PM Lee Hsien Loong at the 2nd Singapore Summit Welcome Dinner

Emerging Asia: Prospects and Possibilities

Mr George Yeo

Singapore Summit Conference Chairman

Distinguished guests, ladies and gentlemen

WORLD ECONOMY AND ASIAN MARKETS

Welcome back to the 2nd Singapore Summit!

We meet at an interesting time for the world, and especially for Emerging Markets and the Asian economies. A few years ago, when the Global Financial Crisis (GFC) struck, many doomsday predictions were made for the system as a whole, and for the developed world in particular - US would go bankrupt, Eurozone would split, the “Grexit”, Greek Exit, would start it all. It did not happen, the situation has stabilised- although not all problems have been solved - and risks still remain. In contrast, at that period, there were similar, equally passionate views about Emerging Markets –that this was the future of the world economy, that this was going to be the primary engine of growth, that the last shall be first.

Indeed over the last five years, the Emerging Markets have done well; a primary engine of development. Last year alone, in Asia, the Emerging Markets grew twice the world average. But this was not necessarily because of its intrinsic capabilities and drive, but partly fuelled by QE (quantitative easing) and robust domestic demand. Recently, the lustre has been lost. The prospect of QE tapering off was enough to cause capital outflows, currency depreciations and asset/equity markets to soften. The mood changed, and many people now doubt the sustainability of the Emerging Markets story. Some even wonder whether in Asia, if this is a repeat of the Asian Financial Crisis which happened a decade and a half ago. I think it is useful to take a step back and avoid getting carried away by prevailing sentiment and try to get a feel for what are the longer, more enduring trends and factors, which are at work.

Indeed, individual Emerging Market countries have weaknesses. They have relied excessively on capital flows, their current account positions are not bad, but weakening, and there are shortcomings in infrastructure and governance. Indeed, the leaders of many of these countries have acknowledged this candidly. Malaysian PM Najib Razak said this year, that there is a “need for (Malaysia) to strengthen the fiscal and macro position of the Government”. In Indonesia, President Yudhoyono identified five “illnesses and factors that have caused development to fail at the national and regional levels”, and he listed them – inefficient bureaucracy, regional governments, investors who did not fulfil pledged commitments, a flawed legal framework, and unhealthy political interests. In India, Finance Minister Mr. Chidambaram said, “India needs a more open economy to seed growth. And it needs more reforms and less economic restrictions”. So the problems are recognised, but they were glossed over and could be put aside, as the capital flowed in - cheap money. As the euphoria subsided, and with the threat of the (QE) withdrawal, the issues now re-surface and loom larger.

But I do not believe that we are in the situation of the Asian Financial Crisis. The fundamentals are stronger than they were back then in 1997. The banks are better capitalised – non-performing loans are lower, capital adequacy ratios respectable; external balances generally stronger, although some countries have recently slipped into deficits; and a smaller proportion of debt has been denominated in foreign currency, so that the external debt is only about half of what it was, in terms of % of GDP during the Asian Financial Crisis. Countries have built up reserves significantly higher than last time. Also, they have learnt not to peg their exchange rates, so with more flexible exchange rates, they can ride the ups and downs, and the bumps. We have put in some firewalls, e.g. a regional initiative, called the Chiang Mai Initiative Multilateralisation for countries to come to one another’s help when you have large and destabilising capital flows. Central banks have had bilateral currency swaps, and the presence of the fire brigade and these precautions have deterred excessive speculation as well as panic.

CHALLENGES AND OPPORTUNITIES FOR ASIAN ECONOMIES

Overall, we are betwixt and between. There are challenges, but overall in a stable position. If you look beyond where we are today, and try to see what are the deeper issues which face many of the Asian economies, I think you will find some common features. And how the countries deal with them will determine how well these countries do over the longer-term. Let me just list four of them - demographics, a generational change, transformations of the economy and society, and lastly, security factors. Let me start with demographics.

Ideally, societies are in demographic equilibrium – people grow old, people get born, but the society stays about the same shape. There is no Asian society which is like that. We are all either growing old, or with lots of young people. The ones which are growing old, are among the most rapidly ageing societies in the world. Japan has had a workforce which has been declining since 1995. China, a dynamic economy, but its workforce has also started declining last year. Hence, the worries that China will grow old before it gets rich. And this poses very difficult challenges which have to be met early. How to build an entire system of financial, social and medical support for the elderly population, how to maintain the vigour and competitiveness of the economy, how to make sure that you are looking forward, changing and transforming yourself when a large proportion of the population prefers the status quo, security and comfort. At the same time, it causes the countries to encourage parenthood and procreation. More children, try and balance the accounts. Almost all East Asian societies have been trying this, very hard, but unfortunately, mostly in vain. It is a very difficult problem to solve. That is on the ageing side.

