Oleh/By		:	DATO' SERI DR. MAHATHIR BIN MOHAMAD 
Tempat/Venue 	: 	SHANGRI-LA HOTEL, HONG KONG 
Tarikh/Date 	: 	03/06/85 
Tajuk/Title  	: 	THE 1985 INTERNATIONAL MONETARY 
			CONFERENCE OUTLOOK FOR THE PACIFIC: 
			THE NEED FOR OPTIMISM 
			WITHOUT ILLUSIONS 




Mr. Chairman, Distinguished participants, Ladies and Gentlemen.

The subject of my keynote address is 'Outlook for the Pacific Region'. If
I can stand here and tell you without equivocation, without any doubt,
what exactly will happen in the Pacific Region particularly the Asian
side, in the years ahead, I would be a truly great sage or a
charlatan. Even the man who knows everything about the past cannot predict
the future ... because history does not travel in a straight line. Even
complete knowledge of the present, were it possible, can only be
suggestive, for tomorrow is not another name for today. Confucius is
supposed to have said: "Prediction is always difficult ... especially if
it concerns the future". He was right. It truly is best to tell the future
after it has passed into the past, when one can have the benefit of
hindsight.

2. Since the future cannot be the past, the two terms being in
contradiction, can the social sciences come to the aid of the poor souls
who have to divine the future? From the field of politics we get the 'iron
law' which states that in the affairs of men the only true constant is
change.

From the study of history has emerged the equally wise saying that the
more things change, the more they remain the same. From the science of
economics it is interesting to note that there never has been one-handed
economists. Those who have had too active an interest in foretelling the
future without hedging their prognostications to the point of rendering
them nigh useless are a rare breed indeed. In fact the current prolonged
world recession has about killed the whole lot.

3. Since politicians are the only daredevils left on this planet, I
suppose it is fitting that I should be invited to stick my neck out -- not
only to talk about the future, but also to talk about the future of the
whole Pacific Region, and preferably in less than half an hour. The only
thing I can do given what little I know, the great deal I do not know, and
the massive amount that I cannot know, is to indulge in generalisations
that often must descend to the level of caricature.

4. Let it be my central thesis that in the forseeable future the
continuities are likely to be greater than the changes, that there is
justification for hope and confidence; but that the hope and the
confidence can be damaged and destroyed by threats, a few of which already
constitute a clear and present danger. I believe that in approaching the
question of the future of the Asia-Pacific Region there is every reason
for OPTIMISM but no room whatsoever for any ILLUSIONS.

5. What are the grounds for optimism? They are clear enough. The Pacific
has been where much of the action is. It is most likely to remain a
dynamic centre for world economic development. In the period from the end
of the Second World War to the end of the sixties the economic centre of
gravity and growth for this planet was in the North Atlantic. Since then
they have gravitated to the Pacific. Unless things go very wrong, the
Pacific will continue to be the main engine for global economic
advancement for the rest of this decade, for the rest of this century, and
probably well into the twenty-first century.

6. At the very same time that one is optimistic, caution demands that our
optimism must be of the sort that is stripped clean of illusions. Although
for most Asia-Pacific countries the days ahead will continue to be good,
they are going to be tough. For some, obviously, they will be tougher than
for others. The time of wine and roses and easy growth is gone and gone
probably for good.

7. There will be many dangers to test us, to test our capacity to cope,
our ability to roll with the punches, our capacity to take them on the
chin, to fall ... and to get up and fight back. There are the dangers of
rampant protectionism, which is likely to get worse before it gets any
better, if indeed it will get any better. There are the awesome dangers
arising from the problem of foreign debts.

8. There are the dangers of a possible trade war between the two most
important economies of the Pacific: Japan and the United States. Already
we are arguably in the first phase of an Economic Cold War between these
two very important economic colossi of the Pacific -- a conflict
characterised not only by bluster but also by the cutting edge of
bitterness, involving not only open verbal acrimony but also concrete
political action growing out of substantial, deep-seated, animus.

