The People Next Door: Australia and the Asian Crisis

June 1, 1998 Topic: Economics Regions: Asia

The People Next Door: Australia and the Asian Crisis

Mini Teaser: Australia is the nearest Western country to that great bonfire of the vanities, the Asian crisis. The fear is that it may also be the most combustible.

by Author(s): Eric Jones

Australia is the nearest Western country to that great bonfire of the vanities, the Asian crisis. The fear is that it may also be the most combustible.

The extent of Australian dismay at this state of affairs can be understood only by reflecting on how Australia long ago set about repelling influences from Asia and denying its proximity to that continent; how comparatively recent it is that the country woke from its Eurocentric dreamtime; how uncritical fashionable opinion was in proclaiming the new dawn of Australia's intimacy, if not identification, with an emergent and dynamic Asia; and how ambiguous the new relationship has in fact proved to be. A brief recapitulation of some salient features of Australia's history over the last century will aid such understanding.

As Australians moved from being the inhabitants of a collection of colonies to being the citizens of an independent state, a run of shocks--lasting from the depression of the 1890s to the slump of the 1930s--drove in on themselves a people who had once been innovative and enterprising. Among the responses to these events was what historians have dubbed the "Australian Settlement", a tacit pact between labor and capital that institutionalized protectionism, high-wage unionism, and the White Australia policy. Dependence on Pacific Islander and Asian labor was forsworn. Australians schooled themselves to be oblivious to Asia.

Hence the Second World War found Australia thoroughly unprepared for Japan's drive into its backyard, and not solely in terms of material unpreparedness. There were few Australians who knew anything about Asia. As their lives had been devoted to a systematic denial of the fact that their land was located at the southern extremity of Southeast Asia, they were caught flat-footed. Victory in that war made surprisingly little difference to all this. Import substitution in manufacturing was promoted, but the country really lived, in the phrase of the time, "on the sheep's back." Good living standards were sustained by high prices for the minerals and agricultural commodities that Australia exported, notably to Britain. "Asia" remained scarcely more than a string of ports-of-call for P&O liners on the long voyage "home" to Southampton.

Profound awakening came only in the Whitlam years of the early 1970s. Among the many reasons for this was the urge of the young to participate in the radical social and cultural changes then taking place in Britain and the United States. Yet once Britain defected to the shelter of the Common Market in 1973, the only markets that could sustain the Australian economy were in the newly industrializing parts of Asia, notably Japan. Neither of these factors should obscure the genuine liberalization achieved by the Australian Labor Party government of Prime Minister Gough Whitlam, who set about reducing tariffs and induced the unions--urban New Class voters were easier to persuade--to abandon remaining elements in the already-eroding White Australia component of the Australian Settlement.

From the mid-1970s on, Asian immigrants began arriving in some numbers, and students in far greater numbers than before, with no significant social friction. Today, one in twenty of the population is of Asian origin. Although older white Australians remain concerned about what they perceive as the unwillingness of Asian immigrants to assimilate, opposition to immigration was not politicized until recently, rising and falling with the rate of unemployment rather than the size of the intake. Australia's large cities became quite happily integrated, as they remain: a 1998 survey of 7,000 fifteen and sixteen year-olds has found fewer than 1 percent willing to express strong racial prejudices. Australian companies switched their trade to such an extent that Japan and South Korea became the country's first and second trading partners. The Asian affiliation of trade became gospel and subsequent Liberal (i.e., conservative) oppositions or governments did not reject it.

Fast forward now to 1991-96, when another Labor prime minister, Paul Keating, decided to make his government the vehicle for a crusade to "Asianize" the country. This campaign was curious. Keating's abrasive style and temperament could scarcely have been further removed from those of Asia's leaders. Nor--as it eventually transpired--could "becoming Asian" and accepting even larger numbers of Asian immigrants have been further from the minds of many older, less-educated, or rural Australians. As this has become clear, fear of an electoral backlash against the intended (or pretended) transfer of cultural allegiance from West to East has had the unintended and ironic effect of putting lead weights in the saddle bags of current policy toward Asia and Asian immigrants.

