australia and East Timor - a cause for pride

I wanted to talk about East Timor today because I think that recently there has been much ill-focussed commentary on that subject, commentary that has completely missed the main issues and has done nothing to further the cause of the East Timorese people.

It seems to me that there is one key fact that has been overlooked in all the grandstanding that has passed for debate in the past week - the fact that the people of East Timor will be deciding their own fate in less than a fortnight. The historic significance of that vote cannot be overstated, because less than a year ago such a ballot - giving the East Timorese a real choice about their future status - would have been unthinkable.

That we have gone from pipe-dream to reality in under a year is a remarkable achievement. It is due to the good will and hard work of many people in Indonesia and East Timor, from the most senior levels on down. And it is also due in no small part to the sustained efforts of Australia, a matter which some people in this country wilfully choose to ignore.

In fact, East Timor has been a subject of intense foreign policy activism by Australia over the past year, and our Government is proud of what we have been able to achieve in those few short months. The success of international action is judged on results - and on East Timor, the results are plain to see. We continue to have a strong relationship with Jakarta while at the same time playing an important role in helping bring the forthcoming ballot on East Timor to fruition.

Late last year our Government recognised that political changes in Indonesia had opened a window of opportunity for debate on East Timor's future. Prime Minister Howard wrote to President Habibie late last year, suggesting an act of self-determination for the people of East Timor and urging the release of Xanana Gusmao. Both President Habibie and Xanana Gusmao have told me that the Prime Minister's letter was a catalyst for a major shift in Indonesian thinking on these issues.

Having helped start the ball rolling, Australia has played an unfailingly constructive and supportive role as the process of deciding the territory's future has unfolded.

Australia helped assemble an international coalition on East Timor - including Indonesia, Portugal, the UN, the United States and others - which has built momentum for the decision on East Timor's future. It is that coalition that has allowed us to get as far as we have today. Even as the Tripartite Agreement was being worked out by Indonesia and Portugal at the United Nations, we made it clear that all parties could count on our practical assistance.

We have been at the forefront of efforts to support the United Nations - contributing over $10 million in "in-kind" assistance to UNAMET, and $10 million to the UN Trust Fund for this operation, making Australia the largest single national contributor to UNAMET. Now, as the process moves to consideration of the UN's role in the post- 30 August period after the vote, we are again making clear our commitment to assisting - including through continued 'in-kind' and other support -with the next stage of the process.

Beyond material and financial support, the most important Australian contribution to date has been our people. We have been a leading contributor of personnel to UN operations: Australia has provided the largest national contingent of civilian police for the territory - with 50 AFP officers - including the commander of the police contingent, Alan Mills from the AFP.

A further 50 Australians work for UNAMET, including 6 Military Liaison Officers. And we will be sending a 10-person Official Observer delegation to observe the 30 August ballot, comprised of 4 parliamentarians, 3 NGO representatives and 3 officials.

We are helping the people of East Timor in many other ways. Australia is already the largest aid donor to the territory, and will continue those efforts after the ballot. We provided over $7 million in development assistance for East Timor in the 1998/99 financial year, and we've sent several AusAID missions to the island this year to assess the humanitarian requirements for the next century.

We are in regular dialogue with the Indonesian authorities and local East Timorese officials and organisations to reiterate our concerns about human rights abuses and related humanitarian issues - in particular the situation of internally displaced persons. We also promote human rights standards under our aid program, including through our Human Rights Fund. We have constantly urged reconciliation among all the factions in East Timor, and have provided $180,000 towards practical reconciliation activities to date in 1999. We have indicated that we remain willing to consider further support for fully representative reconciliation activities in the future.

To boost our own capacities on the island, we have established an Australian consulate in Dili. During my recent visit to East Timor, I had the honour of officially opening the Consulate, which is staffed by a highly professional team of dedicated Australians headed by James Batley. Already they are proving the value of having our own diplomatic presence in the territory. They are able to provide consular assistance to the approximately 170 Australians in East Timor as well as provide support to the UN process.

