• Mr. Chairman and distinguished members of the Subcommittee, it is a pleasure to be here today to testify on the many challenges facing U.S. policy toward Asia. I would like to thank you in particular, Mr. Chairman, not only for your invitation, but for the steadfast leadership and interest you have shown over the years in U.S.-Asian affairs. My colleagues and I at The Heritage Foundation's Asian Studies Center have always enjoyed and benefited from working with you on Asian affairs, and we look forward to continuing our cooperation in the future.

  I have prepared remarks that I would like to deliver, but with your permission, Mr. Chairman, I would like to submit for the record a written version of my testimony.

  CHALLENGES TO U.S.-ASIA POLICY

  For the past 50 years, peace, stability, and prosperity in Asia have depended on American leadership and involvement. During World War II, Americans became painfully aware of the importance of Asia to its own peace and freedom. This understanding, born in the grim days of Pearl Harbor and deepened in countless battles throughout the Pacific, endured in the Cold War. It endured in the structure of alliances and relationships that, despite setbacks, secured the peace for most of the region.

  Americans have learned that the fate of Asia is also our fate. Our freedom and prosperity depend on the freedom and prosperity of Asians.

  This fact is sometimes forgotten in America today. It should not be. Asia is as important to America today as it was in 1941. Our security depends on the network of military alliances with Japan and South Korea to preserve peace and stability in Asia.

  Asia today presents many challenges to you and your colleagues:

• Threats of ballistic missiles to our shores are raising their ugly heads in Asia (from North Korea).

• China is emerging as a world power, challenging us not only in Asia but globally as well.

• The jobs of millions of Americans depend on U.S. exports to Asia.

• Japan's economy, which is still so important to the world economy, is chronically ill.

• And, of course, the Asian economic crisis has sparked unrest and instability that potentially threatens not only the health of our own economy, but the network of alliances upon which our own security depends, as well as the internal stability of several key nations in Asia.

• Finally, the United States has a long and abiding interest in supporting the growth of democracy in Asia, particularly in Taiwan, where for the first time in China's long history democratic institutions have taken root.

 

CONCLUSION

Mr. Chairman, to protect our own interests and values, the United States must be the leader in Asia. No other country in the world can serve in that role. It is true that leadership has its costs and burdens, but it also has its rewards. What other country in the world has such control over its own destiny as does the United States of America? Fulfilling our destiny in this way is not just the best way to promote and protect the freedom and material well-being of other peoples. It is the only way to preserve our own freedom and security.

This is true no less in Asia than in Europe. But there is a special American interest in Asia. I have tried to describe that special interest to you today. To protect those interests, we need a more coherent policy agenda. And we need a more steadfast, stronger will in implementing that agenda.

We need to emphasize that the key lesson from the Asian economic crisis is that more, not less, economic freedom will ease the pain of the crisis and re-establish the basis for a recovery.

We need to come to terms with a growing China, trying to transform it from within with trade and economic relations whenever we can, but also deterring it from intimidating its neighbors, particularly Taiwan.

We need to be more supportive of democratic Taiwan, helping it to defend itself and countering Beijing's policy of isolation.

We need to devise an alternative to the Agreed Framework with North Korea; it clearly has failed and has become an instrument of extortion, not of peace and stability.

We need to strengthen America's military deterrent in Asia, most importantly by working with our allies to build a theater missile defense system for the region.

Finally, we need to do a better job promoting more open trade in the region, by accelerating the timetable to achieve a free trade area for Asia.

Mr. Chairman, our Asian policy needs a course correction. It is not too late to revive the leadership role of America in Asia. I hope these recommendations will assist you and the Subcommittee in urging the Administration, for the sake of America's future, to embark on this new direction.

Thank you.

 

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The Administration's original motivation for entering into the Agreed Framework was to stop North Korea's nuclear program, at the price of $50 million a year in fuel and a commitment to build $5 billion worth of nuclear energy reactors. But it is noteworthy that Washington has not demanded that the North provide a full accounting of the plutonium it had produced in the past. Inspection of its fuel storage sites, which the North is obliged to permit under other international treaty obligations, has been delayed for years to come under the Agreed Framework.

