7TH ANNUAL MEETING
ASIA PACIFIC PARLIAMENTARY FORUM
KEYNOTE SPEECH BY
Rep. AMO HOUGHTON
Monday, January 11, 1999 (12:30 h ?14:00 h)
Mediterraneo C Room, Los Delfines Hotel
Hon. Oswaldo Sandoval, Chairman of the Committee on Foreign Affairs of the Congress of the Republic of Peru
Mr. Nakasone, President of the APPF,
Distinguished Members of the different Parliaments that are represented here today,
Ladies and gentlemen,
I have the great honor of introducing our keynote speaker for today's luncheon, Mr. Amo Houghton, Member of the House of Representatives of the United States Congress, who is going to speak to us about the issue of the economic and financial situation. As you are all aware of, it was unanimously decided during the last Executive Committee Meeting that took place in September in Lima, that this should be the issue to deal with as one of the main topics of our conversation, considering the fact that this is a situation that affects most of the world but specifically and precisely, in a determined form, our region.
Mr. Houghton is a very distinguished Member of the House of Representatives of the United States?Congress, and it was very interesting for me to see in his biography that he is the only member of the United States Congress who has previously been a Chairman of a Fortune 500 Corporation, the Corning Company, company which is very well known in Peru, and I am sure in other parts of the world as well. And I took special interest in the fact that I just mentioned -that he was such a prominent businessman before- because I myself happen to be a businessman and of course it is always interesting to see how businessmen enter the political arena. It is not that politicians do not do it well themselves, but a little help from the businessmen does not hurt. I am sure that some of you will agree with me. In any case, with this very brief introduction, allow me to introduce Mr. Amo Houghton. Mr. Houghton.
Hon. Amo Houghton, Member of the U.S. House of Representatives
Thank you Mr. Sandoval, thank you Mr. Chairman, thank you ladies and gentlemen. I made an offer down at this table that I would give my notes plus a hundred dollars to anybody who would be willing to give my speech. And someone said keep your notes and give me the hundred dollars and I will do it. As you can see, I am not Senator Roth. He is very sorry that he cannot be with us today. As you know, the United States Senate is going through a very tortuous time in the impeachment process. The hearing, I predict, and I can only say this from my own standpoint, will be short, it will have a good resolution, I happen to be one of the Republicans who voted against the impeachment in the House, and I think we will get on about our ways. The only bad thing about this whole process is that the newspapers and those people who have been watching television will no longer have the topic of impeachment to talk about, because we will be going on to something else.
But, anyway, I am delighted to be here with you all at this important meeting. APPF is growing into an important regional institution, and thanks so much to our brilliant, sagacious and determined Chairman, Mr. Nakasone. APPF has served our mutual interests, as you can well know, by engaging key regional legislators and these discussions of the important issues in problems of the Asia-Pacific. It has most importantly provided us all with a chance to get to know one another better and to gain insights in terms of our different countries and things which are of importance to us.
Senator Roth and I, and Dan Bob, and Bob Van Wicklin, who are here for the American Delegation, support the development of regional institutions in the Asia-Pacific. And I do not think that is any secret. We believe that they can serve to undergird the regional prosperity and security. I use the word "can" purposely because Asia's recent economic turmoil has left some questions in many people's minds about the effectiveness given the role of organizations such as APEC and ASEAN, not to mention any other international organizations wholly designed to deal with these sorts of crisis, such as the International Monetary Fund.
In the midst of the Region's worst financial and economic crisis in the half century, frankly, we had hoped APEC and ASEAN would have been more engaged in the development of greater effective approaches to the crisis. Both organizations however, as you know, have been outstanding and have had outstanding achievement. Both have great potential and I hope that the central goals of both APEC and ASEAN -regional trade liberalization in the former case and sub-regional economic and political and social cooperation in the latter remain unchanged.
However, today, I would like to talk about the crisis and some of its causes and consequences. I would like to address what we, as Parliamentarians, might do to deal with the effect of the crisis and how we can work to prevent, or at least minimize the onset of similar occurrences in the future. If I could just add a note here, I would rather talk this theme in a more ad lib fashion, but this is supposed to be printed and therefore, I have to adhere to the strict text and I apologize for this. While many of the causes of the crisis remain in dispute, I believe that there is something which can be certain. First, global finance has undergone a sea change in the past several years. Global capital flows, including flows to developing countries, have increased exponentially to the point today, where if you can believe it, such flows are more than seventy times the size of the volume of global trade, something unheard of years ago. Advances in computer and communication technology have not only reduced the cost of capital mobility but have also vastly sped its flow. The growth in derivatives, those mysterious derivatives, and other highly leveraged forms of trading has led to more aggressive forms of financial intermediation. Capital providers have come to encompass an even larger and more diverse group from banks to mutual funds and even now, to public and private endowments.
Second, while many Asian governments in the 1990's liberalized their financial systems, there was often a failure to take the necessary steps to improve regulation, supervision and transparency - and I am going to be mentioning those three words consistently during this talk - all critical components to maintaining a healthy financial environment.
Third, in many Asian countries, the corporate sector has maintained a high level of debt, and in many cases much of that debt was both short-term and denominated in foreign currencies. In addition often as a result of government direction and personal relationships between borrowers, credit was frequently extended on an unsound basis.
