ASEAN Economic Co-operation and Challenges 9789812306982

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ASEAN Economic Co-operation and Challenges

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publications, an established academic press, has issued more than 1,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publications works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world. The Southeast Asia Background Series is a major component of the Public Outreach objective of ISEAS in promoting a better awareness among the general public about trends and developments in Southeast Asia. The views and opinions expressed in this series are those of the authors and do not necessarily reflect those of the editor or ISEAS.

Southeast Asia Background Series No. 2

ASEAN Economic Co-operation and Challenges Linda Low

First published in Singapore in 2004 by ISEAS Publications Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace, Pasir Panjang Singapore 119614 E-mail: [email protected]

• Website: bookshop.iseas.edu.sg

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. © 2004 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy of the publisher or its supporters.

ISEAS Library Cataloguing-in-Publication Data Low, Linda. ASEAN economic co-operation and challenges. 1. ASEAN. 2. Asia, Southeastern—Economic integration. 3. Asia, Southeastern—Foreign economic relations. I. Title. HF1591 L91 2004 ISBN 981-230-264-6 (hard cover) Typeset by Linographic Services Pte Ltd. Printed in Singapore by Seng Lee Press Pte Ltd.

Contents About the Author

vi

1

Background

1

2

Trade Co-operation

13

3

Investment and Industrial Co-operation

31

4

Other ASEAN Co-operation Efforts

45

5

ASEAN External Co-operation

61

6

Prospects and Prognosis

75

Selected References

81

v

About the Author Linda Low is Senior Fellow, Institute of Southeast Asian Studies. She was previously Associate Professor in the Department of Business Policy and the Department of Economics and Statistics, National University of Singapore. Currently, she is on no-pay leave in the Department of Economy, Abu Dhabi, United Arab Emirates.

vi

Chapter 1

Background INTRODUCTION Since its formation in 1967, the Association of Southeast Asian Nations (ASEAN) has changed from security and political concerns to the more economic. It started with a preferential trade arrangement (PTA) in 1977, graduating to a free trade area aimed for completion by 2002 which did not quite happen. Currently the concept has been modified somewhat to an ASEAN Economic Community with a single market in mind. ASEAN enlarged once in 1984 with Brunei joining Indonesia, Malaysia, the Philippines, Singapore and Thailand as ASEAN-6. It has faced greater and more profound widening and deepening issues since it took in Vietnam, Cambodia, Laos and Myanmar in the new millennium with ASEAN-10, i.e., a total of ten countries are now members of ASEAN. If ASEAN continues to muddle through at its own pace and time as it has for almost four decades, it may be marginalized. This is because a new regionalism has occurred including ASEAN Plus Three with China, Japan and Korea since the Asian crisis. Paradoxically, the geographical value of Southeast Asia has gained ascendancy as Japan, China, the United States and India have individually approached ASEAN for some free trade arrangements (FTAs). The challenge and dilemma for ASEAN is to get itself in shape to take advantage these offers. It has to take the

1

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ASEAN Economic Co-operation and Challenges

evolving new regionalism in its stride. Drifting along as it continues to muddle through the changing geo-economics and geo-politics, is not an alternative. The most crucial ingredient, that is ASEAN leadership, seems to be missing. Individual ASEAN states are in various stages of their own political and economic transition. The “ASEAN Way” lacks deep political commitment to push for economic integration, unlike the experience in the European Union. The prospects of ASEAN remain ambiguous and ambivalent. Perversely, it may take another crisis or external threat for the ASEAN resolve to be glued together again.

GENESIS, ORIGINS, AND DEVELOPMENT The brief existence of the Association of Southeast Asia (ASA) started in 1959 was to deal with territorial and political disputes. It was not as ambitious or full-blown as the Southeast Asian Treaty Organisation (SEATO) formed in 1954 to mimic the North Atlantic Treaty Organisation (NATO). These and a few others like Malphilindo may be deemed as predecessors of ASEAN which was set up on 8 August 1967 with security and political concerns. When the United States left the region after the Vietnam War and the British withdrew its military bases east of Suez, including that in Singapore, leaving a Five-Power Defence Arrangement involving the UK, Australia, New Zealand, Malaysia and Singapore, no other explicit political-military-security alliance remained. Newlyindependent ASEAN states had yet to build up their own defence forces. It was an external threat of communism and the “domino theory” which led Thailand to canvass for the conception of ASEAN. The five original member countries, namely, Indonesia, Malaysia, the Philippines, Singapore, and Thailand were joined by Brunei on 8 January 1984, making ASEAN-6. Vietnam joined

1. Background

3

on 28 July 1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999. The ASEAN region currently has a population of about 500 million, a total area of 4.5 million square kilometers, a combined gross domestic product of US$737 billion and a total trade of US$720 billion. ASEAN is thus a formidable group of developing economies with a heterogeneous range of natural resources, capabilities and market size. Uneven development and effective management of the wide ASEAN spectrum in some co-ordinated regional way, constitute a challenge. As officially framed, the 1967 ASEAN Declaration has five aims and purposes, the first two being: 1.

2.

To accelerate the economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian nations. To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter.

In 1995, the ASEAN Heads of States and Government reaffirmed that “cooperative peace and shared prosperity shall be the fundamental goals of ASEAN”.

FUNDAMENTAL PRINCIPLES The fundamental principles of ASEAN are enshrined in two documents. One dates back as early as on 27 November 1971, when the Foreign Ministers of the then five ASEAN members signed the Zone of Peace, Freedom and Neutrality (ZOPFAN) Declaration. It commits all ASEAN members to “exert efforts to

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ASEAN Economic Co-operation and Challenges

secure the recognition of and respect for Southeast Asia as a Zone of Peace, Freedom and Neutrality, free from any manner of interference by outside powers”, and to “make concerted efforts to broaden the areas of cooperation, which would contribute to their strength, solidarity and closer relationship”. ZOPFAN recognizes “the right of every state, large or small, to lead its national existence free from outside interference in its internal affairs as this interference will adversely affect its freedom, independence and integrity”. The other is in the Treaty of Amity and Co-operation (TAC) in Southeast Asia, signed at the First ASEAN Summit on 24 February 1976. This declared that in their relations with one another, the member countries should be guided by the fundamental principles, one of which is the mutual respect for independence, sovereignty, equality, territorial integrity and national identity of all nations. The right of every state to lead its nation free from external interference, subversion or coercion is another principle. Noninterference in the internal affairs of one another, settlement of differences or disputes by peaceful manner, renunciation of the threat or use of force and effective co-operation among themselves, are other principles. While these principles are correct and laudable for the sovereignty of individual ASEAN states, the so-called “ASEAN Way”, so defined, may be deemed too passive in its consensual diplomacy. Over time, the ASEAN Way has proved somewhat lacking in the political will to intervene in matters of a regional economic nature. So long as socio-economic issues and problems are really internal and confined to domestic consequences and effects, the ASEAN Way can be respected. But where the spillover effects cannot be so neatly compartmentalized and contained or can be contagious (as will be seen in Section 5 on the Asian crisis and