Furthermore, under the Agreed Framework, North Korea's behavior has become more outrageous. Noting that America is willing to pay real money for North Korea's unfulfilled promises, last year North Korean officials told visiting congressional staff members that it would halt its dangerous ballistic missile exports for $300 million. It now makes on and off demands for the same amount for U.S. inspectors to visit a new underground facility, which is suspected of being connected to its nuclear program. And since 1994, Pyongyang has sought to advance such extortion by undertaking numerous terrorist attacks against South Korea and by developing and exporting long-range ballistic missiles.

There are many good reasons to construct a new deal for North Korea that goes beyond the Agreed Framework. Just last week, the CIA offered disturbing observations about increasing internal volatility in the North. Indeed, the Pyongyang regime has produced one of the world's worst economic basket cases with widespread famine and starvation among its oppressed people. But the North still finds the resources to maintain one of the world's largest standing armies. Deterring this military threat requires the presence of 37,000 U.S. troops in South Korea.

There is also the ultimate question of the manner in which the eventual Korean unification will occur. Having made such an historic investment in blood and resources, it is critical that Seoul and Washington be able to achieve a peaceful unification that leads to a democratic Korean nation.

Members of Congress who have been called upon to appropriate hundreds of millions of dollars to support the Agreed Framework are losing their patience with it. Last September, Congress approved the Administration's request for $18 million to fund its North Korea policy. However, it stipulated certain conditions. The White House is being pressed to certify that the North truly has frozen its nuclear program, that it will end its aggressive missile development program, and that it will stop stonewalling talks with the South. Realizing that it has to sustain congressional support, the Administration has asked former Defense Secretary William Perry to review U.S. policy toward North Korea. As we await Secretary Perry's recommendations, I would like to suggest the following policy options:

Expect that the Agreed Framework process may collapse. It is not likely that the North will fulfill the conditions required by recent congressional certification requests, although these conditions are reasonable. The Congress has in effect called the North's bluff with respect to Pyongyang's commitment to peace, reconciliation, and reform. If the North continues to be defiant and uncooperative, the United States, Seoul, and their allies should end its support for the Framework process.

In return for a new trade and aid package offer, call on the North to engage in serious, high-level peace talks with Seoul. The baseline for those talks should be the Basic Agreements that were ratified by the North and South Korean governments in 1992. Virtually ignored by the Clinton Administration, these pacts were negotiated by the Prime Ministers of North and South and outline specific and practical steps toward easing political and military tensions. The steps include expansion of North-South trade, citizen exchanges, a pullback of troops from both sides of the border, and phased reductions of armaments and troops. Washington, Seoul, and their concerned allies should develop guidelines that make the delivery of aid and other benefits to the North dependent on Pyongyang's cooperation.

Appoint a senior American negotiator as a special presidential envoy to oversee these policy adjustments and communicate with the Pyongyang regime at high levels. While Congress recommended that the Administration do this last year, the appointment of Secretary Perry does not constitute a full response. There is still a need for a senior envoy who can more decisively "sell" new policies to Pyongyang while affirming America's resolve to end the threat to peace posed by Pyongyang's military machine. My colleagues at The Heritage Foundation first proposed such an envoy in November 1994. Congress should continue to press for the adoption of this proposal.

Challenge No. 5: Crafting a New Deal With North Korea

This year, Congress can play a key role in helping the Administration formulate a new policy that rewards North Korea's positive behavior. There is justified bipartisan frustration in Congress with the Administration's 1994 Agreed Framework. Despite promises from the Administration that the Agreed Framework would result in stability, it instead encouraged Pyongyang to seek other avenues of extortion and to continue its threatening behavior. Instead of putting Seoul and Washington in the driver's seat, the Agreed Framework created divisions between Washington and Seoul. Today, South Korean President Kim Dae Jung's "Sunshine" policy permits trade and personal contacts between North and South, but this policy is not connected to real North Korean concessions toward peace.

