STATEMENT OF AMBASSADOR PAUL WOLFOWITZ

FOR THE

HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES

HEARING ON THE ASIAN FINANCIAL CRISIS

January 30, 1998

Mr. Chairman, Distinguished Members of the Banking and Financial Services Committee:

It is a privilege to be able to address this important body on the subject of the Asian Financial Crisis and I appreciate the invitation.

My name is Paul Wolfowitz and I am the Dean of the Paul H. Nitze School of Advanced International Studies of the Johns Hopkins University, also known as SAIS. As proud as I am to be the Dean of that distinguished institution of higher learning, I am not here today to represent the School but rather to present my personal views, based on my previous government experience in a number of positions, most significantly for our discussions today as Assistant Secretary of State for East Asian and Pacific Affairs from 1982 to 1986 and as United States Ambassador to Indonesia from 1986 to 1989, but also as Undersecretary of Defense for Policy from 1989 to 1993. I will also draw on knowledge acquired in the subsequent four years during the course of establishing a program in Southeast Asian Studies at SAIS and as a consultant to some American firms investing in Asia.

I am not an economist or a financial expert, and the array of distinguished economists that have appeared before me and that are with me on the present panel are unquestionably intimidating. However, while this is a financial and economic crisis, its causes are in some respects political and its consequences are potentially strategic and it is those aspects of the crisis which I assume you want me to address.

In this brief statement I would like to make three points:

1) It is wrong to use terms like "bail out" in referring to the possibility of U.S. support to the troubled economies of the region. That suggests an act of pure charity when in fact we have important interests as a country in helping Asia to recover as fast as possible.

I should leave to the economists the question of whether a Great Depression in Asia could threaten the extraordinary prosperity that the United States enjoys today, and I am somewhat reassured that the consensus among economists seems to be that the effects of Asia on our economy are relatively small. However, this is not a matter on which we can afford to be wrong, and our track record of predicting the course of economic and financial events over the last eight months ought to inspire a bit of modesty and caution.

In any case, there are other dangers to consider beyond the purely economic ones. Despite its present difficulties, East Asia is already one of the most important power centers in the world and when it resumes its impressive economic growth -- as it most probably will -- it could become the most important center of world power as early as the first quarter of the next century. It also has perhaps the least well-established relations among major powers of any region of the world. The most immediate danger is on the Korean Peninsula where North Korea’s enormous military buildup creates the largest military threat to peace in the world today, and one which U.S. forces are committed to deter.

But that is not the only danger we should be concerned about. We are fortunate that relations among the other major powers of the region are relatively peaceful today, astonishingly peaceful when compared with the bloody history of this century in Asia from the Russo-Japanese War in 1905 to the Vietnamese withdrawal from Cambodia at the beginning of this decade. But it would be a mistake to be complacent about a peace that is so recent in a region that continues to have many latent animosities and unresolved sources of conflict. The United States has a large stake in preventing the kind of prolonged economic misery that could produce domestic upheavals in key countries of the region, instability which in turn could increase both the short- and long-term dangers of war. Because such a situation would create great dangers for the United States as well, we need to do what we can to prevent it.

2) While there are legitimate questions about the role of the IMF, this is not the time to undertake wholesale reform of the IMF and certainly not the time to abandon it.

There are important questions to be asked about whether the policies that the IMF pursued in the past in Latin America and other developing economies are the right policy prescriptions for the very different economies of Asia; there are questions about whether those were the right policies even for the countries where they were applied in the past; there even fundamental questions about whether the whole notion of the IMF as lender of last resort creates a situation of "moral hazard," where people make bad economic decisions because they do not bear responsibility for the results. There will be time enough to consider major international financial reform later. Right now, there is a huge fire burning. The time to reorganize the fire department or to question whether fire insurance makes people careless about fire prevention is not when the whole neighborhood is burning down.

The mood in East Asia today is indescribably grim. East Asians fear that they may be facing an economic crisis as long and as deep as the Great Depression of the 1930’s. It is important that we help them prevent such an outcome. They have been important friends and allies in the past and are likely to be even more important to us in the future. Memories are long in that part of the world, and it is important for the United States to be remembered as a partner that helped them in their hour of need, not as a "fair weather" friend that neglected them or, even worse, as a predatory competitior that took advantage of their weakness.

For that reason, I would urge the Congress to consider the symbolic as well as the substantial effect of its actions. To withhold funding from the IMF because of concerns that some IMF programs may hurt the poor or help the wealthy or even rescue individuals or institutions from the consequences of their own irresponsibility would be like using an axe to do the work of a scalpel. The message that would send to Asia is not that we are concerned about the poor or concerned about corruption, but that we are not concerned at all, that we are too complacent or too stingy to help them in their hour of need. The poor will only blame us even more for their poverty. And those who are struggling to make the necessary economic reforms in those countries will feel that we have abandoned them.

