APEC: Challenges and Opportunities 9789814379991

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director, who is also the Chairperson of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

I SEAS Series un APEC

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edited by

Chia Siow Yue National University of Singapore

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ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 119596

Internet e-mail: [email protected] WWW: http://www.iseas.ac.sg/pub.html All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1994 Institute of Southeast Asian Studies, Singapore First reprint 1997

The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data Workshop on APEC: Challenges and Opportunities (1994 : Singapore) APEC : challenges and opportunities : first roundtable I edited by Chia Siow Yue. (!SEAS series on APEC, 0217-7264: 2) I. ASEAN--Congresses. 2. Asia-Pacific Economic Cooperation--Congresses. 3. Pacific Area co-operation--Congresses. 4. Asian co-operation--Congresses. I. Chia, Siow Yue. II. Title. DS501 15991 no. 2 1994 sls94-96366 ISBN 981-3016-92-2 ISSN 0217-7264 Typeset by International Typesetters Printed and bound in Singapore by PaperScan Printing Services

Contents

List of Tables List of Figures List of Contributors Foreword

vii ix X

xi

1. The Asia-Pacific Region: Confidence-Building in the Post-Cold War Era Paul Wolfowitz

2. Dynamism of East Asian Economies: Retrospect and Prospect Sueo Sekiguchi

13

3. The Institutional Framework for APEC: An ASEAN Perspective Hadi Soesastro

36

4. A Post-Uruguay Round Agenda for APEC: Promoting Convergence of North American and Asian Views Seiji Finch Naya and Pearl Imada lboshi

54

5. Options for Asia-Pacific Trade Liberalization (A Pacific Free Trade Area?) Ross Garnaut

94

6. Asia-Pacific Foreign Direct Investment: An APEC Investment Code? Chia Siow Yue

113

VI

Contents

7. APEC and ASEAN: Complementing or Competing? Mohamed A riff

151

8. AFT A and NAFTA: Complementing or Competing? Wisarn Pupphavesa and Maureen Grewe

175

The Editor

196

List of Tables

2.1 Main Economic Indicators of Selected Asia-Pacific Economies, circa 1990 2.2 Foreign Trade and Balance of Payments of Selected Asia-Pacific Economies 2.3 Main Economic Indicators of Selected Asia-Pacific Economies, circa 1979 2.4 Main Economic Indicators of Selected East Asian Economies (not covered in World Development Report), circa 1990 4A1 Trade Policies of Asia-Pacific Countries 4A2 Trade Policy Matrix 5A1 SITC 3-Digit Commodities in Which Intra-APEC Imports Exceed 75 Per Cent of Total APEC Imports, 1992 5A2 Value of APEC Exports of Commodities in Which APEC Suppliers Dominate APEC Imports 6.1 APEC Region: Foreign Direct Investment Stocks, 1980-92 6.2 APEC Region: Foreign Direct Investment Inflows and Outflows, 1982-92 6.3 APEC Region: FDI/GFCF and FDIIGDP Ratios, 1971-92 6.4 APEC Region: Percentage Distribution of Inward Foreign Direct Investment Stock, by Source, 1975-91 6.5 APEC Region: Intra-Regional Distribution of Foreign Direct Investment Stocks

16 17 18 19 80 88 110 112 116 120 122 124 126

viii

List of Tables

7.1 Economic Indicators 7.2 Average Growth Rates of Bilateral and Intra-Regional Trade, 1980-91 7.3 Bilateral and Intra-Regional Trade Intensity Indices 7.4 Revealed Comparative Advantage Indices for Exports, 1981 7.5 Revealed Comparative Advantage Indices for Exports, 1991 7.6 Revealed Comparative Advantage Indices for Imports, 1981 7.7 Revealed Comparative Advantage Indices for Imports, 1991 7.8 Bilateral and Intra-Regional Complementarity Indices, 1981 7.9 Bilateral and Intra-Regional Complementarity Indices, 1991 7.10 ASEAN: Inward Foreign Direct Investment, 1986-90 8.1 ASEAN-NAFTA-Japan Trade Patterns, 1991 8.2 ASEAN Exports of Selected Products to the United States, 1991 8.3 Commonality of Preferences under AFT A

152 154 156 158 158 159 159 160 161 166 178 184 190

List of Figures

4.1 4.2 4.3 4.4 4.5

Growing Interdependence: Intra-Regional Trade Intra-ASEAN Trade, 1970-92 Increasing Self-Reliance: Intra-Regional Trade U.S. Foreign Affiliates' Trade Deficit Foreign Direct Investment in ASEAN and China, 1986-91 Cumulative 4.6 U.S. Foreign Direct Investment, 1992 4. 7 Trade Biases of the United States with the PECC Economies

7.1 Intra-Regional Trade: Destination of ASEAN Exports 7.2 Complementarity Indices for ASEAN Exports

56 57 58 61 62 66 67 155 163

List of Contributors

Mohamed Ariff is Dean in the Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia. Chia Siow Yue is Associate Professor in the Department of Economics and Statistics, National University of Singapore. Ross Garnaut is Professor and Head of the Department of Economics at the Research School of Pacific Studies, Australian National University, Canberra. Maureen Grewe is a researcher with the Thailand Development Research Institute. Pearl I. Imada is Fellow in the Program on International Economics and Politics, East-West Center, Honolulu, Hawaii. Seiji Naya is Chairman of the Economics Department, University of Hawaii at Manoa, Honolulu, Hawaii, USA. Sueo Sekiguchi is Director of the Center for Asian and Pacific Studies, Seikei University, Tokyo, Japan. Hadi Soesastro is Executive Director of the Centre for Strategic and International Studies (CSIS), Jakarta, Indonesia. Wisarn Pupphavesa is Director of the International Economic Relations Program at the Thailand Development Research Institute, Bangkok, Thailand. Paul Wolfowitz is Dean ofthe Paul H. Nitze School of Advanced International Studies, Washington DC, USA.

Foreword

Initiatives to promote regional co-operation in the Asia-Pacific basin began as early as the mid-1960s, but the idea of an Asia-Pacific Economic Co-operation (APEC) grouping emerged in response to the rising regionalism of Europe and North America, and in response to the slow progress of the Uruguay Round negotiations. Since its inaugural meeting in Canberra, Australia, in 1989, APEC has gained rapid momentum. From the original twelve members, consisting of the six members of ASEAN - Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand - and OECD countries such as the United States, Japan, Canada, Australia, New Zealand, and South Korea, APEC has expanded to eighteen. In 1991 China, Taiwan, and Hong Kong were admitted as members, and in 1993, Papua New Guinea and Mexico were added. Chile joined the grouping at the Jakarta meeting in November 1994. The 1993 summit meeting in Seattle was extremely important in energizing APEC. The leaders issued a vision statement and endorsed the Eminent Persons Group (EPG) Report. APEC agreed to work in three broad areas - trade liberalization, trade facilitation, and technical cooperation. There is no doubt that an APEC grouping of eighteen member countries will be working out different and divergent viewpoints on the key issues of organization and procedure, goal implementation, and future directions. The Institute of Southeast Asian Studies, which for two decades tracked the growth and development of ASEAN, will in addition be taking up the

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Foreword

challenge of bringing scholarly minds to bear on APEC issues. ISEAS organized its first project on APEC in 1994. "APEC: Challenges and Opportunities" was co-ordinated and led by Associate Professor Chia Siow Yue of the National University of Singapore. A number of scholars and analysts from APEC and OECD countries attended the conference. The two-day meeting examined the political, security, and economic underpinnings of Asia-Pacific co-operation, asking basic questions about the relationships, especially sub-regional relationships, and exploring alternative frameworks and agenda for action, and options for interregional trade and investment co-operation. The project has benefited tremendously from contributions of scholars from the APEC region and from Europe. We wish to express our appreciation for their participation. We would in particular like to thank the Rockefeller Brothers Fund for their financial support, which has made this project possible. The success of this conference has persuaded us that ISEAS could usefully add to the APEC intellectual process by involving the academic community in an annual discussion in one of the most dynamic regional developments of our times. Professor Chan Heng Chee Director Institute of Southeast Asian Studies December 1994

chapter 1

The Asia-Pacific Region: Confidence-Building in the Post-Cold War Era PAUL WOLFOWITZ

There is no question that the economic issues today are appropriately the primary ones. This is the only chapter in this volume on the subject of security. That properly reflects the fact that, in the post-Cold War era, with at least some of the major security dangers behind us, it is possible and indeed imperative to give primary attention to economic issues. However, if we are not successful in preserving the security that has been achieved, then all of our hopes for economic progress could vanish. It is significant that this century of ours - a century that will, unfortunately, go down in history as the bloodiest century in world history -is nonetheless ending on two very optimistic, indeed revolutionary, notes. One of those revolutions, of course, is the dramatic collapse of Soviet communism and the end of the Cold War that has come with it. But there is a second revolution, obscured a little by the drama of the end of the Cold War, but in the long run perhaps even more important, and that is the revolution that is taking place in economic development. It is a revolution that actually started in this part of the world, with the spectacular develop-

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ment records of a number of East Asian countries, which demonstrated that it is possible to succeed in economic development and to do so principally by one's own efforts. That example has now been carried successfully to Latin America and possibly to other parts of the world. That is the revolution that is producing nearly double-digit growth rates, year after year, in some countries. It is earning the respect and indeed the admiration of much of the world. That change in economics brings to us the prospect of several decades of truly unprecedented wealth creation and the possibility, in twenty or thirty years, of a world that is vastly more prosperous than anything we could have imagined before. This hopeful prospect depends on two things. It depends, first of all, on our ability to preserve a world economy that is open to trade and investment. And from that perspective, the work of APEC assumes a fundamental importance. In economics, as in many other things in life, it is impossible to preserve things just by standing still. It is only possible to preserve things by moving forward, because the world changes, and if we do not keep up with the changes in the world, then we will almost certainly go backwards. So the effort, through APEC, to move forward in further opening of economic opportunities is also a kind of insurance policy- one might call it an economic security policy- to prevent the kind of backsliding that could be extremely dangerous. It is worth remembering that many of the great political and military tragedies of this century grew out of the economic disaster of the 1930s. We cannot afford to repeat that experience, especially not in an age of nuclear weapons. So the work of the economists is vital. But our hopes depend also on our ability to preserve·a stable international order; economic success depends on international peace. Not perfect peace perhaps, but the kind of broad peace among the major powers that we have achieved today. Some might say: Why worry about problems of international security now that the Cold War is behind us; the Soviet threat is gone; even the danger of Sino-Soviet conflict, which was a very real threat in this part of the world, seems to be behind us. There are many answers to that question, but I would start with one simple basic fact: by most measures of military power, including specifically military manpower, the Asia-Pacific region is still the most heavily armed region of the world. The seven largest armed forces in the world are in this region - not just those of the four big powers, China, India, Russia, and the United States, but also Vietnam, North Korea, and South Korea. And you may notice that that list does not even include Japan, although Japan has one of the largest defence budgets in the world, even with less than 1 per cent of its large gross national

1. The Asia-Pacific Region: Confidence-Building in the Post-Cold War Era

3

product (GNP) devoted to defence. So there is plenty of material for trouble if trouble were to start. Secondly, one cannot be too sanguine when one looks at the long history of tensions and border disputes in this region, with difficulties in the past between almost every country and its neighbours. So the fact that today we are in a time when the guns are silent in Asia is something truly remarkable. For the first time in the century, it is appropriate to use the word "Pacific" not just as a geographic designation but as ap adjective to describe this region. That is something for which we should be profoundly grateful. And it is something we should build on. The present peace and tranquillity, if we do not take it for granted, if we see it as an opportunity, offers the possibility that the next century will be truly a "Pacific" century in both senses of the word. The ASEAN countries have been taking the lead in the Pacific region for some time, in developing regional security dialogue among the very diverse and disparate countries of this part of the world. When attending ASEAN Post-Ministerial Conferences starting in the early 1980s, I could not help but be struck by the fact that this organization, which was founded for economic purposes and whose charter covered only economic matters, could count among its major successes two extremely important achievements in the area of international peace and security. The first was the peace that had been achieved among the ASEAN countries themselves, a peace that today is often taken for granted but was certainly not a reality at the time the organization was founded. And secondly, what was most evident in the early 1980s, ASEAN was taking the lead in fashioning the diplomacy for dealing with the Cambodian problem. Foreign ministers from some of the Dialogue Partners said it was time to give up, because time was working against the ASEAN strategy. It would be interesting to hear what they have to say now that so much progress has been made on the Cambodian problem. That progress came in part because of huge changes in the world, particularly the collapse of the Soviet Union, but it would not have been possible had ASEAN not developed such an effective strategy and pursued it so persistently. It is significant that this organization, which was created for economic co-operation, has already scored two very important successes in the area of security co-operation. Now, with the end of the Cold War and the end of the ideological divisions ofthe Cold War, the ASEAN countries are more comfortable dealing with security issues. In 1992, for the first time, the ASEAN Post-Ministerial Conference put security issues explicitly on the agenda. Something that would have been regarded ten years ago as a kind of political embarrassment is now taken as a matter of course.