9. There are fears with regard to the military build-up of the Soviet
Union. Many also view the positive signs of development and modernisation
in China with a mixture of enthusiasm and trepidation. The enthusiasm is
based on hope and belief in expanding trade and investment
opportunities. The trepidation is founded on the challenges and the
threats -- economic, political, and military -- that China could pose
should it fail ... or should it succeed.

10. I shall not dwell at length on the good news. The impressive dynamism
of the Pacific -- the Japanese miracle, the amazing performances of the
Asian NIC's, the superb evolution and growth of all the states of the
ASEAN Community (with the Philippines becoming an exception only in very
recent years) -- have all been told and extolled. Permit me only to
underline several common factors which explain why the Asia-Pacific
countries have done so well, if only because these factors have predictive
value in any examination of the outlook for the rest of the Eighties.

11. Perhaps the most important element in their success has been the
adoption of a free enterprise system and the successful development of a
dynamic and aggressive private sector. In the last decade especially,
economic samurais carrying the passports of many nations under their belts
have played a most important role in the transformation of the many
societies in which they have been given relatively free rein.

12. It may not be true to say that we have seen the end of the age of
ideology. It is nearer the truth to say that we have seen the end of
extreme socialist ideology, the severe loss of faith in the efficacy of
rigid, over-centralised state planning with its concomitant state
enterprises and monopolies; we have seen the flowering of the ideology of
free enterprise even among newly independent developing countries, free
enterprise which seeks to reward to each according to his effort, to his
contribution and to his ingenuity. Communism remains a wonderful system
whose only fault lies in the fact that it simply does not work. What works
is pure dictatorship in the name of that ideology. In as far as the lesson
of free enterprise has taken very deep root and has become unshakable,
there is every reason for optimism with regard to the future economic
dynamism of the entire Asia-Pacific Region.

13. A second factor for their success has been the fact that all the
successful economies of the Pacific have put their faith in export-led
growth and adopted export-oriented policies. Let there be no illusion that
these strategies will escape unscathed in a world where fewer doors will
remain wide open. Despite the rising tide of protectionism, this faith and
these policies have been justified and therefore will continue. New doors
will hopefully be opened and new markets created to sustain these
export-based economies.

14. Third, all the successful economies of the Asia-Pacific have achieved
high savings rates, which have facilitated high rates of investment,
especially in the industrial sector. In Malaysia there are any number of
'tabungs' literally 'piggy banks' where all kinds of people, from serving
soldiers to Muslim Pilgrims, save and so provide the funds for the
country's growth.

15. Fourth, most of the successful Pacific economies have been able to
develop their agricultural capacity and productivity, even as they
advanced on the industrial front. Indonesia with a population of 160
million now produces enough rice for its own consumption. So does
Thailand, China and Japan. Malaysia's agricultural products are well known
and are still the mainstay of its economy.

16. Fifth, all the successful economies have been able to develop
capabilities for rapid and dynamic adjustment policies. Indeed they have
not been averse to copying strategies and approaches of successful
countries or of each other. Consequently, they have developed the capacity
to tighten belts when the going gets tough, to weather the storms of
global economic turbulence, and to take full advantage of the situation
when the world bounces back.

17. All these five factors which have underpinned our economic success are
likely to remain in place in the difficult days ahead. Indeed the
indications are that they will be improved upon to cope with whatever
changes that may take place.

18. So much for the good news. How about the dangers which I have alluded
to? Of all of them, the Soviet danger has been the one that looms most
ominously over everything that happens in the region. But the Soviet bogey
seems overplayed.

19. No-one who looks at the military build-up of the Soviet Union should
be dismissive of this reality. I shall not belabour the details. Over the
last two decades, the Soviet Union has without doubt steadily and
relentlessly enhanced its military capabilities. But please note the words
'steadily' and 'relentlessly'. Over the entire period, the Soviet military
build-up has not been dramatic and has not been quickly responsive to any
particular event, which would be the case if Moscow has any specific
aggressive intent in any part of the Asia-Pacific Region. This is not to
say that neighbouring small states can be complacent.

20. If this argument is correct, if it is true that the Union of Soviet
Socialist Republics has no specific intention to aggress in any part of
the Asia-Pacific Region, one might well ask why it is that the build-up
has been so steady and so relentless. I believe that this is a most
important question, which requires a most persuasive answer. I believe
that to understand Moscow's actions one has to understand the seven
task-oriented and three non-task specific reasons why there has been this
massive deployment of Soviet military assets in the region.

