Commonwealth Club Lecture
Ladies and gentlemen,
I am delighted to be back in San Francisco, one of the world’s great cities. And it gives me great pleasure to join you here, at one of America’s most beloved forums for public debate.
Our subject tonight is one that occupies some of the finest minds in my continent and yours: the rise of Asia.
Fifty years ago, Asia accounted for less than 15% of global output; today it is more than 40%. Within a single generation, the most populous region on earth became one of the most prosperous. China’s relentless growth has been the dominant story of the early twenty-first century, but it is by no means the only high achiever. Fifty years ago, South Korea’s economy was smaller than Mozambique’s; today it is almost equal to the whole of sub-Saharan Africa. Fifty years ago, Kuala Lumpur was not even classed as a city; today it is twice as big as San Francisco.
Asia’s remarkable economic development – perhaps the fastest in history – has been accompanied by waves of political reform. A few decades ago, there were only a handful of free societies in Asia. Today, the Philippines, Taiwan, Korea, Malaysia and Indonesia – between them, home to 400 million people – have joined the growing list of vibrant Asian democracies.
Much has been written about this extraordinary phase in Asia’s development, and what it means for the global order; often from the perspective of the main protagonists – a surging China, and a resurgent America. But Asia – the world’s most populous region – is about much more than one country, or one relationship. New centres of wealth and influence – and new pressures and hotspots -are emerging throughout the continent. It is too complex a picture to see through the lens of US/China relations alone.
After all, Asia’s 4.3 billion people speak hundreds of languages; they live amongst the world’s biggest cities, highest mountains, most remote islands. Asia has a larger middle class than Europe, and is home to more billionaires than North America; yet a quarter of its people live on less than $2 a day, and pressure on its resources is relentless. It is a vast and varied continent: more than four thousand miles separate Karachi from Kyoto, but the cultural and economic distance between them is greater still.
It is this diversity – these contrasting trajectories – that makes Asia’s future so difficult to predict. To understand Asia’s development, and where it is headed, we must seek a number of vantage points. Just as a spotlight cannot illuminate the whole stage, so a single perspective cannot put Asia’s growth into context. To understand the implications of Asia’s rise, and to build an image of what it will look like in the future, we must take multiple exposures and combine them into one. It is with this principle in mind that I would like to approach our subject tonight: Asia’s future, as seen from a Malaysian perspective.
Ladies and gentlemen,
Our nation is a bridge between cultures, markets and ideas. And it is the embodiment of Asian diversity: a multiracial, majority Muslim nation, with the third-largest Chinese population outside of China and more than 130 living languages. Our urban landscape is a heady mix of temples and mosques, colonial architecture and glittering skyscrapers. Malaysia is home to the world’s oldest rainforest and largest flower; to indigenous communities living in longhouses and Asia’s first internationally linked stock exchange. And by 2020, it is set to become the first nation this century to make the leap from the developing to the developed world.
Many of the issues facing Asian societies – such as the recipe for economic development, and the nature of sustainable growth – are being explored in Malaysia. It is a useful lens through which to examine the rise of Asia; and to consider the opportunities and challenges it poses – starting with economic development.
In the fifty years since independence, Malaysia’s GDP has increased more than a hundredfold. Over the past four decades, we have averaged nearly 7% annual growth. Poverty rates have fallen from 49% to less than 4%. And per-capita GDP has risen from US$370 to more than US$9,000.
This growth has been matched by a fundamental change in the structure of our economy. Like many Asian countries, we have moved from an economy based on agriculture and raw commodities to a multi-sector economy driven by services and manufacturing.
How did we get here? Successive governments set a clear direction for the country, using macroeconomic policy to achieve strategic aims. These interventions were not strictly ideological in nature, but reflected emerging national priorities: in the 1960s, consolidation and unity in the aftermath of colonialism. In the 1980s, industrialisation and foreign investment. In the 1990s, diversification into high-value manufacturing and services, and recovery from the Asian financial crisis. And in the new millennium, financial services, free trade agreements, and a growing emphasis on domestic demand.
Malaysia’s economy has been more centrally planned than some Western nations are used to. And we have defied economic orthodoxy on occasion, too; during the Asian financial crisis, we rejected the IMF’s erroneous prescriptions, and recovered faster than our neighbours. But our story is neither one of the state choking off the private sector, nor a ‘big bang’ of deregulation: it is about gradual and managed reform to open our economy.
It is with this in mind that, in 2010, I launched the Economic Transformation Programme, a comprehensive plan to help Malaysia meet the World Bank’s threshold for a ‘high income nation’.
The programme identifies key sectors for investment, and prioritises policy reforms to make growth possible. It also has a clear vision for the kind of economy it wants to create: one where services take a greater share of economic activity, and where the state manages down its involvement in industry.