For the moment, at least, the IMF is the best vehicle that we have for promoting the economic reforms that the region needs. And the IMF is not standing still. It is trying to learn the lessons of the past and to understand the new circumstances of Asia. In the case of Indonesia, the country that I know best, there is a very broad consensus that the reforms the IMF is recommending are what that country needs.

3) The problems of the Asian economies cannot be solved by economic measures alone and no amount of outside assistance will work if the countries involved do not help themselves.

The problems, and the solutions, are political in two respects. First, in every case political will is needed to undertake the necessary economic measures and to maintain support for those measures in the face of the economic hardships that are going to grow in the coming months. Second, the financial crisis is a crisis of confidence and financial confidence cannot be restored in an atmosphere of political instability and uncertainty.

This problem is particularly acute in Indonesia, a country that I know well and admire greatly, a country whose importance to the region and the world is very poorly appreciated in the United States.

In fact, it is probably safe to say that there is no country in the world as important as Indonesia about which Americans know so little. Even though Indonesia has, unfortunately, been much more prominent in the news in recent months than it ever was in the preceding twenty years, I continue to be surprised at how even well-informed Americans are often unaware of the facts that make Indonesia one of the most important countries of the Pacific region. Let me emphasize three in particular:

· With a population of two hundred million people, Indonesia is the fourth largest country in the world. It was one of the ten economies on the Commerce Department’s list of Big Emerging Markets. While that designation may seem anachronistic now, Indonesia’s impressive economic growth, averaging almost seven per cent per year over a period of more than two decades, was not a mirage. When it resumes, Indonesia will become a very important trading partner for the United States. And its large population is important in many other respects as well.

· Indonesia’s location also makes it very important strategically. Some of the most important sea lanes in the world, those which connect the Pacific Ocean to the Indian Ocean and the Persian Gulf, pass through or by Indonesian waters. But even more significant is Indonesia’s crucial role as the largest country in Southeast Asia, a region of more than 400 million people that is China’s strategic neighbor. If Southeast Asia maintains its stability and the good relations among its members, there is a much greater chance that China will remain at peace. Alternatively, if Southeast Asia becomes a region of instability or potential threats, China might be drawn into that instability, with consequences for the entire Pacific region, including the United States. Indonesia is crucial in determining that outcome.

· Third, but by no means least important, Indonesia has the largest Moslem population of any country in the world. With Moslems making up an estimated ninety percent of Indonesia’s 200 million people, the Moslem population of Indonesia is almost as large as that of the entire Arab world put together. And the character of Indonesian Islam is as important as its size. Islam as practiced in Indonesia is moderate and extremely tolerant. And while Indonesia’s population is predominantly Moslem, there are also large Catholic, Protestant, Hindu and Buddhist communities. In fact, Islam is not the state religion and Indonesia is justifiably proud of its record of religious tolerance. As one looks around the world today at the tragic effects of religious intolerance, I think it becomes apparent how important it could be for the country with the world’s largest Moslem population to be a model of religious tolerance. I believe that if Indonesiacan resume its impressive economic development, its influence as a country of religious tolerance and moderation will grow over the coming decades.

Considering that Indonesia has been independent for only a relatively short 51 years, it has made remarkable progress during that time. At a time when we have been made acutely aware of important problems and challenges that remain, it is worth recalling the record of major problems successfully solved. It may provide a helpful perspective to think of where the United States was in 1827 and how many major problems -- including human rights issues -- remained for us to solve then.

The list of accomplishments is long, but let me mention four in particular:

· Indonesia’s economic development over the last thirty years, has transformed the country. People who knew Indonesia at the end of the Sukarno era, in 1966, have difficulty recognizing it today. Where thirty years ago poverty and malnutrition were endemic and thousands of people literally starved to death, over the past twenty years, tens of millions of people hav e moved out of poverty. That is one of the achievements that is in jeopardy today.

· Indonesia stretches across a vast geographical expanse, as great as the distance from London to Moscow, and there are probably as many different languages, ethnic groups and religions in Indonesia as in all of Europe. Despite important exceptions like East Timor, Indonesia today is impressively unified and stable. In a world where internal ethnic strife has caused and continues to cause such terrible crimes and bloodshed, this peace and unity is also a significant achievement.

· Indonesia, as I have already noted, has achieved a degree of harmony and tolerance among very diverse religious groups that ought to serve as a model for many other countries in the world. This achievement did not come without some serious struggles and it is not complete. Religion is still a sensitive issue and some problems persist. But in a world where so many people are still persecuted and even killed because of their religion, Indonesia’s religious tolerance is another great achievement.