In reality, Keating's "Asianization" had less to do with the change mooted than with altering the balance of domestic political power. Almost certainly it was a partly heartfelt, partly opportunistic bow to the realities of the region and attractions of the growing markets to which Australia found itself neighbor. Beyond that, the move seems to have been an effort by left-wing city elites to part the country from its English heritage, which is felt to favor conservatism and the conservative political parties. A current example of the same radical project is the Republican movement, which, to judge from the almost laughably unspecific plans put to a Constitutional Convention in February 1998, is also a mixture of negative endeavor--anti-heritage--and elite power play rather than having seriously to do with removing the authority of the English Crown over Australians. Royal power long ago vanished. In similar fashion, as far as "Asianization" went, no one ever described in detail what was intended, and it is indicative that few who rode the bandwagon bothered to learn a single Asian language. If the program was, as I believe, more fac ade than reality, it would be easy to replace in its turn, though a full retreat from engagement with Asia is unlikely. Australia's alternatives to Asian markets are limited, and, after all, these markets have contracted, not collapsed. Beyond economics, too, there is no possibility of extrication from strategic involvement with the region.

The Paradox of Australian Culture

Cultural links are separate from trade links and herein lies the greatest Australian paradox. As some Asian leaders continued to insist, even during the Keating years, Australia's culture derives ineradicably from Britain, Europe, and the United States. Indeed, links with the rest of the West are likely to increase rather than dwindle in the immediate future--this because of the irony that, just when "Asianization" became the cry, the Internet and e-mail started to put Australia into instantaneous contact with the other English-speaking countries, dethroning the famous "tyranny of distance" that had hitherto dominated Australian history and constructing a new bridge back to the old homes of Western culture.

This bridge is the stronger in that the Australian uptake of new technologies is exceptionally rapid. Australians are among the world's heaviest users of the Internet and supply a disproportionately large share of editors of web sites. (According to The Economist, Australia is fourth from top of the list for Internet hosts per capita, after Finland, Norway, and the United States.) Meanwhile the costs of other forms of communication have been dropping too. The real price of airfares has come down far more than most prices, meaning that Sydney and Melbourne have to all intents and purposes shifted closer to London and Los Angeles. "Asianization" was in any case never a plausible option for a population whose historical referents are European, and whose social manner is the opposite of the reticence typical, or at least stereotypical, of Asians.

Certainly, increased cultural exchange with Asia is now taking place, and many educated young Australians are equally intrigued by Asia and the West. But strident official Asianization is another matter. In the "bush" and smaller towns it has been rejected--wrongly, because immigrants were seen as a threat to jobs, but understandably, in that the campaign was trumpeted by a condescending city elite. This rejection was nastily signaled by the election of a populist politician, Pauline Hanson, to federal parliament in 1996. For months no newspaper or broadcast was complete without reference to Hanson and her views that Aborigines receive preferential treatment and Asian immigrants are taking jobs from Australians. The advent of openly racist politics stunned the defeated Keating government and the media, both of whom had been unaware or contemptuous of opinion in the bush. Although media comment was almost uniformly hostile to Hanson, the publicity exaggerated the extent of Australian racism and fueled extremes of Australia-bashing in the Asian press. Into this embroilment fell the publication of Samuel Huntington's The Clash of Civilizations and the Remaking of World Order (1996). The fury with which Australian journalists greeted his characterization of Australia as a "torn country", attempting unavailingly to decamp from one civilization and join another, showed that there was enough truth in it to sting.