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Paul Wolfowitz

In 1993, ASEAN went a step further by calling for the formation of the ASEAN Regional Forum, which had its first meeting in Bangkok in July 1994, at which time the six ASEAN countries and the seven Dialogue Partners, along with Russia, China, Vietnam, Laos, and Papua New Guinea, participated in a discussion of security issues. Never before has a group of such diversity addressed these issues at such a high official level. Simply the fact of the meeting itself is remarkable, something truly inconceivable just ten years ago. Simply enhancing regional dialogues in various forms, institutionalizing the exchange of views among governments and among experts on regional security problems, by itself is an important activity. More ambitiously, there are proposals to seek agreement on basic principles of international behaviour, or a kind of international code of conduct. One such mechanism that has been suggested is to expand adherence to the ASEAN Treaty of Amity and Co-operation. Although one should not have exaggerated hopes about what such a statement of principles might accomplish, nevertheless, it could be a constructive step. There have been many proposals for what were commonly called, during the Cold War, confidence-building measures. These include various activities to reduce the danger and the likelihood of accidental military confrontation, to improve mutual understanding of one another's military budgets and military forces, to publicize data on transfer of weapons. The Australian Government has submitted a paper suggesting that perhaps, instead of calling these steps confidence-building measures - a term that was developed in the Cold War to describe measures for building confidence between adversaries - something like "trust-building measures" might be more appropriate. That is an interesting distinction, because we are, for the most part, talking about building confidence and trust among countries that already have a very broad base of common interests. There are other proposals to create forums for dealing with specific issues. This is an idea that I find particularly exciting and important. Perhaps the most important activity under this heading is the series of "seminars" that Indonesia has convened to deal with the problems of the South China Sea. This kind of effort is the heart of what "preventive diplomacy" should be about, attempting to resolve problems that have the potential to lead ultimately to war, but to do so before they have. That is the fundamental dilemma: to muster the resolve and the energy required to deal with such issues, to get people to make the compromises needed for a solution, is very hard when countries do not see a clear and present danger. The essential challenge for "preventive diplomacy" is to generate the

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necessary will to resolve issues when there is no immediate danger, when it seems so much easier to put off the hard decisions and concentrate on other problems. The Indonesian seminar is particularly important because of the extreme gravity of the disputes over the Spratly Islands, disputes that could eventually lead to a major armed conflict. There are other proposals for what is generally called conflict management exercises. Some of these involve actual military exercises. Others might involve simulations and political-military games among senior officials, with the purpose of developing a better understanding of how different countries think and respond, and thereby improve their ability to deal with real crises when they arise. And, finally, there are a number of proposals to create resource centres, both official and non-official, centres that could be both sources of authoritative information on military developments and also places, once again, where officials and experts from different countries could get to know and understand one another better. There is something good to be said about almost all of these ideas. They are all heading in the right direction. But they all need to be understood as only first steps. None of them, except perhaps the discussion ofthe Spratly Islands, dramatically change the basic prospects of war or peace. But they can start the region moving on a course towards building more substantial institutions in the future. One thing these initial steps can do is to improve mutual understanding of security issues, so that in a crisis there can be a better appreciation of mutual fears and concerns. A second valuable purpose is to increase transparency about military activities, so that instead of countries fearing and suspecting what their neighbours may do in the future, they have some clear idea of military plans. And a third purpose of some of these activities is to convey mutual reassurance, so that countries do not embark on unnecessary military competition in the mistaken belief that others are about to do so. The implicit assumption behind many of these proposals is that there are few or no basic conflicts among the parties participating, so that the better they understand one another, the lower the danger of conflict. The remarkable fact is that, in much of the Asia-Pacific region today, we can indeed proceed on that assumption. But no matter how valid the assumption is in general, it is unfortunately the case that the most serious security problems arise where there are real conflicts of interest as, for example, in Korea. In such cases, greater transparency may lead to greater fear, not less, and understanding one another may in fact mean understanding the seriousness of another nation's aggressive intentions. As important as cooperative activities can be, when these more serious conflicts arise, it is

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essential to have effective mechanisms to restrain aggressive behaviour. From that perspective, if this process is a first step towards something larger, it is most valuable as a first step towards longer-term building of institutions that are strong enough to provide that kind of restraint over the long term. But we are still a long way from that goal. It will take many more steps, a great deal of time, and significant changes in national attitudes to build a solid institutional framework. As important as it is to adapt to change, and to create new institutions and structures, it is also important to keep in mind the things that need preserving. It may be helpful to think about that question in the light of the common observation that we are moving from a bipolar world to a multipolar world. Usually that observation is accompanied by the implicit or explicit assumption that this trend is a healthy development and a great improvement over the bipolar divisions of the Cold War. Certainly, the divisions of the Cold War and the threat of nuclear war that lay behind them were terrible. No one wants to go back to a bipolar world. But multipolarity in the military sphere is not nearly so benign as it may be in the economic sphere. In economics, multipolarity is both inevitable and desirable. Economic competition can lead, not to a world of winners or losers, but to a world in which everyone is better off. In the military sphere, some diffusion of power and therefore greater multipolarity may be also inevitable, but it is not a desirable development. Moreover, in a very fluid world, where power alignments are constantly shifting, there is uncertainty, fear, and, in the worst case, temptations for powerful countries to misuse their strength. If the diffusion of military power is to some extent inevitable, part of our effort should be to figure out how to mitigate its effects. In the area of security, competition is not desirable, it is more generally conflictual and dangerous. In 1992 at a conference in Kuala Lumpur, when I was still a government official, I was asked what was the greatest security threat in the region now that the Soviet Union was gone. It seemed quite clear that the questioner had North Korea in mind as the new bad guy in the neighbourhood. North Korea is, of course, a serious problem, as I will discuss later, but North Korea is probably not the big threat of the future. In fact, it seems probable that somewhere around the end of the century, and maybe well before it, we will see the unification of Korea, one way or another hopefully, a peaceful unification- and the problem of North Korea will be a problem of the past. The greatest long-term threat to the security of the region is that the patterns of co-operation which we have inherited from the Cold War will

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disappear. Instead of building on that co-operation, we may throw it away without creating anything to replace it. Even though the threat from the Soviet Union has gone away completely, there is a great deal that is still valuable in the security structures that we inherited and it is important to maintain existing patterns of co-operation in this region. I would start by citing first the co-operation that ASEAN has so commendably achieved, both among its member countries and between individual ASEAN countries and various external powers. Particular importance should be attached to the two security alliances that are critical to stability in Northeast Asia, the U.S.-South Korean alliance, and, most important of all, the U.S.-Japan security treaty. It is also important for the region as a whole that the United States continue to maintain the network of formal and informal security ties that it has with countries from Australia to Japan and even to expand them. We may be starting once again with China. The basic point is that, while broader multinational co-operation in the security area is a good thing, broad co-operation on a region-wide basis will not be a substitute in the foreseeable future for more focused alliances among small groups of countries. The construction of region-wide institutions must be viewed as a supplement to that more focused or bilateral cooperation, and not a substitute for it. As someone who cares very much about the future of the Asia-Pacific region as a whole, I believe that it is important, not just for American interests, but for the security and stability of this region as a whole, that the United States remain engaged in Asia-Pacific security. There is some possibility that we will not, that we will repeat mistakes of the past and decide that we can do without the world and the world can do without us, since we have important problems to deal with at home. It is true that there is a strong isolationist tradition in the United States that has not disappeared, despite the lessons we have learnt. But most Americans understand the simple argument that it is far better to engage in problems and prevent them than to repeat the experience of the 1930s and allow problems to become so big that only large wars can solve them. That, in a real sense, is the meaning of the D-Day anniversary, which was recently commemorated. It is true that the U.S. military budget is declining; indeed, it is declining much more substantially than is often understood and our military forces are shrinking with it. But the threats and the military requirements are also decreasing very substantially. Both the threats and U.S. forces are decreasing, particularly in Europe. In fact, despite the overall

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decline in American military strength, our relative military position in Asia is far stronger than it was during the Cold War, when most of our resources had to be devoted to a global threat from the Soviet Union. American relative economic power is declining as other countries grow faster, but that development is more than offset by the fact that most of those other countries are our friends and our allies, with a great potential for burden-sharing. The support and contributions of allies are important politically as well as economically to convince the American public that this is a burden the United States can afford to manage. The tranquillity of this region can be tranquillizing, and that is a danger. There is a danger that people will take things for granted, particularly that people in the United States will take things for granted and say that we cannot even afford the efforts that are needed, even though the burden is relatively modest by historical standards. Therefore, mechanisms that can focus attention on problems in their early stages and keep people engaged are very valuable and that is one of the reasons why the ASEAN Regional Forum could prove to be so valuable. There is some danger in Asia today that the idea of American retreat will be made a self-fulfilling prophecy. The United States' understanding of its national interest is the product of a political process, heavily influenced by American perceptions of whether the United States is wanted in this region, whether it is needed in this region, whether there will be problems to. deal with, and quite importantly, whether others are doing their share. So, while broader multinational co-operation is a very good thing, there is a small risk of overstating its claims and so fostering the illusion that more traditional and more demanding bilateral co-operation is no longer needed. If keeping the United States engaged in the region and maintaining those key alliance relationships is one major task, another challenge of great importance in this new world is the task of integrating Russia into the regional security. Russia today has the possibility of becoming an important constructive force in Asia-Pacific security. Ten years ago I would never have imagined that I could say this, but on the whole the Asia-Pacific region now needs a Russia that is strong, not a Russia that is weak. A Russia that is strong is a Russia that can contribute to solving problems here. A Russia that is weak could become a source of insecurity in Asia, particularly if that weakness leads to instability and vulnerability in the Russian Far East. So it is important to change our view of Russia and to engage the Russian establishment and the Russian military in regional security activities. If the problem of Japan's Northern Territories can be

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solved, it may be easier to do it here than it is in Europe, where the picture is complicated by Russia's relations with its neighbours in what they call the "near abroad". In the Asia-Pacific region there should be greater scope for involving the Russian military in joint exercises and in U.N. peacekeeping operations. That kind of involvement is not only valuable in concrete military terms, it can also help to give the Russian people, and particularly the Russian military as an institution, a sense of belonging to a constructive world. Perhaps the most fundamental challenge for the Pacific is that of integrating China into the regional security. On its current trajectory, China is a country that will become an economic superpower relatively early in the next century. Unlike Japan and unlike Germany, it will be an economic superpower with few inhibitions on converting some significant share of that economic power into military capability. At present, with China's economy growing at a rate of 10 per cent or so a year, its military budget is growing just as fast or perhaps slightly faster. Thus, China presents the phenomenon of a country that is doubling its military budget every six years or so at a time when virtually every other major power in the world, including quite importantly Russia and the United States, are cutting their military forces. While we should take note of that trend, we should not become alarmist. China starts from a very low base; it has a lot of reasonable and rational modernization to do in its military. It would be unreasonable to expect a great power as China to change to not having a substantial military capability. Nevertheless, if the trend does not change, there will be problems, particularly in the light of China's history in this region and some of the continuing tensions involving China, particularly in the Spratly Islands. It is essential, then, to make it clear to China that the region as a whole will respond positively to a constructive Chinese role; but also, that we can respond differently if China chooses a less constructive course. Let me conclude this discussion of security issues with a brief treatment of the problem in Korea, although the subject could easily merit a whole chapter by itself. There is no question that Korea presents the most serious near-term danger of war in this region. Although the danger of a war in the next mo~th or two is commonly exaggerated, the longer-term danger is real indeed. North Korea is not likely to start a war just because the United Nations might impose sanctions, but one cannot be so sanguine about what might happen over the next three to five years, with North Korea pushing ahead in a determined way to acquire nuclear weapons and at the same time facing enormous internal strains, reflecting both a collapsing economy and

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Paul Wolfowitz

a political succession. So there is certainly a danger, if something does not change, of a war on the Korean peninsula. There is also, of course, the danger of further nuclear proliferation. And there is a third danger, which is in some ways the most worrisome. That is the danger that if this problem is not handled wisely, it could end up splitting the very countries whose cooperation is so essential- that it could ultimately drive a wedge between the United States and South Korea, or, even more dangerously, between the United States and Japan. Most current discussion of this issue focuses on conflict resolution: How can we persuade or convince the North Koreans to abandon its nuclear programme? But we also need to think seriously about what to do if this effort fails, and especially how to deter the very serious consequences that may develop if North Korea does acquire nuclear weapons. Doing so would in tum help us do a better job at conflict resolution. The consequences of a North Korean nuclear capability are often misunderstood. There is the danger of nuclear proliferation, that if North Korea obtains a nuclear weapon, then other countries, anywhere on the globe, will feel that they have to have nuclear weapons too. The most immediate danger is that if North Korea acquires nuclear weapons, South Korea will insist on having them as well. A further danger follows from that, a danger of splitting South Korea from the United States. The effect on Japan is also worrisome, even though this effect is often exaggerated; even a small chance of a major change in Japan's security policies is a matter of major concern. The second obvious danger that a nuclear-armed North Korea will present is the danger of export of nuclear weapons and fissionable materials. North Korea is a country that has so far sold virtually every type of weapon that it has produced, and the market for nuclear weapons probably ranges into billions of dollars. There is a very real danger that North Korea might sell nuclear weapons if it has the capability to do so. Finally, while it seems likely that even the North Koreans could be deterred from actually using nuclear weapons, by the prospect of the retaliation they could expect in return, it is also disturbingly plausible that a nuclear-armed North Korea will feel much more confident about usingor misusing- its enormous conventional military forces. Having found today that they can frighten people about voting for sanctions simply by the threat of a conventional war, imagine what North Korea might hope to accomplish with the threat of a nuclear war. With a credible nuclear threat, the North Koreans might start a war in the belief that they could impose terms before the tide began to tum against them, or even hope that a nuclear

1. The Asia-Pacific Region: Confidence-Building in the Post-Cold War Era

11

threat would keep the United States from intervening. It is probably foolhardy to comment on the results of former President Carter's visit to North Korea, particularly since we have only the sketchiest of reports about what took place, but one cannot help questioning the progress being claimed. I certainly hope I am proved wrong, but the obvious interpretation is that the North Koreans are playing for time. From all the indications, they seem to be manipulating Americans in a classic fashion. On the other hand, there is a very small possibility -perhaps it is 5 or 10 per cent- that the North Korean regime in fact sees the need for fundamental change. Certainly the need is there. When there have been dramatic strategic changes in the past, such as the diplomatic opening with China, those changes followed a major shift in thinking, not simply because of diplomatic manreuvres. In that case, the diplomatic breakthrough followed on the Chinese perception of a fundamental change in its relationship with the Soviet Union. In the case of the breakthrough between Egypt and Israel in 1977, the spectacular diplomatic efforts were undoubtedly essential but they would have come to nothing were it not that the Egyptian people, and the Egyptian President in particular, were convinced that Egypt could not afford more wars with Israel. Whether it is 5 or 10 per cent, there is some chance, even through the veil that shields them from accurate information, that the North Koreans understand that without a fundamental change of course, their regime will not survive. We have reason for scepticism, however, especially because it is unclear that this regime can survive a fundamental change of course. Fundamental change would be an admission that the policies of the last fifty years have been wrong and that untold suffering and deprivation have been for nothing. But even a 5 or 10 per cent chance is sufficiently valuable to be worth a try. In the process of trying we need to keep our wits about us, to be realistic about who it is we are dealing with, above all, and to prepare for the 90 per cent probability that nothing will improve after all. However events unfold, it is important for the United States to take a strong lead, to provide fundamental judgements on this issue. While we have to be appropriately deferential to the concerns of the countries in this region- particularly, our Korean and Japanese allies- we also have to exercise judgement rather than merely sample opinions and search for the least common denominator. No course of action in this situation can give a clear guarantee that a war can be avoided, because that decision is ultimately in the hands of the North Koreans. The actions that reduce risk in the short term may in fact increase it in the long term, and vice versa.