Since its introduction, per capita GDP has increased by 49%; and we are on track to reach high-income nation status ahead of schedule. By working closely with the private sector, and opening up policymaking to public and business involvement, we have changed the structure of the economy, and taken a significant step forwards in our development.
This policy package is accompanied by government and political transformation programmes, designed to reduce crime and corruption; improve education, infrastructure and public transport; and also to remove outdated and repressive laws, some of which date back to colonial times.
For many Asian societies, judging the pace of such political reform remains of critical importance. Although Asia’s democratisation has been impressive, it is not yet complete. Finding the precise balance between individual rights and public security has been the task of democracies for centuries; understanding how far Asian societies should go, and how fast, is for Asians themselves to figure out. But we should not neglect the direction of history, which leads us not into repression but towards greater liberty.
In Malaysia, I believe that by opening up politically and economically, our reform programme will allow us to remain competitive in an increasingly connected world, and on course to reach developed nation status.
Ladies and gentlemen,
When that threshold is crossed, it will be a significant moment in our nation’s history. But we understand that development at the expense of people or the environment cannot be lasting. For Malaysia, and for Asia, development must be both inclusive and sustainable; the new economic powers cannot repeat the mistakes of the old. As Asian nations such as my own strive to become high-income developed nations, and as emerging economies push for a place on the middle-income ladder, they must ensure social development is not sacrificed in the name of growth.
For all the extraordinary statistics about investment and expansion, Asia remains home to two thirds of the world’s poorest people. And the gap between haves and have nots, as wealth concentrates in the hands of the wealthy. Divides are opening up between urban and rural populations. Locked out of economic opportunity, too many Asian people lack access to basic social infrastructure – sanitation, healthcare and housing.
If we do not give all of our citizens a stake in our region’s future, we risk encouraging ethnic tensions, religious extremism, and political instability. That in turn imperils the very objective we seek: a more prosperous and harmonious Asia. So we must ensure development brings economic opportunity for all, not riches for a few; that it expands not just nominal GDP figures, but also critical social infrastructure.
The work starts at home. Many Asian economies are affected by corruption, which crushes individual endeavour and harms social cohesion. Corruption not only suppresses meritocratic opportunity, but eats away at people’s confidence in the institutions and power of the state; it should come as no surprise that it was mentioned so often as a factor behind the Arab Spring.
I want to make corruption part of Malaysia’s past, not its future. And that means changing organisational as well as business cultures. I have created a new governance and integrity minister role in the cabinet; it is held by the former president of the Malaysian chapter of Transparency International. And we have elevated our anti-corruption agency – which answers annually to a parliamentary special committee on corruption, an independent advisory board, and a complaints committee – to self-regulated, independent commission status.
It is our hope that the commission may serve as an example for other countries looking to build the institutional capacity to combat corruption. After all, for governance and commerce alike, the most vital currency is trust. If we deliver what we have promised to the people – in this instance, a concerted fight against corruption – and deliver consistently over time, that currency will appreciate. The reward is not just a more open and transparent business environment, with more vibrant markets and greater opportunity, but also a renewed faith in the ability of governments to change things for the better.
I also believe Asian states must look to build stronger, more lasting economic connections – both within our region, and with the outside world. The trend towards greater financial integration across borders can not only help developing nations climb the ladder, but also ensure fewer citizens are left behind, as common standards and entry requirements filter back into domestic policy.
As a founding member of the Association of Southeast Asian Nations, Malaysia also supports the push to create a single market in Southeast Asia. It is my hope that the ASEAN economic community will bind us together in the service of common goals, providing greater depth of opportunity for citizens across the region. A thriving single market will support jobs, growth and increase the standard of living for more than half a billion people; it will also ensure that Asia’s remarkable growth story spills across into all member states. That in turn is the ultimate guarantor of Asia’s success; not just in base economic terms, but in meeting the highest ambitions for its development.
But in an interdependent global economy, the benefits of greater co-operation extend far beyond Asia’s borders. That is why I look forward to the completion of the Trans-Pacific Partnership, which will strengthen our ties with the wider world; and the Regional Comprehensive Economic Partnership, which will bring three of the largest economies into the world’s largest trading bloc.
Finally, as Asian nations open up to the global economy, we must also do our best to encourage and practice responsible capitalism.
In many countries, public confidence in financial industries is wavering, as ordinary people reap the unhappy harvest of bets gone bad. Some banks over-reached, abusing the trust of shareholders and other market participants; and when systems failed, taxpayers were asked to pick up the bill.
In the countries hardest hit by the recent financial crisis, that led to serious questions: about whether banks are properly equipped to assess risk, about whether their current business model is appropriate.