If actions speak louder than words, we can surely be proud of our commitment to a peaceful and orderly decision on East Timor's future. These are actions which have contributed immeasurably to the welfare and long-term future of the East Timorese people, and it is important that more Australians understand these achievements and take pride in their country's contribution.

Before I conclude my remarks on East Timor, I want to say something about the recent debate about peacekeeping or peace enforcement in the territory. I begin with the obvious, but often conveniently ignored, point that the Tripartite Agreement on East Timor was signed between Indonesia and Portugal, and mentored by the United Nations, after protracted and complex negotiations. Australia, or for that matter any other country, was neither a party to it, nor could pretend to speak on behalf of any of the East Timorese factions involved.

And I make the further point, though it is so obvious that I am almost ashamed to have to do so, that it is completely ludicrous to suggest that the United Nations, or Australia, or the United States, or any other country could have used military force to impose a settlement in East Timor. Not only would that have involved an invasion of Indonesian territory, it would have led to loss of life on a scale that would have dwarfed any of the tragedies we have seen this year on the island. Let me also put paid to the lie that we have done nothing about the violence that has ravaged East Timor.

We were very active in the preparations for the vote on autonomy in East Timor - what is termed Phase I of the process - through constant representations calling on the Indonesian authorities to uphold their security responsibilities in the Tripartite Agreement, including by ceasing support for and reining in the militia groups. And the Prime Minister's summit in Bali on 27 April was important in securing President Habibie's agreement to a significant civilian police presence in East Timor.

The period immediately after the vote - Phase II - will obviously be extremely delicate, and it will be important that the United Nations and the Indonesian authorities cooperate closely to maintain security and stability throughout the territory regardless of which way the vote goes. We have argued for an increase in the UN's civilian police contingent for the territory, and in the number of military liaison officers. It is likely that the Tripartite partners will agree to this. We are closely involved in discussions about those arrangements, and maintain our willingness to help in appropriate ways.

We are also looking forward to the end of the process - Phase III - which will come once ratification by Indonesia's parliament, the MPR, of East Timor's new status is implemented. Of course, we make no assumptions about the outcome of the vote. And regardless of that outcome, Phase III will be a very busy time for Australia.

But if autonomy is rejected in favour of independence, the UN will eventually have to provide for security in East Timor and this could involve a peacekeeping force or something along those lines. Australia would be happy to be involved in this exercise.

We should not forget there are significant limits to what the international community can do, and that the primary responsibility for a smooth transition to either autonomy or independence lies with the parties in East Timor themselves. But when the time comes for us to lend a hand, we will do as we have always done since we helped move East Timor's future on to Indonesia's national agenda. We will look to the best interests of all the parties involved.

Australia has been able to make a real difference to the situation in East Timor because we have been consistently helpful and productive in our actions.
East Timor has arguably been the most difficult foreign policy issue Australia has had to grapple with since the end of the Vietnam War. It has been a very delicate, difficult issue for us and we have had to balance finely a range of national interests. But just as I gave my best efforts to help fix the nine year old war in Bougainville, so too am I and the Government as a whole, doing all we can to help solve the East Timor crisis.

It is, I think, very sad that the Federal Opposition has chosen this extraordinarily delicate issue as its sole battleground for party politicking on foreign affairs. I do not think it becomes the Opposition to play out its profound sense of guilt that it ignored the East Timor issue for 13 years by trying to score points off a Government determined to help fix the problem.

Nevertheless, it makes me and my colleagues smile that the loopiest views on East Timor don't only come from John Pilger and Brian Toohey - they've been joined by Laurie Brereton. And in the process he has successfully alienated Indonesia and the United States of America - and to offend both of them at once on the same issue from Opposition is quite a first!

Where the region is headed

So I turn now to the main subject of my remarks tonight - just where is our region heading? Of course, just about every forecaster you speak to will counsel caution in the interpretation of economic trends. But that said, most analysts of regional economic developments do seem to agree that recovery in East Asia is now under way.