12

Paul Wolfowitz

This chapter concludes with a brief comment on a topic that bears on the subject of security even though it may not appear to do so: the issue of "Eastern" versus "Western" values in the area of human rights. Certainly, the West does not have a monopoly of wisdom on these issues, regarding the balance to be struck between individual rights and collective rights, and we must recognize that what is appropriate for one country at one time in its history is not necessarily appropriate in another time for a different country. When the United States was tom apart by civil war, the country might not have survived if we had followed all the rules that we hold sacred today. Americans sometimes tend to take for granted the principles that we have acquired over 200 years of often difficult experience. Nevertheless, there does seem to be a powerful global tendency towards greater political openness and greater political participation, perhaps as an almost inevitable consequence of economic growth. Middle-class societies cannot be governed the same way as traditional societies and successful modem economies depend on the flow of information and ideas. This basic direction of change is highly desirable, not just from the standpoint of human rights but from the standpoint of stability and security as well, and for two reasons. First of all, broader participation ultimately produces societies that are stronger internally. A commonly heard observation in some Asian countries is that democratic politics is a very unstable business, rife with factionalism and tension. There may be some truth in that observation, but on the other hand, nobody in the United States has to worry about what will happen if the President of the United States dies, the way people worry about what will happen when Deng Xiaoping dies, or President Soeharto dies. When there is no orderly process for handling the succession of political power, you may have short-term and medium-term stability, but you pay for it with long-term instability. Secondly, history suggests that more democratic countries are more moderate in their foreign policies. Moreover, as we understand one another better politically, we will find it easier to co-operate on issues of security. Security co-operation and even alliances are sometimes possible in the face of huge political differences. The West maintained an enormously important wartime alliance with Stalin despite a profound gulf in political values. But the fact remains that the strongest alliances and the strongest security co-operation in Europe and in Asia have been among the democracies. That is one more reason why the search for common values an~ common purposes is so important.

chapter 2

Dynamism of East Asian Economies: Retrospect and Prospect SUEO SEKIGUCHI

I. Introduction

East Asia has often been cited as the growth centre of the world. The growth miracle spilled over from Japan in the 1950s and 1960s to newly industrialized economies (NIEs) in the 1970s and 1980s and further to middle-income countries of ASEAN in the 1980s and 1990s. A new feature in the 1990s is that China has participated in this growth race, followed by Vietnam. This chapter reviews the economic dynamism in East Asia and examines its prospects. East Asia here includes Northeast and Southeast Asia but not South Asia. Geographically, Far East Russia and Mongolia belong to East Asia on the northern front, and Myanmar is classified as a Southeast Asian country. However, the focus of this chapter is on the market economies, South Korea, Japan, China, Taiwan, Hong Kong, the six ASEAN countries, and the Indochina peninsula. The rapid economic growth in East Asia has been explained in many ways, often attributed to socio-cultural factors such as Confucianism. However, this chapter focuses on economic factors. The countries and

14

Sueo Sekiguchi

regions are categorized as follows for analysis: • OECD member: Japan; • NIEs: South Korea, Taiwan, Hong Kong, and Singapore; • middle-income market economies: the ASEAN-5 countries of Brunei, Indonesia, Malaysia, the Philippines, and Thailand; • socialist economies: China, Vietnam, and North Korea. A retrospect of economic growth is offered in Section II, referring to both supply and demand factors. Section III investigates the external factors that have supported economic growth, covering both sub-regional and broader global perspectives. Section IV discusses new factors that affect the economic development prospects of East Asia, including the effects of regional integration outside the region, such as the European Community (EC) and the North American Free Trade Area (NAFTA). Section V concludes the discussions. II. Mechanism of Growth in the East Asian Economies

The dynamism in the East Asian economies suggests that there is an underlying mechanism generating this growth. However, in fact there is neither an obvious mechanism nor is there consensus as to what accounts for such dynamism. A brief survey of the factors affecting economic growth, both from the supply and demand perspectives follows. Spin-Off of Economic Growth It is well known that the East Asian economies have recorded rapid growth

in the decades since 1945, with only a few exceptions. Japan reconstructed its economy in the early 1950s and achieved rapid development for two decades. The NIEs of Hong Kong, South Korea, Singapore, and Taiwan, have accelerated their economic growth since the late 1960s, though there were variations in the timing of the "take-off' for industrialization. In the mean time, Japan entered a phase of slower growth in the 1980s, even though its macro performance was relatively high compared with other Western industrial countries. The NIEs replaced Japan in the growth race in the 1980s to become the fastest runners, and began to show some signs of economic maturity. It is the so-called middle-income countries, centring around the ASEAN5 that are about to take over the NIEs' place in the growth race, as they have gone through a preparatory phase for industrial take-off while the NIEs are experiencing labour shortages. Through the processes of industrial adjust-

2. Dynamism of East Asian Economies: Retrospect and Prospect

15

ment first in Japan, and later in the NIEs, new industries were transplanted to the middle-income countries, a process accelerated by foreign direct investment (FDI).' The centrally planned economies in the region were separated from the market economies until the mid-1970s, though China traded directly with Japan and with other countries on a substantial scale through Hong Kong. During the period of superpower confrontation, it was only Japan that traded with the former Soviet Union on a large scale with expansions and contractions depending on the political situation between the Soviet Union and the United States. Economic failures in the centrally planned economies became increasingly obvious. China introduced economic reforms with greater reliance on the market mechanism and modification of ownership of property. Vietnam also adopted economic reconstruction through its reforms known as doi moi. Russia and Mongolia have been planning political as well as economic reforms, though the results are not yet evident. North Korea remains in diplomatic isolation and faces an economic crisis and severe resource constraints. The family-based dictatorship, a strange regime in the contemporary world, suffocates efforts for reconstruction by technocrats because of grave political risks. Other nations such as Cambodia and Laos have been economically stagnant for various reasons, but may benefit from the economic development of ASEAN and the reconstruction of Vietnam. To give an overview of the East Asian economies in an Asia-Pacific perspective, Tables 2.1 and 2.2 summarize the domestic and external economic indicators for recent years. Table 2.3 shows those of a decade ago and changes in savings rates for selected Asia-Pacific countries. Table 2.4 summarizes the economic indicators of some countries and regions that do not appear in official estimates of international organizations. Countries in the region have continued to enjoy economic growth as long as their governments pursue appropriate policies. Handicaps in initial conditions are not fatal nor insurmountable. Man-made institutions can be set up to rectify deficiencies in natural resource endowments. An economy has a life cycle of growth, moving from pre-conditions for take-off, to takeoff and varying levels of maturity. 2 Some Japanese economists call the spin-off of economic growth the "flying geese" hypothesis. 3 Factors Affecting Economic Growth

Obviously, economic growth is affected by increases in production factors, including capital, labour force, and technological progress. The age structure of the labour force, education, and allocation of labour are of critical

TABLE 2.2 Foreign Trade and Balance of Payments of Selected Asia-Pacific Economies

China Taiwan Hong Kong Japan North Korea South Korea ASEAN Indonesia Malaysia Philippines Singapore Thailand United States Canada Australia New Zealand

Terms of Trade 1987 = 100

Current Account Surplus (US$ billion)

ODA Flows* ($US billion)

Exports (US$ billion) 1991

Imports (US$ billion) 1991

1985

1990

1970

1991

1985

1991

Foreign Debt (US$ billion) 1991

72.9 n.a. 29.7 314.4 n.a. 71.7

63.8 n.a. 100.3 234.1 n.a. 81.3

109 n.a. 97 71 n.a. 103

Ill n.a. 101 99 n.a. 108

-0.1 n.a. 0.2 2.2 n.a. -0.7

12.9 n.a. 2.5 84.7 n.a. -R.5

0.9 n.a. 0.0 -3.4 n.a. 0.0

2.0 n.a. 0.0 -11.0 n.a. 0.1

60.8 n.a. n.a. n.a. n.a. 40.5

29.0 34.3 8.8 58.9 28.3 397.7 124.8 37.7 9.3

25.9 35.2 12.1 66.0 37.4 506.2 117.6 39.5 8.5

134 98 93 99 91 100 110 111 88

101 137 91 101 91 102 105 107 94

-0.4 0.0 -0.1 -0.6 -0.3 4.7 1.0 -D.7 -D.2

-4.2 -4.6 -1.4 4.4 -7.6 24.7 -24.6 -9.7 0.0

0.6 0.2 0.5 0.0 0.5 -7.1 -1.1 -D.7 -0.1

1.9 0.3 1.1 0.0 0.7 -11.4 -2.6

73.6 21.4 31.9 n.a. 35.8 n.a. n.a. n.a. n.a.

NoTE: Current account surplus is before official transfer. n.a. = Not available. *Minus sign for ODA indicates donor position; year 1980 for the recipients and 1985 for the donors. SouRcE: World Bank, World Development Report 1993 (Washington, DC, 1993).

1.1

-0.1

TABLE 2.1 Main Economic Indicators of Selected Asia-Pacific Economies, circa 1990

Area ('000 km. 2)

GNP Per Capita (US$) 1991

GDP (US$ billion) 1991

1970-80

1980--90

Agriculture

Industry

1970

1990

1,149.5 n.a. 5.8 123.9 n.a. 43.3

9,561 n.a. l 378 n.a. 99

370 n.a. 13,430 26,930 n.a. 6,330

369.7 n.a. 67.6 3,362.3 n.a. 283.0

5.2 n.a. 9.2 4.3 n.a. 9.6

9.4 n.a. 6.9 4.2 n.a. 9.6

27 n.a. 0 3 n.a. 17

42 n.a. 25 42 n.a. 27

29 n.a. 25 40 n.a. 15

39 n.a. 32 34 n.a. 36

181.3 18.2 62.9 2.8 57.2 252.7 27.3 17.3 3.4

1,905 330 300 l 513 9,373 9,976 7,687 271

610 2,520 730 14,210 1,570 22,240 20,440 17,050 12,350

116.5 47.0 44.9 40.0 93.3 5,610.8 510.8 299.8 42.9

7.2 7.9 6.0 8.3 7.1 2.8 4.6 3.0 1.9

5.6 5.7

19 n.a. 26 0 12 n.a. n.a. 3 9

41 n.a. 35 38 39 n.a. n.a. 31 27

14 27 22 18 21 18 24 27 22

36 30 19 47 32 15 19 19 20

Population (million) Mid-1991 China Taiwan Hong Kong Japan North Korea South Korea ASEAN Indonesia Malaysia Philippines Singapore Thailand United States Canada Australia New Zealand

GDP Annual Growth Rate(%)

n.a. =Not available. SouRCE: World Bank, World Development Report 1993 (Washington, DC, 1993).

1.1

6.6 7.9 2.6 3.1 3.1 1.5

Share in GDP (%)

Gross Domestic Saving/GDP (%)

TABLE2.4 Main Economic Indicators of Selected East Asian Economies (not covered in World Development Repon), circa 1990

Mongolia North Korea USSR* Taiwan Brunei Cambodia Vietnam Laos

Area ('000 km. 2) 1990

Population (million) 1991

GDP (US$ billion) 1990

GNP Per Capita (US$) 1990

1,565 122 22,402 36 6 181 332 237

2 22 288 21 0 7 68 4

2 22 2,500 157 4 n.a. n.a. n.a.

522 987 3,000 7,332 15,200 190 200 156

1986--90

%of Manufacturing inGDP (%) 1990

Exports (US$ billion) 1990

Imports (US$ billion) 1990

6 1 n.a. 9 n.a. n.a. 5 n.a.

27 n.a. n.a. 34 n.a. n.a. 32 116

0 2 394 75 n.a. 0.0 2.2 n.a.

3 517.0 66 n.a. 0.1 2.6 n.a.

GDP Annual Growth Rate (%)

I

Exports -Imports (US$ billion) 1990 -0 -1 -123.4 9 n.a. -0.1 -1.4 n.a.

NoTE: The above data are mostly rough estimates and are not to be used for precise comparisons. * Figures are for the whole of the former USSR. SouRCE: Far Eastern Economic Review, Asia Yearbook 1992; Japan External Trade Organization (JETRO), Sekai to Nohon no Boeki [World trade and Japan's foreign trade], 1991.