1. Background

5

regional haze), some justifiable collaborative intervention may have to be considered to avert or reduce collateral damage. The Treaty of Amity and Co-operation is, however, clear on political co-operation. It focuses on ASEAN political and security dialogues and collaboration to promote regional peace and stability and enhance regional resilience. Regional resilience has to be achieved by co-operating in all fields based on the principles of self-confidence, self-reliance, mutual respect, co-operation, and solidarity. The Treaty of Amity and Co-operation thus constitutes the foundation for a strong and viable community of nations in Southeast Asia.

EXTERNAL RELATIONS It is patently clear that ASEAN remains very linked extra-regionally while it tries to promote intra-regional ties. This fundamental outward-looking orientation is reflected in the ASEAN Vision 2020. This Vision affirmed ASEAN’s pivotal role in the international community and advancing ASEAN’s common interests. ASEAN has made major strides in building co-operative ties with states in the Asia-Pacific region. It has been a lead player as an ASEAN caucus in the Asia Pacific Economic Co-operation (APEC) formed in 1989, contributing ideas and views in many projects. The ASEAN Summit of 1992 mandated that “ASEAN, as part of an increasingly interdependent world, should intensify cooperative relationships with its Dialogue Partners”. Consultations between ASEAN and its dialogue partners are held at the Foreign Ministers’ level on an annual basis. ASEAN’s dialogue partners include Australia, Canada, China, the European Union, India, Japan, Korea, New Zealand, the Russian Federation, the United States and the United Nations Development Programme (UNDP). ASEAN also promotes co-operation with Pakistan on certain sectors.

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ASEAN Economic Co-operation and Challenges

Consistent with its resolve to enhance co-operation with other developing regions, ASEAN as a developing-country group, maintains contact with other inter-governmental organizations. These include the Economic Co-operation Organisation, the Gulf Co-operation Council, the Rio Group, the South Asian Association for Regional Co-operation, the South Pacific Forum and the East Asia-Latin America Forum (EALAF), renamed the Forum for East Asia-Latin America Co-operation (FEALAC). ASEAN maintains links with developed country groups as well, such as the Asia-Pacific Economic Co-operation (APEC) and the Asia-Europe Meeting (ASEM) formed in 1995. Co-operation with other East Asian countries has accelerated with the holding of an annual dialogue among the leaders of ASEAN, China, Japan and Korea – the genesis of ASEAN Plus Three as noted later. In 1997, a joint statement between ASEAN and each of the East Asian nations was signed, providing a framework for co-operation towards the 21st century, followed by another in November 1999, outlining the areas of co-operation among them.

INSTITUTIONAL STRUCTURE AND MECHANISMS Figures 1.1 and 1.2 show the organizational structure in ASEAN. The highest decision-making organ of ASEAN is the Meeting of the ASEAN Heads of State and Government. The ASEAN Summit is convened every year. The ASEAN Ministerial Meeting (Foreign Ministers) is held on an annual basis. The ASEAN Economic Ministers (AEM) Meetings have paralleled the meetings of Foreign Ministers. Ministerial meetings on several other sectors are also held. These include agriculture and forestry, economics, energy, environment, finance, information, investment, labour, law, regional haze, rural development and poverty alleviation, science

1. Background

7

and technology, social welfare, transnational crime, transportation, tourism and youth. As explained later in Chapter 2, the development of the ASEAN Free Trade Area (AFTA) and the ASEAN Investment Area (AIA) means the respective ASEAN Free Trade Area Council and the ASEAN Investment Area Council fall under the purview of the ASEAN Economic Ministers as well. Supporting these ministerial bodies are 29 committees of senior officials and 122 technical working groups.

FIGURE 1.1 Illustrative ASEAN Organizational Structure ASEAN Summit

AEM

AMM

AFMM

Others

SEOM

ASC

SOM

AFDM

Committees

Sub-Committee Working Groups

Working Groups

Working Groups

Sub-Committee Working Groups

Sub-Committee Working Groups

ASEAN Secretariat AEM : AMM : AFMM : SEOM : ASC : SOM : AFDM :

ASEAN Economic Ministers ASEAN Ministerial Meeting ASEAN Finance Ministers Meeting Senior Economic Officials Meeting ASEAN Standing Committee Senior Officials Meeting ASEAN Finance and Central Bank Deputies Meeting

* Ministerial meetings in agriculture and forestry, trade, energy, environment, finance, information, investment, labour, law, regional haze, rural development and poverty alleviation, science and technology, social welfare, transnational crime, transportation, tourism, youth, the AIA Council and the AFTA Council. Supporting these ministerial bodies are 29 committees of senior officials and 122 technicial working groups. Source: ASEAN Secretariat.

Source: ASEAN Secretariat.

Openly Recruited Staff: 42 Locally Recruited Staff: 135

Bureau for Economic Integration • Trade Policies – Tariffs; Non-Tariffs; Customs; Standards & Conformance; IPR; Liberalization of Services • External Trade • Investment • Industry • SMEs • Legal

IAI Unit

Bureau for Finance and Integration Support • Finance & Macroeconomic – Survelliance • Statistics • Infrastructure – Energy; Minerals; Transport; Telecommunications • e-ASEAN/ICT • Science & Technology

Deputy Secretary-General (Economic Co-operation) Office of the Secretary-General • Special Assistnat (Institutional Affairs) • Finance • Personnel and Training • Adminstration • ASEAN IT • Special Duties: Food, Agriculture, Fisheries and Forestry, COCIL ASEAN Foundation • Special Assistant (Executive Affairs) ASEAN Summit, AMM, ARF, SOM, ASC Research and Analysis • Public Affairs Office

Secreatry-General

Bureau for External Relations and Coordination • ASEAN Plus 3 • ASEAN Dialogue Partners • ASEAN nondialogue Partners • Inter-regional Organization Relations • Programme Coordination – ASEAN Cooperation Plans; Evaluation • Trust Fund Accounts • Resource Mobilization