21. It appears apparent enough that the Soviet military build-up in the
Pacific is part of the global game of military balances. It is part of the
central strategic balance of power between the United States and the
USSR. Is it any surprise to find the Soviet Union deploying one third of
its naval assets in the CINCPAC theater if the United States deploys one
half of its naval forces in the same area? 

22. Second, Moscow apparently continues to feel the need to militarily
counter 'The Yellow Peril'. Third, it apparently feels the need to have
the military forces for the purpose of aiding Vietnam, from whom it gains
both an ally and invaluable facilities. Fourth, the Soviets apparently
feel the need to secure Siberia, increasingly being called 'The Treasure
House of the USSR'. Fifth, the Soviet Union understandably feels the need
to demonstrate military and political credibility to friend and foe alike,
just as the Americans have to constantly demonstrate their own military
and political credibility.

23. Sixth, and more controversial, it has been argued that Moscow feels
the need to politically intimidate Japan. Seventh, it might be argued that
bereft of the economic, ideological, cultural, political and diplomatic
capabilities of its adversaries and faced by a steady and dramatic
deterioration of the correlation of forces in its favour in the Pacific, a
supremely uni-dimensional Power, which only possesses military assets, has
no choice but to respond militarily to prevent a further deterioration in
and to improve its position.

24. At the more generalised, less task-specific level, it has been argued
that the Soviet Union has a tremendous drive to achieve the status of
superpowerhood, a status which it can only seek to achieve through the
deployment of the only capabilities it possesses -- its military forces. A
superpower by definition has to be in every nook and corner of the
world. The Pacific is not a nook and corner. It is fast becoming the
centre-stage. To expect the Soviet Union not to have a very strong
presence in the Pacific is to expect the Soviet Union to opt out of the
game of superpowerhood. It is also arguable that having built up massive
military forces, Moscow has to deploy them somewhere. (There should be
little doubt that if the European quadrant were to experience greater
tensions, many of its military assets in the Pacific would be redeployed
to the European theater).

25. To cut the analysis short, it might be argued lastly that it is only
natural for the Soviet Union to deploy its military forces in Asia and the
Pacific because the Soviet Union is not only a European state but also an
Asian and a Pacific state. Lenin said so. A series of Soviet leaders after
him have said so. Three quarters of the Soviet Union is in Asia. A
fast-growing twenty percent of its population are Asians. The Soviet Union
has 12,000 miles of Pacific coastline. Some have argued that it should not
be surprising for the world's largest Asian state, with the longest
Pacific coastline of any country in the Pacific, to be militarily in Asia
and in the Pacific.

Ladies and Gentlemen,

26. Let me be perfectly plain and state that it would be insane for any
Pacific state to be complacent about the existence of so much Soviet
firepower in the region. At the same time, it would be mad for us in the
region to live in a state of continuous fear and to die of fright. It is
more reasonable for us to expect the Soviet Union not to use its military
capability to directly aggress against any state in the Pacific, unless it
is seriously or foolishly provoked. And there are no signs that any
Pacific state has any irrational desire to indulge in the medieval sport
of bear-baiting.

27. I hope that you will not think that Malaysia has changed its views
about the Soviet Union because of what I have just said. We still think
the USSR is a bully and we condemn their actions in Afghanistan and in
Eastern Europe. We certainly do not approve of their backing of Vietnamese
aggression against Kampuchea. But we must make some effort to see their
rationale for their actions.

28. Rather than be over-exercised by the Soviet threat, I would argue that
a much greater threat to the entire Asia-Pacific Region is the emerging
Economic Cold War between the United States and Japan and the serious
economic conflicts between these two states, conflicts which provide cause
for concern not only to the two economic giants but also to their friends
-- in the Pacific and in the rest of the world.