TABLE 2.3 Main Economic Indicators of Selected Asia-Pacific Economies, circa 1979 GNP Per Capita (US$) 1979 China Taiwan Hong Kong Japan North Korea South Korea ASEAN Indonesia Malaysia Philippines Singapore Thailand United States Canada Australia New Zealand USSR

GDP (US$ billion) 1979

GDP Annual Growth Rate (%)

Gross Domestic Savings/GDP (%)

Imports (US$ billion) 1979

Exports -Imports (US$ billion) 1979

1960-70

1970-79

1960

1979

Exports (US$ billion) 1979

14.0 n.a. 15.2 103.0 n.a. 15.1

17.3 n.a. 17.1 110.7 1.0 20.3

-3.3 n.a. -1.9 -7.7 n.a. -5.2

15.6 11.1 4.6 14.2 5.3 178.6 55.3 18.5 4.7 64.8

7.2 7.8 6.6 17.6 7.2 217.7 52.2 16.4 4.5 57.7

8.4 3.3 -2.0 -3.4 -1.9 -39.1 3.1 2.1 0.2 7.1

260 n.a. 3,760 8,810 1,130 1,480

252.2 n.a. 17.4 974.0 n.a. 60.6

5.2 n.a. 10.0 10.5 7.8 8.6

5.8 n.a. 9.4 5.2 6.2 10.3

23 n.a. 6 34 n.a. 1

30 n.a. 28 31 n.a. 28

370 1,370 600 3,830 590 10,630 9,640 9,120 5,930 4,110

49.2 20.3 29.4 9.0 27.6 2,350.0 39.9 127.8 18.3 n.a.

3.9 6.5 5.1 8.8 8.2 4.3 5.6 5.5 3.9 5.2

7.6 7.9 6.2 8.4 7.7 3.1 4.2 3.2 2.4 5.1

8 27 16 -3 14 19 21 25 22 28

30 34 24 26 21 18 25 24 23 28

n.a. = Not available. SouRCE: World Bank, World Development Report 1981 (Washington, DC, 1981).

20

Sueo Sekiguchi

importance in growth accounting. No doubt capital accumulation is of the utmost importance in economic development. Again, the efficient allocation of capital is as important as the total accumulation of capital; note, for instance, the waste of capital in large state enterprises in centrally planned economies. The supply of savings to finance domestic investment often falls far short of demand, and many developing countries have to turn to foreign capital. To induce foreign investment and to service the foreign debt, capital importers must offer adequate rates of return and increase their debt-servicing capacity. Growth theories place greater importance on supply factors, but demand factors are also important, as developing countries face severe competition, especially in new industries that they want to promote. Static comparative advantage often conflicts with long-term gains from international trade. Developing countries do not have comparative advantage in new industries, but promoting new industries benefit them in the long run in many ways -externalities , learning effects, increasing returns to scale, destroying foreign monopoly, improving the terms of trade, and so on. · Supply Factors: An increase in labour force expands not only total income but also per capita income, since the labour force supports the dependent population. In Japan, growth in its labour force stagnates with the ageing population. This trend may be seen in the NIEs in the near future, though they have a more abundant supply of labour force. The middle-income countries still enjoy high growth in its labour supply, and continue to have an "unlimited supply of labour". 4 In China and Vietnam the supply of labour still exceeds demand considerably, thus creating an enormous amount of disguised unemployment. Savings behaviour follows a life cycle. The age structure of the population and hence the labour force affect economic growth through domestic savings. Generally, we can argue that a high rate of population increase in a middle-income country leads to a growing and relatively young labour force, a large dependent population, and low domestic savings. The savings rate rises with labour force growth. This has been a factor that differentiates East Asia from Western Europe in recent decades. Evidence is vivid in the East Asian NIEs that their savings rates increase as their high economic growth starts, which leads to a decrease in the current account deficits. Taiwan and South Korea are examples. In the case of Japan, however, the ageing of its population will reduce domestic savings and growth. Developing countries often face a shortage of skilled labour in the

2. Dynamism of East Asian Economies: Retrospect and Prospect

21

midst of an excess supply of unskilled labour. Education and training thus are of critical importance. At some point in time, skilled labour emigrated from the NIBs to learn and earn abroad, but an increasing number of these foreign-trained engineers and technicians have returned, and have accelerated technology transfer from developed countries. To make such a mechanism work effectively, the economic system must reward those who introduce technological improvements. Capital formation and technological progress more directly contribute to economic growth in terms of per capita income. Late developers have the advantage of saving on investment in research and development (R&D), even though investment in basic research is required to enhance capability in developing significant inventions. Later investments have more recent technology embodied. New investors can save on the sunk cost that inventor countries must bear. One can find such examples in Japan's steel mills and shipbuilding facilities compared with their American and West European counterparts. Now a similar comparison is made between Japan and South Korea, 5 with the latter enjoying an advantage. To catch up with the frontrunners, the followers must obviously invest in education, training, and R&D as well. The needs for investment in capital equipment and human capital often far exceed. the supply of domestic savings. Thus, when a developing country begins the industrial take-off, it faces a prolonged deficit in its current account. This is no surprise. As long as it can increase its income more than its liabilities, capital importation can be easily repaid. It took Japan two decades to achieve a surplus in its current account. Taiwan and South Korea entered a similar phase one and two decades later, respectively. Technology imports and FDI have played important roles in raising the efficiency of production and producing new products, though the relative importance of the channels vary among countries. Some governments took a cautious policy stance to separate technology imports from foreign management controls, while others accepted a package of management control, technology imports, and capital borrowing. To a large extent the East Asian market economies have been successful in managing these tasks. The "socialist market economies" of China and Vietnam try to introduce the market system, though they adhere to past political systems, which are based on single-party control - communist party and labour party, respectively. To provide incentives for enterprises to achieve longterm growth, however, it is not sufficient to rely on the market mechanism. Ownership or the right to use and improve productive equipment must be

22

Sueo Sekiguchi

guaranteed in order for enterprise managers to fully play their roles. Political leaders seem to face a difficult choice - to promote economic reconstruction through overall reforms or to make a compromise with those who stick to the interests of single-party domination. The "socialist market economy" seems a compromise to legitimize their plans for economic reconstruction. Demand Factors: While the supply side conventionally received greater attention in growth theories, it is important to balance demand and supply in the domestic market, especially in the early stages of economic development. Suppose that a nation tries to promote a new industry that has externality and/or increasing returns to scale. In such a case, developed countries enjoy overwhelming advantage as frontrunners. As the late comer cannot compete in the international market, it has to protect its infant industry for a certain period of time. Protection is a double-edged sword, however. Success improves national welfare, but failure leads to its deterioration. 6 Since most developing countries face serious resource gaps, they face severe foreign exchange constraints. Generally, they have to import foreign equipment and intermediate goods, and finance them by exporting. To save on imports, they try to replace foreign consumer goods with domestic production. Quotas are often placed on consumer durables, including electrical appliances and passenger cars. Domestic production, which may be a poor substitute for foreign products at an earlier stage, improves through learning from others and increasing returns to scale. Taiwan and South Korea are good examples of such success, and there is no reason that the ASEAN middleincome countries cannot follow similar paths. China, which enjoys a huge domestic market, endeavours to follow this line of development and Vietnam is following suit. The debate on import substitution versus export promotion has been a favourite among development economists. The issue is not clear-cut in my view. Any newcomer starts with import substitution. The point is how to make these new industries sufficiently efficient so that their products are competitive in the international market-place. FDI seems to have played a significant role in the development of the NIEs and middle-income countries in introducing these new industries. It replaces imports of final goods with domestic production no matter how much the host countries depend on foreign technology and intermediate goods. Domestic employment and income rise, which in turn increases domestic demand for these products. In the mean time, domestic production improves in efficiency, and the

2. Dynamism of East Asian Economies: Retrospect and Prospect

23

products become internationally competitive. A related issue is "export-led" or "domestic market-led" growth. It has often been said that the East Asian economies followed the former pattern of growth. This is a complicated issue to determine. Literally, the former seems to mean that exports have led the growth offering a larger portion of the total demand. If an economy maintains a stable proportion of current account surplus, or a balanced current account, it means that growth in exports is balanced by growth in imports. Clearly, the growth in this case is not "export-led". Looking at the East Asian market economies, their current accounts have remained stable except for Japan and Taiwan. Even in Japan and Taiwan, the surpluses increased after the period of fast growth. In reality, demand for domestic products expanded fast in the rapid growth phase, encouraging domestic investment and improving efficiency in domestic production. When domestic expenditures stagnated, these two economies showed that domestic production exceeded domestic expenditures, thus creating growing surpluses in their current accounts. What is more important is that the East Asian market economies have been oriented to outward-looking strategies. They borrowed foreign capital and imported foreign technology to expand production for export. Export orientation induced the governments to encourage transplantation of industries that can easily be turned to export industries. Domestic markets were seed beds on which infant industries grew. Multinational enterprises might have transplanted those industries that can absorb the products their subsidiaries and joint ventures export, to serve their outsourcing. Or the time schedule for import liberalization might have pushed those enterprises to cut production costs significantly within a short period.7

II!. External

Markets and Environments

During the 1960s and 1970s, the East Asian regional market comprised two groups: centrally planned economies and market economies. The former group consisted of members of the Council for Mutual Economic Assistance (CMEA) as well as those that were not its members. The East Asian market economies were more integrated with North America and Western Europe, though there were no specific regional institutions. Only the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF), and the International Bank for Reconstruction and Development (IBRD) networks facilitated integration of market economies in the Asia-Pacific. 8

24

Sueo Sekiguchi

An Overview

As the first industrialized economy in East Asia, Japan was ahead of others in expanding its trade with Asian and Western partners. The United States used to be a dominant player in foreign trade and investment in East Asia. Countries in Western Europe followed the United States in intensifying their ties with their former colonies. China's involvement in the regional trade had been limited, as it had followed a strategy of self-reliance to avoid dependence on foreign nations until the late 1970s. 9 As the Japanese economy grew, Japan's trade with other East Asian economies expanded rapidly, accounting for an increasing share of each country's foreign trade. In the mean time, Japan's overseas direct investment started expanding since the late 1960s. During this period, all other East Asian economies were not yet well developed; the term "newly industrializing economy" was created much later. South Korea was poor and strictly controlled by a military government. Taiwan was an exception in that it had already started a more balanced growth between agriculture and industry. While Hong Kong and Singapore had been relatively prosperous and stable, other Southeast Asian countries were frustrated by the growing penetration of Japanese products and enterprises. Anti-Japan demonstrations and riots in Bangkok and Jakarta in early 1974 was a symbolic event. Slow economic growth and the influx of Japanese products and advertising combined to create a strong anti-Japan sentiment, especially among students who protested against their own governments and Japan. It was in such a situation that the then Japanese Prime Minister Kakuei Tanaka visited these capitals. North-South confrontation on various economic issues such as trade in oil and natural resources was also behind this event. Self-reflection on the part of Japanese business circles and a serious recession in Southeast Asia after the first oil crisis made both sides more co-operative in subsequent trade and investment relations. In the mean time, ASEAN, originally established to counter communism in the region, became more oriented to economic co-operation, including the development of industrial co-operation and preferential trade arrangements, even though the progress was slow. South Korea, after Taiwan, entered a phase of rapid growth. Hong Kong and Singapore became investors in ASEAN countries. The Asian NIEs attracted the attention of the world, often referred to as "the Four Asian Dragons". Thus, Taiwan, South Korea, Hong Kong, and Singapore became champions in the growth game.

2. Dynamism of East Asian Economies: Retrospect and Prospect

25

The growth of the Asian NlEs diversified foreign trade and investment in East Asia: the greater the diversification, the less the trade friction. It was under these circumstances that China participated in regional trade in a decisive way in 1979 and that the Pacific Economic Co-operation Conference (PECC) was established in 1980. Although there were some political turbulence due to struggles between reformists and conservatives in China, and though ASEAN was initially extremely cautious towards the PECC, the thrust for broader regional co-operation was enhanced with the inclusion of China. China, once feared by many ASEAN countries because of its influence over communist or related political parties in their nations, became accepted as time went on. Country after country normalized its relations with China. A decade of China's economic reforms and opendoor policies showed that this large country can live harmoniously with its Asian neighbours. Business opportunities have been eagerly sought by other East Asian countries. A large potential market with a population of 1.2 billion appears to have attracted the attention of its neighbours as well as Western industrial nations. Thus, China's participation in the regional trade and investment has been a significant event. Although its trade remains only as large as that of South Korea, China will increasingly become a large trader and a host for: foreign investment. This will also contribute to greater diversification in the regional trade. 10 Of the other transitional economies, Russia Far East remains in disorder. While its natural resources have export prospects, it is short in labour and infrastructure. Mongolia is limited in the size of its domestic market, as it has a population of only 2 mi11ion. North Korea, a unique regime of family-based dictatorship, is pursuing an extreme inward-looking strategy. Countries on the Indochina peninsula have suffered from prolonged economic stagnation for various reasons: Vietnam lagged far behind because of failures in its economic policies and the U.S. embargo; Laos because of its socialist regime and land-locked isolation in the unstable peninsula; Cambodia because of prolonged civil war. Thus, it was only very recently that the peninsula changed "from a battle field to a market-place", as noted by a former Thai Prime Minister. Economic Interdependence

Japan played the role of supplier of capital goods (both equipment and intermediate goods), technology, and various consumer durables in the past decades. Japan's position has been,similar to those of the Western industrial countries. Changes have been taking place and the NIEs are replacing Japan. More intermediate goods are now supplied by the NIEs,