Paradoxes of Business Behavior

"Asian Values" were often admired during the Keating years--more often than not the wrong Asian values, those of an imposed consensus fronting for authoritarianism, rather than those of a slowly emerging democratic Asia. The corporatism of the then-prosperous Asian Tigers was seized on by business commentators eager to weave a closer mesh with government at home. Business was inclined to believe that Asian governments cleared obstacles from the path of commerce and altogether favored industry in a way that Australian governments were willfully ignoring. The spin put on the links between Australia and its neighbors also served to obscure rather than clarify what was really happening. Government often spoke of trade with Asia as if it had the ASEAN (Association of South East Asian Nations) countries principally in mind; yet the bulk of trade was with the Northeast, that is, with Japan, South Korea, and increasingly the Chinese Economic Area. Again, for all the talk of economic integration with Asia-Pacific countries, as soon as capital flows were liberalized businesses actually decreased the share of their investment in the region. They traded with Asia but they invested in the United Kingdom and Europe, the United States, and New Zealand. As recently as 1995, whereas over 60 percent of Australian exports went to Northeast and Southeast Asia, over 50 percent of overseas investment was still going to the United States, Britain, and New Zealand, and a mere 7.5 percent to the countries of ASEAN.

The direction of overseas investment was surprising, even astonishing, given the hoopla about profits to be made in Asia. Even as their money was heading toward London and New York, business leaders were asserting that Australia had to be in Asia because returns on investments were supposed to be well above those of mature Western markets. To be sure, investment did shift over time toward East Asia because the Asian "miracle" continued so spectacularly. Australia is in any case prone to much the same enthusiasms as the United States; indeed, as the smaller country it tends to import them across the Pacific. In addition it has generated its own "New China lobby" of former politicians, assorted bureaucrats, and ex-diplomats, who exploit the contacts they made when in the service of the public in a manner familiar to Americans but hitherto rare in Australia. There are even lobbyists for trade with Burma. More broadly, the whole discussion of the subject is characterized by a degree of self-censorship with respect to candid opinions about negative features of Asian society. In the circumstances, then, the continued westward flow of so much investment has been surprising.

My sense of why this has been so, based on discussions about particular deals, is that many firms have found it hard to assess risk in cultures of which they have scant experience and whose languages only a rare executive or board member can speak--cultures in which guanxi (personal connections) govern commercial relations, bribery is so commonplace it is not seen as wrong, and the lack of independent law means that contracts ultimately rest on access to government. Dispatching or receiving consignments of goods is one thing, investing is another. Mature markets in the Anglo-Saxon countries may not have promised such glittering rewards, but the institutions were familiar and the courts were trusted.

A number of firms did plunge into Asia. Some made money but others did not, shrugging this off with brave talk of being in it for the long haul and the desirability of doing business in the personalized Asian way, by slowly forging relationships with influential people. As time passed, more joined in. Australian business is thus significantly implicated in the financial crisis, with an unknown but clearly embarrassing volume of loans and assets now at risk. Of course, losses of all kinds will be laid at Asia's door for the foreseeable future, since, as Christopher Lingle has quipped, the Asian crisis is the El Nin o of economic life, a vent for all blame whatever its true cause. Luckily in this instance, many Australian companies were characteristically slow to move, so that their shared pain may turn out to be less than that suffered by more alert and quick-off-the-mark companies from distant Western lands. Australian banks, by and large, seem likely to suffer smaller write-offs than the more eager among their European counterparts.

"By and large" is used advisedly. The fog surrounding the Asian crisis is pierced by the gleams of many dubious statistics but very few genuinely illuminating ones. The most exposed of the larger Australian banks is the ANZ, which may be used to illustrate the level of uncertainty. The general manager of its chief executive division acknowledges estimates of exposure ranging from $A100 million to $A400 million. Differing accounting conventions and assumptions about the likelihood of repayments mean that a single, scientifically guaranteed figure is not likely to be shrouded in the murk, for such a figure does not really exist. After all, even between Australia and the United States accounting practices vary substantially; between Australian methods and the opaqueness of many Asian companies they differ much more, with as yet unknown implications.

Markets reflect expectations and prices vary with degrees of confidence. With each passing day articles appear in the press contending that there will be a gloomy outcome in East Asia or promising easy pickings followed by rapid recovery. In such a data void, and given the political houses-of-cards involved, categorical statements remind one of the remark, supposedly after Groucho Marx, that the one thing in life that matters more than all else is sincerity--"and if you can fake that, you've got it made."