Indeed most economies in our region, Hong Kong aside, are forecast to experience positive growth in 1999. Granted, for many economies that will be off the low post-crisis base of 1998. But a conjunction of positive economic indicators, aided by falling interest rates and expansionary fiscal policies helping to stimulate growth, show a build-up in momentum for a potentially self-reinforcing recovery in East Asia.

Economic activity has picked up strongly in Korea and Singapore, with more modest upturns also evident in Malaysia, Thailand and the Philippines. Korea's recent economic performance has been remarkably strong and, on latest forecasts, it will get close to its pre-crisis level of output this year. Singapore and Malaysia are benefiting from a strong up-swing in the electronics cycle which has boosted their exports. The recovery is also broadening in Thailand and the Philippines, with signs that domestic demand may be finally turning the corner. Indonesia remains in a different category because of the severity of its economic contraction last year and the overlay of uncertainty associated with the political situation leading up to elections. But there also economic indicators are improving, with GDP growth resuming and inflation being reigned in.

All these factors point to a continuing strengthening in economic activity in the region. Particularly encouraging are the recent signs that increased domestic consumption and rising exports are following the earlier recovery in industrial production.

That is very important, because the region's trade performance generally has not been boosted by the devaluations of regional currencies to the extent that it was initially expected. The most recent data indicates a significant upswing in exports. After contracting earlier this year, Malaysian exports have been growing by an average of 14 per cent in the past three months, compared with the same period last year. Korea's and Philippines' export growth in the same period has also averaged above 10 per cent. As the regional economies recover, one would expect to see continuing improvement in intra-Asian trade which accounted for around 50 per cent of the region's trade before the crisis.

That improvement in East Asia's position has flowed into the outlook for the global economy. The IMF's latest forecast is that growth for the global economy will be down marginally in 1999, to 2.3 per cent, but will rise to 3.4 per cent in the year 2000.

There are several other factors contributing to this more optimistic global outlook - and contributing also to a rosier outlook for the region. The US economy has continued to remain strong and buoyant, when many expected its relatively high level of growth to taper off. And there are signs of renewed activity in the Japanese economy, although there is a question mark over the economy's ability to maintain this revival.

Now, all these positive signs are still some way from amounting to a full-scale resumption of sustained economic growth in East Asia and the global economy. In any case, the path to recovery was always likely to be a long and bumpy one for some economies. And it would be remiss of me if I did not also point out some areas of potential concern, including:

There is one final matter which could completely derail the process of recovery in East Asia - a failure by governments to heed the lessons of the crisis and implement needed reforms. It is to this subject I now wish to turn.

A boost for reform

There is no doubt that many people in East Asia have suffered terribly from the effects of the economic crisis. Growth has been severely curtailed, banking systems have been hit hard, and countries now have a long-term legacy of debt that will be a drain on future economic growth.

But one aspect of the crisis that has encouraged me has been the positive manner in which countries have tackled their problems. Faced with mountainous problems, regional governments have been compelled to tackle structural weaknesses, spawning economic reform and liberalisation which is already helping to mitigate the damage, and which will bring major medium to long term advantages for the region and its economic partners, including Australia.

Not surprisingly, those economies that have IMF programs in place - Thailand, Korea and Indonesia - have clearly set the pace. But good progress has also been made by others. Malaysia has pressed on with financial sector and corporate governance reforms, despite its decision early on in the crisis to introduce capital controls. Japan has stepped up its reform efforts, particularly in the critical banking sector, although this comes after many years of relative inactivity.

Reform has touched just about every aspect of economies in East Asia. In broad terms, reforms have included:

Financial sector reform has been a key part of the recovery process in many countries and has strengthened supervision, enhanced risk assessment policies and improved the capital adequacy of financial institutions. In most crisis-hit economies, the burden of non-performing loans on banks still remains severe. But it is being reduced - albeit through the injection of public funds which will push up government deficits and debt. And although I am confident that the crisis will provide impetus for a more sustainable system of market-based credit allocation based on risk and reward, it may take some time before this is fully reflected in a new banking culture.

