Peter Costello

Speeches

The Macroeconomic Policy and Structural Change in East Asia

THE MACROECONOMIC POLICY AND STRUCTURAL CHANGE IN EAST ASIA CONFERENCE

“AUSTRALIA AND THE ASIA-PACIFIC: MOVING FORWARD AS PARTNERS”

THE QUAY RESTAURANT
THE ROCKS, SYDNEY

THURSDAY, 24 FEBRUARY 2005

I am very pleased to be here this evening to address such a distinguished group from East Asia, the Pacific and the United States. In particular, I would like to extend my warm regards to my former colleague, Dr Boediono, who was Indonesian Finance Minister from 2001 to 2004 and with whom I shared many valuable exchanges.

This conference occurs at yet another time of stress for the people of our region. Since I became Treasurer in 1996, East Asia has collectively encountered several crises: - the economic collapse of 1997; the rise of terrorism that was tragically brought home to Australians and Indonesians in Bali in October 2002; the SARS epidemic of 2003; and now, natural disaster through tsunami.

Through these crises Australia’s response has been to heighten our cooperation and draw close to the region.

May I take this opportunity to personally convey my condolences to the people of Indonesia, Thailand, Malaysia and Myanmar for the loss of life and enormous suffering that has followed from the Indian Ocean tsunami. Those countries are represented at this conference, but let us not forget those affected by the tsunami in other countries like Sri Lanka, India and the Maldives.

Australia’s response has been unprecedented in terms of the speed and size of our commitment — in addition to our volunteer medical teams, and defence force personnel, the A$1 billion package of assistance to Indonesia represents the single largest aid contribution ever made by Australia. This will be distributed through the Australia-Indonesia Partnership for Reconstruction and Development. It represents a partnership of long-term sustained cooperation and capacity building. And it is just that – a partnership.

The Partnership will be overseen by a Joint Commission, chaired together by President Yudhoyono and Prime Minister Howard. The Foreign Ministers of Indonesia and Australia are also members.

I too will be a member of the Joint Commission, together with one of my Indonesian counterparts, to give an economic focus to the work of the Partnership and to ensure this innovative approach is able to deliver progress on development as well as immediate reconstruction and humanitarian assistance.

I am conscious that Australia can only make this commitment if we keep a focus on strong economic policy at home. Without a strong economy we will have neither the capacity nor the credibility to assist in this reconstruction.

Australia and East Asia

Important developments are now shaping our common future in the region:- the threat of terrorism and our response to it; the emergence and rise of the Chinese economy, with all the challenges and opportunities that entails; and the growth of regionalism and regional trading associations. Tonight I would like to talk with you about these broader, longer-term challenges and how we can work together to enhance our collective interests.

A growing and stable Asia is good for the region and good for the world. It is of huge importance to Australia.

Our largest export market is Japan. China is now our second largest export market, with its share of our exports nearly doubling over the last 5 years. Australia has a natural trade complementarity with the region.

Our security is tied to Asia’s security. We place great importance on our cooperative relationships with Southeast Asia in combating terrorism. We share the objective and have a clear interest in the peaceful resolution of historical tensions in Northeast Asia. Like several other regional countries, our long-standing security alliance with the United States is at the centre of our security arrangements, and contributes to the security of the region.

As I noted in a speech in 2002, Australia’s commitment to the region has been tried, tested and proven. Australians are enmeshed in the region, and our interactions with the region have shaped and changed who we are.

The Rise of Regionalism

In recent years there has been a marked shift towards regional approaches to economic challenges in East Asia and the deepening of regional economic integration.

ASEAN + 3 has emerged as a very significant forum for regional economic and political dialogue. The region, including Australia, has entered new territory in its approach to trade policy with multiple FTAs either planned, in discussion or already signed. Australia-New Zealand have just started negotiating an FTA with ASEAN.

Arguably the most striking aspect of regional integration is the pace with which financial cooperation has progressed. Many of you here have been involved in important regional initiatives such as the Chiang Mai Initiative (CMI) for cooperation in crisis financing. While not part of the CMI network, Australia supports this process and has considerable experience which can be drawn on to assist, particularly in technical areas.

We have the experience of moving from a fixed exchange rate to a floating exchange rate, of developing liquid bond markets and of raising domestic denominated debt in overseas markets. We would like to offer the benefit of our experience of successes and failures to other countries that are now moving down the same path.