· Indonesia has played a prominent and constructive role diplomatically in promoting peace and cooperation among the ASEAN countries and in the Pacific region more broadly. It was not historically inevitable that the largest country in Southeast Asia would choose to take its place as an equal partner among its neighbors, rather than seeking to dominate them. In fact, Indonesia’s policy of "confrontation" under its first President, Sukarno, suggested that it would take the latter course. President Soeharto deserves credit for Indonesia’s very decisive turn toward cooperation, a policy course which made possible the creation of ASEAN in 1967 and which is a major factor in the peaceful condition of the Pacific region today.

I note these very important achievements that Indonesia has made in order to provide some perspective and balance. And I note that these achievements owe a great deal to the extraordinary leadership that President Soeharto has provided his country over the last thirty years.

However, all of these achievements are to some degree in jeopardy unless Indonesia can emerge relatively quickly from the economic crisis that it is facing, a crisis that will surely get much worse before it gets better. That crisis cannot be overcome simply through economic and financial measures. It requires a restoration of political confidence as well, and that cannot happen unless President Soeharto can add one last great achievement to his historical record, by preparing Indonesia for a new generation of leadership in a way that he has not done so far.

I offer the comments that I am about to make with a sense of humility and respect. Americans need to be careful about telling others how they should run their affairs, without appreciating that they may understand their own problems much better than we do and in any case they are the ones that have to live with the results. However, in the general comments that follow, I am not simply stating my personal desires but rather reflecting what I believe to be two facts. First, that my comments reflect the views of an increasingly broad range of Indonesian opinion, views on which both supporters and critics of the government would agree. Second, I believe that the judgment of the markets will depend on how these issues are addressed. I have spoken to a great many American investors and others who would like to invest in Indonesia and I find that none of them will do so unless a much greater measure of political confidence is restored.

There is much speculation in Indonesia and among the international financial community about the question of succession and speculation about who will be chosen as the next Vice-President of the country when the People’s Consultative Assembly meets in early March. This is a very important question, particularly when a 76-year old President begins his seventh term in office, but I believe it is only part of a much larger question. Whether the government can broaden its base of support so that the country can face its developing economic crisis with as much unity as possible and so that the process of succession will be a smooth one.

There are, I believe, three ingredients that are critical if that ambitious goal is to be achieved and confidence is to be restored:

· Developing the new generation of leaders: It is to choose a Vice-President who inspires confidence among broad sectors of Indonesian society and among the international investment community, but that is only part of the solution. It is equally important to give that person real experience and authority in the day to day functioning of government. And it is also important to develop leaders at others levels. President Soeharto has played such a dominant role in his country’s development that Indonesians and foreigners alike fail to recognize how much other talent there is in the country. But that talent needs a chance to be demonstrated. It would also be useful if some of the grand old figures who contribute to Indonesia’s past successes could be brought back into government to help impart their experience to a new generation. But the most important thing is to give new leaders the chance to be tested, not merely in the Vice-President’s office but in the equally important decisions that will be made in selecting the new cabinet.

· Broadening participation in government of all elements of society: Developing national unity is as important as dealing with the issue of succession. Korea today has the enormous advantage that Kim Dae Jung, the new President, enjoys the broad support of the entire country. That gives him the legitimacy that is crucial for making the difficult decisions that he confronts even before he has formally taken office. President Soeharto has the challenge of producing the same degree of unity and support for a regime that is very old, not one that is brand new. That can only be achieved by broadening the base of the government, by reaching out even to critics and disaffected elements, not by narrowing the base of government with strict tests of loyalty. This means listening to the views of all elements of Indonesian society on the most important issues facing the country today, including the choice of the Vice-President and even giving critics a chance to be tested by real experience of governing.

· Promoting reconciliation and avoiding scapegoating: Finally, the country cannot be unified unless everyone resists the temptation to assign blame. President-elect Kim Dae Jung has set an extraordinary example of reconciliation for Koreans by urging his predecessor to pardon former Presidents Chun and Roh. Reconciliation is even more important in Indonesia, which does not enjoy Korea’s advantage of an ethnically homogeneous and unified population. Indonesia cannot afford a return to the ethnic and religious scape-goating that was a hallmark of the Sukarno era. The government must take the lead in discouraging attempts to scapegoat ethnic and religious minorities and critics of the government need to be careful about blaming individuals for problems that are common to the whole region and for which responsibility must be shared widely, not only among Indonesians and Asians but also among the creditor nations.

This is a tall order, but I believe that it would go a long way toward avoiding a calamity in a country that does not deserve one and should not have one. There is great talent in Indonesian society and still a broadly felt desire for social harmony.

And President Soeharto has shown in the past that he is capable of great things. A distinguished diplomat from the Philippines told me not long ago that one of the great differences between Ferdinand Marcos and President Soeharto is that Marcos was despised by his people, whereas Soeharto is admired by Indonesians. He will earn their undying admiration if he can rise successfully to the challenge of the present danger.