36th Storey, PSA Building, 460 Alexandra Road, Singapore 119963.

Tel: 3757794/5

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Professor Thomas Gerrity

Dean, The Wharton School

Distinguished Guests

Ladies and Gentlemen

I would first like to thank the Wharton School for inviting me to address you at the 6^th Asian Regional Meeting’s Wharton Asian Forum.

In the light of the economic upheaval that the region has experienced over the past 1½ years, the theme of the Forum ‘Survival, Recovery and Prosperity’ is indeed timely and appropriate. I will first address these issues with regard to the economic situation in East Asia. I will then deal, in particular, with Singapore’s strategies to cope with the regional economic crisis and the measures we are taking to position Singapore for sustainable economic growth and long-term prosperity.

As you would recall, the economic crisis in Asia started in July 1997 with the devaluation of the Thai baht and spread rapidly throughout the region. This plunged hitherto robust East Asian economies into deep recession which saw some of them battling for survival.

The causes of the economic crisis are beginning to be identified. Over-investment in certain sectors of the economy particularly property, fuelled by imprudent lending practices, led to an asset bubble in several East Asian economies. With the subsequent deflation in asset capital value, many companies ran into financial difficulties, resulting in high levels of non-performing loans. Inherent institutional weaknesses in the financial, legal and corporate systems in some countries increased the risks of capital liberalisation.

Investor doubts about several countries’ ability to continue servicing huge amounts of accumulated foreign debt resulted in speculative assaults on the regional currencies. The consequent loss of investor confidence led to massive capital outflows and plunges in the values of several East Asian currencies, notably those of Thailand, Indonesia, Malaysia and South Korea.

The initial efforts of these countries to stem the tide of currency devaluation resulted in a severe drain on foreign currency reserves. The sharp currency depreciation exacerbated these countries’ difficulties in making payments for imports. High interest rates resulted in a collapse of industrial production, and a sharp drop in private consumption and investment. After years of high economic growth, most economies in the region suffered contraction or experienced slower growth in 1998. The effects of the economic turmoil – massive unemployment and a sharp increase of people living below the poverty level – spilled over into political and social turbulence, notably in Indonesia.

Singapore and Taiwan were relatively less affected, a result of sound economic policies and prudent financial supervision. However, as open economies with close economic ties and substantial financial exposure to the region, they did not escape unscathed. Singapore saw a decline in its real GDP growth from 8% in 1997 to 1.5% in 1998. The number of workers retrenched also rose to an unprecedented 29,000. Likewise in Taiwan, diminishing demand from crisis-hit regional economies led to a plunge in exports by 9.4% in 1998, compared to an increase of 5.3% in 1997.

GDP growth also slowed to 4.8% in 1998, the lowest in 16 years.

In the battle for economic survival, governments in the region have begun to reform their economies in response to the crisis. Korea and Thailand have adopted IMF prescriptions. For example, in addition to making the restructuring of its chaebols a priority, Korea has instituted new labour and bankruptcy laws, as well as opened its doors to greater foreign investment.

Although Indonesia has also accepted IMF measures, progress has been hindered by political and social uncertainties. Malaysia has taken a different route to resolving its economic problems, adopting capital controls to shield itself from external influences.

To remain competitive in the global economy, Singapore introduced a US $6.3 billion package of comprehensive cost-cutting measures in November 1998 covering all major components of business costs. These included a 15% wage cut and 30% reduction in rentals of industrial properties.

Singapore is also proceeding with progressive deregulation in the financial sector with more areas being opened to greater competition and investment. On 17 May, Singapore introduced a significant package of measures to liberalise and develop its commercial banking sector. Restrictions on foreign banks in the domestic retail sector were lifted, including a removal of the 40% limit on foreign ownership of local banks.

The regional economic outlook has brightened over the past few months. The reforms adopted by crisis-hit countries in East Asia have begun to take effect. Boosted by continued growth in the US and EU economies in the first quarter of this year, signs of recovery have emerged over the past few months, particularly in Korea, Thailand and Malaysia.

Current account balances have stabilised, restoring foreign reserves to healthier levels. In Korea, for example, international reserves increased from US$33 billion in the second half of 1997 to US$59 billion in the first quarter of 1999. Useable reserves have also recovered to pre-crisis levels.

This has led to Korea’s recent announcement of partial repayment of the IMF’s loan package.

Regional currencies have also stabilised. Since mid-1998, exchange rates have strengthened by an average of 12%. In Indonesia, for example, the rupiah has recovered from a low of Rp13,000 to the US dollar, to Rp 8,600. With the stabilisation of regional currencies, a significant fall in risk premia has seen interest rates in Thailand and Malaysia drop to pre-crisis levels. This return in confidence, marked by a return of institutional funds to the region, has helped regional stock markets recover.

The more positive outlook has stemmed largely from the efforts of extensive corporate and banking reforms. As a result of the systematic buy-out of non-performing loans and sell-off of under-performing assets in the banking sector by independent asset management outfits, hitherto crippled banks have resumed lending to companies. This has been a key factor in the revival of industrial production and exports in the crisis economies. As inflation and interest rates have eased, consumer spending and confidence have also started to pick up. In line with the more positive financial indicators, the trend of negative GDP growth in 1998 is beginning to be reversed this year.

In particular, the resolution of the high levels of non-performing bank loans will remain critical in underpinning the economic recovery for Asian economies undergoing reforms. In Thailand, the recent passage of two landmark bills pertaining to bankruptcy and foreclosure laws is a demonstration of the Thai government’s commitment to push through necessary reform measures.

Genuine, rather than cosmetic, reform is essential in retaining and attracting fresh investment. The relationship between government and business is now under closer scrutiny than before – investors expect greater transparency, more effective legal structures and closer financial supervision.