The Administration established a precedent by not insisting that the North fulfill its part of the Agreed Framework while the United States continues to pay for its part of the agreement. For example, as part of the deal, the North promised to resume substantive dialogue with the South in order to promote tension reduction. The minimal dialogue allowed by the North has produced no meaningful bilateral progress. Instead, Pyongyang seeks contacts with the U.S., clearly hoping that it can isolate the South and extract maximum financial concessions from the United States. Since 1994, more than $272 million has been spent by the U.S. government on the North in humanitarian food assistance, payments to the North to return the remains of U.S. Korean War-era troops missing in action, and supplying energy assistance under the 1994 U.S.-North Korea nuclear deal. Today, North Korea is the largest recipient of U.S. aid in all of Asia.

These anniversaries dramatically highlight the changing relationships we have with both countries. Where once we forthrightly defended democracy, human rights, and freedom, we now attempt to build a "constructive strategic partnership" with a communist regime in China by way of "engagement." At the same time, the Administration would have us constrain our support for the democracy on Taiwan.

Clearly, the Administration hopes that its frequent, high-level, and highly publicized meetings with Beijing will encourage China to peacefully resolve problems in the Taiwan Strait and on the Korean Peninsula, will advance human rights, and will help revive troubled economies throughout the Asia Pacific region.

Unfortunately America's interests in Asia require more than lofty rhetoric and frequent meetings. They require leadership, strong resolve, and determined action. Moreover, American interests are not well served by a partnership with Beijing, especially if that partnership comes at the expense of our existing alliances and if it undermines American efforts to promote freedom and democracy throughout Asia.

In the seven months since President Clinton's much heralded trip to China last June, Beijing has not behaved like a "strategic partner." China continues to modernize its missile and space programs, to threaten Taiwan, and to slow the reforms necessary to promote further economic development and speed up its bid to join the World Trade Organization. It has broken off communications with the Dalai Lama and engaged in the most systematic attack on organized dissent since the 1989 Tiananmen Square massacre of peaceful activists.

In addition, according to evidence uncovered by a congressional commission led by Representative Christopher Cox, the export policies of this Administration may have compromised American security by allowing China to obtain important dual-use missile and satellite technologies through commercial satellite launches. And the Pentagon cautions that China's military modernization poses serious potential new threats to U.S. interests.

In short, the three legs of the U.S.-China relationship-security, commerce, and diplomacy-have been significantly weakened. The Administration failed to use Hong Kong's success to promote market competition and transparency, and it failed to promote Taiwan's successful democratization. Worse, the President publicly stated his "Three-No's" policy in Shanghai, which gave the Administration's stamp of approval to Beijing's campaign to isolate and intimidate Taiwan. Such a dramatic failure of policy demands a reassessment and a course correction.

In order to regain sound policy as the basis for an effective U.S.-China policy, to better protect security and promote freedom, Members of the House of Representatives should encourage the Administration to:

Support cross-straits dialogue without isolating Taiwan. The United States has a significant interest in the peaceful resolution of differences between Beijing and Taipei. But Washington should steadfastly refuse to take an active role or undertake any action that would impose preconditions on the negotiators. Wang Daohan, China's chief unofficial negotiator with Taiwan, will visit Taipei later this year. He is returning the October 1998 visit of his counterpart, Koo Chen-fu, to the mainland. This dialogue is encouraging. Sadly, however, Beijing was able to use the President's "Three-No's" statement to pressure Taipei to enter negotiations on future relations before Taipei was ready to do so. Washington should support the cross-straits dialogue and oppose Beijing's attempts to isolate Taiwan. We should speak out in favor of Taiwan's membership in international organizations even if Beijing objects. Taiwan has much to offer the international community by its participation in organizations involved in trade, economic development, and humanitarian assistance. Furthermore, China's isolation efforts further encourage the pro-independence sentiment in Taiwan.

Reaffirm the 1979 Taiwan Relations Act. The 1979 Taiwan Relations Act was a unique product by Congress to express America's desire to preserve democratic freedoms, national security, and human rights in Taiwan. The Act stipulates an official governmental relationship that allows our economic and cultural ties to flourish. Especially important is Section 3 of the Act, which calls on the United States to sell Taiwan defensive arms, and to view any threat to Taiwan as being "of grave concern to the United States" as well. China's aggression in the Taiwan Strait several years ago, and its military modernization, should demonstrate the need for the United States to sell Taiwan a new generation of defensive weapons, including missile defense systems, advanced air combat equipment, and conventional submarines.