Special Projects Unit • Transnational Issues • Drugs • Disaster Management • Immigration Bureau for Resource Development • Human Development – Labour; Civil Service; Social Policies; Health; Education • Natural Resources – Agriculture/ Fisheries; Forestry • Environment • Culture and Information

Deputy Secretary-General (Functional Co-operation)

FIGURE 1.2 Organizational Structure in ASEAN

8 ASEAN Economic Co-operation and Challenges

1. Background

9

To support the conduct of ASEAN’s external relations, ASEAN has established committees composed of heads of diplomatic missions in the following capitals: Brussels, London, Paris, Washington D.C., Tokyo, Canberra, Ottawa, Wellington, Geneva, Seoul, New Delhi, New York, Beijing, Moscow and Islamabad. The Secretary-General of ASEAN is appointed on merit and accorded ministerial status. The Secretary-General of ASEAN who has a five-year term, is mandated to initiate, advise, co-ordinate, and implement ASEAN activities. The members of the professional staff of the ASEAN Secretariat are appointed on the principle of open recruitment and region-wide competition. ASEAN has several specialized bodies and arrangements promoting inter-governmental co-operation in various fields. To name some, they include the ASEAN University Network, ASEANEC Management Centre, ASEAN Centre for Energy, ASEAN Agricultural Development Planning Centre, ASEAN Earthquake Information Centre, ASEAN Poultry Research and Training Centre, ASEAN Regional Centre for Biodiversity Conservation, ASEAN Rural Youth Development Centre, ASEAN Specialised Meteorological Centre, ASEAN Tourism Information Centre, and ASEAN Timber Technology Centre. In addition, ASEAN promotes co-operative activities with organizations with related aims and purposes. These include ASEAN-Chambers of Commerce and Industry, ASEAN Business Forum, ASEAN Tourism Association, ASEAN Council on Petroleum, ASEAN Ports Association, ASEAN Vegetable Oils Club, and the ASEAN-Institutes for Strategic and International Studies. Furthermore, there are 53 non-governmental organizations (NGOs), which have formal affiliations with ASEAN.

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ASEAN Economic Co-operation and Challenges

A TENTATIVE EVALUATION OF EARLY ASEAN Although the ASEAN Free Trade Area is uncompleted, ASEAN has provided an important atmosphere of peace and stability. ASEAN is understood, accepted and preserved by major external powers. In its own way, ASEAN served the 1967 imperative which established ASEAN in the first instance. More than that, ASEAN has also provided a human bond and networking among its leaders, bureaucrats and even private sector participants in their face-to-face dialogues. There has been criticism of its many meetings at all levels, from senior officials’ meetings to committee and subcommittee meetings suggesting that there is endless consultation. Response to such a critique is that the ASEAN meetings may not have much real action, but ASEAN serves a human bonding purpose. In Asian culture and values, from Confucianism to religious tradition in Islam and other beliefs, relationships rather than pure rule of law and logic remain important and valued. This may also be the Achilles’ heel in ASEAN as the ASEAN Way denotes a kind of consensus in decision-making. The decision must be acceptable and comfortable to all, arrived at in an informal, noninstitutionalized manner, based on respect for sovereignty, and non-interference in domestic politics above all. This consensual strength may also be an organizational weakness as impasses are swept under the carpet and progress is retarded. Such was the situation until a principle of “ASEAN-X” was invented. So long as some ASEAN members were ready and willing to move ahead while “X” are not, the projects proceeds, while the rest may catch up when they are ready. The “ASEAN-X” rule proved invaluable especially in many ASEAN economic experiments and projects which have evolved since 1976. Given its short history and the heterogeneity and the diversity among the original five ASEAN founding members, this brief

1. Background

11

tentative assessment shows that a tremendous milestone has been crafted in setting up ASEAN as a pioneer co-operation group of developing countries. It took as much vision as gumption for ASEAN to be set up the way it was in 1967 before evolving into the full-fledged organization. It now encompasses economic, social, political and security aspects as depicted in the organization charts in Figures 1.1 and 1.2. A more critical question is how should ASEAN respond to new challenges – from globalization, technology and the making of the new economy to the emerging regional political economy trends.

00 SEAsians_ASEM.indd 10

9/18/14 10:52:23 AM

Chapter 2

Trade Co-operation INTRODUCTION There has been a perceived change from political and security concerns since the inception of ASEAN in 1967 to an economic emphasis since 1976. Increasing intra-ASEAN trade has been the primary goal of ASEAN since the economic gear has been in place. Traditionally, intra-regional trade is promoted when members in a trade arrangement or trade bloc drop tariffs and other trade barriers for each other in what is deemed trade creation. This may be at the expense of some trade diversion for non-ASEAN trade partners as substitution takes place with cheaper ASEAN products without tariffs. But on a net basis, trade creation usually exceeds trade diversion to make net trade effects generally favourable for all concerned. In fact, the World Trade Organisation is a kind of “watch-dog” to ensure any bilateral or regional trade arrangements among its members first receive approval to have their trade arrangements outside of the World Trade Organisation’s mostfavoured-nation principle based on the net positive effect for all.

WHY THE ECONOMIC EMPHASIS By the ASEAN Summit in Bali in 1976, ASEAN states had all suffered from the first oil-induced recession of 1974–75, after the

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Organisation for Petroleum Exporting Countries (OPEC) quadrupled oil prices during a Middle East war. It caused a stagflation, implying economic stagnation with high unemployment and inflation which further reduce supply and production as demand is dampened, all in a vicious circle. While the oil-producing economies including Brunei, Indonesia and Malaysia, even Singapore as the world’s third largest oil refiner after Houston and Rotterdam, benefited from higher oil prices, the general impact had been recessionary. A switch in gear to ASEAN economic co-operation was also timely, as security and political concerns had receded somewhat by 1976. China had begun to open diplomatic ties first with the United States, a precursor to its formal economic opening in 1978, putting a hiatus to the “domino theory” of communism. Instead, the region as a whole seems to be gearing up in economic terms, if prosperity and development have to be generated by economics in the first instance. The most significant development in mechanisms for economic co-operation since the Bali Summit was the addition of ASEAN Economic Ministers (AEM) meetings to that of ASEAN Foreign Ministers. Some 11 permanent committees (civil air transport, communication air traffic, food and agriculture, shipping, commerce and industry, finance, mass media, tourism, land transport and telecommunication, science and technology and socio-cultural activities) came under various member states’ direction. Many other ad hoc committees co-ordinated by the Standing Committee based on mixed sectoral and commoditybased concerns were established.