The Formation of Opinion

How did the world slither into such a confusion of opinion? Some Australian voices, such as those of Helen Hughes (late of the World Bank and the Australian National University) and Prudential Bache's Anna Borzi, issued clear warnings about Asian economic or banking problems back in April 1997. But contrarian voices like theirs were drowned out by the euphoric roar of the marketplace and the insouciance of a government keen on recommending business to enter this one favored region.

Australia is a smallish country, its brashness more a matter of style than of genuine nonconformity. This has implications for the way business, or at any rate large businesses, responded to Asia and may respond in future. Many businesspeople scorned the notion of political risk and were impatient with the inevitably tentative manner in which advice on the subject was offered. For many older businessmen, "academic" is still a term of derision. Thus all too little homework has been done and too much reliance has been placed on the "Grand Tour" as a means of surveying markets: executives making occasional forays into the region, talking to, believing, and then acting on the advice of local contacts and their company's representatives on the spot.

Late into 1997 they were still receiving assurances that the fundamentals were sound, whereas anyone with a sense of Asian history and institutions could see that for the most part they were archaic and rickety. There is little evidence that business went out of its way to solicit countervailing opinions, certainly not the opinions of academics and other specialists outside the ranks of technical economists, who (it now transpires) were relying on late-appearing and comically understated official figures of foreign investment. High volumes of investment--simply what other people were doing--were actually taken as justifying confidence in the market. Unsound conclusions were likewise drawn from high rates of GDP growth, without closely considering how these might translate into profits for Western investors.

Contacts with local Cassandras would not only have been temperamentally uncongenial to senior businesspeople visiting Asia, but would have had the added and serious drawback of irritating authoritarian governments with contracts on offer. It is also true, as we have seen, that businesses from other Western countries, especially banks, were as or more imprudent in not listening to warnings about risk and in relying on inadequate research. The Chicago analyst David Hale is right in saying that the bankers who lent so much to Asia were "unsophisticated" and showed an obsession with "statistical quantification at the expense of other factors which influence credit quality such as history, politics, sociology, and culture." But he is not right in saying that this constitutes a "great mystery." For one thing, it is quite of a piece with the history of boom-and-bust investment in all emerging markets. (The only difference in this instance was the scale and duration of the East Asian upturn, which made the downturn all the more humiliating.) For another, many of the bankers and fund managers are very young. If they studied anything at university pertinent to their work, it was economics--during a period when academic economists have been stripping non-mathematical subjects from the curriculum, thereby robbing their students of the kinds of vicarious experience and knowledge of context that a broad education used to give.

According to Derek Fatchett, foreign office minister of state in Britain, the European Union is particularly exposed to the crisis, its banks having lent over $50 billion in 1996 to what he calls "emerging East Asia." This is more than the exposure of American and Japanese banks combined, and vastly more than that of Australian banks. But again, I am inclined to attribute any restricted exposure by larger Australian firms less to better foresight than to their characteristic slowness off the mark; they were saved by one of their weaknesses. Surveys find Australian managers to be worse prepared than American, German, or Japanese managers dispatched to Southeast Asia; they perform less well and not as many last the full term of their postings. Whereas Japanese expatriate managers stay on foreign postings for an average of four years and fewer than 5 percent fail, Australians last on average under two years and 30 percent fail (The Australian, May 14, 1996). Australia may be physically close to Asia but the cultural gap is still wide, so much so that there are specialized consultancies advising on how to recover from elementary errors in dealing with Asian firms.

This relative incapacity of some major Australian corporations to go international is suggested by data on the composition of boards of directors. Piecing together the few available comparative figures reported in studies by David Uren and John Onto we find that only 28 percent of the boards of public companies include a woman, compared with 69 percent in the United States, and an infinitesimally small percentage include either a member of a racial minority (51 percent in the United States) or a foreign national (17 percent in the United States). Looking more closely at large companies with at least 10 percent of their assets offshore, only 7 percent of board members are foreign nationals, and these include New Zealanders. There is little diversity even within Australia: 67 percent of directors reside in the city in which their company is headquartered. The chairman of one major company told Onto, "If I had my choice, all members of my board would be from Melbourne."