Economists are also asking whether the business model that puts shareholder value above all else is truly sustainable: not just for companies, but for whole economies. Here in the US, for example, the relationship between corporate profits and business investment appears to have broken down; profits are at record highs, but investment is not keeping pace. It appears that the focus on short-term results, rather than the long-term health of the company, is warping the investment landscape: one study found that privately listed companies invest almost twice as much as publicly listed companies.
Together, these conversations – about the nature of good growth, the real value of companies, and trust in the financial system – add up to something bigger. Around the world, there is an ongoing discussion about the nature of the modern market economy; about how capitalism can serve people and nations, not just businesses. Policymakers are now preoccupied with the quality of growth.
China’s attempts to focus the next phase of its development on quality and efficiency represents one strain of this anxiety; so do the ongoing conversations about the role of financial sector in Western economies. The common thread is one of corporate responsibility; of accountability not just to the immediate bottom line, but also to the society which enables transactions to take place.
One of the primary lessons from the 2008 financial crisis was that short-term business decisions can fatally undermine the health not just of companies, but of whole economies. It is incumbent on policymakers to guard against them, and on corporate leaders to avow them.
In laying the foundations for high-income status in Malaysia, we must all be careful not to encourage unsustainable growth. So we will honour our commitment to secure the public finances, with fiscal reforms to secure Malaysia’s position. We will further rationalize subsidies, broaden the revenue base and manage spending through the infrastructure pipeline. We will act to support the ringgit when necessary, and we will stick to both our debt ceiling and our deficit reduction target.
And we will also work to ensure Malaysia’s growth industries rest on firm foundations. We want a vibrant and dynamic financial sector; but we have also set up clear regulatory structures, giving our central bank greater supervisory oversight and enhanced financial surveillance. Having been through a financial crisis in the last century, we were more prepared for the 2008 crash: with better governance, capitalisation and liquidity requirements for financial institutions.
Academic studies show that decision making – and financial performance – improve when boards are more diverse. So we are also looking to safeguard the economy by increasing corporate diversity. By 2016, 30% of boards of directors in Malaysian companies must be women.
We have also made a strategic pitch for the global Islamic finance market. For investors who have been buffeted by the financial crisis in Western markets, Islamic bonds offer an alternative growth model. No investment is without risk, and this relatively young market will still have the occasional growing pain. But by its very nature, Islamic finance is not prone to the same excesses which so damaged the world economy; because speculating is forbidden and interest is prohibited, returns are based on profit sharing alone.
It not surprising that sukuk is the fastest growing financial instrument in the world. Ten years ago Malaysia issued the world’s first sovereign ‘sukuk’, or shariah-compliant bond; today we account for nearly three quarters of the global market, and have increased public participation by issuing retail bonds open to the general population. It is one way of increasing economic participation; strengthening our economy as a whole, and giving the people of Malaysia a greater stake in our nation’s success.
By encouraging a culture of responsibility and ethics, as described by clear an universal standards, we can make a valuable contribution to the debate about how market capitalism can benefit modern society. We can also make a significant improvement to the future health of our economies.
Ladies and gentlemen,
That health is, of course, dependent on the health of the biosphere. As a famous San Franciscan said, ‘business is a subset of the environment, not the other way round’. And it is here that Asia’s sustainability challenge is perhaps most pronounced.
Asia sits at the crux of the climate problem. Thanks to our geography, natural disasters already take a disproportionately heavy toll on our people and our economies. More people are at risk from climate change in Asia and the Pacific than anywhere else. But we are also fast becoming one of its main causes.
Asia will produce more than 40% of the world’s energy-related greenhouse gases in the next decade. Deforestation – which already accounts for 17% of global carbon emissions – is one of our continent’s biggest issues. As our countries modernise, commanding greater energy resources, Asia’s development model will be of global significance. So too will our approach to climate diplomacy.
The answer is clear: We must commit, globally, to binding carbon cuts. The United Nations remains the best hope for securing a settlement on global terms. All countries should stand in favour of emissions reductions, and unite behind the promise of the global low-carbon economy. But until such an agreement is signed, we must also pursue clean energy projects, and low-carbon policies, at the national level.
Ladies and gentlemen,
These challenges -of economic development and sustainable growth – will test Asia’s capability, and its resolve. They will not be met without a commitment to co-operation; without the investment of time, resources, and political will.
But I believe we will do it. I believe in Asia’s potential. I believe in Asia’s ability to find sustainable growth models, not unbalanced ones; to create opportunities for all, rather than wealth for a few; to choose clean energy over climate change. I believe we can make the hard calls required to sustain peace and prosperity in an age of dizzying ascendance.
Over the past decades, great change has come to Asia; even greater change awaits. By choosing to work together, to look not for dividing lines but for common ground, we can ensure that change brings better lives for our citizens, and better futures for our countries.