It is not a coincidence that, Thailand and Korea, the two countries which have undertaken extensive reforms, are widely considered to have made the most progress in their economic recovery.

However, given the deeply entrenched cultural and institutional practices in the crisis-hit economies, fundamental change cannot be expected overnight, but is likely to take place only gradually. Regional governments ignore, at their peril, the potential short-term social disorder and political instability that can arise from massive economic dislocation resulting from the process of reform. A difficult balance will have to be sought and maintained between implementing necessary but painful reforms, and coping with the socio-political repercussions of the reform efforts. The continuity and success of Indonesia’s institutional reforms, for example, will depend on the results of the coming elections in 2 days’ time on 7 June, and the maintenance of socio-political stability is vital to the process of economic recovery.

Long-term economic prosperity for the Asian economies depends on more than institutional and corporate reform. In the increasingly globalised and knowledge-driven economies of the 21^st century, a nation’s economic competitiveness will be sustained not only through the ability to manufacture goods and provide services. Nations will also need to create new products and services, and invent new designs to reach and carve out new markets. Hence, human capital and technology, rather than vast natural resources, a large population and physical capital, will be critical in determining a nation’s competitive advantage.

The key products of a knowledge economy will be dependent on the creation, dissemination and application of knowledge and information. The key resource of a country will be a skilled and creative people who are able to adapt to the fast pace of change, continually learn and upgrade their skills and knowledge, and, most importantly, create and sustain value through innovation, particularly in science and technology.

As a small country without abundant natural resources, Singapore’s most important resource is its people. Singapore’s response to the challenges of the future is to take pro-active measures to enhance its capabilities to compete in the long-term and prepare its citizens for the knowledge-based economy by investing in infrastructure and developing human capital.

Information technology and e-commerce will increasingly offer new challenges and open up extensive business opportunities. By the year 2003, it is projected that Internet commerce will amount to US$1.4 trillion. In recognition of the importance of being connected to the global network of information, we have taken measures to develop information infrastructure such as "Singapore ONE", the world’s first nation-wide, high-speed, broadband network and applications. By next year, almost every home, school and business in Singapore will be wired up. "Singapore ONE" can then serve as a test-bed for cutting edge technologies, services and new businesses.

Singapore’s Economic Development Board’s vision of "Industry 21" (or I21) aims to position Singapore as a vibrant global hub of knowledge driven industries in sectors such as electronics, chemicals, engineering, life sciences, education, healthcare, logistics, communications and media. Emphasis is placed on the quality of high value-added and knowledge driven industries, both in manufacturing and exportable services. Hence, I21 seeks to increase technology transfers from investors and create new demand for enhanced capabilities. Of the 20-25 thousand jobs I21 aims to create each year over the next 10 years, 70% will be for knowledge and skilled workers.

The cutting edge of a knowledge economy is a strong, vibrant technopreneurship i.e. "technological entrepreneurship" sector which will provide the additional boost to drive the whole economy forward by infusing a culture of creativity, innovation and risk-taking in society to create an environment where people seek to identify opportunities and exploit intellectual property to sell to the global market. To encourage the development of technopreneurship , Singapore announced in April a series of initiatives centred on upgrading education, relaxing regulations, creating facilities and providing finance to foster the growth of hi-tech enterprises in the Republic.

As skilled manpower is a critical resource in a knowledge-based economy, manpower development, both in pre-employment and continuing education, will take on greater significance. Training programmes with government funding have been put in place for workers at all skills levels.

US$30m have been set aside to train engineers over the next 2-3 years to ensure a supply of skilled manpower to high technology industries. The government has also contributed US$72m to a Skills Redevelopment Programme to encourage older and less educated workers to upgrade their skills.

In recognition of the strategic role that education plays in enhancing national competitiveness in the next phase of economic growth, the Singapore Government has continued to invest heavily in education. Despite the economic downturn, Singapore’s 1999 education budget was 14% higher than that in the previous year. Spending on pre-employment and continuing education in this financial year will constitute 5% of Singapore’s GDP. US $1.2 billion has been set aside for providing our students with the computer software, hardware and training necessary to cope with the knowledge age of the new millennium. There have also been new initiatives in our schools in terms of curricular and extra-curricular programmes that will foster a more conducive school environment for independent learning, creativity and innovation.

We are also seeking to build a high-quality university sector through the development of our local universities into world-class institutions of academic and research excellence. These efforts are complemented by the attraction of top foreign universities such as MIT, Johns Hopkins University and INSEAD to collaborate with our universities or set up independent branch campuses in Singapore.

In this context, we are privileged to have the Wharton School’s involvement in our newest and third university, the Singapore Management University (SMU), which will focus on management and business-related disciplines. In February this year, Wharton and SMU signed a collaboration agreement that covered curriculum and institutional development, and faculty and student exchanges for SMU’s forthcoming undergraduate business programme. Wharton and SMU are presently discussing a further agreement which will extend their collaboration into research activities. We hope to be able to tap on the expertise and support of Wharton’s faculty and extensive alumni network of public and private sector leaders while offering Wharton a "beach-head" in Asia to extend its presence and influence.

The causes, effects and lessons learnt from the Asian economic crisis will continue to be analysed for many years to come. The difficult task of balancing social and political change with economic reform is something that each Asian country has to grapple with. Wharton can play an important role in the future growth and prosperity of Asian countries by contributing to the development of human resources, educating the people who will be the knowledge workers of the new millennium. Wharton will, in turn, benefit from the experiences of its international alumni as they provide feedback on how they tackled the unique problems in their countries. Through this symbiotic relationship, we will not only move forward the frontiers of learning. We can hopefully move all Asian economies to the next stage of development, and, in the process, provide a better quality of life to all their citizens.

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