The market has now realized that the local culture of "mateship" may dull the response of the top end of town to the crisis. The search is on for American executives to run Australian companies. "The current wave of executive replacements", declares the Australian Financial Review, "marks the failure of Australian management culture."

The ThirdAustralia

The earlier economy of Australia referred to at the beginning of this essay--the Australia of the "Settlement"--was dominated by big business and big unions. Fortunately there is now an increasingly important third Australia--the universe of small and medium-sized enterprises, in comparison with which the cluster of big corporations in downtown Sydney and Melbourne can look like Jurassic Park. The last twenty-five years, during which tariffs were reduced, higher education expanded, and immigrants admitted from all destinations, have gone a long way to rejuvenate the smug society of the Australian Settlement. Historically, Australians were handy, adaptable people. Less regulation, new markets, and reinforcement by immigrants, whose children tend to perform well academically, have now revived some of that spirit. One-third of small business operators were born overseas, 50 percent more than the proportion of immigrants in the population. The country remains an excess producer of scientific knowledge. Singapore's expressed wish that young Australians move there and share their creativity is a particular irony, given its previous criticisms of Western culture and patronizing comments about Australia by some of its politicians. It testifies to the vitality of Australian intellectual life, just as the business start-ups testify to its underlying commercial vitality.

Australia's service sector has greatly expanded. I have already alluded to the interest in information technology, an industry for the young if ever there was one. Financial industries are set to remake themselves in the wake of further deregulation recommended last year by the Wallis Committee. The banking system contains plenty of expertise. Asian banks, such as Sime Bank in Malaysia, have been eager to acquire credit risk managers on secondment from Australia, while the Bank of Bangkok has been hiring them away from Australia. Approximately $1 billion of flight capital came into Australia from Indonesia during the last five weeks of 1997.

Far from being the "convict dustbin" of Southeast Asian journalistic hyperbole, Australia is firmly governed, political opponents are not legally hounded, there is a proper apparatus of contract law, and a free, if rather faddish, press. Whatever the surviving patches of arthritis in big business and big labor (which is currently fiercely resisting radical reform of the waterfront), Australia is one of the countries in the world where it is precisely the fundamentals that are sound. Foreign firms are interested in acquiring its resource companies and thereby gaining entry to low-risk exploration in Australian territorial waters--meaning low political risk. This is the feature that has attracted to Sydney the Asia-Pacific regional headquarters of multinational corporations, and will now attract more. There is a fair chance that the Australian economy will become more adaptable than it has ever been, though of course many obstacles remain and the Asian crisis has undoubtedly intensified some of them.

Economic Dangers

Even if we suppose, for the sake of argument, that the losses do prove to be bearable, growth will be slowed for a while. The Aussie dollar is so dependent on regional trade that it must remain exposed to further shocks. South Korea and Japan hold much of the key: a resource-exporting economy like Australia's, versatile though its other parts are, cannot quickly replace these markets. And even if the South Korean economy does recover by means of IMF help and Kim Dae Jung's reformism, Japan is a much less tractable problem because of the unresponsiveness of its political system to the corruption of its bankers.

Domestic demand in Australia has been high during the early part of 1998 and this has provided some cushion--but it is a cushion from which the air has already begun to leak. The rate of growth in GDP was 3.3 percent in 1997; leading authorities forecast it at the end of March 1998 as heading for 3.2 percent this year. But that is a hope; others expect the Asian crisis to shave off as much as a percentage point. The estimates rely on so many assumptions that all forecasts are more than ordinarily doubtful. They have been scaled down and down over the past months. The forecasters failed so dismally to predict the start of the crisis that it would surely be foolish to put much faith in them now. If some of them do prove right this time, one has to be sure--as one needs to be with stock market wizards--that this is because their predictive models are robust, rather than just because their luck happens to be in.

