REMARKS BY DPM LEE HSIEN LOONG ON `THE FUTURE OF ASIAN ECONOMIES', ON 24 JAN 2003, AT DAVOS, WORLD ECONOMIC FORUM

Overall, the picture in Asia is one of progress. China is transforming itself. India is beginning to do so. Southeast Asian economies now face the prospect of a different Asia. Provided they adapt themselves to it, they too will be part of the new Asia which is emerging.

The most salient change for the Asian economies, and for the world, is the rise of China. Its economy is rapidly modernising, and it is quickly becoming a major investment destination and exporter to world markets. Hundreds of millions of Chinese are enjoying rising affluence and opportunities unimaginable just a decade ago. Their confidence, energy, and determination to improve their lives and get ahead is tremendous, especially in cities like Shanghai.

In the long term, this is a very positive development for Asia. China will be a major market. Its exports to the region have grown rapidly, but so have its imports from the region. Already millions of Chinese tourists visit Southeast Asia each year. More and more affluent Chinese will demand services like healthcare or education, some of which will be provided overseas.

But in the short term, China presents a major competitive challenge to the rest of Asia. MNCs are restructuring their Asian activities. As business conditions in China improve, MNCs are moving their plants to China from other Asian countries, to take advantage of Chinese workers who cost less but are equally or more skilled and hardworking, and to position themselves for the large Chinese market. Every Southeast Asian country feels this pressure. Even in India, the most popular white goods come from China. Countries are being forced to fundamentally rethink the way they compete and earn a living in the global economy.

India itself is changing, despite the complexities of security issues, and tensions between Hindus and Muslims. After the disappointment of many previous promising starts, investors are naturally cautious. But there is now a new mood in the economy, especially in the South. High growth pockets and sectors are emerging, for example in IT. Development is visible everywhere. Governments at the state level are focussed and promotion minded. There is a broader sense of an economy beginning to stir, although the shift is still far from being as entrenched and profound as in China.

Sustaining this transformation will call for painful and politically difficult reforms. But India's opening up will be very favourable to the rest of Asia. It is an enormous market whose potential has gone unrealised for too long. For Southeast Asia, a dynamic India would counterbalance the pull of the Chinese economy, and offer a more diversified basis for prosperity.

The other major Asian economy is Japan. Its advanced economy has been a major source of investments and technology, and an important market for the rest of Asia. Unfortunately for the last decade the Japanese economy has been mired in difficulties. All Asian countries hope that Japan will be able to overcome the deep structural problems in its economy, end deflation, and again play its proper role in Asia.

For Southeast Asia, the world has changed. Globalisation is has brought fiercer competition. China and India are new heavyweight players, simultaneously competitors and partners. The Asian Financial Crisis in 1997 abruptly ended two decades of vibrant growth in Southeast Asia. The crisis brought new political uncertainties, and now the problem of terrorist groups linked to Al Qaeda.

Islamic extremist terrorism is a global problem from which no region is immune. The large Muslim populations in Southeast Asia provide a natural cover for the radicals. Tackling the problem requires political will and sensitivity, to isolate and neutralise the tiny, dangerous minority without antagonising the broader Muslim population. Malaysia and Singapore are doing this, and so is Indonesia after the Bali incident. While the problem cannot be totally eliminated, it can and must be kept under control.

The economic fundamentals of Southeast Asia remain positive, especially compared to other emerging economies. It has a sizeable market of 500 million people, a skilful and educated workforce, and good infrastructure. For investors who want to spread their bets, Southeast Asia is a clear diversification play.

Southeast Asian countries need to resolve the political and security problems, and take decisive actions to steer their economies back to a growth path. Its future lies in maintaining open, outward looking economic policies, and staying plugged into the global economy, despite all the risks that this entails.

Externally, Southeast Asian countries must strengthen their links with major trading partners. ASEAN is pursuing FTAs with China and Japan. Singapore has concluded FTAs with Japan, Australia, the US, and other countries, in the hope of encouraging its neighbours to do the same. And indeed the US has signalled its intention to enter into FTAs with other ASEAN countries. This would consolidate ASEAN's critical economic relationship with the US. The only element still missing is the EU.

Among themselves, ASEAN countries must integrate their economies further, to benefit from their market of 500 million people. There is already an ASEAN Free Trade Area (AFTA) which eliminated tariffs on manufactured products and components within ASEAN. But this only covers a small part of the trade among the countries. ASEAN must broaden and deepen our co-operation in other areas too, especially in the services sectors and investment.

Individually, ASEAN countries must reassess their position and rethink their economic strategies. In Singapore, we have concluded that the old model of attracting FDI to create jobs will no longer suffice.

For the future, we aim to be a major hub serving our region, linked up with other major hubs in Asia, such as Tokyo, Shanghai, Hong Kong or Mumbai. We need to attract talent from around the world, to live and work in a cosmopolitan and vibrant city.

To deal with a faster changing and less predictable world, we need to promote the spirit of enterprise, the sense of venture and dare. We must help entrepreneurs to startup companies easily, and encourage major companies to venture abroad and grow into international players.

We need to diversify our economy, having MNCs as well as Singapore companies, established players as well as startups, manufacturing as well as service industries.

Other Asian countries will face different challenges, and will respond in different ways to the new environment. Life has changed fundamentally for all of them. Provided they respond creatively and vigorously, the outlook for Asian economies is bright.