13 November 2009
Speech to the APEC CEO Summit 2009
Thank you for your warm welcome.
Can I start by acknowledging the Chair of the Organising Committee for this Summit, Ms Chong Siak Ching, as well as my fellow panelists:
- President Bachelet of Chile
- Mr Tom Donohue, CEO of the United States Chamber of Commerce
- Mr Richard Adkerson, CEO of Freeport-McMoRan
- Mr Teng Theng Dar, the chair of ABAC.
I spoke at this summit a year ago in Peru and can I say, what a difference a year makes.
This time last year, Lehman Brothers had recently collapsed and many other large financial institutions had been bailed out by the government or acquired under duress. It was a time of rapid change and unpredictable developments.
Fortunately, the world has responded well to the crisis. The extraordinary measures by governments to shore up banks and develop stimulus plans have averted catastrophe.
The world's financial markets have settled down and most countries have passed the worst of the financial and economic crisis.
But it would be foolish to think that everything is back to normal. In particular, high private sector debt and rapidly rising public debt will be a major issue for many countries. With financing harder to come by than in the past, growth prospects will be subdued for a while yet.
I want to offer a few thoughts today on the crisis and its aftermath, from the perspective of a small country whose fortunes depend to a considerable extent on what is happening elsewhere in the world.
That is no criticism of globalisation. New Zealand is actually testament to its potential.
We are a small and very open country. We are the descendents of immigrants from Polynesia, Europe, Asia, and elsewhere, and we have created a unique Kiwi identity.
We are a nation built on imported capital. And from our earliest days trade has been the lifeblood of our economy. Our farm exports in particular provide the base on which New Zealand's prosperity lies.
We feel the pain when our access to overseas markets is threatened or when our exchange rate fluctuates wildly because of external factors. So we know about the exposure to risk that small economies must deal with.
What the economic crisis has reinforced is that small economies can get badly knocked about by the shockwaves of a global upheaval. Policy choices by the powerhouse economies can have far-reaching effects, and effects that are hard to predict.
It is therefore crucial that as a global community we better understand and manage the inter-connected nature of the global economy.
In that regard we welcome the emergence of the G20 as the premier forum for international economic co-operation.
It is encouraging that G20 members are continuing to consult with non-G20 members. We would welcome taking that process a step further and establishing a regional outreach mechanism in the Asia-Pacific region.
The G20's Framework for Strong, Sustainable and Balanced Growth is an opportunity for the world to work more closely together to manage globalisation.
That's important because my view is that future recessions could become even more correlated across countries and as a result could potentially be deeper than those we have seen in recent decades.
That is because the world's economies are becoming more and more inter-connected and the flow of information around the globe is only going to get faster and more comprehensive. Economies will therefore find themselves more in step, not less.
So in global forums like the G20, and in regional forums like APEC, we need to think seriously about the future economic cycles that will affect us all.
The topic of this Summit is "What APEC can do for Business".
At the top of my list would be a continuing focus on economic policies to resolve global imbalances, a renewed commitment to free trade, and a considered and coordinated look at financial regulation.
At the moment, many of the major world economies are still breathing pure oxygen in the form of massive stimulus packages. That has got them through the crisis but is not sustainable. At some stage - and probably sooner rather than later - that stimulus will have to be unwound.
That won't be easy, as I know all too well. In New Zealand we have had to sharply rein in Government spending increases over the medium term to ensure our rising public debt is brought back under control.
So a sustainable recovery can't happen through ongoing fiscal stimulus. But what will be critical for a long-term sustainable recovery is resolving global imbalances.
Many developed economies, including New Zealand, need to re-orient towards exports, and away from credit-fuelled domestic consumption. That will require economic policy changes to encourage more productive activity.
On the other side of the ledger, many high-saving emerging economies, whose exports have been hit hard in this recession, will need over time to lift consumption among their own people.
That could happen through a variety of channels. But exchange rate adjustment is likely to be part of the mix.