Urge China to reduce its trade barriers and increase the transparency of its trade rules and regulations. The visit later this year of Chinese Premier Zhu Rongji to Washington will offer the U.S. a chance to impress upon him that China's best interests are served by opening markets and liberalizing the Chinese economy. We should continue normal trade relations, while making clear that reduced trade barriers are essential to addressing China's $60 billion trade surplus with the United States. China has made progress in reducing tariffs and other trade barriers, but they still fall short of WTO standards. Taiwan's admission to the WTO should be encouraged and not held hostage to Beijing's timetable.

Encourage China's Democratic Forces. By encouraging trade and economic liberalization in China, we also promote economic freedom. Economic freedom, in turn, creates the demand for more political freedom. But we can do much more to help China's democratic forces. We should stress to Chinese leaders like Zhu Rongji that economic reform cannot succeed without political changes, all of which serve China's interests. Recent reports of increasing organized unrest in China underscore the need for China's leaders to undertake greater democratic political reforms. We should also speak loudly when China responds to such popular demands by suppressing forces striving for peaceful political reform. When the United Nations Human Rights Commission meets later this year the U.S. should strongly protest the crackdown on the Chinese Democracy Party. Administration officials and Members of Congress can speak out on behalf of persecuted political and religious leaders, as we continue to welcome leaders like the Dalai Lama and Wei Jingsheng, and as we continue to seek the release of others who languish in prison. And U.S.-funded organizations like the National Endowment for Democracy, the Voice of America, and Radio Free Asia should continue to receive the resources to convey a message of democracy and freedom to the people of China.

Challenge No. 4: Advancing American Interests With China and Taiwan

We mark several somber anniversaries this year with respect to China and Taiwan:

Fifty years ago, the government of the Republic of China fled to Taiwan, and the communist government established the People's Republic of China.

Forty years ago, the Dalai Lama fled Tibet.

Twenty years ago, we established diplomatic relations with Beijing and passed the important Taiwan Relations Act.

Ten years ago, we witnessed the atrocities of the Tiananmen Square massacre.

And one year ago, President Bill Clinton enunciated the Administration's unfortunate "Three-No's" policy toward Taiwan.

Challenge No. 3: Strengthening America's Asian Deterrent

Asia's economic stability assumes a continued peace, which in turn, is ensured by America's continued military presence and strategic leadership. America's military role remains essential in Asia. Unlike Europe, Asia has yet to surmount historic and ethnic divisions sufficient to create viable multilateral security system. In Asia today, deterrence depends on the ability of American military forces to operate independently. A recent demonstration of America's vital military role occurred in 1996, when we sent two aircraft carrier battle groups near Taiwan. This necessary response to threatening Chinese military exercises was the kind of action that only the United States could undertake.

China's growing military power deserves to be examined closely by the United States. Two Department of Defense reports on the People's Liberation Army (PLA) requested by Congress in the last three years, plus two soon to be released, confirm what is available from a variety of open sources: China is engaged in an across-the-board effort to modernize its military forces. China is seeking advanced future-generation military systems like lasers, radio-frequency weapons, military-space systems, ballistic and cruise missiles, modern nuclear submarines, and supersonic anti-ship missiles.

In the near-term, perhaps out to 2010, this effort will be directed toward obtaining forces necessary to subdue Taiwan. The PLA will seek the means to counter Taiwan's airpower with overwhelming numbers of non-nuclear but highly accurate ballistic and cruise missiles, while countering Taiwan's navy with conventional and nuclear submarines. China's use of force to intimidate Taiwan in 1995 and 1996 provides a preview of potential future military campaigns. It is unlikely that China will invade Taiwan, but it does seek the missile, air, and naval forces to deter any U.S. military support for Taiwan, as it seeks to force Taipei into unification terms dictated by Beijing.