29. The pattern of the past in US-Japan economic relations has been a far
from healthy one, not only economically but also politically. It might
perhaps be characterised as a pattern of HUE AND CRY ... AND SIGH. In the
first cycle, it revolved around the question of Japanese exports to the
United States. In the present second cycle, the question is about imports
into Japan, the issue of market access. Thus we saw a United States
worried sick about excessive Japanese penetration of the American
market. There was a hue and cry. The Japanese were forced to respond at
the eleventh hour with a policy of voluntary restraint. There was a
welcome sigh. Now there is a hue and cry about access to Japanese
markets. Mr. Nakasone has responded with a series of moves to get the
Japanese not to buy Japanese. We are still some distance from being able
to sigh with relief. The question now is whether he can carry his own
party, whether he can carry his own bureaucracy, whether Japanese
importers and wholesalers will respond and whether the Japanese people
themselves will respond. The answers to these questions are by no means
clear, for the full psychological "opening up" of Japan --- like the
opening up of China --- is not merely a matter of structure and policy but
also a matter of mental revolution on a massive scale.

30. Part of the danger lies in the fact that in the US-Japan economic
conflict, there is some virtue on both sides, enough virtue for those who
believe in "getting tough" to rationalise and justify their
inflexibility. There is enough virtue on both sides so that neither can
claim a monopoly on rectitude, yet both can climb on the high pedestal of
self-righteousness.

31. Part of the clear and present danger is also the fact that there is
insufficient realisation of the seriousness of what are euphemistically
called "trade tensions" and the fact that time is fast running out. It is
essential to note that the present tough situation can get very ugly
unless effective actions are taken now to prevent conflict escalation, to
attack the roots of the conflict and to achieve economic peace. In a
sense, we have all been lucky that the latest round of conflict has taken
place at the best of times, when the American economy has been quite
buoyant, aided and assisted by the rest of the world. The near future for
the United States economy cannot be anywhere near as good. The recent
figures on the first quarter performance of the US economy makes this
clear enough. US-Japan conflict in a situation of downturn and real
American difficulties can be quite a different beast from the animal we
have seen so far during what can only be counted as one of America's good
times.

32. Those who cannot read the writing on the wall must eventually pay the
price of their political illiteracy. Perhaps there is an element of poetic
justice in this, although it is the kind of poetic justice that none of us
want to witness. Unfortunately, there is not even a trace of poetic
justice in the disastrous effects on us in the Pacific and in the rest of
the world should the United States and Japan not be able to resolve their
problems.

Ladies and Gentlemen, 

33. We have a saying in our part of the world that when two elephants
fight, it is the grass that gets trampled. We have a vital interest in
ensuring that we do not get trampled and that the two elephants who are
both good friends of ours do not fight. There is a further twist to the
elephants analogy, however. Not only does the grass get trampled when
elephants fight, it gets squashed when the elephants sit down to make
love.

34. If the US-Japan economic conflict is not satisfactorily resolved, all
the states in the Pacific and much further afield will be squashed one way
or another. However, if the conflict is settled on a self-centered
bilateral basis without consideration for the other states, if for example
Japan and the United States settle their differences at the expense of
their other economic partners, the repercussions could also be very
serious for us. The dangers of the United States or Japan adopting a
system whereby all are "most-favoured nations" but one or two are more
"most-favoured" than others requires no emphasis.

35. One of the greatest dangers of the present American-Japanese trade
tension, of course, is the driving impetus it gives to the forces of
protectionism. The forces of protectionism are strong enough. They need no
further reinforcement to become one of the greatest threats, if not the
gravest threat, to the prosperity and thus to the peace, security and
stability of the entire world.

36. Please allow me to end, ladies and gentlemen, with some words on
China, with which you will be directly concerned in one of your
sessions. Let there be no doubt that the revolutionary turn of events in
the PRC has on the whole augured well for the Pacific, for Asia, for the
rest of the world, and, of course, for China itself. The Chinese
leadership has no illusions about the difficulties they will encounter as
they seek with determination to make up for lost time, as they struggle to
modernise their country, a preoccupation which the Chinese people have
grappled with since the nineteenth century.