We are a founding member of the Asian Bond Fund (ABF), stages 1 and 2. The ABF is an important step toward deepening regional capital markets and increasing countries’ capacities to borrow in their own currency. The ability to borrow in one’s own currency can play a key role in reducing vulnerability to external shocks, as Australia has witnessed since the mid-1980s. For this reason we have subscribed over 10 percent of the capital of ABF2.

We also want to further strengthen macroeconomic policy dialogue between the partners of the region. This conference is an example of Australia’s commitment to this objective.

Our Shared Challenges

Our region is diverse in language, in culture, in ethnic origin and in religion. But we have a common interest in defeating terrorists who seek to exacerbate these difficulties in their attempts to seize power and develop oppressive regimes.

We have a common interest in exposing their ideology of hate and division. We have a common interest in demonstrating to those to whom terrorists want to appeal that peace, openness, and democracy will build a better society than any of the fantasies that the terrorists hold.

Chronic economic weakness and poor governance can produce social disorder, erode faith in institutions and, over time, can create an environment where transnational crime and terrorism can flourish. We must join together to promote economic strength and good governance so that this does not happen.

Trade liberalisation is one of the best mechanisms to achieve growth and poverty reduction, thereby raising living standards. Multilateral liberalisation has been a major contributor to achievements in these fronts.

Australia is also an active player in bilateral and regional trade agreements. We see these as a means to move further and faster in areas where progress has been slow through the WTO. But Australia’s approach is also to ensure these trade agreements are robust and act as building blocks to the multilateral system; that they are comprehensive in their coverage; and that they raise the economic welfare of our citizens.

Multilateral liberalisation should be the ultimate goal. This is my constant message to APEC and G-20. FTAs are an important contributor to liberalisation when multilateral progress is being stymied. But they will never replace the need for multilateral progress.

The Emergence of China

China is already a major player in the global trading system and increasingly a contributor to global growth. China’s continuing integration and its continuing progress towards a market economy is critical to the future of the region.

I have been supportive of China’s approach of carefully sequencing its reform — of focussing on strengthening its financial system before introducing greater flexibility in its exchange rate. We know that the end point of market liberalisation will involve free capital flows and a freely floating exchange rate, but it is important to carefully lay the groundwork necessary to accomplish this.

It will be increasingly in China’s own interest to allow greater flexibility in its exchange rate. This will add to the mechanisms available to absorb external shocks.

But China’s rapid growth and integration mean there will also be a need for adjustments in other countries. Our experience with adjustment to global change suggests the best responses are policies that create and support openness and flexibility.

Another challenge we collectively face is ongoing reform and evolution of the international financial architecture. Australia has been at the forefront in calling for greater scrutiny of the role and performance of the International Financial Institutions (IFIs), the International Monetary Fund and the World Bank. Like all institutions, it is appropriate that the IFIs evolve and adapt. They must respond to the changing dynamics among their shareholders as well as focus on their own internal governance.

East Asia should have a role in global governance commensurate with its economic and strategic weight. That is why Australia has taken steps to allow Korea to share in an Executive chair at the IMF. And that is why we also support Japan’s bid for permanent membership of the UN Security Council.

Still, many of the big global challenges we face cannot be solved by the IFIs or by traditional groupings of advanced economies such as the G-7. Our ambition is to see the G-20 as a robust grouping to deal with important global issues. The G-20, which comprises both advanced and emerging economies, is a key world forum for driving the international economic and financial agenda. I am working to ensure that the G-20 is an ambitious forum, addressing and putting weight behind the major international issues that affect us all.

The G-20 includes the major economies of East Asia and gives better representation to the views of our region than do other fora. I warmly welcome China as the 2005 G-20 Chair and its focus on sustaining public support for growth and reform — an issue for all governments. Australia will Chair the
G-20 in 2006. Not only does this provide an important opportunity for Australia and China to deepen our cooperation and work together on issues of importance to our region, it enables us to bring a regional perspective to global economic issues and to the task of shaping the future direction of the Group.

Conclusion

Australia is deeply integrated with the world and the region.

Our own reform experience has revealed the importance of economic openness and ongoing reform. Engagement with the outside world, and especially East Asia, will continue to demand adjustment and reform in the Australian economy.

We have practical experience in constructing effective economic institutions and frameworks and we can share our experience in a helpful way assisting in the building of strong institutions and policy frameworks that support growth, poverty reduction, employment creation and provide opportunity. This conference is part of Australia’s long-term commitment to working with you as partners in this endeavour.

24 Feb 2005

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