EARLY ECONOMIC RELATIONS When ASEAN was established, trade among the members was insignificant. Estimates between 1967 and the early 1970s showed

2. Trade Co-operation

15

that the share of intra-ASEAN trade from the total trade of the members was between 12 and 15 per cent. This was understandable from the historical colonial orientation. The colonial trade pattern had Southeast Asian colonies exporting natural resources and raw materials to the colonial industrialized countries and importing finished manufactured products. Such a colonial trade pattern is basically exploitative which forms a fundamental argument for industrialization in developing economies once they are able to chart their economic destiny and industrial restructuring. Second, the low level of intra-ASEAN trade is because they produce more or less the same natural resources and raw materials. Until industrialization took off, there was little basis for trade in manufacture and service products. The exception is higher intra-regional trade in Singapore which plays an entrepôt function among neighbouring ASEAN members. Much of the exports and imports through Singapore ports and airport are in re-exports from imported natural and raw materials brought into Singapore for simple processing as in bulk-breaking, grading and packaging for onward transport to markets outside the region, as to the United States, Europe and Japan. The reverse entrepôt function occurs when ASEAN countries such as Indonesia and Malaysia buy imported equipment, machinery and finished manufacture products from these extra-regional economies.

ECONOMIC INTEGRATION As the shift to the economic gear took shape, the earliest economic co-operation schemes of ASEAN were aimed at addressing this situation of low intra-ASEAN trade. One of these was the Preferential Trading Arrangement of 1977 which accorded tariff preferences for trade among ASEAN economies. This means products entering the ASEAN Preferential Trading Arrangement

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ASEAN Economic Co-operation and Challenges

with preferential tariffs would stimulate what is called trade creation, as lower prices via tariff reduction induce greater demand, hence greater supply, all from within the ASEAN region. It may be at the expense of some trade diversion from non-ASEAN trade partners as the relative price of say, a Japanese product with no preferential tariff, would be more expensive than a similar ASEAN product with preferential tariff. On a net basis, so long as any trade bloc like the ASEAN Preferential Trading Arrangement can justify trade creation is larger than trade diversion, and a net economic welfare is generated across the group, the World Trade Organization would approve of its formation. As a multilateral trade body, the World Trade Organization has to look after all members’ interests. Its guiding principle of the most-favoured-nation (MFN) principle means if one World Trade Organization member gives a tariff preference or tariff reduction to another, the same is multilaterally given to all members. Thus, exemption to the most-favoured-nation rule and approval by the World Trade Organization becomes necessary for trade bloc to be formed. The ASEAN Preferential Trading Arrangement is designed to increase intra-regional trade. To make that happen, more products must first be produced so that trade in them occurs. In tandem with the ASEAN Preferential Trading Area, noting relative industrial development, competitiveness and complementarities, the Kansu Report, commissioned by the ASEAN Secretariat, headed by Professor Kansu from Japan, kick-started many ASEAN industrial projects. The principle of such ASEAN economic co-operation is based on resource pooling and market sharing of various national upstream projects. The idea is based on factor endowment and comparative advantage, and a national market support system which guarantees market. Comparative advantage is where relative resource endowments make some countries more efficient in

2. Trade Co-operation

17

producing a product which uses such ample resources, like agricultural production being more labour-intensive and landintensive production favouring Indonesia more than capitalintensive Singapore which enjoys comparative advantage instead in electronic products. Specifically, the Kansu Report recommended the ASEAN Industrial Project, ASEAN Industrial Complementation Scheme and ASEAN Industrial Joint Venture. These involved not only government-to-government co-operation as in the ASEAN Industrial Project, but also private sector participation as in the ASEAN Industrial Complementation projects, in brand-to-brand complementation for vertical integration and even foreign multinational corporations in joint ventures for greater flexibility and practicality. All these have been superceded by the common effective preferential tariff under the ASEAN Preferential Trading Arrangement (PTA) which offered more in tariff and non-tariff incentives. A non-tariff barrier as in a quota or some administrative ruling on health, safety and standards works just like a tariff in obstructing imports. A tariff as in import duty works on the price effect and a non-tariff barrier works on quantitative and other non-price effects. The ASEAN Preferential Trading Arrangement was a first step to economic integration via an item-by-item approach to preferential reduction of tariffs among members to induce intraregional trade. On hindsight, many criticisms include the slow and cautious way of the ASEAN Preferential Trading Arrangement. In a way, the mistake in adopting a bureaucratic, top-down identification of items for preferential trade liberalization was based on an unrealistic equality of costs and benefits for all participating members. This can be deemed as part of the steep learning curve in ASEAN economic integration.

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ASEAN Economic Co-operation and Challenges

TABLE 2.1 Number of Tariff Lines under the 1998 Common Effective Preferential Tariff Package Inclusion Temporary Brunei Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Total

Exclusion Sensitive

Total General

6,105 6,622 533 8,621 2,356 5,202 5,739 9,046 1,718

135 541 2,820 276 2,987 380 0 73 1,141

14 4 96 104 21 71 0 7 23

239 45 102 63 108 28 120 N.A. 131

6,493 7,212 3,551 9,064 5,472 5,681 5,859 9,126 3,013

45,942

8,353

340

836

55,471

Source: ASEAN Secretariat.

Table 2.1 shows the number of tariff lines under the 1998 common effective preferential tariff package in the ASEAN Preferential Trading Arrangement. A country’s total tariff lines is divided into inclusions and exclusions. Exclusions fall into three categories, namely, temporary exclusion (takes time to come back to inclusion), sensitive exclusion (according to national interests as in bumiputra sectors in Malaysia) and general exclusion (conventional exemption as pertaining to national security matters). It is no surprise that Singapore has the highest level of inclusions, Malaysia the largest number of sensitive exclusions and less developing members like Myanmar and Laos with most temporary exclusions. Many ASEAN states are newly independent, zealous of sovereignty and nationalism and demand industrial restructuring with protection of their infant industries. More competitive than

