TEXT: EIZENSTAT ON BROADER IMPLICATIONS OF ASIAN FINANCIAL CRISIS
(Testimony before 2/4 Senate Finance Committee hearing)

Washington -- The United States must be involved in leading the effort to solve the East Asian financial crisis because vital U.S. economic, security and political interests are at stake, according to Stuart Eizenstat, under secretary of state for economic, business, and agricultural affairs.

In testimony before the Senate Finance Committee February 4, Eizenstat summed up the steps that the United States is taking, plans to take, and is encouraging others to take to solve the crisis, including:

"Early in his Administration," Eizenstat said, "President Clinton described his vision of a Pacific community of nations, one in which shared burdens and shared benefits lift us all. To turn from the task at hand not only risks stability abroad, but threatens prosperity at home."

"Moreover," he said, "it would also breed resentment toward what would be seen as our indifference to the plight of friends. With that will be a loss of credibility and goodwill that not only hurts our ability to push needed reforms, but also can affect our broader interests -- economic and political -- including cooperation on security and other important issues in the region and beyond."

"This means more than just cooperating in hard times. It also means moving forward on goals set at the APEC Leaders Meeting in Bogor, Indonesia in 1994 -- a vision of free and open trade and investment in the region by 2010/2020," he said. "We have been working in APEC to turn this vision into a reality. The political support of APEC leaders has been critical to the conclusion of the Uruguay Round and the Information Technology Agreement, opening up markets worth billions of dollars to U.S. businesses and workers. APEC's leadership on the world's trade agenda and its goal of regional trade and investment liberalization could be jeopardized by a persistent, festering financial crisis."

Following is the official text of Eizenstat's testimony, as prepared for delivery:

(begin text)

TESTIMONY BY STUART EIZENSTAT
UNDER SECRETARY OF STATE FOR ECONOMIC, BUSINESS
AND AGRICULTURAL AFFAIRS
BEFORE THE SENATE FINANCE COMMITTEE

FEBRUARY 4, 1998

ASIAN FINANCIAL CRISIS: BROADER IMPLICATIONS

Mr. Chairman and Members of the Committee:

It is a privilege to appear before you today. By including the Department of State in a hearing on the Asian financial crisis you recognize that for the United States, the ramifications of the current economic difficulties in Asia affect much broader interests.

Mr. Chairman, as we consider the United States' proper role in confronting this situation and what actions are necessary and appropriate for us to take, we must fully understand the broad dimensions and implications of this crisis. Vital U.S. interests of great importance to the security, the prosperity and the values of the American people we all serve are at stake. Therefore, we believe strongly that it is in our own interest to lead and act in the international effort to address the financial crisis in East Asia. In this effort, the leadership of the Congress is also crucial and we look forward to working with you on this important issue.

The role of the United States is not just a test of our IMF leadership or international economic leadership, but our political leadership in a changing global environment as we enter the 21st century. Our engagement now at this time of financial unease helps assure our ability to mobilize support in the future for a whole range of issues important to the United States and enhances our capacity to promote greater openness, democracy, and support for human rights in Asia. On the other hand, if we shrink away from our leadership responsibilities, other forces may prevail.

Security

Mr. Chairman, our own security is closely linked to peace and stability in East Asia -- in a little over fifty years we have fought three costly wars there. Since World War II our security policy in the Western Pacific has stressed stability and the deterrence of conflict. Nearly one half of the earth's people live in countries bordering the Asia Pacific region and over one-half of all economic activity in the world takes place there. Four of the world's major powers rub shoulders in Northeast Asia while some of the most important sea lanes on the globe pass through the confined waters of Southeast Asia. We are a Pacific nation, as well as an Atlantic nation, and what happens in the Asia Pacific region directly affects us and has a profound impact in the U.S. and throughout the world.

Today we have 100,000 troops in the Asia Pacific region. Our forward military presence and active engagement in the western Pacific has increased and bolstered stability in the region. This stability has been the essential foundation for unprecedented economic, political and social progress in East Asia over the past several decades -- progress from which we have greatly benefited.