Fourth, a number of countries had large economic imbalances and exchange rate problems.
And finally, and this will always be the case, markets are subject inevitably to herd behavior and the panics thereof.
Now, the combination of these factors led to the striking events that occurred in 1997. Net private flows to five of the most affected economies -Thailand, South-Korea, Malaysia, Indonesia and the Philippines- were a plus 93 billion dollars in 1996, but a minus 12 billion dollars in 1997. That one-year swing of over a hundred billion dollars represented a staggering eleven per cent of the combined GDP's of those five countries.
So, as a result of the crisis, despite the International Monetary Fund's intervention and aggressive work on the part of the global community, much of Asia has been thrown into economic decline on a scale that has not been seen since the Great Depression of the thirties. Economies in Asia that had experienced miraculous growth in recent decades -and I am sure this is not news to you- have seen millions thrust into unemployment and poverty as some countries have also experienced a certain amount of political instability.
The crisis has led to renewed questions over the desirability of open markets and globalization. That sort of questioning, I believe, is both healthy and justified. As you may have guessed, however, both Senator Ross and myself are strong believers in open markets and both trade and capital. And even in the face of the disastrous economic conditions resulting from the Asian crisis, per capita incomes in Korea and Thailand are about 60% higher than they were 10 years ago.
Let me turn now, if I may, to the sorts of things that we should be thinking about in terms of reducing the risk of another crisis and also what we might do to mitigate the most immediate problems faced by the affected countries.
In the list of the five causes of crises that I outlined, two: the sea change in capital flows and the herd instinct are not much subject to change. The other areas, the other three areas however are, and if steps are taken in these, the downside risks of others can be minimized.
And here the three, again: regulation, supervision and transparency, and if they are enhanced in the liberalized financial environment; and if the corporate sectors maintain tolerable levels of debt; and if short-term and foreign denominated debt is kept within bounds; and if credit is extended on a prudential basis; and if macroeconomic imbalances in exchange rate problems are tackled, then it seems to me that abrupt swings in capital flows are far less likely to happen.
The above ideas apply not only to domestic players in the countries affected but to other actors as well. For example, the failure and subsequent rescue of the Long Term Capital Management Hedge Fund, which you remember, was very telling. In the United States while hedge funds must report the amount of equities they own to the Securities and Exchange Commission on a quarterly basis, they need not report how much they have borrowed, or most of the trading they undertake in the many exotic derivatives, and other investment instruments which are available to them. So demands for transparency in the countries affected by the crisis must similarly apply to the hedge funds that control these large aggregates of capital.
There also should be greater transparency in the multilateral institutions that play a primary role in intervening in the global financial crisis. Now while the United States Congress may have taken longer than some of us would have liked in approving funds for the International Monetary Fund last year, one important new element was added as a condition for providing these funds: greater transparency on the part of the International Monetary Fund itself.
So as the United States Congress acted to address these issues, again of transparency, within the International Monetary Fund, legislators in the affected countries have acted to make structural changes in their economies to put them on the road to economic recovery.
As we all know, these three key items: effective regulation, effective supervision and effective transparency are produced through the political and legislative process, and this is of course where we come in. So parliamentarians from every country must be at the front lines in addressing the current crisis and instituting measures to prevent recurrence.
There is another matter that we as parliamentarians have a responsibility to involve ourselves in, and that is ensuring that our publics understand the benefits as well as the cost associated with globalization and open markets, and I know as far as my district is concerned, in my country, it is not well understood.
Many countries in Asia are experiencing their worst economic performance in memory. In the United States we are experiencing probably the largest trade deficits we have ever had in our history social dislocation, job loss and real pain for average citizens in our countries has followed the crisis. But to assert that open markets and globalization are the culprits and thus must be resisted or reversed, I believe is the wrong conclusion to draw up from what has occurred over the past year and a half.
Liberalization of trade and capital markets has been an essential prerequisite for the economic success that Asia has experienced for decades. So just as democracy requires microscopic vigilance, so too do markets. Both are prone to excesses. The changes in global finance in recent decades have been immense. The institution and supervision of global finance must undergo adaptation, not rejection.
Before finishing, and with due respect to our Chairman, I would like to say just a few words about Japan. Tokyo has played a crucial role in assisting the countries of the region most affected by the crisis. Indeed Tokyo has provided more bilateral assistance than any other country in the world.
At the same time, Japan抯 economy still accounts for well more than two thirds of the GDP of East Asia. Until Japan emerges from what is now its 8th year of economic stagnation, it is going to be difficult for the rest of Asia to return to solid prosperity.
The changes necessary for resumption and growth in Japan require political leadership. And we happen to have as our Chairman right here at APPF, in my opinion, the last man Japan has had in the postwar period, able to exercise that level of leadership, Mr. Nakasone. Perhaps, Mr. Chairman, APPF would be most effective in addressing the Asian financial crisis if some of your associates were able to persuade you to step back into office, in which you served so ably and in-depth in the 1980s.
My point, though, is that it is profoundly in the interest of all our countries that Japan as well as those nations most damaged by the current crisis quickly embrace and implement the initiatives necessary to promote growth and stability. And there we go to the three pillars of wisdom: effective regulation, greater supervision and increased transparency. Thank you very much.