26

Sueo SekiguchJ

and outward direct investment is also promoted by Hong Kong, Singapore, Taiwan, and South Korea. Rapid appreciation of the Japanese yen accelerated horizontal division of labour among countries, triggering adjustment problems in the Japanese market. South Korea and Taiwan complain about their trade deficits with Japan, just as they are pressured to reduce their trade surpluses with the United States, the single largest importer of their manufactures. These two countries thus restrict imports from Japan by administrative controls.U Some East Asian economies pay significant economic costs for the sake of political compromise, for example, South Korea and Taiwan, which perceive that they depend on the United States for their security. The fact that Taiwan accumulates a substantial amount of foreign reserves simply implies that the nation expends far less than it produces, which is also the case of Japan. Rapid economic growth creates such a surplus. The age structure of populations in the NIEs has also contributed to the savings surplus. 12 Hong Kong and Singapore have been financial intermediaries and entrep6ts in the region. International services are the most important industries for these city-states. Trade balance has never been an problem for them, and they achieve high income through free trade. Although most of their commodity exports are not of domestic origin, they also export managerial resources with foreign capital, creating enterprises in the region. Middle-income ASEAN countries seem to follow the South Korean and Taiwan pattern of economic development. As they must feed a sizeable population, the governments intervene in the market to allocate resources to meet their goals. They imported capital, technology, as well as industrial equipment and materials from Japan and the NIEs, starting with import substitution and switching to export promotion. Rigid interventions often failed and created corruption among political leaders, high government officials, and business leaders, although on the whole, management of the economy and the political system seem to have improved significantly. A representative example is the success ofthe Thai economy. Market forces and business ties among enterprises may lead to growing exports of manufactures from East Asia to the rest of the world. As is seen in many cases, a multinational enterprise divides the world market to achieve greater efficiency through division of labour among its subsidiaries. If it is oriented to overseas sales, growing FDI from Japan and the NIEs to middle-income countries may strengthen the export position of their subsidiaries to the rest of the world. Naturally, this is not always the case, as some may invest abroad for out-sourcing. The growth in exports of

2. Dynamism of East Asian Economies: Retrospect and Prospect

27

Japan, the NIEs, and the ASEAN countries to Western industrial countries suggests that Asian exports to the rest of the world will grow more rapidly. This is one of the reasons that the East Asian countries are gravely concerned about the enclosure of the North American market through NAFTA and the blocking of an enlarged EC and its regionalism. At the same time it is for this reason that the East Asian market economies look forward to an enlarged market within Asia, with the participation of China and the Indochinese countries. It is true that China's participation in the regional trade has substantially contributed to the diversification of trade and investment in the region. Although the market size of China in terms of external trade remains the size of South Korea, China's economic growth and the variety of its resource endowments will be a stimulus to the regional trade. Although of a smaller scale, the participation of the Indochinese countries also offers greater opportunities for regional trade, especially between ASEAN and the Indochina peninsula. All Indochinese economies need foreign assistance and investment, and Japan and the Asian NIEs are able to supply both of them. Russia Far East and Mongolia will join these new partners, though their participation will not bring about conspicuous changes to the region. East Asia in the mid-1990s thus consists of Japan, a member of the Organization for Economic Co-operation and Development (OECD), the NIEs that are rapidly catching up with the industrial countries, middleincome countries that have entered the self-sustaining growth phase, and low-income socialist countries. 13 The regional market has been enlarged as a result of reforms in economic systems and open-door policies in former and present socialist nations. Trade has been expanding in the region with the participation of China, which has a large potential market, in the regional trading system. The Indochinese countries add to this expansion. Opportunities for international investment are also expanding, as Russia, Mongolia, China, and most of the ASEAN members need foreign investment and foreign technology together with management know-how. Japan and the NIEs are the suppliers of capital funds and business knowhow. Since demand for capital funds in the region far exceeds supply in these countries, the region will face a net shortage of capital. As far as the balance between savings and investment is concerned, it is only Japan and Taiwan that have considerable savings surpluses. South Korea's position is still unstable in this respect. There is also a great need for official development assistance (ODA). Except for Japan and the NIEs, the majority need ODA for infrastructure

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construction. Japan used to be the only donor ofODA until the mid-1980s, when Taiwan and South Korea also became donors. Japan's sense of global responsibility urges it to allocate more ODA to regions other than East Asia. Thus, needs for ODA again exceed supply (see Table 2.2). IV. Prospects

Regionalism and protectionism in the rest of the world have been a grave concern in East Asia: one is the construction of a greater Europe through the integration of the EC and the other is the formation of NAFT A. East Asians regard themselves as having steadily deregulated external trade, though not as rapidly as their trade partners would have liked. Against such a trend, they perceive that Europe and North America are forming regional blocs that discriminate against East Asia. As East Asian exports have been the target for various bilateral restrictions such as "voluntary export restraints" and the application of "anti-dumping" sanctions, East Asians are concerned about trade diversion to the "enclosed" regions. That local content regulations in the rest of the world will induce foreign investment to these regions is an additional anxiety for East Asians. Prime Minister Mahathir of Malaysia proposed the setting up of an East Asian Economic Caucus (EAEC). 14 Washington reportedly pressed Tokyo and Seoul to oppose this proposal when the meeting of the Asia-Pacific Economic Co-operation (APEC) was held in Seoul in 1992. This was resented by East Asians because it contradicted U.S. actions over the formation of NAFTA. Fragmented information that Washington had invited some Asian countries to join NAFT A on an individual basis or on a sub-group basis suggests that the United States was adopting a tactic to "divide and rule" East Asia. A related issue is Pacific economic co-operation through the PECC and APEC, which are, respectively, a private and a governmental organization. While the former, a mother of the latter, was created by the initiative of the Australian and Japanese Prime Ministers in 1980, Washington seems to be exerting a stronger leadership in the latter. At a very early stage, most of the ASEAN countries showed a cautious reaction to the idea of the PECC, arguing that the industrial countries would dominate over developing countries and that it would endanger ASEAN solidarity. Therefore, the PECC started with the promise that members would do nothing without the prior agreement of ASEAN. The PECC grew in membership, including the former Union of Soviet Socialist Republics (USSR), China, and Taiwan. As the PECC is non-governmental, it became necessary to establish a

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governmental organization, APEC, to implement specific programmes for co-operation. At an early stage, security and economic co-operation were joint goals for APEC, as security was a serious issue at the time of the superpower confrontation. After 1991, however, with the dissolution of the USSR, the United States became the single superpower. The United States is perceived by East Asians as an overwhelming power whose unilateral actions to pressure other nations cannot be checked. Thus, many East Asians are gravely concerned about the so-called "American unilateralism", as evidenced in the legislation and implementation of the Super 301 article of its Trade Act to overrule GATT rules and its "bilateral approach" in trade negotiations to pressure its trade partners. East Asia and the Pacific region are not free from other disputes: trade friction between Japan and the United States has been increasingly politicized. There is a confrontation in philosophy regarding human rights between the United States and China. The Korean peninsula has a dynamite concerning nuclear weapons deployment. Hong ~ong's reversion to China in 1997 may create a massive emigration from the territory depending on the way China integrates it. The Taiwan Straits still has some basic problems to be solved. Between Russia and Japan the "Northern territory issues" remain to be settled. On the economic front, however, natural or market-driven integration has progressed. One of the symbolic events indicating this is the planned readmission of China into GATT, together with Taiwan. It has been almost seven years since China started the negotiation. As China is a large economy, its significance in the world economy cannot be denied, and GATT would like to have China as a member. For China, it seems an extraordinarily hard task for the government to adjust to GATT principles and rules, as its economic system has been considerably different from those of market economies. However, China's efforts to rejoin GATT have actually accelerated its economic reforms. So, it may be wise for existing GATT members to give China some time to adjust itself in GATTY While it is desirable for members of the Asia-Pacific region to share a common human rights philosophy and treatment of it, it is dangerous to link the issue of human rights with negotiations in external trade and investment. Legacy of history imposes a constraint on the speed of reforms in the political system. No country should be allowed to force another to accept its concept of human rights or face economic sanctions. Security in daily life is as important as political freedom. Moreover, what is a "universal" human right is also a matter of controversy. In the case of the East European nations, it was not foreign pressure but domestic necessity that

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made them choose a fundamental change in their political system. 16 East Asia is now in a situation in which socialist economies in the region will join the GATT system to enjoy mutual economic benefits. This is the initial stage. Can the East Asian nations form a free trade area or customs union, as North America and the EC did? This seems improbable for at least a decade or so. After lengthy preparatory discussions, it was only recently that ASEAN decided to establish the ASEAN Free Trade Area (AFT A) by 2008 as a sub-regional arrangement. And yet the plan is extremely modest, retaining 5 per cent tariffs against members and with many exclusions. Because of national interests and the competitive nature of member economies, preferential tariff reduction for intra-regional trade will progress only extremely slowly. In Northeast Asia, South Korea and Taiwan prohibit or restrict imports from Japan to reduce bilateral trade deficits. Such bilateral restrictions are partly a result of American pressure on these countries to reduce U.S. trade deficits with these two countries. This violates the principle of mostfavoured-nation (MFN) treatment, one of the important GATT principles. On the other hand, industrial countries impose voluntary export restraints (VERs) and tend to abuse the use of anti-dumping measures against exports of Japan, the NIEs, and middle-income countries. Unilateral reduction of trade barriers and deregulation seem to have promoted natural, rather than institutional, regional integration. Because of geographical proximity and cultural ties, free trade in the East Asian region has expanded. While intra-ASEAN trade is far exceeded by ASEAN's trade with non-ASEAN countries, East Asian trade as a whole has flourished because of two important factors: China's participation and the growth of the NIEs and middle-income countries. Horizontal trade has been replacing vertical trade as the industrialization process in these countries progressed. China, though it is still on its way to opening up its domestic market, offers various trade opportunities. Serious shortage of infrastructure in inland areas of China makes external trade more attractive for the coastal provinces. It is in this context that China's participation in GATT is conducive to m,ore intensified regional co-operation in East Asia. Sharing common rules and practices in international trade will strengthen regional exchanges in goods, capital, and technology. A large population and rapid increase in income will create enormous trade opportunities. The potential strength of China's economy is both a concern and a hope. Export comp~tition from China, with its massive labour force, is perceived as a threat by small neighbours. As a large country China will pursue a strategy of industrial

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diversification to avoid risks and unfavourable terms of trade that result from narrow specialization. It is enormously important that the East Asian countries have a China that is a mammoth in terms of population and land area, and that is also harmonious to the regional economic systems. Some governments in North America and W,estern Europe pressure China with their human rights ideology and at the same time continue to sell their products to China. The East Asian countries, being neighbours of China, are duly concerned about possible chaos in China, such as had happened in Russia. Steady progress is generally preferable to wild swings between chaos and tight control as it is less destabilizing. China's participation in the GATT and further economic and political reforms will create an environment conducive to the formation of a regional institution that facilitates trade and investment some time in the future. In the mean time China will have to settle the Taiwan issue. Hong Kong will become an autonomous administrative territory in 1997, having an independent status concerning its relations with GATT, the IMF, and the World Bank, except for official diplomacy and security matters. 17 At issue is that the top of the Hong Kong administration has to be appointed by Beijing, and most Hong Kong citizens are against such an arrangement. In most Western countries, the local authorities are elected by local residents, and they often belong to the opposition party. But this has not damaged national cohesion at all. As provincial governors are centrally appointed within the communist party in China, it may be hard to adopt a similar system. Beijing may be worried about Hong Kong's movement towards political independence. A fundamental change is required in this respect. The case of Hong Kong is important for China if it really wants to integrate Taiwan under the formula of "one state and two systems". The pride of "China" is a common factor that binds the mainlanders, Hong Kongers, and Taiwanese, though the latter two fear communism and central controls. There is considerable debate on this issue in Taiwan. Some still stick to unification of all China by Taiwan, but growing numbers seem to aim at an independent Taiwan. In between there are some who advocate "one state with two systems". If Beijing tightly controls Hong Kong, however, the latter school may disappear. Many East Asians are concerned about political and military conflicts as well as economic arrangements under the "one state and two systems" formula. Naturally, Taiwan will demand greater independence than Hong Kong. As Taiwan is also negotiating to join GATT, it will be an independent entity in various international economic institutions. When Hong Kong

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and Taiwan are independent entities, it logically follows that trade between them and China must be considered "international" not "domestic" trade. Beijing, however, may not correctly understand the situation. If Hong Kong and Taiwan are integrated into China and dealt with as two provinces, the economic picture of East Asia will differ significantly from the present one, as Hong Kong is an important free port and a regional financial centre and Taiwan a large trader and an investor. Economic benefits for China, Hong Kong, and Taiwan as well as all other East Asian countries seem much greater when Hong Kong and Taiwan maintain their independent status than when they are integrated into the mainland as two provinces. Many mainlanders also seem to share this view. Another significant change may be Vietnam's participation in ASEAN. This largely depends on how decisively and how fast Vietnam promotes economic reforms to make its trade and other systems more compatible with those of ASEAN. Although some ASEAN members are concerned about a slowdown in ASEAN integration with a new member and possible weakening of ASEAN solidarity, recent political developments seem to be speeding up Vietnam's participation in ASEAN. Japan resumed its ODA to Vietnam in October 1992 and the United States has decided to lift its embargo on Vietnam. Thus, the political environment for economic reconstruction has greatly improved for Vietnam. V. Concluding Remarks

While political factors may change the future picture of East Asia, economic factors remain more certain. The age structure of the labour force is one of the most certain variables: Japan's population will be ageing rapidly towards 2010, thus reducing its domestic savings. China will have a peculiar population pyramid biased to the aged because of the strict "one child" policy. The population structures of the other countries will remain more balanced. It has become clear that Japan has entered a phase of slow growth. The NIEs, though their growth rates remain high, are entering a transition period. Middle-income countries are now in an accelerated growth phase. China, having passed a preparatory stage, is now embarked on high growth. Vietnam is about to go through a preparatory phase. These factors favour Southeast Asia in the growth race. The gravity of economic activities may gradually shift from the North to the South. This is the spin-off of economic growth in East Asia, or one may regard this as the "life cycle" of economic development. To ensure such development, however, the South-

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east Asian economies must invest more in human capital as well as infrastructure. Technology and know-how have so far come from the West and via the East (Japan and the NIEs) through FDI and technology imports. Some industrial activities still depend heavily upon foreign engineers and managers. Economic strength can be derived from efforts to absorb imported technology. The ability to adapt foreign technology is one important landmark indicating mastery of foreign technology. 18 East Asia can be a region in which nations develop intra-regional trade as well as a region in which they can counter possible protectionism in the rest of the world, provided that they succeed in reducing existing barriers to trade among themselves. China's participation in GATT is only one such first step. The attempt to establish AFT A is another effort, since ASEAN members may become more confident about deregulation and liberalization of foreign trade and investment. In order to concentrate on these efforts, it is essential to peacefully solve the political issues outlined earlier in this chapter.