Corporate governance has been is another area crying out for reform. There has been some progress across the region through legislative action, including strengthened bankruptcy laws, improved accounting and auditing standards, and increased rights for shareholders. Unfortunately, corporate responses to the reform drive have been mixed, with some vested interests resisting change.

The reform process has clearly benefitted the businesses and peoples of East Asia, and is a prerequisite for any sustained recovery. But Australian businesses will also benefit from the reform process, particularly over the medium to long term, as the regions recovers. Compared to the pre-crisis situation in the region, Australian business currently already experiences improved conditions in a number of areas:

These are the early effects. Much of the reform has been systemic in nature and real dividends, in terms of an improved business environment, will take some time to mature as various reform measures reinforce each other to make these economies more open, transparent and competitive.

How Australia has fared

Australia, thanks to sound macroeconomic policies as well as an ongoing structural reform agenda, has survived the crisis extremely well. Even with our significant trade ties with the region - expected by many to dampen our economy's growth - Australia has been at the forefront of economic growth amongst OECD economies, achieving 4.8 per cent growth in the twelve months to March.

It was inevitable, however, that our exports would be hit by the economic downturn in East Asia. Our latest figures indicate that for the financial year 1998-99, merchandise exports to the region fell by $3.2 billion, or 7 per cent, when compared to the previous year, to a total of $44.1 billion. This was the first time in decades that the value of our exports to East Asia declined. Exports to all major markets in the region contracted, except for China (which was up 2 per cent), the Philippines (up 4 per cent), and Taiwan (up just fractionally on the previous year).

However, our sound macroeconomic policies, combined with a strong, stable financial system and a free-floating exchange rate have helped Australia to ride out the crisis very strongly.Furthermore, our exporters have been able to diversify their markets. The benefits of our policy are now apparent. The share of total Australian merchandise exports going to non-East Asian markets increased to 49 per cent in 1998-99 - a significant realignment from the early 1990s when they represented only around 40 per cent.

But even in East Asia, the prospects for Australian exporters are not completely gloomy. Our figures actually indicate a positive trend for exports to several countries, including Singapore, the Philippines, Indonesia, Malaysia and Thailand. Even with Japan, we have seen significant increases in exports over the past two months.

While I would always urge caution in the interpretation of such figures, it does appear that we are starting to see a few shafts of light through the storm clouds. And if the positive economic trends in our region that I have been speaking about hold true over the coming months, Australian exporters will have more reason to be optimistic. Once the region swings back into recovery, so shall our exports. In my remarks, I have been concentrating on the economic aspects of the regional crisis.

But it is appropriate also to mention Australia's role in other areas. We have been at the forefront of international efforts to overcome the economic and social impacts of the crisis - in terms of the size of our economy and population, we've probably done more than any other country. We were one of only two countries to participate in the IMF second tier support arrangements for Indonesia, Thailand and Korea. We've provided substantial assistance for crisis-hit countries through bilateral aid programs, and established a $50 million, three-year Economic and Financial Management Package for the region, together with our Asia Crisis Fund, doubled under the last Budget to $12 million. We've helped Indonesia as it moved to hold the first democratic elections in more than four decades. And we've helped to create the conditions for the people of East Timor to decide their own future.

In fact, wherever there has been an opportunity to assist the development of greater freedoms, and the evolution of more transparent and democratic institutions, Australia has been there.

Conclusion

You will have gathered from my remarks today that I have confidence in the future of the region. Mine is not a blind confidence - I am fully aware of the possible checks to recovery, and particularly vigilant on the question of commitment to reform in our region. Protectionist pressures remain a real threat to world trade, and could erode all the gains that we and our neighbours have won from the bitter lessons of the past two years. Barriers to trade are no guarantee of lasting economic benefit. They destroy international competitiveness and encourage artificial bubble-economies which are usually short-lived and never sustainable in the long run.

Our Government is determined to ensure that this dead-end road is not taken. We will continue to help our neighbours wherever we can on the difficult road to
recovery, including through the example we ourselves set in economic management. As Australia leads the world in economic performance, our message is simple - reform and openness can bring real benefits, and lasting growth.