The societies with young population have opportunities, but the opportunities also come with challenges. You take countries like India, Indonesia, Vietnam. The median ages are below 30, reaping significant demographic dividends - more and more people working, not many retired to be carried, not so many who are very young, still to be supported before they have started working. In India, the estimate is that because of demographics, India can generate 2% extra growth per year. But you can only collect the dividend if the government can educate the people, find jobs for the people, invest in them, and bring them up to be productive citizens and contributing members of the economy, and not young people, frustrated, disgruntled, worried, looking for translations of Arab Springs. That is not easy to do. In Indonesia, for example, less than half of students are finishing secondary schools. In South Korea, where the young people are well educated, finding them jobs is the next hurdle. And among university graduates in South Korea, unemployment is higher than among graduates of vocational high schools. Well educated, unable to find jobs to match. But these are tasks which the governments have to do, which are soluble, because otherwise, the country will face social and political problems. So the first issue is demographic challenges.

The second issue, which is related to that, are the generational changes which the countries are undergoing. Changes in values, experiences, attitudes and aspirations, between one generation to the next, all happening faster than ever. The older generation which began this process of rapid development and take-off experienced the whole range, from war, poverty, disorder, and later rapid transformation and improvement. They created the improvement. They appreciated what they themselves have achieved. But now the world has changed, a new generation is coming along, and the older ones are under pressure from rapid changes and from the younger, better educated cohorts coming along and putting pressure on them. The younger ones are the beneficiaries of the take-off. They grew up in peace and affluence. They are “digital natives”, meaning born with fingers on keyboards, comfortable with social media and new technology. This is the world which they have known and know how to operate it. This is the world from which they set their base aspirations and expectations. This is what I want to improve on and have my children enjoy even more of, than what I have.

Generational differences per se are not new. It has happened since human beings formed societies and old generations worried about young ones. But the changes are happening faster than ever, because the world is changing faster, and technology is widening the gaps between “digital natives” and “digital immigrants”. Especially in Asia, which has among the most IT literate populations and most wired and wireless countries in world. Korea is probably top of the list and Singapore is somewhere near there. Even China has the biggest population of internet users and mobile users, anywhere in the world. So the differences are no longer just between one generation and the next, but even between cohorts several years apart. I went onto Facebook, which for me is quite a migration because I was advised, young people are there, you have to be there. One day, I met a relative, teenage young lady, I said, are you on my Facebook? She made a face. Facebook is passé to that generation, they are on Instagram! So now, I am there too. But you have to be not just with that generation, but of that generation. And that generation has to be produce people who will be there for them and with them.

But overall, these changes are a positive force. It is how societies progress and it is the way the world has always been. The young will always be better adapted to the world of today and the world of tomorrow. They will change societies to fit the temper of the times, to fit their own psyche, their own social mores and norms, whether in terms of social institutions, economic structures or political organisations. The “feel” of society will change, but it has to change because it has to fit the people who populate it, who animate it, who are its spirit. But as the world changes, we still have to strike a balance between the old and the new. To maintain values and group instincts that have enabled societies to succeed and endure, and which remain relevant today; while at the same time, moving with the times, keeping vibrant and forward-looking, and developing creative responses to the new world.

Among the creative responses, is the third issue I want to discuss, which is the economic and social transformations which these societies have to undergo. Asian economies, I believe, have every potential to continue growing faster than advanced countries, and to catch up with them, or at least narrow the gap on them. To grow, it depends on free markets and private enterprise, but also depends on active and effective governments who create preconditions for markets to be able to operate effectively, properly; for people to be able to have the trust, the contracts, the property rules, the whole environment on which production and prosperity depends. The Asian countries have done this so far, but the strategies which they have used to get here, in many cases, have run their course, and to continue high growth will depend on further structural changes. It will mean changes in economic restructuring - setting rules, defining and enforcing property rights, restructuring industries and state sectors, developing financial markets. It will mean changes in social policies - building social safety nets to protect vulnerable groups, strengthening institutions and social services, e.g. housing, healthcare, education, elderly support. It will mean political changes – to update and evolve systems and practices of government to keep abreast of economic and social conditions.