However, it goes further. Just as increasing peace and stability have enabled economic progress, so too have economic progress and the better life it has brought to hundreds of millions of people reinforced peace and stability. A part of the world once known for authoritarian governments, internal strife and international tension is one now characterized by viable exciting democracies -- in the Philippines, Thailand and South Korea -- that are adopting more open economic policies, alleviating poverty and modernizing.

Mr. Chairman, the current economic difficulties, if not halted, could threaten this stability and much of the progress made over a generation. The markets are not only looking for economic adjustments, but also for the political will in these countries to implement tough structural reforms. The economic and political dimensions of this crisis are closely intertwined -- the markets will respond favorably when they see the sustained political will to make the reforms work.

The countries hardest hit are among our closest and most vital friends and allies -- including South Korea where 37,000 American troops remain deployed to ensure an uneasy peace in the face of the continuing threat from North Korea. A South Korea weakened by economic distress raises the risk of miscalculation by North Korea and conflict on the volatile Korean Peninsula. It makes more difficult our vitally important effort through the Agreed Framework of 1994 and the Korean Peninsula Energy Development Organization (KEDO) to dismantle the dangerous North Korean nuclear program, where a large contribution from South Korea will be necessary. It could well complicate our delicate efforts through the Four Party Talks to secure a permanent peace and bring the Korean War to a formal end. The economic crisis could also strain the ability of countries such as South Korea and Japan to continue to share the financial burden of maintaining security in the region.

Thailand is one of our oldest friends in the region and has been a close, supportive ally for -- decades -- from the Korean War through the Indochina conflict all the way to the present day. We have a treaty relationship with Thailand dating from 1954. We enjoy very close military-to-military relations and access as needed to strategic airbases in Thailand. Thailand provided essential overflight clearance and the use of airbases during the Gulf War and subsequent actions against Iraq. Our long-standing friendship has resulted in close cooperation on a broad range of issues, including most recently in counternarcotics where Thailand has extradited an unprecedented 11 indicted traffickers to the U.S. since 1996, environmental protection, and improved intellectual property rights enforcement.

Indonesia, the world's fourth most populous country, has in recent decades played an influential and constructive role in the region, which serves our interests as well as those of the people throughout the region. Indonesia spans important seaways and airways and possesses rich natural resources, which give Indonesia broad strategic value. It has provided the moderate leadership which has allowed ASEAN to prosper and more recently has been a driving force within APEC in favor of trade liberalization. Just as importantly, Indonesia, a land of many diverse peoples, languages and cultures, is a moderate Muslim state -- the world's largest Muslim nation with more Muslims than the Middle East nations combined. We want to help Indonesia overcome its social problems -- problems which could exacerbate social tensions.

The Philippines has not been as hard-hit by the financial turmoil as Thailand and Indonesia, but remains vulnerable to continued turmoil in the region. The Philippines has been a close friend since its independence in 1946 and a treaty ally since 1952. In recent years it has achieved remarkable success in the difficult task of rebuilding its democracy and economy following the final, chaotic Marcos years. We do not want that record of success undermined.

The core countries of ASEAN -- Thailand, the Philippines, Malaysia, Singapore and Indonesia -- are long-time friends whose prosperity and progress have contributed to increasing regional stability. ASEAN, founded 30 years ago to bolster regional stability, continues to grow in stature. Evidence of its growing maturity is ASEAN's constructive role in Cambodia. Through our bilateral ties with the individual members, our participation in the ASEAN Regional Forum, our other high-level dialogues with ASEAN and by our active role in APEC, the United States has been able to strengthen its overall relationship with ASEAN.