Many of the same systems sought by the PLA in the near term will be useful toward militarily enforcing China's claims to much of the South China Sea. China employs a "talk and build" strategy toward this area. It gradually builds larger and larger outposts to bolster its political claims, while promising to seek a diplomatic solution that never seems to develop. China's slow construction of facilities in Mischief Reef, which is about 170 miles from the Philippines, but over 800 miles from the Chinese mainland, is the most recent example of China's approach. The Philippines' protests have gone unheeded by China. Beijing very simply is filling a power vacuum. This vacuum is caused by Manila's lack of effective military forces and an essentially inoperative military alliance with the U.S.

A second serious security concern is the enormous conventional military threat posed by North Korea, plus its expanding missile capability and latent nuclear potential. While its economy and people are increasingly ravaged, Pyongyang still manages to find the resources necessary to support a conventional army with large armor, artillery, and Special Forces components. The North may not be able to mount a sustained war. But it could still mount a rapid and devastating strike against South Korea.

But through its developing missile forces, North Korea may soon pose a new threat well beyond Northeast Asia, perhaps as far as the American homeland. Within the last week both the CIA and the State Department have warned that North Korea may soon, perhaps even this year, test a ballistic missile capable of reaching the United States. This would be a more advanced version of the Taepodong missile that shocked Japan when North Korea launched it across Japan's territory last August. The first stage of this missile, known as the Nodong, is thought to be the basis for Iran's Shahab and Pakistan's Ghauri missiles. It is now possible that these three countries, with direct or indirect access to Chinese and Russian missile technology, will only compound proliferation and missile challenges for the U.S. in years to come.

These security challenges should prompt consideration of the following policies:

Building missile defenses for Asia. There is a clear urgency for the U.S. to develop effective theater missile defense systems to defend both our allies and U.S. forces in Asia. This is required to respond to both North Korea's and China's rapidly developing missile forces. Already this year China has mounted a major diplomatic campaign to stop U.S. missile defense cooperation with Japan and Taiwan. It is also highly critical of U.S. National Missile Defense plans. China fears U.S. missile defenses will render ineffective its nuclear missile forces, even though they are thought to be small in number. We should tell Beijing that non-nuclear missile defenses are not a threat to China and provide our allies with deterrent that precludes their developing nuclear weapons. China has recently suggested that it would join an expanded Anti-Ballistic Missile (ABM) Treaty. China's goal in doing so is to undermine U.S. missile defense plans. The ABM Treaty no longer serves U.S. interests and should be scrapped.

Strengthen cooperation with Japan. In the coming months Washington should press Tokyo to pass implementing legislation for the new Defense Guidelines. These guidelines, formulated in 1996, ensure that Japan can provide necessary logistical support for U.S. forces in the event of emergencies. It is also important to press Japan to begin TMD cooperation with the U.S. and to eventually include South Korea in such efforts.

Rebuild military ties with the Philippines. Washington's defense relationship with Manila has been essentially moribund since 1992. That was the year that the U.S. closed its military bases in the Philippines. Should the Philippine Senate approve the Visiting Force Agreement now before it, the U.S. should offer the Philippines some of its older military aircraft and ships to begin a much needed Philippine defense re-equipment program. Such aid should not create new dependencies and should proceed in the context of renewed U.S.-Philippine military cooperation.

Invest in our Asian deterrent. The Administration's intention to reverse years of declining defense spending is long overdue. We should pay our troops better and recruit more of them to relax the burden of constant overseas deployments. But we also need to buy them the best tools our defense sector can produce. In Asia, our troops will need not only missile defenses, but better combat aircraft, more survivable cruise missiles, better mobility resources, and enough ships and submarines to sustain an adequate U.S. naval presence in Asia.

I wish I could conclude that the Clinton Administration's responses to the challenges of Asia have been adequate. However, I cannot reach that conclusion. All too often the Administration has treated Asia haphazardly, often reversing policy without sufficient explanation, confusing friend and foe alike, and failing to bring all the pieces of U.S. policy together in a coherent strategy. Over the last six years, our China policy has fluctuated wildly, from being at one time too openly confrontational and at another too timid and appeasing. With North Korea, the United States has not only lost the initiative and been outmaneuvered; we now find ourselves as an object of extortion. To uphold the Agreed Framework with North Korea, the Administration has been forced to consider promising financial aid as an incentive not only to comply with the agreement's terms, but to avoid attacking the South.