2. Trade Co-operation

19

complementary in their similar primary agricultural and commodity activities, with the exception of more entrepôt-based Singapore and one-sector, namely, oil in Brunei, ASEAN as a whole is more extra-regionally than intra-regionally inclined. In other words, the major trading partners of ASEAN remain the triad of the United States, Europe and Japan, with very low intra-ASEAN trade except for entrepôt Singapore. Cosmetic padding of tariff reductions with the Philippines offering snow ploughs to its national list, essentially reflect the frustrating lack of political commitment from the start. The overall impact is inconsequential. Resource allocation that cannot be predetermined and neither can industries be picked even with market support. The slow pace of the ASEAN accreditation process for brand-to-brand complementation stems back to ASEAN bureaucratic procedures. Instead of inter-industry trade and industry specialization based on comparative advantage, increasing intra-industry trade is recognized in accepting joint ventures and foreign participation. It does not mean that comparative advantage as a basis for ASEAN trade is losing importance, but that an additional basis for trade is with a web of multinational corporations. Traditional areas of economic co-operation in food, agriculture, forestry, minerals and energy encompass security with conservation. As industrialization and services develop, cooperation moved into transport, communication and tourism, finance and banking, implying some financial integration as well. New areas in standards and quality, investment, intellectual property, services, infrastructural development, small, mediumsized enterprises besides trade in goods and services, into border and non-border areas have developed. Also, new activities in technology and information exchanges, reciprocal recognition of tests and product certification, rules for fair competition and

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ASEAN Economic Co-operation and Challenges

standard harmonization are part of globalization and information communication technology. The cumbersome organizational structure and many committees and ad hoc working groups were first restructured in 1977 and again in 1983. By 1983, there were five fixed committees (trade and tourism, industry, minerals and energy, finance and banking, forestry, agriculture and fishing and transport and communication) and three rotating committees (social development, cultural and information, science and technology). The sectoral or commodity approach was replaced by general economic committees. But a long list of subsidiary bodies in subcommittees, working groups and ad hoc bodies prevailed. The ASEAN Secretariat established in 1979 was generally perceived as a “glorified post-office” for summits, ministerial meetings, postministerial meetings with dialogue partners, senior officials’ meeting and others, managing some 77 annual economic cooperation meetings. Nonetheless, the same atmospheric bonding and bridging of minds of ASEAN leaders, bureaucrats and other private sector participants must be appreciated. Recognizing the extra- or interregional relations as more realistic and important than intraregional ties, post-ministerial meetings with various dialogue partners proved another significant organizational principle as noted. Keeping dialogue partners engaged in ASEAN developments and having them participate in economic co-operation matters make more sense than ASEAN trying to integrate economically on its own in terms of trade, investment, labour, technology and other factor flows. In other words, direct foreign investment and multinational corporations remain invaluable for ASEAN industrialization. Table 2.2 shows ASEAN’s direction of trade, basically more oriented towards the triad than within member states, with some improvement between 1970 and 1993.

2. Trade Co-operation

21

TABLE 2.2 Direction of Trade in ASEAN 1993 (in percentages)

Export Brunei Indonesia Malaysia Philippines Singapore Thailand Vietnam ASEAN Import Brunei Indonesia Malaysia Philippines Singapore Thailand Vietnam ASEAN

European ASEAN 1970 Community

US

Japan

ASEAN 1993

1.2 14.2 20.3 38.3 20.3 21.6 N.A. 19.9

54.2 30.3 13.0 16.3 7.5 17.0 32.3 15.7

17.8 14.4 14.5 16.8 14.0 17.0 19.6 15.0

83.2 21.1 25.4 1.2 29.4 14.9 N.A. 21.4

19.2 13.4 28.2 7.1 23.9 16.3 17.6 20.2

20.2 11.5 16.9 19.8 16.3 11.7 0.1 14.9

5.4 22.0 27.5 22.8 21.8 30.3 13.1 24.4

27.1 19.9 11.6 10.3 11.5 14.9 11.1 13.3

49.4 7.6 22.5 5.2 26.7 3.2 N.A. 16.3

38.3 9.3 20.0 10.9 21.8 12.1 29.4 17.5

Source: ASEAN Secretariat.

FROM ASEAN PREFERENTIAL TRADING ARRANGEMENT TO ASEAN FREE TRADE AREA An Enhanced Preferential Trading Arrangement Programme was adopted at the Third ASEAN Summit in Manila in 1991, further increasing intra-ASEAN trade. The Framework Agreement on Enhancing Economic Co-operation was adopted at the Fourth ASEAN Summit in Singapore in 1992, which included the launching of a scheme towards an ASEAN Free Trade Area (AFTA). The graduation from the ASEAN Preferential Trading Arrangement to the ASEAN Free Trade Area was slated for completion first by 2008, advanced to 2003, then 2002, but to no avail.

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In theory, a free trade area encompasses tariff reduction to zero duty for all goods and services traded. In practice, the ASEAN Free Trade Area only covers 15 major commodity groups. There are also non-tariff barriers to be lifted for a truly free trade area to operate. One other complication exists in ASEAN. Singapore and Brunei are free ports: the former because free trade is Singapore’s lifeline with too small a market for any import-substitution industrialization for the long-term, the latter because Brunei has more than ample oil revenue and has no industry to protect. It would be attractive for any non-ASEAN economy to bring imports into the ASEAN Preferential Trading Arrangement or ASEAN Free Trade via Singapore or Brunei to enjoy the tariff reductions among ASEAN states. To induce ASEAN-wide investment and production, a 40 per cent ASEAN rule of origin is in place. Essentially, so long as 40 per cent value-added is made for a product in any ASEAN economy, the product qualifies as an ASEAN product. As in Europe, further progression from a free trade area will be a customs union with a common external tariff for non-member states which removes the hassle of certificates of origin for the 40 per cent rule of origin to be administered. After a customs union, the next step is for a common market – for both mobility of labour and capital as well. The final stage of economic integration is an economic union for harmonization of fiscal and monetary policies. Only the European Union has reached the last stage, but even then, not all 15 members are in “euroland” as yet. The euro currency has been adopted in the European Union with a European Central Bank. This bank joins many other supranational bodies like the European Commission for European Union-wide economic policy-making and the European Parliament. For most other trade blocks, the preferred modality is a free trade area. It is precisely ASEAN’s desire for sovereignty, not

