6 September 1998

��

Good afternoon, ladies and gentlemen. I am very honored to be here with you today, as we bring attention to the theme of regulatory reform in APEC, an issue that demands all the more attention in our region in this time of crisis.

Over fifteen months have passed since last year's June 2 devaluation of the Thai baht triggered the plunge in regional currency and stock markets that has thrown open to question the very foundations of our long-hailed Asian economic miracle. Just as these shocking developments have impacted virtually every facet of the global economy over the past year, they inevitably have affected the debate on regulatory reform.

As leaders and pundits seek answers �� and sometimes even scapegoats �� to explain what went wrong, one view has unfortunately emerged which holds that market liberalization itself is to blame for the adverse sequence of events. This view alleges that regulatory barriers should be maintained as a shield from what they see as the destructive forces of globalization.

I believe this view is wrong. Rather, this crisis underscores the need to hasten, not delay, the process of liberalization, for it was liberalization which fueled Asia's impressive economic development, and it is liberalization that will help put Asia back on track toward growth.

��

Market Liberalization and the Asian miracle

This becomes all the more evident if we step back and assess how the so-called Asian miracle was created in the first place. There are two major factors which I believe helped to fuel rapid economic growth in Asia over the past decade. The first was a favorable external environment. The collapse of the Cold War order ended the East-West ideological divide, and allowed nations to reduce military expenditures and focus on domestic economic growth. In Asia, regional interests turned from "guns to butter," giving birth to new relations founded on mutual economic interest, as exemplified by the creation of the ASEAN Free Trade Association, or AFTA, in 1993 and Vietnam's �� accession into this group in 1995.

This "peace dividend" helped to spur what I see as the second major factor creating the Asian miracle, and that is, the spread of market economics. The forces of market economics unleashed by the end of the Cold War spurred the rapid integration of global markets through expanding trade and capital flows. As formerly socialist nations in Eastern Europe shed their planned economies and began to adopt market economic principles, Asia joined the competition to attract capital and fuel export-led growth by lowering barriers to trade and investment, and by the early 1990s, the push toward freer markets firmly took hold in the region.

Newly industrialized Asian economies continued to lift barriers to trade and foreign investment, while ASEAN and China also followed suit, introducing policies to encourage trade and FDI inflows, which would in turn bring in new technology and managerial know-how from abroad. The region thus profited from vast capital inflows to the tune of over $60 billion dollars per year from 1990 to 1996, expanding their share of world exports from 12% in 1990 to 17% in 1996. Clearly, it was by opening its doors to trade and investment that Asia was able to reap the benefits of a fast-globalizing economy and so fuel its miracle of growth.

��

Mismatched Liberalization & Asian Crisis

Yet, despite these striking achievements, Asia's liberalization effort was in many ways an uneven and imperfect process �� and herein lies the root of the problem we confront today. And these inadequacies were particularly apparent in the case of investment.

In many Asian economies, the liberalization of foreign direct investment did not keep pace with trade liberalization. For trade, the completion of the Uruguay Round and the birth of the WTO in 1995 marked a decisive step forward for multilateral trade liberalization, dramatically reducing tariffs and creating a viable dispute settlement mechanism with which to monitor global trade. Investment liberalization on the other hand, has proceeded in a more erratic manner. While the WTO locked in multilateral commitments to reduce tariffs, no such regime has yet been created for investment, although initiatives such as the OECD's Multilateral Agreement on Investment, or MAI, are endeavoring to address this deficiency. Even within the scope of investment liberalization, imbalances have emerged among sectors, with areas like the service sector proving mush slower to open up to inward FDI than the manufacturing sector.

By impeding commercial activity and preventing the optimal allocation of global resources, the inadequate pace and scope of investment liberation must be considered on of the major factors that exacerbated the financial crisis. Indeed, in the crisis-hit Asian economies, restrictive regulatory regimes which discouraged potential long-term FDI inflows could well have contributed to the disproportionately greater influx of more volatile short-term bank lending and portfolio investments. In 1996, of the $93 billion in private flows to the five economies of South Korea, Indonesia, Malaysia, Thailand and the Philippines, commercial bank lending and portfolio equity investments together accounted for some 73% of this total figure, while direct investment accounted for only 8%.

The relatively limited role of direct investment in the composition of financing for these economies can be said to have increased their vulnearability to capital flow reversals. The danger of their over-reliance on short-term financing was strikingly evident within weeks following the devaluation of the Thai baht. Against regionwide currency depreciations, and in the absence of hedging mechanisms to cushion price or currency risks, portfolio investors withdrew their investments in a panic, further aggravating the decline. Already by October 1997, the value of Asian emerging market equity funds fell to $38 billion, a 44% fall from the $68 billion reached in 1996. Commercial bank lending took a reverse course; according to estimates by the Institute of International Finance, the five Asian economies suffered net lending outflows of $21 billion in 1997, after enjoying $56 billion of inflows in 1996; in stark contrast, FDI inflows in 1997 maintained their 1996 levels at $7 billion. And according to the IIF projections for 1998, while the five crisis-torn Asian economies will suffer large outflows of commercial bank lending and portfolio equity investments totaling $16 billion, they should expect inflows of direct investment amounting to roughly $10 billion in the same year.