Mr. Chairman, this is no way to run Asian policy. Instead of a clear delineation of our interests, we see incoherence and sometimes outright confusion. Instead of steadfastness in defense of these interests, we see vacillation that sometimes appears, to friends and foes alike, as weakness. Instead of a clear-cut advocacy of free trade and economic freedom, we have seen a policy that all too often follows the discredited policies of the International Monetary Fund. As a result, America's image and credibility in Asia have suffered significantly. Our allies wonder about our staying power. Our enemies are tempted to test our strength. And our markets in Asia are shrinking.

This is not a time for American weakness and vacillation in Asia. This is a time for strong, predictable, and coherent leadership. China's growing power and prosperity will change the face of Asia forever. We cannot be absent or distracted as this historic transformation occurs. Neither can we be absent or distracted as the momentous economic changes facing Asia today transform the Asian landscape. Japan's continued economic decline and the economic crises in North and Southeast Asia will have long-lasting effects on Asia. And they will also have long-lasting effects on our interests in Asia.

We need to face these challenges head on, not with a second-class strategy that deals with Asia haphazardly and as a set of disconnected crises. Rather, we need a first-class strategy-the kind that has been so successful in the past. We need a strategy that employs the same measure of excellence, intelligence, and will that won World War II and the Cold War.

Challenge No. 1: Restoring American Credibility in Asia

The historic policy of the United States in Asia has been to advance democracy, freedom, and American security. Our security objectives are to deter aggression and to control the proliferation of dangerous weapons and technologies. Our alliances with Japan, the Republic of Korea, Australia, the Philippines, and Thailand are essential to advancing these goals. Our commercial objectives are to help build the institutions necessary for free markets to function well (transparency and rule of law), and to open markets to American participation. Our political objectives are to promote freedom in all its forms, to protect universally recognized civil liberties, and to promote democracy.

However, as a frequent visitor to Asia, I am constantly responding to questions about the direction of American policy in Asia: Who is in charge? What are our goals? How does Washington want the next step or next chapter in any number of issues to evolve? For too long, I have found myself at a loss to explain our policies. It is certainly laudable for President Clinton very eloquently to explain democracy to the people of China. But then when it comes to the only successful democracy in China's long history-that on Taiwan-the President chooses to constrain American support in the form of his "Three-No's."

Vice President Gore made an impressive defense of freedom in Malaysia last November by speaking out for America's friend, Anwar Ibrahim. But it would have been very helpful for someone in his position to give similar voice to the aspirations of the people of Cambodia. I note with some encouragement that Secretary of Defense Cohen has worked hard to convince Japan to join in theater missile defense (TMD) cooperation. But then the Administration reaffirms U.S. faith in the defunct Anti-Ballistic Missile Treaty, which would prevent us from producing an effective TMD system.

These are just some areas in which the U.S. might improve the consistency of its policy and, by extension, the strength of its leadership.

The burden of leadership for the United States is growing heavier in Asia, as it is in so many other areas of the globe. The Congress contains many Members on both sides of the aisle who have demonstrated their concern, have developed expertise, and can share a vision for future U.S. leadership in Asia. What follows is my short list of key challenges that I hope this Subcommittee will examine this year in a full and bipartisan manner.

Challenge No. 2: Promoting Economic Freedom and Free Trade

A second challenge for U.S. policy in Asia this year is to help our Asian friends recover from the devastating crisis that has wracked many Asian economies over the last two years. At the beginning of 1999, there are some encouraging signs of turnaround in countries that have suffered the most from the financial crisis that swept Asia in 1997. For example, South Korea and Thailand, whose economies shrank about 7 percent and 8 percent, respectively, in 1998, may see a return to slight growth in 1999. But as much as one looks for optimism, one finds reasons for caution. If the U.S. economy slows down this year-some U.S. economists predict only 1-percent growth-this will mean a reduced capacity to absorb Asian exports.

In addition, Japan, which had for long been a key engine for Asian growth, may yet see further economic contraction in 1999. China's ability to survive recent economic storms also masks the need for deep and painful structural reforms. And as we have seen, economic convulsions, be they in Russia or South America, can quickly produce negative ripple effects around the world.