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supranational institutions, which makes the ASEAN Free Trade Area the logical endpoint for economic integration instead of going beyond. In operational terms, complete free trade in all goods and services would mean a single market is achieved. The strategic objective of the ASEAN Free Trade Area is to increase the ASEAN region’s competitive advantage as a single production unit and single market. The elimination of tariff and non-tariff barriers among the members is expected to promote greater economic efficiency, productivity, and competitiveness. The Fifth ASEAN Summit held in Bangkok in 1995 adopted the Agenda for Greater Economic Integration, which included the acceleration of the timetable for the realization of AFTA from the original 15-year timeframe (2008) to 10 years (2003). ASEAN enlarged once in 1984 with Brunei joining Indonesia, Malaysia, the Philippines, Singapore and Thailand as ASEAN-6. This was a relatively simple expansion until a greater and more profound widening and deepening when ASEAN-6 embraced Vietnam, Cambodia, Laos and Myanmar by the new millennium to form ASEAN-10. While the enlargement meets with economies of scale in terms of supply (resources) and demand (markets), it did face some political chastisement from the Western world because of the lack of democracy perceived in Cambodia and human rights issues as in Myanmar. ASEAN-6 fully appreciates these concerns, but considers reigning in the Indochinese states as a way to induct them into the capitalist free world system, rather than an endorsement of their policies. However, economic integration of ASEAN-6 as relatively richer and more developed and industrialized with four poorer transition economies is proving to be a difficult task. Widening has diluted and strained ties among the ASEAN-6 which has to grapple with political economy and human rights issues such as those in Myanmar.

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In 1997, the ASEAN leaders adopted the ASEAN Vision 2020 which called for ASEAN Partnership in Dynamic Development aimed at forging closer economic integration within the region. The vision statement also resolved to create a stable, prosperous and highly competitive ASEAN Economic Region, in which there will be a free flow of goods, services, investments, capital, and equitable economic development and reduced poverty and socioeconomic disparities. The Hanoi Plan of Action, adopted in 1998, served as the first in a series of plans of action leading up to the realization of the ASEAN vision. Based on rules on tariff reduction, the ASEAN Free Trade Area covers all agreements including dispute settlement mechanisms, emergency safeguard measures and temporary exclusion list. ASEAN co-operation has resulted in greater regional integration. Within three years since the launching of the ASEAN Free Trade Area, exports among ASEAN countries grew from US$43.26 billion in 1993 to almost US$80 billion in 1996, an average yearly growth rate of 28.3 per cent. In the process, the share of intra-regional trade from ASEAN’s total trade rose from 20 to almost 25 per cent. ASEAN trade has grown further, from US$44.2 billion in 1993 to US$95.2 billion in 2000, an average annual increase of 11.6 per cent. The lower growth rates over the longer period 1993-2000 are understandable because of the Asian financial crisis of 1997. IntraASEAN exports constituted 23.3 per cent of total ASEAN exports by 2000 compared to 29.6 per cent mid-1997 before the Asian crisis, but are significantly higher than 18.8 per cent growth of total ASEAN exports for the same period. A more well-rounded phase of ASEAN economic co-operation thus covers areas in trade, investment, industry, services, finance, agriculture, forestry, energy, transportation and communication, intellectual property, small and medium enterprises, and tourism. Tourists from ASEAN countries themselves are an increasingly

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important share of tourism in the region. In 1996, of the 28.6 million tourist arrivals in ASEAN, 11.2 million or almost 40 per cent, came from within ASEAN itself. By 2002, only 3.8 per cent of products in the common effective preferential tariff Inclusion List of ASEAN-6 or 1,683 items out of 44,060 had tariffs above 5 per cent and the current average tariff on goods traded under the ASEAN Free Trade Area is about 3.8 per cent. While covering all manufactured and agricultural products, 734 tariff lines in the general exception list representing about 1.09 per cent of all tariff lines are permanently excluded from free trade for reasons of national security, protection of human, animal or plant life and of artistic, historic and archaeological value. The ASEAN Free Trade Area has now been virtually realized. The six original signatories have reduced tariffs on all products listed in their 2002 Inclusion List to 0–5 per cent. Since 1 January 2003, tariffs on 99.55 per cent (44,160 tariff lines out of total 44,361 tariff lines) of products in the 2003 Inclusion List of the ASEAN-6 have been reduced to the 0–5 per cent tariff range. Products in their Inclusion List which still have tariffs of above 5 per cent, are those that have been transferred from the Sensitive List and General Exception List in 2003. The average tariff for the ASEAN6 under the common effective preferential tariff scheme is now down to 2.39 per cent from 12.76 per cent when the tariff-cutting exercise started in 1993. Based on the tentative 2003 common effective preferential tariff package, most of ASEAN-6 have already met the target. Currently, about 48 per cent of products in the Inclusion List of the ASEAN-6 have zero tariffs. The newer members of ASEAN still have to reach the 0–5 per cent tariff level for intra-ASEAN trade – Vietnam in 2006, Laos and Myanmar in 2008 and Cambodia in 2010. Overall, by 2003, 87.85 per cent of all products in the Inclusion List of the ten members tentatively had tariffs of 0–5

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per cent and about 10.68 per cent of these products had tariffs of above 5 per cent. Ultimately, tariffs will be completely abolished by 2010 for ASEAN-6 and 2015 for the newer members with flexibility on some sensitive products until 2018. However, the point is that the ASEAN Free Trade is yet uncompleted and the 2002 timetable for older members has come and gone. More importantly, a free trade area connotes free trade of all goods and services, not just in 15 major commodity groups. Nontariff barriers have yet to be tackled and these will prove more difficult than tariffs. A work programme on the elimination of non-tariff barriers was finalized by the ASEAN Free Trade Area Council Meeting in 2003. It includes, among others, the process of verification and cross-notification, updating the working definition of non-tariff measures and non-tariff barriers in ASEAN, the setting-up of a database on all non-tariff measures maintained by members and the eventual elimination of unnecessary and unjustifiable nontariff measures. Besides tariff and non-tariff barriers, another area in trade liberalization involves rules of origin, denoting where value is added in the whole value chain of a product. Rules of origin mean the last country where the production or processing has taken place, as the country of origin is getting difficult to monitor with globalization. For instance, Singapore has a lot of outward processing, with raw materials and semi-finished products shuttling back and forth, involving outward processing in other ASEAN economies. This is a feature of cross-border production networks as in the electronics and hard disk drive industries. An ASEAN task force on rules of origin works on improving and strengthening the rules of origin and operational procedures. Some of the measures include standardizing the calculation of local/ASEAN content to arrive at the 40 per cent rule. There is a

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consideration to adopt the substantial transformation rule (when one product changes physically into another, as via a chemical reaction) as an alternative rule in determining product origin for specific sectors which cannot comply with the 40 per cent local/ ASEAN content requirement. ASEAN could also adopt specific rules of origin for specific sectors such as automotive and semi-finished aluminum products, identify measures to prevent circumvention of the rules of origin and address problems encountered in the issuance and processing of certificates of origin. Keeping track and trade documentation are two aspects that remain the bane especially with uneven level of development in trade data systems and use of information technology in data capture and collation.

