5-6 SEPTEMBER 1998

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Two weeks ago, I had no idea that I would be standing before you today. In the short time that I had had to collect my thoughts, it has struck me that we are living in an era of paradox.

On the one hand, We are experiencing an era of unprecedented economic globalisation, underpinned by rapid technological advances. Transportation, telecommunications and information processing costs are falling. This has supported rapid new productivity gains and greatly increased the ease with which national markets can be integrated into the global economy. Globalisation, therefore, would appear to offer opportunities for significantly enhanced national prosperity.

One the other hand, we are witnessing severe economic problems in many national economies, including some that are members of APEC. Despite their position among the leading trading economies, these economies appear to be suffering severe strains in integrating with the golbal economy, particularly international capital markets. My own economy, New Zealand, has not been immune from these problems.

The thesis I want to put to you today is that these two factors - economic globalisation and the Asian economic crisis - are in fact two sides of the same coin. If we are to harness the benefits of globalisation and put the crisis behind us, the role of regulatory reform at the national level has never been more important. In my view, therefore, the APEC symposium on regulatory reform that we are embarking on today could not have taken place at a more appropriate time.

I hope that my comments to you today will be somewhat thought provoking.

I will be arguing that the focus of international efforts must now build on and move beyond advancing trade liberalisation to focus on improving the functioning of all markets through regulatory reform. In doing this I will adopt a broad definition of regulatory reform as encompassing all the full range of legal instruments and decisions through which governments establish conditions on the behaviour of citizens and enterprise.

In short the forces shaping the global economy may require broader policy responses and approaches internationally consistent with the meaning of economic liberalisation.

I will go on to suggest that a key challenge before the international economic community now is to build a consensus around clear principles and frameworks to guide governments economic reform efforts, be they international or domestic, which support the continued integration of our respective businesses into the international economy.

At the heart of this challenge are questions of the appropriate role of government in a market economy and how governments collectively should be seeking to shape the focus and further development of policy approaches in international institutions.

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The New Zealand Experience

It may be best if I start by reflecting for a few moments on the New Zealand experience which over the last 12 years has seen a critical reassessment the role of government in the economy and major changes in the approach to economic management.

Prior to 1984, New Zealand's economic policy featured a high and increasing degree of regulation and state control. Our manufacturers were protected by high tariffs and import licensing. Minimum prices were set for the agriculture sector.

May of our factor markets were highly regulated and Government owned and operated many of the economy's productive assets.

By 1984, the results of these policies were plain for all to see. Over a period of 30 years we had such low growth that we moved from having one of the highest living standards in the OECD to one of the lowest. Unemployment was growing, our debt was high and becoming increasingly unsustainable and there was large scale migration out of the country . At that time New Zealand was faced by an economic crisis of its own.

We were forced to take stock. This required us to rethink the fundamentals, followed by a comprehensive, disciplined approach to reform aimed at bringing increasing competition and efficiency to the economy. The short run consequences were very tough.

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What then did we do?

First, we set about achieving macroeconomic stability through reducing inflation - and keeping it low, controlling government spending, and increasing the transparency of Government financial management.

Second we set about reforming the different sectors of the New Zealand economy. Our main objective was to introduce greater competition across the board, from telecommunications to taxi services. We recognised early on that much of this competition would come from abroad. We therefore unilaterally lowered tariffs and other import controls and made it much easier for foreigners to invest in New Zealand. Today New Zealand is in the vanguard of liberalisation in APEC and we have said that we will reduce our remaining tariffs to zero well ahead of the APEC deadline of 2010.

Third we set about redefining the role of government in the economy. We agreed that the critical role for government was to provide a policy and regulatory environment which supported open competitive markets and which encouraged businesses to aggressively pursue opportunities and manage risk. We recognised that it is difficult for the government to add value or to manage on an extensive programme of corporatisation and privatisation. Since 1978, the Government has sold 24 State-owned Enterprises and other Crown-owned businesses, as well as various financial assets, housing mortgages, mining licences and cutting rights to large areas of commercial plantation forests. To date the programme has realised total sale proceeds of around $16 billion.

There can be no question that the performance of our economy over the last decade has improved dramatically. Currently we are at the bottom of our business cycle but we have managed over 2.5 per cent economic growth every year from 1993-97, some years substantially more. In the 10 years up to 1993, we could not manage this type of growth rate even at the top of our business cycle. Other indicators of the health of our economy are that inflation is being contained at well under 2 percent while unemployment is around 7 per cent and has been significantly lower than that until recently.

Most importantly, our economy is now showing every sign of being able to adjust rapidly when necessary. Our economy has suffered from the current crisis as growth has slowed and our currency has lost some of its value against the US dollar. But business activity has held up well and we are now witnessing a significant resurgence in exports, as our exporters increase their volumes to economies that have not been so badly affected by the crisis. The fact that our dollar is floating freely has meant that changes in its value are accompanied by a smooth adjustment process. Our past experiences with attempts to closely regulate the financial sector were not happy ones.