Another cause for pessimism is that some in Asia are learning the wrong lessons from this crisis. At one extreme is Malaysia, which has imposed a ban on trading in its currency outside Malaysia as a means to protect its markets from volatility. At the same time, Malaysia directed its banks to ease credit in a move both to prime its economy and to help politically connected businesses. Malaysia is gambling that a return of growth can preclude the need for real reform and financial transparency. A lack of financial transparency, and a structure of outmoded bankruptcy laws that facilitated poor lending for the politically connected, is at the root of the financial crisis in Thailand and Indonesia. Real confidence in their financial markets will not return until there are serious reforms in these areas.

Another unwise lesson gaining ground is that somehow government agents can out-think the market. Hong Kong's exemplary record of avoiding government interference in its economy was blemished by its decision last August to intervene in its stock market to ward off currency speculators. It was with great anguish that I had to inform my good friends in Hong Kong that their move could cost them the number-one ranking in our Index of Economic Freedom.

The extreme results of seeking to manage what should be left to the market can be seen in Japan. Years of economic management by government bureaucrats have resulted in weak and uncompetitive banking sectors, non-performing loans, and a record of allowing poor investments that have compounded debt burdens. Once thought to be the wave of the future, "Japan Inc." has proved that bureaucrats cannot outsmart markets.

At an even further extreme is China. Its massive state-owned sector is not able to sustain itself, requiring bad loan after bad loan, which raises real questions about the solvency of China's banking sector. At both ends-the state owned enterprises and the banks-China refuses to relax political control out of fear of creating greater social unrest. Were it not for China's controlled exchange rates, the loss of confidence that led to crises in other Asian financial sectors would also have affected China. Yet, as is well known, China faces great pressure to devalue its currency to increase export competitiveness. If it does so precipitously, it may cause another great financial convulsion. But the issue of devaluation should not divert us from the real problem: China must undertake painful economic reforms to strengthen markets, affirm the rule of law, and provide real transparency in order to establish a basis for foreign and domestic confidence.

After five years of measuring economic freedom in most of the world's economies, our Indexprovides ample evidence that Asian countries which took seriously the requirement to open markets, reduce government interference, and reduce corruption, have fared better during the recent economic crisis than other economies that scored lower. Hong Kong, Singapore, Taiwan, and even the Philippines have, to differing degrees, been less affected than their neighbors by the Asian economic flu because they have improved their level of economic freedom. To help promote a firmer foundation for Asian economic recovery, this year the U.S. should:

Use the APEC Forum to push for free trade and free markets. Trade has been the traditional engine of Asian economic growth. We are fortunate that this year's APEC host is New Zealand, the fourth most free country in the world. A small country of 3.5 million, New Zealanders prosper by promoting a free and efficient domestic market while taking full advantage of foreign trade and investment opportunities. New Zealand's experience with a free trade agreement with Australia offers a positive example of the benefits of free trade to other APEC members. Before the APEC summit in Wellington this September, the U.S. should work with New Zealand to gain a commitment to accelerate the 1994 Bogor Declaration's goal to create an APEC free trade area by 2020.

Urge continued reform of financial markets. Inasmuch as Asia's economic crisis began as a financial crisis, there is a requirement that Washington place a clear priority on promoting Asian financial reform. For example, U.S. officials should encourage Thailand to proceed with badly needed bankruptcy reform laws that will meet global standards.

Urge continued reform of the International Monetary Fund. The Heritage Foundation has long supported reform of the International Monetary Fund and the World Bank. For too long, these institutions have been bastions of statist economic policies, which all too often have facilitated the kind of legal corruption, or cronyism, that helped foment the recent Asian economic crisis. If we are to continue supporting the IMF, we should insist that it promote policies that work, such as full transparency in markets, and renounce policies that fail, like currency controls. Inasmuch as American taxpayers provide about 18 percent of the IMF's total funding, it is essential that we do not allow IMF funds to bail out failing but politically connected companies. The IMF should not be a lender of last resort that continues to bail out countries that first need to adopt economic policies and laws that foster greater economic freedom.