ASEAN FRAMEWORK AGREEMENT FOR SERVICES On services trade liberalization, the ASEAN Framework Agreement for Services was signed in 1995. This aims to enhance co-operation in services, to eliminate substantially restrictions to trade in services and to liberalize trade in services by expanding the depth and scope of liberalization beyond those undertaken by the World Trade Organization General Agreement on Trade in services (GATS). The aim is to realize a free trade area in services through two rounds of trade liberalization covering most service sectors. The problems in services trade liberalization lie in the nature of service being intangible or invisible, unlike merchandise trade which crosses borders visibly. Three other forms of service trade include consumers crossing borders as in the tourism trade, commercial presence as in foreign banks setting up branches locally, and movement of natural persons as in professionals crossing borders to deliver expert medical, legal, engineering or accounting services. As issues extend beyond trade to national

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security as in the movement of people, sensitive content as in broadcasting and media services and other non-economic concerns, services trade liberalization in ASEAN is difficult. ASEAN has concluded three packages of commitments from two rounds of negotiations. The first round of negotiations covered seven priority sectors. These are air transport, business services, construction, financial services, maritime transport, telecommunications, and tourism while the second round was to cover all sectors under the Statement of Bold Measures issued at the 6th ASEAN Summit in Hanoi in December 1998, after the Asian crisis. In 2001, the ASEAN Economic Ministers launched a third round of negotiations, beginning in 2002 and ending in 2004 covering all sectors and modes of supply. During the 7th ASEAN Summit in 2001, it was agreed to speed up negotiations in liberalizing intra-ASEAN trade in services and also to start negotiations on mutual recognition arrangements to facilitate the flow of professional services in the region. ASEAN sectoral working groups directly involved in the negotiations comprise those in business services, construction services, telecommunication, air transport, maritime transport, financial services and tourism. Negotiations to broaden and deepen the liberalization of services trade have not been successful. Not only has the coverage failed to expand beyond the initial seven sectors, the deepening of commitments to go beyond the General Agreement on Trade in Services has also been limited. The lack of progress has been attributed to many factors. These include the lack of authority and/or technical expertise to negotiate, absence in some countries of the legislative basis for making offers, even absence of regulatory frameworks to govern the delivery of services. The lack of participation and support from professional associations, difficulties in internal co-ordination between agencies involved in the sectoral negotiations under the ASEAN Framework

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Agreement on Trade in Services, are other stumbling blocks. So is the lack of concurrence on a single approach to guide services liberalization due to the complex nature and scope of the services sectors involved. Even the present request-and-offer approach in ASEAN services trade liberalization is a stumbling block, being a slow bargaining process. This is in contrast to the approach used in merchandise trade liberalization which is to include all tariff lines unless specifically excluded under the three categories as shown in Table 2.1. To accelerate the pace of intra-ASEAN trade in services liberalization, technical support is needed in addressing two general sets of issues impeding negotiations. One relates to the substantive aspects of the commitments being considered, while the other relates to the structure and approach to services negotiation itself.

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Chapter 3

Investment and Industrial Co-operation INTRODUCTION Chapter 2 explained the theory and empirical evidence of how trade co-operation is effected first through the ASEAN Preferential Trading Arrangement, progressing to the ASEAN Free Trade Area including the ASEAN Framework Agreement for Services. More intra-ASEAN investment is vital to increase intra-ASEAN trade which is the subject of this chapter. Intra-ASEAN investment is part and parcel of ASEAN’s need to attract direct foreign investment from the rest of the world. As a group of developing and newly industrializing economies, tapping direct foreign investment and multinational corporations is imperative not just for capital infusion. More vital is the role of direct foreign investment and multinational corporations for technology transfer and other management resources, skills, markets, branding and overall linkage with the global economy.

INVESTMENT REGIME IN ASEAN The ASEAN region is a leading recipient of direct foreign investment flows in the developing world. Between 1990 and 1997, direct foreign investment represented an annual average of 40 per cent of the net resource flows to the ASEAN countries, with

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Malaysia, Myanmar and Vietnam accounting for more than 50 per cent of direct foreign investment composition. A high percentage of direct foreign investment to net private capital flows in the 1990s is almost the norm for many developing countries, and this is true for ASEAN. This suggests the increasing importance of net private capital flows, particularly direct foreign investment, to official flows for development finance. Five ASEAN countries were among the top 20 developingcountry recipients of such long-term global capital flows from 1997 to 1998. Between 1993 and 1998, ASEAN received about 17.4 per cent of the US$760 billion in cumulative global net direct foreign investment flows to developing countries. Over the same period, ASEAN received an annual average of US$22 billion in net direct foreign investment flows, compared with an annual average of US$7.8 billion in the period between 1986 and 1991. Direct foreign investment flow in ASEAN increased on average by about 14 per cent annually from 1996 to 1998, while direct foreign investment stock in ASEAN grew tenfold from US$23.8 billion in 1980 to US$233.8 billion in 1998. Despite the region’s successes in attracting sizeable direct foreign investment flows, two factors have been worrisome. One is the rise of China which has the largest singular rate of absorption of direct foreign investment and is fast replacing ASEAN as an attractive investment area. Two is the Asian crisis and subsequent crises (see below, in this chapter) which made ASEAN even more unattractive. ASEAN has thus to undertake more collective as well as individual measures to further liberalize their investment regimes and to provide competitive and attractive investment environments. Further policy measures have been introduced to attract greater direct foreign investment flows as a means to helping the countries recover from the serial economic crisis that beset the region since 1997 and continued into the new millennium.

