Japan’s Contribution to Building the East Asian Community
Special Luncheon Address
By Haruhiko Kuroda,
Special Adviser to the Cabinet, the Government of Japan,
At the First East Asia Congress, Kuala Lumpur, August 5, 2003
Ladies and gentlemen:
It is my great pleasure to speak before this distinguished audience at the First East Asia Congress in Kuala Lumpur. Malaysia has always appealed to me as a beautiful country during my many visits to attend interesting meetings and events. I am here today to talk about the future prospects for East Asian economies and Japan’s contribution to building the East Asian Community.
It is opportune to discuss such issues in Malaysia, which, under the leadership of Prime Minister Mahathir, has transformed itself from a small developing country into a dynamic emerging economy, and is now playing a leading role in building the East Asian Community. I hope that my speech will contribute to lively discussions on the future East Asian Community.
East Asian Economies after the Financial Crisis of 1997-98
After the financial crisis of 1997-98, East Asian economies made a sharp V-shaped recovery in 1999-2000. Then, reflecting the global economic slowdown, their growth rates somewhat decelerated in 2001, but rebounded strongly in 2002.
The proximate causes of the strong recovery of East Asian economies are (i) the appropriate economic policies they adopted during and after the crisis, (ii) the financial support provided by the international community, and (iii) global growth in exports and intraregional trade expansion.
The East Asian countries affected by the financial crisis implemented prudent macroeconomic policies and radical structural reforms, which paved the way for the subsequent economic recovery. All crisis-hit countries initially tightened their fiscal and monetary policy, and then gradually relaxed it once the financial market stabilized. Most of them reformed their financial sector and strengthened corporate governance; Korea succeeded in doing this under an IMF-supported program while Malaysia reformed its financial sector independently.
The international community supported the crisis-hit countries bilaterally as well as through the IMF and other international financial institutions. When the Thai baht crisis erupted in July 1997, East Asian countries led by Japan provided Thailand with nearly $11 billion on top of the $4 billion from the IMF. Japan also supported Indonesia and Korea in 1997. Then, in September 1998, Japan announced the $30 billion “New Miyazawa Initiative” to help East Asian countries recover from the financial crisis. This assisted those countries in recovering strongly in 1999-2000.
Meanwhile, global trade expanded rapidly, leading to the crisis-hit countries’ increase in exports, particularly manufacturing exports, to developed countries. This helped them emerge from the financial crisis and recession. Intraregional trade also expanded tremendously, and brought about the simultaneous recovery of East Asian economies. Although the Japanese economy continued to grow slowly, with its more than $4 trillion GDP and $1 trillion in accumulated overseas investment, it increased imports from East Asia by 37% between 1998 and 2002.
Future Prospects for East Asian Economies
The future prospects for East Asian economies appear to be bright as the nations’ potential growth rates remain quite high. However, in order to realize such growth potential, they must implement substantial structural changes in the coming years.
For the six high- to middle-income ASEAN countries, further improvement in their investment environments is required for them to continue to attract foreign direct investment, which will be vital for them to compete with China. At the same time, they must develop their own technology to produce new goods and to increase productivity. Here, higher education and R&D investment will be of critical importance.
For China, continued efforts to transform the economy into a full-fledged market economy are necessary: state-owned enterprises must be privatized, accompanied with the development of social safety nets, and the “rule of law” must be firmly established. SARS has revealed China’s weakness in the health sector, pointing out the need of more balanced growth, including that in the social sector. As a member of the WTO, China must fully respect international rules, including those for intellectual property rights.
For low-income ASEAN countries such as Vietnam and Cambodia, because their basic industrial and social infrastructure is still deficient, substantial investment and institution building (supported by the international community) are required. They will likely enjoy the fastest growth in the region in the coming decades.