We see this transition, this inflection point, and these challenges in many Asian Emerging Markets. Take China – over the last 30 years, it has been one main story in the world. 500m people lifted out of poverty – almost the entire population of Southeast Asia. But now, it is at an inflection point. Having to shift to a more sustainable growth model – more balanced, more emphasis on social development and more environmentally-friendly. The Premier, Mr. Li Keqiang, speaks of humanity-centred urbanisation, having this in mind. If they get this right, it offers the opportunity and potential for many more years of high growth, but that means far-reaching reforms. The ideas for these reforms and economic policy changes are there. The World Bank has done a study, they did a “China 2030” report last year, which offers a comprehensive roadmap of the things that need to be changed and fixed. But the reforms will not stop with the economy. You also need social transformation, e.g. healthcare, education, social equity. And you need, in parallel, political adjustments, to curb excesses and malpractices, meet rising public expectations for accountability and participation and maintain social order and stability. That is the hardest of all. Unlike economic reforms, there is no World Bank to do it for you, there is no roadmap. Nobody has made this transformation, or walked this path before, starting from circumstances similar to what the Chinese are today. So they have to feel their own way forward, crossing the river one stone at a time, to borrow Deng Xiaoping’s phrase.

China has a new leadership in charge, under President Xi Jinping and Premier Li Keqiang. There are high expectations of the new leadership and there is a clear feeling even among Chinese officials, who fully understand that changes are necessary, and indeed it would have been better if changes had happened earlier. We are not looking for drastic discontinuities - because with a big country that is risky and not possible - but considered, cogent steps that signal moves in the right direction, that will be carried out consistently and will build on one another, so that after two terms of leadership, you have left China better prepared for the next phase. I know they have been discussing these issues very seriously; they have fixed the date for their 3rd Plenum of their Central Committee, which is meeting in November, and that is when they usually make major policy initiatives. This will be closely watched for signs of the leadership’s strategy and even more, of the leadership’s resolve. It is not easy to do. When they tell you that they have a big challenge, they are not just being modest, or putting you on.

You look at developed countries having to make these changes; they do not find it easy either. Take Japan – not an Emerging Market, but a developed country trying to re-emerge. It has had a very difficult two decades since the bubble economy burst. But with Mr Abe who came back as the Prime Minister for the second time last December, he has changed the mood, and changed this course, with Abenomics. The Nikkei index has gone up 40%, the real economy is showing positive signs – output is rising, unemployment is down. And winning Olympics 2020 has been an extra bonus, because now he has “Three Arrows” and “Five Rings”. These things do make a difference. But the Japanese economy cannot revive just by pump priming. So, when Mr. Abe says that the “Third Arrow” is structural reform - that is the key. The package of structural reforms was announced in June. It is the first step in the right direction, announced before an election and therefore, very cautious. But a lot more will have to be done, whether it is more flexible labour markets, healthcare and pensions, or agriculture reform. These are things which take years and not months to do, and even more years to show results, and to entrench themselves. Japan needs to do that. But Japan, to succeed, needs to go beyond domestic policies and ensure a favourable international environment for itself. This starts with good relations with its neighbours, especially China. It has to open itself further to the outside world. Therefore, I welcome Japan’s participation in the Trans-Pacific Partnership (TPP) negotiations, an FTA covering both sides of the Asia Pacific, including the US, and Singapore is part of the negotiations too. Japan joining this is a signal to its own people that it wants to revitalise itself, to contribute to the prosperity of the broader Asia Pacific region. It is an example interesting in itself, but also an example of how difficult it is for countries to reinvent and transform deep characteristics of the country. And therefore, to come back to China, we wish China every success. We wish China every success because we believe that China has a role to play in the peace and security of the region, which is the fourth critical factor relevant to all the emerging economies.

Peace and security has been the basis for Asia’s progress since the war. All our projections and assessments and people plotting charts and calculations, how fast you are going to grow and when you are going to reach middle income status and so on, all those assume one big unspoken presumption, that the region will remain peaceful and stable, that there is no war – otherwise all bets are off. There are potential hotspots in the region. There are territorial disputes – between China and Japan, between Korea and Japan, in the South China Sea between China and many ASEAN countries; there are tensions in the Korean peninsula; there is a problem we have with extremist terrorism, including the growing threat of people self-radicalising, making themselves believers of these extremist, radical views, just by going on the Internet. These problems have (always) been there. If you ask me, over the last one year, they have not diminished. In some cases they have become more difficult, for example on the territorial disputes. So we cannot neglect tensions and risk of mishaps, which may well jeopardize the overall climate of peace and stability. But these are individual issues. In the longer-term, the biggest determinant of regional security is China’s peaceful development and integration into the regional order. This is a major shift in the global balance and so far, it has been executed remarkably smoothly. China has integrated well into the international order. It participates in WTO, G20; it has an interest in a peaceful environment with which it can do business, and which can free it to focus on domestic issues. But the process is not complete. China will continue to grow economically, and it will also continue to strengthen and modernise its armed forces. It is a major continental power; every power needs to do this. China also aspires to be a maritime power, and Mr Xi Jinping has personally championed China’s efforts to do this. So this will create new realities and push it towards a new balance. Both China and its neighbours will have to continue to adjust to this new situation. It is essential that this process, the journey, be peaceful and be based on equal, win-win relations. This will be welcomed by China’s many friends and partners, especially in Asia.

