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Mr Chairman, President of the Council of the European Union, Fellow Ministers.

GDP growth in Asia moderated slightly last year, to 6.9% from 7.3% in 1995. For some economies, the slowdown had come as a welcome breather. China saw double-digit growth rates in 1992-95, while Malaysia, Thailand, and Singapore, had above 8% growth for much of the 1990s. The slowdown in growth was accompanied by a general easing of inflationary pressure. The inflation rate in Asia declined to below 5% in 1996 from 6.6% the year before.

The currency turbulence in Southeast Asia has taken economic centre stage in Asia this year. Speculative attacks on the Thai baht has spread to other Asian currencies, so that even the currencies of the Philippines, Malaysia, Indonesia and Singapore came under selling pressure against the US dollar.

Uncertainties in foreign exchange rates, if prolonged, could have a negative impact on short-term growth in Southeast Asia reflecting higher interest rates and a more cautious investment sentiment. I believe, however, that the concrete measures announced to address current account deficits and other investor concerns have been well received by the financial markets, and I expect that confidence in Southeast Asia will be restored fairly soon.

Asia – and especially Southeast Asia – will also benefit from a recovery in external demand from the second half of this year, after the region-wide slowdown in exports last year. Favourable global economic conditions are underscored by robust growth in the US and Europe. There are firm indications that the global electronics market, which has become increasingly important to Asia, has bottomed-out and is on a strong recovery path. A protracted slowdown of regional growth is thus unlikely at this stage.

The recent events in regional financial markets have called attention to the wider implications of the globalization of financial markets. Advances in information technology and the widespread trend towards financial deregulation have contributed to the tremendous increase in the speed and magnitude of financial flows since the mid-1980s. The early 1990s saw a surge of funds into emerging Asian markets, in search for higher returns and opportunities for risk diversification.

Many Asian countries benefited from this. The inflow of foreign funds, in the form of direct investment as well as portfolio capital, supported the industrialization needs of the region, by facilitating the transfer of technology, and plugging countries' savings-investment gaps. This free flow of capital continues to offer opportunities for efficiency and welfare gains for Asian countries.

Financial markets also have a role to play in providing discipline to the conduct of macroeconomic policy. They provide early warning signals, alerting governments to the need for decisive policy action, in light of changing economic conditions.

However, recent events have reminded us that while financial markets are a useful barometer of economic conditions, they can take on a life of their own. Market reactions can be exaggerated. In large part, this is due to the limited depth and size of financial markets in many parts of developing Asia. A minor reallocation of the emerging country portfolio by global fund managers can have a destabilizing effect on currency and stock markets in the region, and implications for the real economy that are disproportionate to the initial perceived source of economic imbalance.

However, there is no going back to the days of extensive capital controls. The challenge for Asia is how best to reap the gains from capital flows while managing the risks associated with these flows.

Governments across Asia confront the ongoing task of adopting an exchange rate regime that is best suited to their individual needs and circumstances. For Southeast Asia in particular, the issue has taken on greater urgency.

The currency turbulence has been attributed to overly rigid exchange rate regimes. Most people would agree that an inflexible exchange rate system could pose a moral hazard problem by encouraging domestic residents to borrow cheaper funds from abroad. It also accentuates financial market instability during a period of economic stress. I would also argue, however, that the opposite – that of a fully flexible exchange rate regime – is an equally frightening prospect, if only because it is, as yet, untested in much of Asia. Will the open economies of Southeast Asia, with the limited depth of existing financial markets, lead to excessive volatility in exchange rates? With all their faults, exchange rates that are linked to major currencies provide certainty to manufacturers and exporters who sell in global markets, and just as importantly, they appeal to international fund managers who take comfort in stable exchange rates.

In my view, Asian countries, with the exception of Japan, are likely to move toward some form of flexibly managed exchange rate system, rather than a purely floating one characteristic of industrial economies. The move away from fixed exchange rates is not new. The currency turbulence affecting Southeast Asian economies obscures the fact that many of them already have more flexible exchange rate regimes than they did 10-20 years ago. The current rethinking is thus on the pace of change, rather than on the need for it. Domestic financial systems need time to adapt to greater flexibility in exchange rates. For example, new financial instruments have to be developed that allow for hedging of currency risks.

Policymakers also need to be clear on the objectives of monetary policy. Industrial countries typically adopt some form of inflation or price level targeting as the sole focus of monetary policy. Asian countries will need to arrive at their own set of policy instruments and targets appropriate for their given economic circumstances and national objectives.

On this, I would be interested to hear comments from my Asian colleagues, as well as our counterparts from Europe.

To conclude, the present concerns about exchange rates should not detract from other long term challenges in Asia. Foremost among these is the need to devote more resources to human capital development. Following a period of sustained high growth, several Asian countries are reaching the limits to growth based on abundant and cheap labour, or continued infusions of capital. Other developing regions, in Africa, Latin America, Eastern Europe and South Asia will compete for capital, and in the exports of low-end manufacturing products. Asia will have to concentrate on improving the quality of its labour force to facilitate the transition to higher end and more skills-intensive production.

On balance, I believe that the long-term outlook for economies in Asia, including those of the ASEAN region, remain promising. Governments in Asia have always been pragmatic. They will adhere to the fundamental principles that have served the region well in the past, including fiscal discipline, openness to trade, and government interventions only in directions encouraged by the market.

I now pass the floor back to the Chairman.

Thank you.