Note: Remarks as prepared for delivery
More than 50 years ago, Joseph Schumpeter gave vivid expression to a fundamental insight into the law of progress in the market economy. He called it Creative Destruction. This is, in his words, “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
The Asian crisis should be seen in this light. We must attempt to recreate as best we can the positive conditions which brought about the so-called East Asian Miracle. In the course of this turmoil, much of the good has been destroyed along with the bad and the ugly. But we should not try to restore the status quo ante. Not only would it be an exercise in futility but it would also constitute an act of denial. To be sure, this is a crisis of nightmarish proportions, but it is no phantasmagoria. The consequences are severe, its effects are hard hitting, and the toll heavy. But the sooner we come to terms with it by trying to understand its real causes and deriving lessons from it, the sooner we will be on the road to recovery. Indeed, we must seize the moment to put into place the much needed reforms which can purge our system of its excesses and abuses.
The gale which has swept through Asia is indeed an agent of creative destruction. No doubt, to many people, be they victims or simply bystanders, the creative part of the storm is hard to perceive. Rather than be enlightened, they are more likely to be confounded and mystified by its ferocity, as if all this while we have been living in a fool’s paradise. Wealth accumulated over years of robust economic growth has simply vanished overnight. To borrow from Shakespeare, “what seemed corporal melted as breath into the wind.”
There are some who dismiss Asia’s economic success as nothing more than a mirage. They need to be reminded of the real and tangible achievements of East Asian economies over the last three decades. For instance, in a feat that has no precedent, hundreds of millions were freed from the shackles of abject poverty directly as a result of years of sustained growth. On the other hand, those who laboured under the delusion of Asia’s economic invincibility must now wake up to its failings and shortcomings.
The effect of the convulsion has been profound and far reaching, raising questions about many of our commonly held notions and cherished beliefs. Increasingly, the basic assumptions about development, the market economy, the international economic order and the role of multilateral institutions are all being challenged. The crisis has also spurred demands for good governance and the development of civil society.
For decades, Asian governments adopted an interventionist approach towards economic development. While policies were generally market-friendly, the state played the principal role in the allocation of resources. This was considered not only to be legitimate but essential to correct social and economic imbalances which could plunge whole nations into chaos. Surely, Americans, at least, can understand our concerns, given their experience of the New Deal in the wake of the Great Depression. We are therefore under no illusion that the market, left entirely to its own devices, will cure all our ills.
Nonetheless, we do recognize that state intervention in the economy, no matter how well intentioned and carefully conceived, is fraught with risks. What are meant to be mere crutches often become permanent appendages, spawning a dependency mentality and rendering the public purse a rich feeding ground for all kinds of parasites. Legitimate affirmative action policies can also degenerate into perverse patronage, creating a breeding ground for the rent-seeking activities of leeches which suck the life blood of the economy. These moral hazards thrive under a system which is more responsive to the demands of vested interests than market signals.
The truth is that no less than five years ago, even when hordes of global fund managers were stampeding Asia, it was already evident that the economies of the region were growing too fast, and that the growth rates could not be sustained. Voices of caution were drowned by the sounds of triumphalism. Success had bred arrogance and over-confidence, which lulled many in Asia into complacency. This culture of contentment as well as the convergence of accumulated rigidities in the economic, social and political spheres caused the stresses to develop into a large scale systemic crisis.
The panic is over and we must now face the consequences of slower economic growth or even contraction. The rich has become poor and the poor poorer still. The pain is indeed real, and will be compounded by the absence of a social safety net. Since “adversity is the best teacher,” learning from adversity is precisely what we have been doing. Corrective measures and reforms are being instituted to cleanse the economy and social system from elements that can derail growth. An important outcome of the crisis is the consensus for regional surveillance to facilitate coordination in macroeconomic policies. Each country is sovereign and entitled to formulate its own fiscal and monetary policies. However, it is in everybody’s interest to maintain economic stability and confidence in the region as a whole. With the regional economy being increasingly integrated it would be foolish for any country to pursue unsustainable and incongruent policies putting its neighbours in danger of imminent failure.
We will continue with the reforms, not to placate the West, but in response to the moral imperative to do what is right. The pressure has been building up in recent months in the region itself and we are aware that unless we reform the system from within, changes will be imposed from without. But all our efforts can come to naught if deficiencies in the international architecture of capital and trade are not redressed. The growing volatility of short-term capital flows, coupled with the systemic fragility of the international monetary system, threatens the very foundations of the global economy. So is the lack of transparency in currency trading.
It was Lenin who asserted that the best way to destroy the capitalist system was to undermine the value of money. This assertion found support from an unlikely quarter. John Maynard Keynes himself agreed when he wrote that “there is no subtler nor surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” It would seem that little has changed since the end of the First World War, when Keynes wrote his best-selling book, “The Economic Consequences of Peace.” The frequency and increasing scale of financial crises with global systemic implications accentuates the weaknesses within the international monetary framework. There is a pressing need to improve the governance of international financial transactions to ensure justice and transparency and to avoid policies which can have far-reaching adverse regional or global repercussions. For this purpose, a balanced and effective monitoring and surveillance regime is required. Such a regime should be capable of regulating the activities of lenders as well as disciplining the borrowers. To penalize only the borrowers while allowing the lenders to escape unscathed is inherently unjust. It is crucial that the international community work towards constructing a system that would actively promote order and prevent future economic convulsions and financial crises.
The policies and actions of the United States are crucial to advancing this agenda. We welcome U.S. support in lending its considerable clout to addressing our concerns over the skewered direction in which globalization is apparently headed. Already, there are complaints from the impoverished parts of the world that funds are being diverted to Asia by both multilateral institutions and the market, although they are more needed elsewhere.
Let me reaffirm our own commitment to liberalization, to integrating our capital market and financial institutions with the global marketplace. Globalization is unstoppable and irreversible. While we must all remain vigilant in guarding our respective national interests, in the context of a globalized economy, there is no room for the rancid rhetoric of misplaced nationalistic sentiments and protectionists. However, their claims will gain legitimacy if the global community does not commit itself unequivocally to reforming the international financial regime in tandem with the changes being demanded upon nation states.
The financial crisis in Asia has indeed called for much reflection and soul searching. We have had to grapple with fundamental issues and make difficult decisions. The pendulum has swung from the irrational exuberance of much of this past decade to the undue pessimism of the last nine months. Before this, Asian governments could do no wrong. Now it appears that they can do no right. When Americans faced a similar situation in the 1980s, the prophets of doom claimed that the United States had lost its competitive edge, that its education system was mired in mediocrity and that it was losing the technological race to Japan. They confidently predicted the dawn of an Asian Century as the new millennium approached. Obviously, the reports of America’s decline were greatly exaggerated. The U.S. economy has since rebounded, and now it is Japan and East Asia which find themselves on the ropes.
However, the process of creative destruction is already working its way through our economies. In truth, this process is not confined solely to the market economy. As vigorously argued by Karl Popper, science and society advance by destabilizing old notions and conceptions, debunking hypotheses and refuting theories. Let no one therefore entertain any doubt about Asia’s ability to reform and recover. We will emerge stronger for having undergone this pain. The fat will be squeezed out, but the muscle will remain. Asia has demonstrated its resilience in the past, and I am confident it will do so again.