These four issues will shape the prospects for Asian economies, particularly the emerging ones. We cannot guarantee that all countries will manage them successfully, but on balance, I am confident of the future of Asia. In big countries like China and India, even if one part of the country, or the country as a whole encounters difficulties, that will not necessarily prevent individual provinces/states or cities in the country from forging ahead and doing well. If you look at India, you will see a very varied landscape where there are many bright spots and many cities and states which are pushing on their own and overcoming the problems of the broader subcontinent. Furthermore, Asia is home to more than half the world’s population – a population which is driven, talented, hungry to get ahead, and wants to change the world. They have seen others succeed, and they want to do the same for themselves and their families. I think it is presumptuous to think that none of them will join the ranks of developed countries in the next 20 to 30 years.

SINGAPORE AT THE HEART OF GLOBAL-ASIA

Singapore faces these issues too. We are not at the developing country income level anymore, but we face many of the same challenges that they do. In terms of demographics - we are an ageing society, anticipating and preparing for a rapid ageing population, and doing our utmost to encourage Singaporeans to have more babies. Alas, with limited success. We are undergoing generational changes too, rapidly, and are educating and engaging our youth to build a better Singapore for themselves. We are pushing for economic transformation, upgrading, and inclusive growth, so that there are benefits for the whole society. We are strengthening safety nets, so that we can prepare for the uncertainties ahead. And we hope and we work for peace and stability, together with ASEAN and external partners to promote a stable, predictable, open, regional environment.

We are preparing ourselves for a bright future in this new world. We are exploiting our Global-Asia position - connected to the world, located in Asia. We are staying wide open to talent and investments. We are connecting ourselves to the world, e.g. I mentioned the TPP, we have also completed negotiating a FTA with the EU, and we also are part of another FTA on the West side of the Pacific Ocean - the Regional Comprehensive Economic Partnership. We are serving as a bridge for Asian companies expanding globally, e.g. Amorépacific (South Korean cosmetics company whose Asia Pac HQ is in Singapore), Mitsui Chemicals (Asia Pac HQ and first R&D centre outside Japan in Singapore). We are a base for Western companies venturing into Asia, e.g. Halliburton (Manufacturing & Technology Centre for Eastern Hemisphere), IBM (Services Control Tower for Asia-Pac region), functions here which utilise Singapore to coordinate and manage operations all over the region. At the same time, we are helping Singapore companies internationalise, e.g. Olam, Keppel, SingTel. Traditional markets, developed countries, new markets. We have a Singapore company which does a very big business selling used cars all over Africa. And out of Singapore, setting up an operation here, to manage and oversee the business in all these countries, doing very well. We will do the same with Latin America, even though that is further away. We are upgrading our capabilities - transforming our businesses, investing in our people, through education and lifelong learning. We are creating new possibilities and overcoming our physical constraints, e.g. expanding Changi Airport. We are going to move one of our airbases, a big airbase, from Paya Lebar to Changi, free up land, airspace, height constraints, enable a big chunk of Singapore to be redeveloped over the coming decades. We are moving our port from Tanjong Pagar, where it has been for more than a century, to Tuas, where we are building a new one, bigger and better. That will free up another big piece of land, where we will develop, practically, a new Southern Waterfront City. We are seeking to unleash the human spirit and imagination in Singapore.

SINGAPORE SUMMIT

The Singapore Summit is one example of how we can unlock new possibilities and ideas. It is a natural and even platform to bring together thought leaders and successful practitioners from East and West. You will discuss significant Global-Asia issues – the current slowdown and uncertainties, the developments in China and Southeast Asia, the business models for succeeding in Asia. All of you have extensive experience and valuable insights to share. So I hope you will contribute as well as benefit from the discussion and the insights.

I hope you enjoy the Summit, and also make time to enjoy Singapore, as well as the entertainment and revelries that happen this weekend.

Thank you very much!

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