We recognise that we cannot be complacent, particularly in current circumstances. We still have a lot to learn about how to run a successful economy. The reform effort is continuing. Our current account deficit has been compariatively high, fueling a debate about levels of saving in the New Zealand economy. We are in particular giving high priority to looking at how we can improve the quality of regulation in the interest of reducing the costs of doing business.

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Global Structural Reform and Adjustment

Our experience in NZ is by no means unique. The policies pursued by other Governments intent on regulatory reform show a remarkable consistency. Almost invariably, they have included such features as macroeconomic stability, trade liberalisation, domestic deregulation, and a paring back and redefinition of the role of Government.

These changes, adopted largely on a unilateral basis, have had significant implications for the ease with which business can operate across national frontiers. Increasingly, reform is driving and is being driven by the globalisation of business. Never has it been so easy for firms to operate on a global basis in terms of securing markets, inputs, and investment funds. These trends apply even to small and medium size enterprises whose flexibility can in some cases provide an advantage in operating in the global economy.

The globalisation of business has been greatly assisted by rapid technological improvements, particularly in the areas of transport, communications, and information technology. In effect, technological advances have helped to overcome the nature barriers of space and time that separate national markets. They are likely to be of increasing significance in breaking down the trends associated with globalisation are now clearly reflected in world trade and investment statistics. In the last 10 years, for example world trade has grown nearly three times as fast as world output. World investment flows in turn have grown nearly three times as fast as world trade.

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New Challenges for Governments

This phenomena of business globalisation entails significant new challenges for governments.

Business is looking for certainty that national border restrictions will keep coming down and will stay down. It is increasingly, however, more concerned with the policy environment behind the border. A country's investment, environmental, occupational regulation, or the fact that it continues to operate protected state-owned monopolies, clearly have direct impacts on the costs and opportunities for businesses. Many of the issues affecting business are now also beyond the sole control of national governments:

anti competitive practices have become global in nature and increasingly are not captured by any one country's legal system; framework to deal with issues such as multi-media, the internet, trademarks and biotechnology; capital markets regulation is becoming increasingly internationalised to cope with global capital flows;

All these factors point to a number of clear implications for governments. First, governments can no longer afford to think purely in terms of national markets or economies when business, the wealth creators, are thinking in terms of regional and global markets. Governments objectives now need to be clearly focused on maximising the opportunity for all firms, national and foreign, to participate in economic activity at home and around the world. Business increasingly wants a regulatory environment that is more consistent across nation states, and doesn't distort their choices about how to do business, that is, whether to export or invest, and where to export (and import) from.

Second, the policy distinction that has been drawn between trade and domestic economic policy is now clearly artificial. Perhaps it always has been so; now it is obvious. Competition policy and trade issues are now inextricably linked. New competition perspectives will increasingly focus attention on grey areas of trade policy often associated with the concept of so called "fair trade", where practices frequently run counter to the principle of liberalisation. The application of anti dumping measures is one example.

Trade and domestic economic policy today are moving towards a merger - under a broader paradigm defined by competition and quality of regulation principles �� designed to minimise anti-competitive implications of both government intervention and private practice. This could be called a "contestability of markets" approach. A contestable market is one in which there are no substantial barriers to entry, government or privately imposed, a situation in which the process of competition is unimpeded.

What this boils down to is that individual nations have an increasing stake in how well markets are functioning at the international level. Nations' domestic regulatory regimes are coming under increasing international scrutiny.

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Pressures for Policy Convergence

These developments have seen growing pressure for policy convergence between nations. There is considerable breadth and depth to this process. Significant intergovernmental networks now exist to address customs policy and procedures, standards and conformance, competition law and policy, intellectual property rights and occupational regulatory practices. Convergence is taking place at all levels, bilaterally, regionally and also in wider groups such as the WTO, OECD and APEC.

This poses an internal challenge for Governments. International trade and economic policy was once the domain of foreign and trade ministries. Today there is an external dimension to the work of virtually every government department. Government must ensure that their internal procedures support a coherent overall approach internationally.

Will, as some believe, the process of convergence inevitably mean the international harmonisation of policies, regulations and standards?

While the pressure to harmonise may be growing, the answer is no.

Indeed, critically assessing when harmonisation is appropriate and when it is not in the national, or international interest, is a key policy challenge for governments. We want to be very careful about substituting new international regulation for good domestic regulation. Harmonisation can result in the lowest (or highest) common denominator rather than the optimal approach.

The successful pursuit of good policy and regulatory design will be increasingly important for high economic performance.