Ahead lie even greater, or at any rate more perverse hazards, though they are ones that could be avoided given the political will to do so. Thus if Australia is foolish enough to listen to its own siren voices, it may yet revert to the false safety of protectionism. Fear of overseas competition provides an excuse for mercantilists and rent-seekers to demand shelter or subsidy at the expense of the taxpayer. Loud calls for such transfer payments are already to be heard, amid signs that the present Liberal-National (i.e., conservative) government is becoming more inclined to buy off special interests. In 1997, as the Asian crisis reinforced populist support for handouts to industry, the government encouraged this pork-barreling by commissioning "reports" on particular industries from committees headed by businessmen. These reports invariably speak up for "industry assistance" on the grounds of creating jobs or attracting investment to Australia, without serious consideration of well-known findings that the net effects are best described as corporate welfare. Hence the automobile industry has received support, the information technology industry has made its case, and the chemicals industry is in the process of bringing up its heavy artillery. A country that seemed to have shaken off its inwardness, and where a consensus had arisen about letting tariffs and other distortions evaporate, is showing that it had never forgotten whereabouts on the shelf the old bottle of nostrums is kept.

The Wider Picture

It is these indirect effects of the crisis that Australia has most to fear, since they will drag down adjustment and impede self-help. The gurus of nationalist, centralist, and interventionist projects are becoming vocal worldwide. The greatest danger of all would be a return to protectionism in the United States. Congress is not thought to be tender toward America's allies. That one-third of the congressmen of Madeleine Albright's "indispensable nation" are said not to possess a valid passport is worrying. It smacks, if not of isolationism, then certainly of insularity and parochialism. One can almost sympathize with the writer in the left-wing British Guardian Weekly who said that "Non-U.S. citizens should be allowed to vote in U.S. elections, as their outcome affects us almost as much as it affects the Americans."

The probability that the United States really will close its shutters in response to particular trade deficits may be low, but it cannot be said to be negligible. Even a partial blockage to imports would create a loud implosion in the Asia-Pacific region. As a regional country much more dependent on trade, especially Asian trade, than the vast American market, Australia would be deafened.

At the heart of the Asian crisis were incautious extremes of investment by Western businesses in countries that lack the political safeguards and afford little of the security expected in mature economies. What is now hoped for, and IMF requirements are directed to bringing about, is the modernization of societies that got rich too fast to develop checks and balances like those hard won in the West. Until its institutions modernize, Asia will remain less sound than the Western democracies; its markets will, or should, incur a risk premium. And a return to another twenty or thirty years' stability will once more be a mirage if again it depends on authoritarian rule.

Meanwhile, Australia perches alongside the crisis zone, with a detonation more likely in Indonesia than anywhere. The strategic dangers face policymakers with an acute dilemma, which can be summed up as how much to bet on the Indonesian regime. Other strategic problems are evident, above all how much the regional sway of China may increase if its economy continues to escape the troubles that are weakening its smaller neighbors--in short, whether at least some of China's neighbors will be Finlandized. But Indonesia is closer to Australia and already in a calamitous state. At the time of writing it is uncertain whether it will convulse and in so doing throw the Suharto family off its back. If it were to do so, what type of regime might follow is utterly unclear. Where interactions between politics and economics are concerned, the inconclusiveness becomes multiplicative, not additive.

Many economists believe that for Indonesia to regain its growth path, IMF-style reforms are definitely required. They seem surprised that the regime is maneuvering to retain its privileges when these are so obviously costly for the country, both via the direct exercise of monopolies and the indirect damage that shilly-shallying does to investor confidence. "Monopolies are acceptable if they are in the public interest", says "Bob" Hasan, one of Suharto's closest associates. He does not say that the public will be permitted to decide. In the opinion of an Indonesian politician, "fellow countries" should provide economic assistance but must not interfere in "domestic affairs", which means paying up but keeping quiet about how the funds supplied are actually distributed and used.