East Asian economies are becoming increasingly interdependent, and they will have to “institutionalize” and strengthen their interdependence by creating cooperative mechanisms among them. Under the “Chiang Mai Initiative” within the framework of the ASEAN+3, a financial safety net totaling around $40 billion has been established to prevent any future financial crisis in the region. Bilateral as well as regional FTA negotiations have already started to further enhance intraregional trade. It is hoped that the entire East Asian region can attain sustainable growth and eradicate poverty.
Japan’s Contribution to Building the East Asian Community
Japan has been contributing to building the East Asian Community in various ways, particularly after the East Asian financial crisis erupted in the summer of 1997.
First, Japan organized international financial support for Thailand, Indonesia, and Korea in 1997. In the same year, it also proposed the establishment of an “Asian Monetary Fund” to prevent and resolve any future financial crisis in the region. Although the proposal was shelved due to the strong international criticism against it, the idea has survived as a symbol of regional solidarity and acted as a “catalyst” for subsequent financial cooperation initiatives such as the “Chiang Mai Initiative.” Japan will continue to explore ways to further strengthen financial cooperation in East Asia.
Second, working with Korea and Malaysia, Japan has been promoting regional surveillance via “economic review and policy dialogue” at the ASEAN+3 Finance Ministers Meeting. The six countries including Japan have also been exchanging information regarding international capital flows. Regional surveillance could reduce financial and macroeconomic vulnerability, and increase stability in the region. Japan maintains that the ASEAN+3 may need a secretariat to perform the surveillance. This is a matter of future discussion.
Third, Japan has been trying to develop bond markets in the region. The basic idea is to mobilize the region’s vast pool of savings for direct use as long-term investment in the region, thereby reducing maturity and currency mismatches (“double mismatch”) and diversifying the modes of financing. For this purpose, the largest possible number of investors and issuers must be attracted to the market, and market infrastructure, including strong information disclosure, fair credit ratings, and sufficient credit enhancement, needs to be improved. The ASEAN+3 Finance Ministers will meet in Manila on August 7, 2003 to discuss this issue, and they are expected to endorse the “Asian Bond Markets Initiative.” Regional cooperation such as this will prove useful in fostering regional bond markets in East Asia.
Fourth, although Japan had long believed in the WTO system and refrained from engaging in any bilateral or regional FTAs, it has recently widened its trade strategy to consider FTAs as a possible means to liberalize and facilitate trade. The reason is that regional or bilateral trade arrangements can be trade creating if managed properly as in the case of the EU in Europe and the NAFTA in North America. Japan has already established an FTA with Singapore, is negotiating a possible FTA with Mexico and Korea, and will soon start negotiations with Malaysia, Thailand, and the Philippines. Recently, Prime Minister Koizumi has proposed a regional FTA between Japan and the ASEAN be concluded in ten years. Such FTA networks could compliment the WTO system and further enhance intraregional trade.
Fifth, Japan has proposed the study of appropriate exchange rate systems for East Asian economies, and suggested a “basket-peg” system, under which regional currencies would be managed by linking their exchange rates to a basket of major international currencies, including the dollar, the euro and the yen. The increased interdependence among East Asian economies means that even small intraregional exchange rate movements could disrupt intraregional trade and economic activities, so that exchange rate stability in the region could become a very important issue. Japan intends to promote discussion of exchange rate cooperation at the ASEAN+3 Finance Ministers process.
The road to the East Asian Community will not be easy. The financial, macroeconomic, capital market, trade, and exchange rate cooperation needed to solidify such a Community will be intensive and demanding. And yet, East Asian countries have just started financial cooperation, and other parts of cooperation in the region are still at a very rudimentary stage.
Looking at the economic integration process in Europe over the past 50 years or so, one can only admire the determination shown time and again by the politicians and general public to overcome difficulties and never retract in the process. Now, Europe has a common market and a common currency, and is still deepening and expanding its economic integration.
It is up to the East Asian politicians and general public whether they can build the East Asian Community by replicating the European counterparts’ determination in the coming decades.