My sense is that policy convergence is likely to take place around a set of shared best practice "competition and regulatory principles" designed to promote the contestability of markets without necessarily being prescriptive about how individual governments should implement these principles across the broad spectrum of economic policy.

These would include recognition of the principle of consumer welfare maximisation, commitment to minimise entry and exit barriers to markets, with defined property rights consistent with the development in the long run of innovative markets, commitments to limit governments to those areas of economic activity which are appropriate for it to be involved in, and to minimise the costs of complying with regulation.

Many of these principles are already inherent in approaches to international agreements such as the General Agreement on Trade in Services under the WTO umbrella and APEC's Osaka Action Agenda. They are also already implicit in specific reform policies that governments are pursuing domestically today.

But they have yet to be articulated and endorsed as a comprehensive framework for advancing sound regulations at the national level. Exploring how an international competition and regulatory framework would interact with trade and investment policy may be the one of the major new international policy challenges.

The Asian Economic Crisis

To illustrate my point, I would argue that the kinds of challenges I have outlined above are of critical importance to those economies in APEC that are currently experiencing severe economic difficulties.

The difficulties these countries are experiencing have not been due so much to poor macroeconomic policies, which in many cases have been reasonably sound. I am not one of those who thinks there are purely macroeconomic solutions for the current difficulties in some APEC economies. Nor have they been founded in trade issues. Rather, it has been the approach to microeconomic and structural issues that appears to be at the heart of the crisis which has its most obvious expression in the turmoil in financial markets.

The approach taken to regulatory reform will, therefore, be a critical part of the policy mix as governments attempt to put in place the conditions that will allow their economies to return to prosperity. Regulatory reform will need to focus not just on the development of sound policy frameworks but also on building the capacity to implement policies and to see them succeed in the marketplace.

Most of the reforms required will need to be carried out on a unilateral or domestic basis. They will need to be concentrated in such areas as defining an overall competition policy, and applying further trade liberalisation, deregulation of individual sectors, privatisation and withdrawal of government from those areas where its presence is not warranted. There will also need to build capability and to strengthen institutions including the putting in place of sound legal frameworks which demand improved transparency and information disclosure-reform will not just be about deregulation. How to lend support to these endeavours, in a coherent way, I believe, will increasingly be the challenge of the international organisations.

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The Role of APEC

APEC has a key role to play in all of this and I don't think it is any surprise that APEC has come to prominence just at the time when APEC economies are facing common policy challenges which, at least at his early stage, defy negotiated outcomes. The commitment of the region's Leaders reflect a recognition of the need for new approaches.

APEC has found a formula that is well suited to its members adjusting to the requirements of a globalising world economy, in part this reflects Asian culture factors but it also reflects the willingness of governments to make significant policy adjustments to suit changing circumstances.

What then are the elements of this formula? First is a focus on unilateral economic reform or "concerted unilateralism". APEC members have come to realise that if meaningful change is to be accomplished, such change will have to be driven primarily at the domestic level. These changes have been remarkably rapid and are starting to be reflected in APEC members' Individual Action Plans.

Second is the recognition that competitive forces are now genuinely global in nature and that is important for the economies of the region to be completely open to these. This concept known as "open regionalism" and means that at the same that the economies of APEC open up to each other, they also open up to the rest of the world.

Third, the economies of APEC have recognised they need to lower their border restrictions but also to reform their economies behind the border. This is explicitly recognised in the Osaka Action Agenda which covers not only the trade and investment liberalisation but also such areas as competition policy, deregulation, standards and conformance and intellectual property rights. In many ways, the Osaka Action Agenda reflects a set of general principles and it is flexible enough to allow individual member economies a good deal of latitude to choose the means by which they will conform to these.

Finally, APEC stresses dialogue with the private sector of the very type that is taking place at this Symposium today. In this there is a recognition that in a globalising world economy, greater liaison between government and business is essential. Although it is an official process, APEC has been business driven from the outset. APEC cooperates closely with non-governmental forums such as PECC that are making a significant contribution to the development of new thinking on trade, competition and regulatory policy. The competition principles that have been developed by a group of PECC experts, and are to be discussed at the APEC competition policy workshop here in Kuantan in two days time are a good example of the kind of work that needs to be done.

I would argue that there is a significant role for APEC to ensure that the conditions are put in place that will encourage sound approaches to regulation in individual APEC economies. The great diversity of APEC economies is an advantage in that a variety of approaches to implementation of regulatory reform can be brought to the table, and discussed without binding participants. I see this Symposium as providing a platform for a full and vigorous discussion on how this can occur.

New Zealand will be hosting APEC next year and I can tell you now that we will be emphasising the regulatory reform aspects of APEC's work programme during our year in the chair. As such I am looking forward to hearing the views of the speakers that follow. I can assure you that we will take full account of these views as we develop this policy theme for 1999.