NOTES l. Among middle-income countries, only the Philippines failed to develop its economy because of political instability in the early 1980s. The nation was ahead of Thailand in its per capita GNP until the mid-1960s but has now fallen behind Thailand. 2. In contrast to the Rostovian historical view (Rostow 1960), there are economic theories that offer more rigorous treatment of the mechanism of economic development. See Inada, Sekiguchi, and Shoda (1992). 3. Akamatsu (1956), Kojima (1958), and their followers offer this term without providing a theory for it. 4. For the concept of "unlimited supply of labour" see Lewis (1955), Fei and Ranis (1964), and Inada, Sekiguchi, and Shoda (1992). 5. Japanese engineers who are engaged in developing new energy-saving devices often point out that South Korean engineers are more anxious to introduce the newly developed devices as they are free from the sunk costs involved in its past investment. 6. For a more rigorous treatment of protection and investment allocation for industrialization, see Inada, Sekiguchi, and Shoda (1992). 7. It is a task for empirical studies to determine the extent that multinational enterprises have contributed to turning import-substituting industries to export industries and how effectively governments have managed this transition. 8. The term "integration" has two aspects: institutional and non-institutional. The latter means neighbours are integrated with each other through unilateral

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reduction of trade and investment barriers. In this chapter the term is used in both ways. 9. Before the confrontation between Russia and China surfaced in the late 1950s, China used to seek foreign trade and assistance. But from the late 1950s until the late 1970s it maintained an autarkic strategy. 10. Diplomatic normalization between China and its neighbours in Asia has politically isolated Taiwan, but Taiwan's economic relations with others have not been seriously affected by this political change. Thus, fortunately, East Asia enjoys peaceful co-prosperity with China and Taiwan. 11. The author does not agree with the view that the current account surplus reflects some "unfair practices" or the "closed nature" of a country's market. Neither does he accept the view that current account deficit endangers a nation's economy. 12. It is true that South Korea and Taiwan reduce their current account surplus to the extent that they spend more on defence. 13. It will be a memorial event when South Korea joins the OECD in 1996. Russia Far East and Mongolia are not classified under any category. If the former restores its economic order, it may be classified as an NIE, though it has surpassed that position. Mongolia, whose political and economic systems are yet t.o be established, seems comparable with China. 14. Originally, East Asian Economic Group was the title. This was suggested by Prime Minister Mahathir when he met Prime Minister Li Peng of China in 1991. The aim of the EAEG was to check protectionism in the EC and NAFTA. The original idea was to include China and exclude Oceanic nations. As it was a controversial idea, the ASEAN summit postponed its adoption as an official agenda. 15. Western Europe reportedly suggested this approach. See Asahi Shimbun, 10 Aprill994. 16. The news that the Clinton administration extended MFN treatment to China without directly linking it to the human rights issue was welcomed in East Asia, as it takes more time for nations to share a "common human rights" concept. 17. For more details, see Lai (forthcoming). 18. A dramatic but experimental example of economic construction is seen in the Shenzhen special economic zone, where Hong Kong capital and enterprises flourished under special treatment extended by the central authority of China. The newly born industrial site and city, however, seems a world separate from China in general.

REFERENCES Akamatsu, Kaname. "Wagakuni Sangyo Hatten no Ganko-Keitai: Kikaikigu Kogyo

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nitsuite" [Flying geese pattern of industry development of Japan: machine and tool industries]. Ikkyo Ronso (Hitotsubashi University, Tokyo), November 1956. Fei, John C.H. and Gustav Ranis. Development of Labor Surplus Economy: Theory and Policy. New Haven, Connecticut: Economic Growth Center, Yale University, 1964. Inada, Ken-ichi, Sueo Sekiguchi, and Yasutoyo Shoda. The Mechanism of Economic Development: Growth of the Japanese and East Asian Economies. Oxford: Clarendon Press, 1992. Kojima, Kiyoshi. Nihon Boeki to Keizai Hatten [Japan's foreign trade and economic development]. Tokyo: Kunimoto Shobo, 1958. Lai, Frances. "Prospects of Economic Interactions in the Asia-Pacific: The Case of Hong Kong". In Economic Interactions in the Asia-Pacific Region, edited by Sueo Sekiguchi and Makito Noda. Forthcoming. Lewis, Arthur W. The Theory of Economic Growth. Homewood, Illinois: Irwin, 1955. Rostow, W.W. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge: Cambridge University Press, 1960.

chapter 3

The Institutional Framework for APEC: An ASEAN Perspective HADI SOESASTRO

I. Introduction

Economic integration in the Asia-Pacific region is market-driven. This market integration process is distinct from the institutional integration that has characterized developments in the European Community (EC) since its creation in the mid-1950s. And yet, the Asia-Pacific region today is confronted with the question of whether it needs to organize itself through the creation of formal regional structures. The demand for a regional forum derives from the desire to lessen the possible adverse effects of increased economic interdependence. One major new factor that has influenced thinking in the region with regard to institution-building is the belief that in the post-Cold War era the AsiaPacific region also needs to have a number of regional structures, including in the field of economic co-operation, to guarantee regional peace and stability. Another major factor that may have become of lesser urgency following the successful conclusion of the Uruguay Round is the concern about the possibility of regional fragmentation into separate economic groupings on different sides of the Pacific Ocean.

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The region now has the Asia-Pacific Economic Co-operation (APEC). It is not immediately obvious from its name what APEC is supposed to be.

When it came into being in November 1989 it was proclaimed as an "informal inter-governmental process" to promote economic co-operation in the Asia-Pacific region. APEC can be seen as a major experiment in regional institution-building. Is APEC still an informal process, or has it already evolved into a more formal one or even into some kind of a regional structure? In what direction should APEC develop institutionally? This chapter examines the main issues in the institutional development of APEC and attempts to outline elements of APEC's institutional framework that are important from an ASEAN perspective. II. Organizing the Asia-Pacific Region

Ideas about organizing the Asia-Pacific region that have been aired since the 1960s have been given expression in a variety of proposed institutional arrangements. Over the years, such ideas have evolved either in response to changing circumstances and different perceived needs or as a result of critical evaluations of the concepts themselves (Soesastro 1983a). These different ideas can be examined by employing different approaches. A concept-oriented approach would recognize that the idea of Asia-Pacific economic co-operation, which is of relevance today, is derived from the fact and implications of regional economic interdependence. Such ideas began to emerge only in the mid-1960s and found their more elaborate expression in the 1970s. The rationale given for an institutionalized arrangement in the Asia-Pacific rested on the realization that the growing economic interdependence of the region requires new mechanisms for more effective communication and association, and the recognition that bilateralism is no longer adequate. An event-oriented approach can also be employed. Kiyoshi Kojima's proposal for a Pacific Free Trade Area (PAFTA) in the mid-1960s can be seen primarily as a reaction to the establishment of the European Economic Community (EEC). A third approach focuses on the actors involved. Actors can be nations, institutions, or individuals, depending on the preferred level of analysis. The role of Saburo Okita, for example, comes to mind as one of the most important actors in the development and realization of ideas about economic cooperation in the Asia-Pacific region. An examination of the evolution of and the different proposals for organizing the Pacific is useful because this can help identify the relevant

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aspects, including political factors, of institution-building in the region. The proposal for a free trade area, PAFTA, involving the five developed countries in the region (Australia, Canada, Japan, New Zealand, and the United States) was based on an analysis of the effects of external events, initially the establishment of the EEC and later the completion of EEC's internal tariff elimination in 1968, on those economies (see Kojima 1971 ). Kojima argues that it should be logical that these countries promote their economic integration in developing the area, which has much greater potential than Europe. He further argues that global developments, namely, the conclusion of the Kennedy Round of multilateral trade negotiations in June 1967, should give additional support to his PAFTA proposal. Firstly, it was shown that complete regional trade liberalization would have considerable advantages over partial multilateral trade liberalization. Secondly, it was thought that another round of significant global tariff reduction was not likely to take place in the 1970s. However, Kojima shows that although a PAFTA would result in sizeable intra-regional trade expansion, the distribution of the gains would be very unequal mainly because of the disparity in stages of industrialization even among the five developed economies. Thus, the difficulty of obtaining a consensus was well recognized. There were other factors that worked against the PAFTA proposal. Firstly, the five countries concerned still lacked the solidarity and degree of integration that would be necessary for dispensing with protective measures. Secondly, the United States was reluctant to take part because of its global economic interests and because of the subordinate importance of foreign trade in its economy then. The effects of PAFT A upon the Asian developing countries are also examined, and it is found that even though the elimination of tariffs among PAFTA members was to be extended to Asian products under MFN, their import would remain insignificant. In a later paper Kojima proposes an arrangement for strengthening functional, rather than institutional, integration. The proposed Organization for Pacific Trade and Development (OPTAD) was given the task of administering three codes of international behaviour: a code of good conduct in the field of trade policy, a code of overseas investment, and a code of aid and trade policy towards associated developing countries. OPTAD's organizational structure was to follow the OECD model and would have three committees, namely, on trade, investment, and aid. The OPTAD idea is further developed by Drysdale and Patrick (1979). They propose that such an organization could become a "regional reference point" to facilitate the pursuit of common trade and development objec-

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tives and overcome conflict in these areas among countries in the region. They note that the dynamic developments within the region itself brought about new opportunities as well as new problems in foreign economic relations, and argue that existing regional and international institutions were inadequate to meet those needs. In addition to defining membership, which, as distinct from the OECD, would include developed and developing countries, the proposal stresses on the importance of its style of operation, which should be consultative, informal, and communicative. The issues in the organization's agenda would be handled by specific functional task forces. In essence, OPTAD was not meant to function as a regulatory agency, but it should assume a role as a "purposeful association", similar to ASEAN. Next was the Pacific Basin Co-operation Concept (PBCC) developed by a Japanese Study Group, which has become the first official proposal. The Study Group appears to have taken note of the many objections and reservations to the earlier proposed institutional arrangements. It also is careful in outlining its proposal in view of the prevailing suspicions towards initiatives coming from the Japanese Government. The PBCC Report (1980) describes the various tasks for regional economic co-operation without specifying the means to carry them out. It merely proposes a stepby-step approach and recommends the setting up of a committee as a first step in building the machinery for economic co-operation in the AsiaPacific region. The committee would initially manage a series of international conferences on regional economic co-operation. It could then become an informal consultative forum for discussion on regional issues of common interest, establish "working groups" to study regional issues, and make recommendations by consensus. In the longer term, the committee could develop into an inter-governmental consultative organization with a permanent secretariat. The Study Group also stresses that membership should be open to all countries interested in regional co-operation. This brief review shows the evolution in the concept of Asia-Pacific economic co-operation. In a sense, greater realism was introduced into the discussion as issues of political feasibility were given attention. The most pronounced aspect in the evolution of the concept was the move away from an EEC-type of institutional arrangement to a more loosely structured OECDtype consultative body, and, as will be discussed later, to a "confidencebuilding" process; from institutional integration to functional integration, and, as suggested below, to facilitating market-driven integration. Initially, a great deal of concern was raised with regard to this "diffusion phenomenon", and that the region might end up establishing another ESCAP (the

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U.N. Economic and Social Commission for Asia and the Pacific). It was soon recognized, however, that given the great differences among the countries in the region, the promotion of regional econoJ!Uc co-operation should be pursued through informal forums. To complete the story- or an account of the history- of the concept of Asia-Pacific regional co-operation, the recommendations of the Japanese Study Group were examined in a non-governmental seminar at the Australian National University in Canberra in September 1980, sponsored by the Australian and Japanese Governments. The seminar recommended the establishment of a Standing Committee, called the Pacific Co-operation Committee (PCC). Although the PCC was proposed to be unofficial, private, and informal, its establishment was made conditional upon an endorsement by governments. Such endorsement could not be secured because many governments still had reservations about the idea of AsiaPacific economic co-operation. In June 1982, a follow-on meeting was held in Bangkok, and participants agreed to establish a standing committee and four study task forces, as recommended at the Canberra seminar. They also agreed to begin with a consultative process that became known as the Pacific Economic Cooperation Conference (PECC) series. This process adopted the approach towards community-building in the region, which was agreed upon at the Canberra seminar. It encompasses the following principles: • the need to avoid military and security issues so as to create a sense of community without creating a sense of threat; • that EEC-type discriminatory trading arrangements are inappropriate in the Pacific; • the need to "hasten slowly", and to proceed towards long-term goals step by step; • the need to ensure that existing bilateral, regional, and global mechanisms for co-operation are not undermined by any new wider regional arrangement and that it be complementary with them; • the need to ensure that it is an outward-looking arrangement; • the need for an "organic approach", building upon private arrangements already existent in the Pacific; • the need to involve academics, businessmen, and governments jointly in this co-operative enterprise; • the need to avoid unnecessary bureaucratic structures; • the need for a fairly loose, and as far as possible, non-institutionalized structure, recognizing that while dispute settlement may prove diffi-

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cult in sensitive areas, discussion of problems may contribute towards ameliorating them; the need for all members to be placed on an equal footing; the need to concentrate attention on areas of mutual regional interest. (Crawford 1981)