By exposing the potential dangers of an excessive reliance on portfolio and other short-term financing, the Asian crisis has underscored the benefits of encouraging stable, long-term FDI inflows. Thus, while Asian economies rightfully address the need to improve the regulation of short-term capital flows and financial systems in general, they should at the same time make a renewed effort to improve their regulatory frameworks for direct investment. Trade-distorting regulations such as local content and performance requirements, restrictions on rights of establishment and foreign capital transactions, or disadvantageous tax regimes still persist in the investment regimes of many Asian host economies, unnecessarily increasing risks and costs for potential investors. To rectify these problems, host countries should be encouraged to improve their investment environments by harmonizing tax systems with international standards, ensuring currency convertibility, and working toward the establishment of an internationally-recognized rules-based regime that honors such principles as national treatment, MFN, and rights of establishment.

��

Regulatory Reform: Revitalizes Economy & Improves Human Lives

It is true that regulatory reform of this nature is likely to face strong opposition from certain entrenched domestic interests, as market liberalization may require a painful transitional phase as new competition forces a restructuring of local industries. But if we look over the longer term, market liberalization can fuel new demand, revitalize economic activity, and in the end, improve human lives. To illustrate this point more clearly, I would now like to turn to some specific examples in my own backyard - that is, Japan's own recent experiences with regulatory reform �� which I think can speak best of the benefits of effective deregulation.

First, let's take a look at the deregulation of the wireless communications market in Japan, which has undergone significant regulatory reforms over the past several years. Phone rates for wireless carries were deregulated in December 1996, bringing down rates for consumers and encouraging investment in new technologies. And under the WTO, Agreement on Basic Telecommunications Services, Japan has recently permitted foreign equity ownership of wireless communications service provides, opening the doors to participation by such companies as GTE, Motorola, U.S. West, Time Warner, British Telecom, and Cable and Wireless into the domestic wireless telephony market.

The effects of these and other regulatory reforms in this market have been phenomenal. Cellular phone subscriptions doubled in both 1995 and 1996, and increased over 40% in 1997. As of January 1998, Japanese subscribers to wireless telephony services totaled over 36 million �� or the equivalent of three out of every ten Japanese �� accounting for almost 30% of the Japan's total telecommunications market.

The reasons behind these numbers are clear. For consumers, the deregulation of the wireless market opened up new alternatives to traditional phone services that boasted a competitive edge in both cost and convenience: on top of the obvious advantages of a mobile pocket-sized device was the added blessing that wireless subscribers could start-up their services free-of-charge - in stark contrast to the 72,000 yen hookup fee charged by NTT for traditional phone line users. So it comes as no surprise that the cellular phone has now become as ubiquitous among high school students as their uniforms �� if not more so.

We can also see similar outcomes in the aviation market, which is currently undergoing significant deregulation in fares, routes, and frequency of flights. Recent regulatory reforms as well as a bilateral U.S. �� Japan aviation accord helped to loosen restrictions on airfares, while regulations governing the routes and numbers of domestic flights will be abolished in fiscal 1999. These reforms will allow airlines like United and Northwest to increase flights to and beyond Japan, while the market will be opened up to new entrants for the first time in forty years. As the major airlines restructure their operations to meet the onslaught of competition from these new market entrants, the price was have already begun. The three major airline have begun to discount fares on selected domestic routes, while one industry analyst expects overall domestic ticket prices to fall from 30 to 40% in the next five years.

Telecommunications and aviation are just two of the many sectors which, thanks to deregulation, are bringing greater choice and cheaper prices to Japanese consumers. But what will deregulation mean for domestic industries? Indeed, they as well, will be beneficiaries �� not victims �� of deregulation, as heightened competition will propel a rationalization of business that will help to strengthen their competitiveness and enhance productivity. This revitalized industrial sector will, in turn, provide the momentum needed to regenerate Japan's economic growth. As we all know, a vigorous Japanese economy will be a welcome blessing for its trading partners, and particularly, for Asia and its economic recovery. And it goes without saying that the final beneficiary of a healthy Asian region is none other than the global economy itself. And so, as you see, deregulation is truly a win-win situation for us all.

Thus, I ask all of you business and government leaders of APEC to learn from Japan's experiences, and consider the long-term advantages of market-opening regulatory reforms. For crisis-hit Asian countries, it is this market deregulation, coupled with the financial systems reform programs already underway, that will be the key to reinvigorating economic growth.

We cannot fight globalization, we must work with it. Indeed, it was globalization that allowed us to grow in the past, and so we must continue to use globalization as our best leverage for new growth in the future. And this can only be done by bringing down the barriers to inflows of trade, and especially, investment. So, as well all seek a way out of this crisis, I call upon APEC to work together with other regional and multilateral for a such as the OECD and the WTO, to consider how we can keep the protectionist forces at bay and advance our common goal of global free trade and investment �� for this will, in the end, be the key to achieving peace and prosperity for us all.