37. Much will depend on what happens after China's second great
revolutionary of this century, Mr. Deng Xiaoping, passes from the
scene. Can the Dengist Revolution be sustained? The Chinese invented
bureaucracy: will the Chinese leadership be able to win over the
bureaucracy which can be expected to resist changes which threaten its
role, position and power? Can the attitudes of the party functionaries
whose importance in Chinese society is in process of fundamental
transformation be changed to full support, and kept that way? Will the
problems of tremendous labour dislocations -- possibly up to 160 million
farmers in the countryside and tens upon tens of millions in industry --
be effectively tackled? Can they be tackled? 

38. Unemployment, underemployment, inflation, cultural pollution of the
kind that saw an utterly incredible football riot in Beijing just two
weeks ago, the weakening of social control, the classical problems
associated with income disparities and the explosion of rising
expectations -- all these problems and more, justify the judgement that of
all the countries in the Pacific it is probably with regard to his own
country that Confucius's saying, which I quoted at the beginning of this
Address, applies most of all.

39. Having said that, let me add that in my judgement, the desire of the
Chinese people for progress is so overwhelming that the Dengist Revolution
will succeed to more or less the extent that the Maoist Revolution did
thirty-five years ago. In a sense both are heroic leaders of their time,
responding to the aspirations of their people in the only way they know
how.

Ladies and Gentlemen, 

40. I started off with the argument that in discerning the outlook for the
region it is important that we adopt an attitude of OPTIMISM WITHOUT
ILLUSIONS. I end on China because it is with regard to China that many in
and outside the region have the greatest number of illusions. I say the
Dengist Revolution will probably succeed. But even if China does succeed,
it will not justify the market illusions, the investment illusions, and
the competition illusions that many now hold.

41. First the market illusion. Many believe that China is and will be a
huge market for the world's exports. Not so. China's leaders will not be
so naive as to encourage or allow for the free and massive importation of
consumer goods, or for that matter capital goods. The country will produce
its own consumer goods. China's industries will not run on the capital
goods of the West. China will buy a few machines, understand them, adapt
them, copy them and manufacture their own. Remember the devastating effect
on the West when Japan did the same.

42. Let us look at the facts: in 1981, China imported US$22 billion from
the rest of the world; the Asean states imported US$72 billion. Which
means that in 1981 the Asean market was three and a half times the size of
the China market. Lest you think the situation has changed fundamentally
since then, let me say that in 1982, the Asean market was four times the
size of the China market. And it may come as a surprise to many that the
United States trades as much with Singapore as it does with China.

43. How about the investment illusion? Those who have successfully
invested in China will have no illusion. The fears of other countries that
in the future massive investment will be diverted from their countries to
China are unfounded. China lacks and will continue to lag behind with
regard to much of the invisible as well as the visible infrastructure and
incentives which investors find attractive. A system of rule of law, a
judicial system and other infrastructure to the liking of the potential
investor is not yet in place in China. There are other problems.

44. There are many in the Pacific, including in my own country, who fear
China as an economic competitor not only for investment but also for
markets. Such apprehensions are not groundless but in their overstated
form they could be a large illusion. Much of the produce of China will be
consumed internally. Much of the competition will be in products in which
we no longer trade. Even when we are direct-product competitors, there
should be no presumption that we cannot be more efficient producers. Most
assuredly, I believe that most of the countries of the Pacific will be
able to meet the coming Chinese challenge.... if the rules of the game are
fair. What we should have no illusion about is to presume that the rules
will be fair, that for strategic reasons the rules of the game will not
take into account -- in the future -- the dictates of the development of
the United States-Japan-China strategic coalition.

45. Some of you might find it surprising that in an analysis of the future
of this region a politician of this region has almost exclusively
concentrated on the economic questions. I have done so because in my
judgement it is the economic factors, the economic dangers, the economic
threats that will determine the future. Ideologies have lost ground
now. At this stage in the development of the countries of the Pacific,
economics is security, economics is politics, economic forces will decide
whether in the concluding decades of the twentieth century we in this part
of the world enter an age of Pacific dynamism or an age of Pacific
conflict and stagnation. Our justified optimism must say that it will be
the former. If we have no illusions, we must admit to ourselves that the
path will not be paved with roses and the journey will not be without
serious and sometimes severe obstacles.

46. This, Ladies and Gentlemen, is the outlook for the Asia-Pacific.