We should not take ASEAN's success for granted. The peace and progress it has helped bring to Southeast Asia may seem natural. But go back to the mid-1960s -- there was tension, there were insurrections, there were shooting wars, such as the Indochina conflict and Indonesia's policy of confrontation with its neighbors, and communal killing. The changes since then have been astounding, but prolonged economic crisis and the attendant joblessness, impoverishment and despair could revive internal instability in these countries and provide fertile ground for extremism. Millions of foreign guest workers work in some of these economies, while other ASEAN countries provide large number of workers to their neighbors. There already exists increasing pressure to send them home. Prolonged instability will generate an increased flow of economic refugees. In a region where old suspicions and ethnic rivalries persist, the risk of instability spreading is real.

With the end of the Cold War the security landscape in East Asia is evolving. During this delicate transition period it is important that the nations of the region remain strong and that confidence in U.S. leadership remain firm. A peaceful and stable Asia Pacific is a region that will remain open to American influence, American ideas and American trade, if we show continued leadership. But if we appear disinterested or unengaged, we will cede to others political and diplomatic influence -- and the economic opportunities that go with this influence.

Prosperity

Mr. Chairman, I have begun by discussing security and political issues. However, security is not just an end in itself but a means of assuring the welfare and prosperity of our own citizens, one of the principal duties of any government. The economic health of East Asia is important to our own prosperity. The dynamism of the region has provided increasing trade and investment opportunities to American companies, creating jobs here at home. The growth of exports has helped fuel our economic expansion. In recent years, our participation in the global economy has been fundamental to our sustained growth, low unemployment and low inflation.

Let me share with you just a few statistics, Mr. Chairman, which illustrate the importance of trade and exports to our economic well-being:

A look at individual state figures further underscores the importance of trade to this region. A large portion of the exports from our west coast states goes to East Asia -- in 1996, nearly 58 percent for Washington, 57 percent for Oregon and 51 percent for California in 1996, with a total value of some $76 billion. Even more remarkable are the high numbers in other parts of the country -- 45 percent for Nebraska, 42 percent for Utah, 37 percent for Louisiana, 21 percent for New York and 18 percent for Delaware.

The benefits of this growing trade have been widely spread, and so would be the costs of a downturn. Continuing deterioration of the Asian economies, and the further depreciation of their currencies which makes their goods cheaper and hurts our competitiveness, will mean lower U.S. exports, fewer contracts for U.S.-supplied services and ultimately job loss here at home. There will be more pressure on our balance of payments as Asian economies buy less but seek to export more. We will see a noticeable increase in our trade and current account deficits. This will create economic challenges and political problems as well, fueling protectionist pressures.

A further hazard from the financial crisis lies in the fact that the longer the uncertainty and instability persist, the more chance there is that other economies will be pulled down as well. This contagion factor could spread the crisis beyond the immediate region, increasing the likelihood of more severe global costs and more severe costs to us. Mr. Chairman, when an infectious disease breaks out, counter-action to limit the spread of the disease and panic must be swift, determined and comprehensive. Only the international community and its multilateral institutions can perform this critical task -- again underscoring the critical importance of Congressional approval of the IMF package. Only the United States can provide the leadership for this effort.

We have been engaged in assisting Asia to recover through our economic leadership in the International Monetary Fund (IMF), in addition to offering a second line of defense to Korea and Indonesia, not only because they are our customers, but because they are our security partners. The IMF programs, if fully implemented, offer the best chance for these countries to resume their impressive economic growth -- that made them the envy of the world -- on a more sound, sustainable basis. For this reason, it is not only in our economic interests, but our political and security interests, to support the IMF New Arrangements to Borrow and the Quota increase -- neither of which will cost the U.S. taxpayer a dime, but will pay rich dividends over time.

As a founder and the largest shareholder, our active involvement and support is essential to the IMF's efforts to solve the East Asia economic crisis. If we appear to turn our back on an institution we created just when the IMF is playing an essential role in this recovery, we will send a negative signal to the markets and a devastating message about U.S. leadership and engagement in the post-Cold War era.