That shouldn't be something to be fearful of, or something done as some sort of sacrifice to "help out" other countries. For a fast-growing country with very large trade surpluses, a higher exchange rate is just one of the ways of ensuring that its citizens - and not just its exporters - share in the prosperity.
I would also strongly urge a new commitment to free trade.
That is essential in the current climate where there is always the risk of protectionist policy responses.
But I don't just want to argue about how bad it is to go backwards on trade - I want to argue about how good it is to go forwards.
Trade benefits everyone. That is why in New Zealand we are continuing to pursue free trade agreements with a number of countries. In the last two weeks, for example, we have signed an FTA with Malaysia and concluded free trade negotiations with the Gulf Cooperation Countries and with Hong Kong.
APEC has been a part of this process. APEC was the catalyst for the P4 trade agreement involving New Zealand, Brunei, Singapore, and Chile.
Building on that high-quality agreement, we are working towards a Trans-Pacific Partnership which would involve another four APEC countries including the United States.
That, in turn, could be a stepping stone to an eventual trade agreement involving all the economies in the Asia-Pacific region. As APEC economies, we should be ambitious for free trade across the region, because this helps create the conditions for business success in all our economies.
Policy makers will also need to look carefully at financial regulation.
I believe that many of the shortcomings that have become evident during the last two years are ultimately about how the financial sector manages risk. As a former head of global foreign exchange at Merrill Lynch, I have seen first hand the sort of risks that are taken on a daily basis.
In my opinion we won't get anywhere if we fall into the trap of somehow blaming ‘the markets' and financial innovation per se. Risk taking is part and parcel of how financial markets have been so successful, over a long period of time, at allocating capital.
There will be booms and busts again. We shouldn't fool ourselves that we can prevent them. But we do want to minimise collateral damage and to ensure that policy isn't feeding excessive risk taking.
Over the past year or so, governments around the world have needed to step in and support many large financial institutions. However, the danger is that these actions will have the effect of eroding market discipline in the future. Institutions may be managed in a riskier way if creditors and management think they are ‘too big to fail'.
In my view we should be careful not to create rules for banks that merely push the risk into other institutions, like hedge funds or global insurers, which then become systemically important but are not appropriately regulated.
Liquidity risk is also important. Too many institutions were overly reliant on short-term wholesale funding markets prior to the crisis.
That was certainly the case in New Zealand, where too much of our current account deficit was being funded by short-term wholesale liabilities. We are now implementing new liquidity rules to strengthen the resilience of New Zealand's financial sector, while keeping a close eye on related developments at the Basel Committee on Banking Supervision.
Internationally, attention has also been given to the issue of cash bonuses to executives, particularly senior executives in investment banks.
While the huge bonuses paid to such people can often appear obscene, it seems to me that many of the changes suggested worldwide are largely symbolic.
To be really effective, it is necessary to look well beyond senior executives to the incentives on traders on the floor, fund managers, hedge fund promoters, and so on.
Pay should, wherever possible, be based on long-term performance, and in a way that reflects the fact that often high short-term returns are simply the result of excessive, and potentially dangerous, risk taking.
Employee compensation may also need some limiting where institutions are getting heavy taxpayer support.
But we should also recognise that it is hard for people in many financial institutions to limit risk-taking, when the wider environment is one in which their investors are constantly demanding that they do whatever is needed to generate high returns, this quarter, next quarter, and every quarter that follows. Those are the facts of life for traders and for their bosses.
So it is important that the global debate on these sorts of issues continues. We need to get our policy responses right.
There is a role here for APEC to work alongside the G20 and others to ensure there is a clear understanding of the issues and a coherent debate in this region.
In conclusion, it is clear to me that opportunities are there for the taking.
The world economy, its businesses, financial institutions and markets have enormous potential to improve living standards.
We have seen their shortcomings, but those shortcomings can be overcome. The challenge now is to position ourselves to realise the potential that our region has.
The APEC economies can work their way back to more prosperous times, and I and the other leaders are determined to work with you to make that happen.