There are two contrary views on the achievements of the PECC process. One view is that the process has kept on discussing what ought to be done without ever moving into real action. The other view points to the importance of the PECC process as a vehicle or forum through which a regional consensus can be formed. Such consensus is manifested in the socalled Vancouver Statement on Pacific Economic Co-operation, wh:icfi was presented at the Fifth PECC in 1986 and the so-called San Francisco Declaration on Open Regionalism, which was presented at the Ninth PECC in 1992. In essence, they stress the importance of strengthening the concept of an "open region" and the commitment to coherent measures that are required to maintain an open region and to further its objectives (see Cheit 1992). Without doubt, however, the most important achievement of the PECC is that it has opened up the way for- perhaps even, given birth to- the inter-governmental APEC process. In addition, as pointed out by Aggarwal ( 1993), and to be further discussed later, "meta-regime formation in the Pacific has been marked by PECC leadership in the formation of principles and norms, with the APEC following behind". Meta-regimes are distinguished from international regimes in the sense that the former represent the principles and norms underlying international arrangements, whereas the latter refer specifically to rules and procedures. Ill. APEC's Evolution: From Canberra to Seattle

In January 1989, during his visit to South Korea, the then Australian Prime Minister, Bob Hawke, proposed a meeting of ministers from the region to discuss ways to establish economic co-operation at the government level. The successful inauguration of what has become APEC has been attributed .to a number of factors (Alatas 1991). Firstly, the pragmatic approach on substantive areas of clear common interest. Secondly, the sensitive approach with regard to the possible operational modalities. Thirdly, the careful and extensive consultations undertaken by Australia in developing and preparing the concept. However, it should not be overlooked that the dramatic changes in the regional and international political and economic

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environments have led governments in the region to recognize the necessity to establish an inter-governmental forum for consultation and cooperation on economic issues. The first APEC ministerial meeting, held in Canberra in November 1989, was attended by twenty-six ministers from twelve regional economies, namely the six ASEAN countries, the five Pacific developed countries, and South Korea. Three organizations were accepted as official observers: ASEAN, the PECC, and the South Pacific Forum Secretariat. This meeting agreed on the following basic principles of APEC: • that the objective of APEC is to sustain growth and development in the region to contribute to improving living standards and, more generally, growth of the world economy; • that APEC should seek to strengthen an open multilateral trading system and not be directed towards the formation of a regional trading bloc; and • that APEC should focus on economic rather than political or security issues, to advance common interests and foster constructive interdependence by encouraging the flow of goods, services, capital, and technology. The second ministerial meeting was held in Singapore in July 1990. In this meeting, seven work projects for practical co-operation were established. They are aimed at "developing the habit of co-operation" and demonstrating the benefits of economic co-operation through improving regional data on the flow of goods, services, and investment; enhancing technology transfer; human resources development; and promoting cooperation in energy, marine resources, and in telecommunication. Three additional work projects were added later, namely, transportation, tourism, and, fisheries. To demonstrate APEC's support for a strong, open multilateral system, ministers issued a declaration that stressed their firm commitment to a timely and successful completion of the Uruguay Round. It was also agreed that a central theme of APEC, after the completion of the Round, would be to promote a more open trading system, with exploration of the scope for non-discriminatory regional trade liberalization. China, Hong Kong, and Taiwan (as Chinese Taipei) were admitted as members of APEC at the third ministerial meeting in Seoul in November 1991. The meeting also adopted the Seoul Declaration, which set out the scope of activity, mode of operation of, and principles for participation in APEC. The scope of activities for APEC includes the following:

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• exchange of information and consultation on policies relevant to common efforts to sustain growth, promote adjustment, and reduce economic disparities; • development of strategies to reduce impediments to trade and investment; and • promotion of regional trade, investment, human resources development, technology transfer and co-operation in specific sectors such as energy, environment, fisheries, tourism, transportation, and telecommunication. The mode of operation of APEC is based on mutual benefit, a commitment to open dialogue and consensus-building and co-operation through consultation and exchange of views drawing on analysis and policy ideas contributed by member economies and relevant organizations (ASEAN, the PECC, and the South Pacific Forum). APEC also welcomes privatesector participation in appropriate APEC activities. Participation in APEC is open, in principle, to economies in the Asia-Pacific region that have strong regional economic links and accept its objective. Decisions on participation are made by consensus. The fourth APEC ministerial meeting, held in Bangkok in September 1992, agreed to set up a permanent secretariat as a support mechanism and a fund to finance APEC activities. The Secretariat was set up in Singapore in January 1993, headed by an executive director (from the country chairing APEC) and a deputy executive director (from the succeeding country chairing APEC). The Secretariat's function is to co-ordinate and assist APEC' s work projects, facilitate communications between APEC members, and provide a point of contact for the public, other organizations, and the business community. It also has a research and analysis unit. The APEC Central Fund to be derived from member contributions was set at US$2 million for the first year. In their statement, the ministers, among other things, agreed to the following: • renew APEC's firm commitment to achieving the strengthened multilateral trading system that would result from the successful conclusion of the Uruguay Round; • confirm the importance they attach to strengthening and liberalizing trade and adopt regional trade liberalization as one of the main priorities for 1993; • establish an Eminent Persons Group (EPG) to enunciate a vision for trade in the Asia-Pacific to the year 2000 and identify constraints and

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issues that APEC should consider in advancing regional trade liberalization over the next ten years; • implement the following four proposals, which would provide significant benefits for businesses in the shorter term: establish an electronic tariff data base for APEC members to facilitate regional trade through better information flows, harmonize and facilitate customs procedures and practices, examine the administrative aspects of market access and recommend means of reducing the costs they impose on trade, and prepare a detailed guide book on investment regulatory procedures in the region. In the fifth ministerial meeting in Seattle in November 1993, Mexico and Papua New Guinea were admitted to APEC and a decision was made to admit Chile to APEC at the next ministerial meeting in 1994. It was also agreed to defer consideration of additional members for three years. The ministers reiterated that the strengthening of the multilateral trading system, expansion of regional and global trade and improvement of investment rules and procedures in a GATT-consistent manner were central APEC objectives. They called for an early and successful conclusion of the Uruguay Round and demonstrated their commitment to this goal by expressing their preparedness to take additional specific trade-liberalizing measures. They also adopted the "Declaration on an APEC Trade and Investment Framework" to advance APEC's role in trade and investment by engaging its members in both policy and facilitation matters. A Committee on Trade and Investment (CTI) was formally established. The EPG Report to the APEC ministers entitled "A Vision for APEC - Towards an Asia-Pacific Economic Community", issued in October 1993, was presented by its Chairman, C. Fred Bergsten. The report emphasizes that APEC must accelerate and expand co-operation in order to respond to three threats to the continued vitality of the region: erosion of the multilateral global trading system; evolution of inward-looking regionalism; and risk of fragmentation within the Asia-Pacific region. The EPG recommends that APEC undertake initiatives in four areas: regional and global trade liberalization, trade facilitation programmes, technical cooperation, and institutionalization of APEC. The APEC Informal Leaders Meeting, proposed and hosted by U.S. President Bill Clinton, took place on 20 November 1993 at Blake Island and was attended by leaders from all APEC member economies except Malaysia. The leaders issued an "Economic Vision Statement" containing

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three main components. The first is an affirmation of the importance of an open multilateral trading system and the determination of Asia-Pacific leaders to lead the way in taking concrete steps to produce the strongest possible outcome of the Uruguay Round. The second is a vision of "a community of Asia-Pacific economies": (a) which is based on the spirit of openness and partnership, (b) whose dynamic economic growth contributes to an expanding world economy and supports an open international trading system, (c) where trade and investment barriers continue to be reduced, (d) where the benefits of economic growth are shared by the people, (e) where education and training are improved, (f) where goods and people move quickly and efficiently because of advances in transportation and telecommunication, and, (g) where environmental protection is improved to ensure sustainable growth and to provide a more secure future for the people. The third is a list of initiatives, which includes the following: • convene a meeting of APEC finance ministers to discuss broad economic issues including macroeconomic developments and capital flows; • establish a Pacific Business Forum to identify issues APEC should address to facilitate trade and investment in the region; • establish an APEC education programme to develop regional cooperation in higher education; • establish an APEC business volunteer programme to promote human resource development; • convene a meeting of APEC ministers involved with small and medium-sized business enterprises to discuss ways to improve the environment for the co-operation of these enterprises; • develop a non-binding code of principles covering investment issues; • develop APEC's policy dialogue and action plan for conserving energy, improving the environment, and sustaining economic growth; • establish a Technology Transfer Exchange Center to facilitate the exchange of technology and technology management skills among APEC members. The leaders also agreed to meet again in Indonesia in 1994. The EPG Report proposes that the leaders' meeting be held once in three years. However, as stated by Bergsten ( 1994), it is to be expected that after Seattle such a meeting will be held annually. He argued that this decision will assure that the leaders will continue to focus on APEC and get to know each other better, that the president of the United States will travel to Asia at least once a year, and that all APEC members will broaden their

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perspectives and that ministers and officials will be fully energized to carry out their leaders' instructions. This "upgrading" of the APEC process could contribute to resolving bilateral disputes in the region and its institutionalization should "increase the momentum of community-building in the region". Bergsten further points out that the Seattle meetings showed that "the leaders were far more ready than their ministers, who in tum were far more ready than their senior officials, to adopt and pursue visionary goals". In addition, he notes the importance of the proliferation of meetings among APEC ministers: in 1994 these include meetings of finance ministers, of environmental ministers, of trade ministers, and of ministers in charge of small and medium-sized enterprises. He concludes that "leaders in Seattle began the process of converting APEC from a purely consultative body into a substantive international institution". Bergsten's conclusion does not appear to be supported by all APEC members. At the Tenth PECC General Meeting in Kuala Lumpur in March 1994 and in an interview with the Australian Broadcasting Corporation, the Malaysian Minister for Trade and Industry, Rafidah Aziz, clearly opposed this transformation when stating that "APEC is slowly turning out to be what it wasn't supposed to be, meaning that APEC was constituted as a loose consultative forum" (New Straits Times, 24 March 1994). How should this statement be understood? On an earlier occasion, when addressing a forum of Malaysian and Filipino business executives, Minister Rafidah Aziz stated that Kuala Lumpur will oppose attempts to give APEC a formal structure because it will weaken ASEAN .... The moment APEC is institutionalized, ASEAN will be submerged. (Jakarta Post, 18 January 1994) After meeting with President Soeharto during her visit to Indonesia, Minister Rafidah Aziz reported that Indonesia did not support turning the APEC forum into a formal and structured organization and that President Soeharto was of the opinion that APEC should remain just a loose and informal forum because of disparities in the level of economic development among its members (Jakarta Post, 24 January 1994).

IV. ASEAN and APEC ASEAN has been cautious about APEC from the beginning. As suggested by Tan Kong Yam et al. ( 1992), there is genuine concern that the vast disparities in income, technology, and skill level among the APEC economies could lead to asymmetrical dependence, heightened tension, and

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North-South polarization within APEC. Discussions in the 1980s (see Soesastro 1983b) clearly show that ASEAN fears of dilution in a wider regional organization and the concern of being dominated and overshadowed by the much larger economies have led to the insistence on informal arrangements and the non-institutionalization of APEC. The principles of ASEAN participation in the APEC process have been jointly crafted by ASEAN members in 1989 and are contained in what is known as the Kuching Consensus. These principles are: • ASEAN's identity and cohesion should be preserved and its cooperative relations with its Dialogue Partners and with third countries should not be diluted in any enhanced APEC. • An enhanced APEC should be based on the principles of equality, equity and mutual benefit, taking fully into account differences in stages of economic development and socio-political systems among countries in the region. • APEC should not be directed towards the formation of an inwardlooking economic or trading bloc but should strengthen the open, multilateral economic and trading systems in the world. • APEC should provide a consultative forum on economic issues and should not lead to the adoption of mandatory directives for any participant to undertake or implement. • APEC should be aimed at strengthening the individual and collective capacity of participants for economic analysis and at facilitating more effective, mutual consultations to enable participants to identify more clearly and to promote their common interests and to project more vigorously those interests in the larger multilateral forums. • APEC should proceed gradually and pragmatically, especially in its institutionalization, without inhibiting further elaboration and future expansion. These principles continue to be aired by ASEAN leaders and officials, including in an address by President Soeharto at an international conference in Bali as recent as August 1993. Questions have been raised from within ASEAN itself whether this consensus still holds. However, even if these principles are adhered to, there is sufficient room for ASEAN to participate actively and constructively in APEC. Similarly, other members can further the process of regional economic co-operation even though APEC remains essentially a consultative forum. There are many reasons why APEC is likely to maintain its character as

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primarily a consultative forum for some time to come. One important reason is the necessity for APEC at this stage to promote confidencebuilding as its main task. As suggested by Sheridan (1994) in his presentation at the Tenth PECC General Meeting, "continuous consultation breeds community and breeds public acceptance of community". He further pointed out that the history of ASEAN shows that "process can be substance". And as suggested by Wendy Dobson, the final test for the process to be regarded as effective is whether it can mobilize domestic support for the goals of this regional community-building.' The APEC process has many levels. Both the ministerial meetings and the informal leaders meeting are consultative in nature, in the sense that participants are not engaged in negotiations. However, the consultative processes at these level can produce initiatives as shown in Seattle. If translated into programmes and implemented effectively, they will form the basis for a rich agenda for APEC. There is no reason to doubt that a consultative process cannot lead to the adoption and implementation of a meaningful agenda for regional economic co-operation. In other words, this APEC process can produce substance (Soesastro 1994). A series of senior officials meetings (SOMs) formulate and develop the "structure" for implementing initiatives and agreements made at the higher levels. In doing so, they will make use of the recommendations and results of the various APEC work projects as well as the recently established CTI. Further consolidations of work projects could lead to the development of other committees in the future. This would practically mean a further institutionalization of the process. The development of regional economic co-operation in the AsiaPacific region in general, and the APEC process in particular, needs to be guided by the wisdom that processes are more important than structures. This does not mean that institutional structures are unimportant; however, such structures should be dictated by what is required by the process. APEC's form today is totally logical and will be evolving. The "beauty" of the APEC process is that it is continuously "injected" by a kind of freshness in each succeeding cycle by having the host of the ministerial meeting chair APEC and provide the necessary leadership. The host can, and indeed should, project its interest in and vision of APEC into the process. For instance, Indonesia as the 1994 chair of APEC is emphasizing the need to promote developmental issues that will help raise the level of readiness on the part of the developing members of APEC to participate in a meaningful regional trade liberalization. Despite the occasional rhetorics, ASEAN is sufficiently pragmatic to