Benefits for U.S. Trade and Investment

For years we have argued that open trade and more open economies are the path to greater prosperity. There has been resistance to this view -- the political and economic structural reforms needed to accomplish this can be difficult and painful for all of us. This crisis has shown the merits of more open, transparent and rational economies and the cost of allowing distortions to continue. The reforms and corrections required in IMF-led programs should address these issues and lead to greater trade and investment opportunities for all of us -- including the United States.

Many of the measures required by the IMP to restructure the domestic economies of East Asia will provide expanded opportunities for U.S. companies doing business in Asia:

U.S. Values and Credibility

Less tangible but of equal importance is the fact that many of the countries in deepest crisis are societies that have been opening up not only economically but, in many cases, politically as well. This is certainly true of Thailand, South Korea and the Philippines where major advances in democratization have been made. Even in Indonesia, where our concerns are well known, there is hope for progress. The downturn in these countries will have its greatest impact on the emerging middle class and those struggling to climb up from poverty. These groups represent the region's greatest hopes for the development of more democratic institutions and greater respect for human rights. The course of development we prefer -- open, more democratic societies coupled with open, competitive economies -- is jeopardized by the present turmoil. This is true not only within these countries, but for others in the region as well. It is critical that less open countries such as China, Vietnam and Burma not draw the wrong conclusion from the current difficulties.

In this regard the environment, labor standards and human rights are critically important issues which we have been advancing in many ways. We work with the international financial institutions and others throughout the world to promote progress in these areas. In themselves, IMF-led programs commit governments to increase transparency and good governance. These measures promote accountability, the wider sharing of power and citizen participation and the effects can go well beyond the financial realm. The immediate crisis is economic and IMF programs must of necessity focus on immediate actions to restore economic stability and market confidence. To overburden IMF programs with goals in other areas during a crisis would complicate and delay the process, greatly reducing the chance of success.

We are nonetheless committed to pursuing these other goals by other means. We will continue to raise human rights and worker rights concerns wherever they arise. In addition, we must be sensitive to the social ramifications of these IMF programs in terms of increased unemployment and widening income inequality, which could lead to political instability. Therefore, we believe it essential to work with the World Bank and the Asian Development Bank to implement supporting programs to establish a social safety net. In this regard the role of the World Bank is as large as the IMF on the financial side.

Mr. Chairman, we have enjoyed many of the benefits of leadership on the world stage -- an ability to protect our interests, to prosper from the global reach of our economic power and to see the values and principles we hold most dear not only endure, but indeed spread. However, this leadership is not divisible. We cannot lead on critical security issues, or in opening markets, while abdicating the lead in the sometimes messy work of maintaining the international financial system. This leadership brings responsibilities and burdens. As the leader of an international system from which we gain so much, others look to us to provide the leadership and our fair share of the resources necessary for the success of the international effort underway.

Early in his Administration President Clinton described his vision of a Pacific community of nations, one in which shared burdens and shared benefits lift us all. To turn from the task at hand not only risks stability abroad, but threatens prosperity at home. Moreover, it would also breed resentment toward what would be seen as our indifference to the plight of friends. With that will be a loss of credibility and goodwill that not only hurts our ability to push needed reforms, but also can affect our broader interests -- economic and political -- including cooperation on security and other important issues in the region and beyond.

This means more than just cooperating in hard times. It also means moving forward on goals set at the APEC Leaders Meeting in Bogor, Indonesia in 1994 -- a vision of free and open trade and investment in the region by 2010/2020. We have been working in APEC to turn this vision into a reality. The political support of APEC leaders has been critical to the conclusion of the Uruguay Round and the Information Technology Agreement, opening up markets worth billions of dollars to U.S. businesses and workers. APEC's leadership on the world's trade agenda and its goal of regional trade and investment liberalization could be jeopardized by a persistent, festering financial crisis.

Conclusion

Let me sum up what we are doing, should be doing, and should be encouraging others to do to solve the East Asian financial crisis:

Mr. Chairman, I thank you for the invitation to give testimony on this very important issue, and I welcome your questions at this time.

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