There is no feasible prospect that institutions will adjust without teeth-grinding pain, and in the course of change, or without enough change to bring investment back in, society may be destabilized. The whole region is so fragile that destabilization may yet happen in a number of countries. If it does, some of the blame (for action or inaction) will undoubtedly end up at the door of the IMF and Western countries. Anti-Western resentment has surfaced in Malaysia, South Korea, and Thailand, as well as Indonesia. Opportunistic remarks by China have rubbed salt in the wounds. Western firms buying in at fire-sale prices will help regional economies by injecting scarce expertise, but this is not how the intervention will be depicted: rather it will be portrayed as the arrival of the vultures.

The Australian authorities well know that IMF-style reforms are vital but they do not relish being seen to be closely involved, since, even if the reforms succeed, Asian countries will experience severe pain. They seek, therefore, to put a distance between Australia's role and the approach of the IMF-cum-United States. They are disinclined to embrace the Suharto regime in the almost unconditional fashion of the previous prime minister, Keating (who has now come out with a strong defense of Suharto, with whom he formed close personal ties while in office). Nevertheless, because Australia fears the collapse of order in Indonesia and the replacement of the Suharto regime by one that is conspicuously anti-Western, it cannot fail to support that regime pro tem, while being ready to switch allegiance should there be a breakdown. This means interceding with the IMF and the Clinton administration to soften the terms of the rescue package, hoping for reform measures that have a better chance of actually being adopted and of bearing less hard on the unemployed multitudes. Even the governor of the Reserve Bank of Australia, Ian Macfarlane, has overcome his initial reluctance and is pressing the suit of support for the Indonesian currency.

Indonesia is the largest Muslim country in the world, with a population of two hundred million. All officers of rank are Muslim. Islamic observances have grown among the urban middle classes who benefited from the years of economic growth, which is surprising to most Western intellectuals who expect modernization to lead to secularism. The national airline Garuda, now busy decommissioning planes, has in recent years needed to hire whole fleets of aircraft to convey pilgrims to Mecca. Although Indonesia's is not a fierce or fundamentalist version of Islam, a new regime, born out of the ashes of the crisis, might nevertheless prove xenophobic and form alliances unfavorable to Western interests.

No one anticipates the invasion of Australia or even an uncontrollable wave of refugees; with reason, Singapore and Malaysia express greater worries on that score. For all that, a destabilized Indonesia would put pressure on the Australian dollar, require higher taxes for defense spending, and conceivably threaten access to markets further north in Asia. The blocking of north-south routes through the Indonesian archipelago is a particular Australian fear--and it is perhaps worth recalling that in the 1970s Indonesia was bold enough to depth-charge a Russian submarine passing through its waters. Another fear is that a hostile regime might close the Malacca Straits, the choke-point of trade between East Asia and the Persian Gulf and Europe. Strategic anxieties are shared by American opinion, too. The commander of U.S. forces in the Pacific indicated this in a February lecture at the Royal United Services Institute in London, when he observed that "the word 'amok' is a Malay word. Indonesians will riot at the drop of a hat." Military and government sources in Australia may not comment in such terms but a recently leaked Department of Foreign Affairs and Trade paper was blunt about the deceit with which the Suharto regime is handling IMF requirements. The crisis is a testing time for diplomats.

Australia is closer to the epicenter than the United States and has more to lose because far more of its trade is with the countries most affected by the crisis. At the strategic level, officialdom fully appreciates what Australians long denied, that the country is geographically part of the Asia-Pacific region. It is less clear how determined Australian businesses will be in future in pursuing their plans for investing in the region, let alone in seeking new opportunities. Some will remain active but others will exhibit withdrawal symptoms, the more acute in that the crisis follows so closely on gilded expectations. Some companies may diversify away from Asia, perhaps moving into Latin America. Government is obviously more constrained. Official policy has to cope with strategic realities. The policymakers have little choice. They have to continue their edgy walk around a disaster area closer to home than the current generation of Australians has ever known. And they have to do so aware that, as the "tyranny of distance" is diminishing, so is the protective belt that distance provided in the past.

Eric Jones is professorial fellow at the Melbourne Business School and professor of economics at the University of Reading, England.

Essay Types: Essay