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49

accept a gradual institutionalization of APEC. As stated by the Indonesian Foreign Minister, Ali Alatas, ASEAN should not oppose formalizing of APEC but its members should not be too hasty in institutionalizing the forum: APEC should become an organization with a secretariat and a codified set of rules and procedures in a gradual way like ASEAN. (Jakarta Post, 19 March 1994)

When the APEC finance ministers met in Hawaii in March 1994, ASEAN made it clear that such meetings should not be institutionalized. This consensus was reached in an ASEAN caucus and was supported by China and Japan. However, at the end of the meeting, the Malaysian Finance Minister, Anwar Ibrahim, explained that ASEAN would go along with the decision to meet again in Indonesia in 1995 because "we don't have very strong views on that" (New Straits Times, 21 March 1994). Later, at the annual meeting of the Pacific Basin Economic Council (PBEC) in Kuala Lumpur, Malaysia's Prime Minister, Mahathir, again stated the view that APEC should not be formalized, "but if it is the wishes of other members that it be strengthened, Malaysia would allow itself to be dragged along" (Jakarta Post, 24 May 1994). But how far is Malaysia or the other ASEAN members willing to go? V. APEC's Institutionalization

To some members of APEC, the pace of ASEAN's participation in APEC might be too slow. Indeed, the call to move APEC faster in the direction of its institutionalization continues to be aired. Sandra Kristoff, Director for Asia at the U.S. National Security Council, a person who has actively participated in APEC for many years, proposed that APEC should become a formal economic co-operation association (Media Indonesia, 24 February 1994). Other alternatives were also proposed, one of which was to make APEC "a GATT for Asia-Pacific". When the United States assumed the 1993 chair of APEC, Acting Secretary of State, Lawrence Eagleburger, in a meeting with APEC senior officials in Washington in December 1992, proposed that the 1993 cycle be seen as a time of transition for APEC, namely, to "move beyond the phase of institutionalizing APEC to making it operational". In other words, he suggested that APEC be transformed to an organizational reality, an organization that can produce co-operative solutions to our common regional problems. Specifically, he suggested that members should be able to envisage such things as:

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• • • • • • •

an APEC investment agreement; an APEC code of conduct for administrative measures; an APEC intellectual property agreement; an APEC customs co-operation treaty; an APEC dispute settlement mechanism; an APEC-wide open-skies agreement in civil aviation; an APEC agreement on trade in a particular goods or services sector.

There are a number of ways in which this suggestion can be pursued. As in the case of an APEC "agreement" in the field of investment, it can be based on an initial agreement of what constitutes a set of ideal principles. The agreement can be of a non-binding nature initially. It can be made binding but voluntary at a later stage and then be turned into a code. The alternative would be to adopt ASEAN's "6 minus x" principle, allowing members to opt out of APEC agreements if they are not ready to participate. The former option may be preferred to the latter by Indonesia and other ASEAN countries. As suggested by Suhadi Mangkusuwondo (1994), the "Asian" approach is to agree on principles first, then let things evolve and grow gradually. This is in contrast to the "American" approach, which is viewed by many in Asia as too legalistic and too institutional. He argues that "to start with legally binding commitments covering a wide range of issues scares many people in Asia". Some of the issues identified above for consideration for an APEC agreement are issues in the GAIT and the forthcoming World Trade Organization (WTO). The idea of a "ratcheting up" strategy in which APEC should take up issues that the Uruguay Round had dealt with but could not reach agreement - or even to go beyond the scope of the existing multilateral agreement - does not appear to have received encouraging support from most developing members for fear that in the regional forum they are more prone to pressures from the larger countries than in the global, multilateral forum. In addition, it should also be borne in mind, especially in the agendasetting of APEC, that each member has a different interest in APEC and different expectations of what APEC' s main function should be. However, it should be possible to combine a number of issues into a coherent APEC agenda. It is proposed here that APEC should give equal attention to three main tasks. The first task is regional trade liberalization. The second is trade and investment facilitation, and the third is development co-operation. These three main tasks should form the agenda for APEC as recommended

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in the EPG Report. What needs to be stressed here is that any one task cannot be pursued in isolation of the other; they are interdependent. Indonesian officials, for instance, have made it clear that development cooperation programmes are necessary in order that the weaker countries could increase their capabilities that enable them to participate more fully in regional trade liberalization exercises (Jakarta Post, 29 April1994). On regional trade liberalization, Mangkusuwondo (I 994) is of the view that Indonesia would not be supportive of the idea of an APEC-wide preferential trading arrangement. One reason is political. However, more importantly is the view that the essential part of the APEC process is the encouragement of unilateral liberalization that thus far has been the key to the region's economic dynamism. Thus, the question is how APEC could promote an environment that could sustain unilateral liberalization by members, that by nature is non-discriminatory and applied on an MFN basis, and therefore is entirely GAIT-consistent. In addition, this does not require negotiations. The wisdom, practicality, and feasibility of this strategy have been outlined by Garnaut (1994). This is also entirely consistent with the meta-regime for Asia-Pacific economic co-operation that has evolved over the past fifteen years or so, and manifested in the concept of "open regionalism". Aggarwal (1993) identifies four schools of thought here, of which the currently dominant GAIT-consistent school of open regionalism is one. The three others are: the pure GAIT-ists; sceptics of open regionalism; and lastly, advocates of the Asian bloc. The pure GATT-ists are of the view that APEC would undermine GAIT and that such regional arrangement would foster a fragmentation of the world economy into competing economic blocs. Advocates of the Asian bloc already see the trend towards regional blocs with the further expansion of the EU and NAFTA. The proponents of open regionalism adopt a view of MFN that has been termed "inclusive MFN" where non-members can obtain the same benefits. This is distinct from an "exclusive MFN" that is the GAIT norm, in which MFN is required only for members. In addition, the norm of reciprocity is diffuse (general give and take) rather than specific (direct balancing of benefits). Sceptics of open regionalism have argued that permitting diffuse instead of specific reciprocity will allow potential freeriders to benefit from APEC liberalization. Bergsten (1994) argues that the principle of inclusive MFN should be replaced by a "temporarily conditional MFN", which uses the negotiating leverage available to APEC because of its large economic weight to obtain maximum liberalization around the world. The issue of how "free trade in the region" will be

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achieved will need to be settled soon by APEC members. However, APEC should not become a single-issue organization; trade liberalization should not be the only agenda of APEC. In view of this discussion, APEC's institutional structure can be simple. It has already established a CTI, which could further promote activities that support trade and investment liberalization. A second committee, the Committee for Economic Trends and Issues (CETI), could be established and it would focus on more structural issues affecting trade and investment flows in the region. A third committee, the Committee for Development Co-operation (CDC), would provide an umbrella and give greater focus to the APEC work projects that thus far appear to lack a coherent developmental objective. This balanced three-legged structure can accommodate the interests of APEC' s diverse members. Wendy Dobson suggested that in the future there could be a fourth leg, dealing with macro policies and macroeconomic issues. This, however, has no urgency today because most governments in East Asia have a good record in keeping their house in order. Finally, all members should accept the fact that, as shown by Aggarwal also, the APEC regime will be a weak regime. It is weak because of the region's diversity and because it is market driven. 2 And so be it! NOTES l. This and other references to Wendy Dobson in this chapter refer to her comments on an earlier draft. 2. Wendy Dobson argued that this weak regime also results from the characteristics of firms that are driving integration in the region.

_REFERENCES Aggarwal, Vinod K. "Building International Institutions in Asia-Pacific". Asian Sun~ey 33, no. 11 (November 1993): 1029-42. Alatas, Ali. "Asia-Pacific Economic Co-operation (APEC): Implications for ASEAN". Speech presented at the Conference on ASEAN organized by the Asia Society, Bali, March 1991. Asia-Pacific Economic Co-operation. A Vision for APEC- Towards an AsiaPacific Economic Community. Report of the Eminent Persons Group to APEC Ministers. Singapore: APEC Secretariat, October 1993. Bergsten, C. Fred. "APEC and World Trade". Foreign Affairs 73, no. 3 (May/June 1994): 20-26.

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Cheit, Earl F. "A Declaration of Open Regionalism in the Pacific". California Management Review 35, no. 1 (Fa111992): 1-15. Crawford, Sir John, ed. Pacific Economic Cooperation: Suggestions for Action. Singapore: Heinemann Educational Books, 1981. Drysdale, Peter and Hugh Patrick. An Asian-Pacific Regional Economic Organization: An Exploratory Concept Paper. Paper prepared for the Committee on Foreign Affairs, United States Senate, by Congressional Research Service, Library of Congress. Washington, DC: U.S. Government Printing Office, 1979. Garnaut, Ross. "APEC After Seattle and the Uruguay Round". Paper presented at the lOth International General Meeting of PECC, Kuala Lumpur, 22-24 March 1994. Kojima, Kiyoshi. Japan and a Pacific Free Trade Area. Berkeley: University of California Press, 1971. Mangkusuwondo, Suhadi. "An Indonesian View of APEC". Luncheon speech presented at the Asia Foundation Conference on "Taking Stock of the AsiaPacific Economic Agenda", Center for Asian-Pacific Affairs, San Francisco, 18 April1994. Pacific Basin Co-operation Study Group. Report on the Pac!fic Basin Cooperation Concept. Tokyo, 1980. Sheridan, Greg. "Public Opinion and Regional Cooperation". Presentation at the lOth International General Meeting of PECC, Kuala Lumpur, 22-24 April 1994. Soesastro, Hadi. "Institutional Aspects of Pacific Economic Co-operation". In Pacific Economic Co-operation: The Next Phase, edited by Hadi Soesastro and Han Sung-Joo, pp. 3-52. Jakarta: Centre for Strategic and International Studies, 1983a. ·-----~ . "A SEAN and the Political Economy of Pacific Cooperation". Asian Survey 23, no. 12 (December 1983b): 1256-70. _ _ _ . "APEC's Form Totally Clear, Logical". Jakarta Post, 31 January 1994. Tong Kong Yam, Toh Mun Heng, and Linda Low. "ASEAN and Pacific Economic Co-operation". ASEAN Economic Bulletin 18, no. 3 (March 1992); 309-32.

chapter 4

A Post-Uruguay Round Agenda for APEC: Promoting Convergence of North American and Asian Views SEIJI FINCH NAYA and PEARL IMADA IBOSHI

I. Introduction

In November 1993, President Bill Clinton successfully elevated the AsiaPacific Economic Co-operation (APEC) Ministerial Meeting to an informal leadership conference. At that meeting, two countries - Mexico and Papua New Guinea- formally joined APEC as members, bringing the APEC membership up to seventeen. 1 The unprecedented APEC informal summit lent momentum to the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and added substance to the vision of an AsiaPacific economic "community". This "community" envisioned by the APEC nations is very different from that of the European Community (EC). In trying to define such a "community", distinct views of Asia-Pacific economic co-operation have vied to shape the institutionalization of APEC with the United States pushing for a more legalistic approach and an adherence to timetables, while several Asian countries prefer a consultative forum for discussion. Agreeing on APEC's future agenda will require a reconciliation of these

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views. Fortunately for APEC, distinctive North American and Asian approaches to regional economic co-operation have already begun to converge. To understand the underpinnings of this convergence, it is important to first clarify the nature of Asia-Pacific economic interdependence. Section II of this chapter shows that increasing regional interdependence is based on market forces, not preferential arrangements. Although there is some controversy as to whether or not growing trade and investment flows represent a "bias" towards regional markets, most indices indicate a rise in East Asian and APEC economic interdependence. By overcoming pervasive private barriers to trade, the region's economies have become more integrated even while liberalizing on a non-discriminatory basis. What mechanism can foster the continued Asia-Pacific liberalization that is so important for sustaining the region's rapid development and interdependence? Section III discusses how economic policies of key APEC members, that is, the United States and the Pacific Asian economies, are unlikely by themselves to ensure adequate momentum for regionwide liberalization. The chapter concludes with a discussion of how an appropriately designed APEC agenda, built upon a reconciliation of North American and Asian policies towards regional co-operation, can enable the Asia-Pacific to lead the world in trade and investment liberalization. II. Asia-Pacific lnterdependence2

The Asia-Pacific is well known as the most dynamic region in the world economy today. Interdependence within this region, based on growing trade and investment ties, has grown markedly without any preferential institutional arrangements. Market forces have induced de facto integration by overcol'ning private and official barriers to trade and investment. Trade

Most significantly, the Asia-Pacific economies are trading with each other more than ever before. Intra-APEC trade has grown rapidly from 57 per cent of total trade in 1980 to 69 per cent in 1992 (Figure 4.1). At the same time, intra-East Asian trade rose from 34 to 43 per cent of total East Asian exports in 1992 (intra-East Asian trade refers to trade among Japan, China, the NIEs, and ASEAN countries). East Asian exports to the United States fell from its peak in 1986 of 34 per cent of the total to only 24 per cent, close to the level in 1980 (although U.S. exports to East Asia are increasing, currently around 24 per cent of the total).

56

Seiji Finch Naya and Pearllmada /boshi

FlGURE4.1 Growing Interdependence: Intra-Regional Trade

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It is interesting to note that contrary to common perception, it is not Japan that is spurring the interdependence. In fact, Japan's dominant position is steadily eroding. Rather, "the developing countries of East Asia have been the driving force behind regional trade expansion". As is well known, intra-ASEAN trade has not increased significantly, remaining at about 18 per cent only (Figure 4.2). With the recent formation of the ASEAN Free Trade Area (AFT A), the share of intra-ASEAN trade may

4. Post-Uruguay Round Agenda for APEC: Promoting Convergence of Views

57

FIGURE 4.2 Intra-ASEAN Trade, 1970-92 (Percentage of total A SEAN trade)

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