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In essence, ten ASEAN economies have ten investment regimes which can be quite complicated for foreign investors with investment in more than one ASEAN economy. In contrast, China is one country with one investment regime and one set of laws, rules and regulations, even if there are provincial differences. Generally, ASEAN has done much to make the region as a whole more attractive. For instance, Brunei allows 100 per cent foreign-equity ownership in high technology manufacturing and export-oriented industries. Indonesia offers qualified investors 100 per cent foreignequity ownership in wholesale and retail trading companies, in addition to 100 per cent foreign-equity ownership in all areas of the manufacturing sector. Indonesia has reduced the processing time required for the approval of investment of less than US$100 million to 10 working days. Listed Indonesian banks are now open to 100 per cent foreign-equity ownership. Laos allows duty exemptions on imported capital goods required by promoted investment projects. Malaysia offers 100 per cent foreign-equity ownership in the manufacturing sector, with no export conditions imposed on new investment, expansion and diversification. With limited exceptions, foreigners can also own land in Malaysia. Myanmar has extended a minimum three-year corporate tax exemption to investment projects in all sectors. In addition, Myanmar has extended the privilege of duty-free import of raw materials to all industrial investments for the first three years of operation. The Philippines has opened its retail and distribution sectors to foreign equity, and allowed foreign companies to compete in the domestic private construction sector. Singapore has reduced business costs significantly as past of a cost-reduction package amounting to savings of US$10 billion, in addition to extending a 30 per cent corporate investment tax

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allowance on a liberal basis to industrial projects and to selective service industries. These activities span manufacturing, engineering and technical services, and computer-related services. One hundred per cent foreign-equity ownership for manufacturing projects regardless of location is now also allowed by Thailand. In addition, agricultural projects that export 80 per cent of sales receive importduty exemptions on machinery regardless of location. Vietnam has allowed duty exemptions for imported capital goods for all projects, on the importation of raw materials for production in encouraged investments and for projects located in mountainous or remote regions for the first five years of operation. The period required for the issuance of investment licences for several types of project has been reduced to 15 days from the receipt of the required documentation. Investment licensing for projects under US$5 million in Vietnam has been decentralized to provincial and city levels.

ASEAN INVESTMENT AREA AND ASEAN INDUSTRIAL CO-OPERATION In addition to these individual actions, the member economies are collectively promoting ASEAN as a single investment area. Regional co-operation will facilitate more cost-effective industrial and production activities in ASEAN, providing firms with greater synergy and competitive edge in servicing both global and regional markets. Since 1987, ASEAN has initiated ASEAN-wide investment promotion and protection. In 1996, moves were made to simplify, streamline processes, facilitate the approval process and include the ASEAN Dispute Settlement Mechanism as an alternative modality for investment disputes. Two specific ASEAN investment arrangements as part of economic integration schemes are in the ASEAN Investment Area

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(AIA) and ASEAN Industrial Co-operation (AICO). The ASEAN Investment Area was launched in 1998 to liberalize intra-ASEAN and non-ASEAN investment. Crosslisting of ASEAN companies across various stock exchanges is one initative. Foreign investors are allowed to set up the entire value-adding production chain with advanced ASEAN hosts in the high end of the chain. The aim is to actively involve the private sector in the ASEAN Investment Area development process by promoting freer flows of capital, skilled labour, professional expertise and technology amongst the member countries. At the same time, there is transparency in investment policies, rules, procedures and administrative processes. This in turn provide a more streamlined and simplified investment process, eliminating investment barriers and liberalizing investment rules and policies in the sectors covered by the ASEAN Investment Area. Specifically, the ASEAN Investment Area aims to make ASEAN a competitive, conducive and liberal investment area by implementing co-ordinated ASEAN investment co-operation and facilitation programmes. The ASEAN Investment Area has important implications for investment strategies and production activities in encouraging investors to think increasingly in the regional terms and to adopt a regional investment strategy and network of operations. It will provide greater scope for division of labour and industrial activities across the region, creating opportunities for greater industrial efficiency and cost competitiveness. In addition, current and potential investors will benefit from the ASEAN Investment Area in greater investment access to industries and economic sectors. This would result from the opening up of industries under the ASEAN Investment Area arrangements, if investors qualify as ASEAN investors. The privileges offered by the ASEAN Investment Area in investment market access and the granting of national treatment

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take immediate effect for ASEAN investors, with the exception of those sectors in the list of exclusions. National treatment, that is, giving foreign investors the same in treatment as for local investors if the foreign investors qualify as ASEAN investors, is another concession. An ASEAN investor is defined as being equal to a national investor in terms of the equity requirements of the member country in which the investment is made. Thus, a foreign firm with a majority interest can avail itself of national treatment and investment market access privileges, in addition to the other benefits provided under the ASEAN Investment Area and other regional economic schemes. Granting immediate national treatment, with some exceptions as specified in the Temporary Exclusion List and the Sensitive List, to ASEAN investors by 2010 and to all investors by 2020 is invoked. There are three categories of exclusions for which these privileges will not be accorded immediately. They are as follows: 1. The Temporary Exclusion List which contains industries and investment measures that are temporarily closed to investment and not granted national treatment, but will be phased out within specified timeframes. 2. The Sensitive List which covers industries and investment measures that are not subject to phasing out, but was first reviewed by the ASEAN Investment Area Council in 2003 and thereafter at subsequent intervals. 3. The General Exception List which consists of industries and investment measures that cannot be opened up for investment or granted national treatment because of reasons of national security, public morals, public health or environmental protection. Brunei, Indonesia, Malaysia, Myanmar, the Philippines, Singapore and Thailand had until 1 January 2003 to phase out

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their Temporary Exclusion List for the manufacturing sector. The newer members of ASEAN, Cambodia, Laos and Vietnam have until 1 January 2010. A ministerial level, the ASEAN Investment Area Council has been established to oversee the implementation of the Framework Agreement. The Council is assisted by the ASEAN Co-ordinating Committee on Investment. Three approaches form the main pillars for establishing the ASEAN Investment Area: 1. A co-operation and facilitation programme shall enhance ASEAN’s competitiveness and provide investors with an efficient and low-transaction cost investment environment. It includes activities to facilitate investment flows, human resource development and the upgrading of skills of ASEAN investment agencies. 2. A promotion and awareness programme promotes ASEAN as a single investment destination. It aims to give investors a better understanding and awareness of the region’s investment opportunities. This programme includes regular high-level outward ASEAN Joint Investment Promotion Missions, the creation of investment websites and databases, and the publication of timely and useful investment information. 3. A liberalization programme opens up investment regimes throughout the region by eliminating investment barriers, liberalizing investment rules and policies, and granting national treatment. Greater transparency, information and awareness of investment opportunities in the region, more liberal and competitive investment regimes and lower transaction costs for business operations across the region are also important considerations. In terms of competing for direct foreign

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investment, ASEAN operates as ten sovereign investment regimes while China is one country with one legal and regulatory regime even if there are provincial variations. The ASEAN Investment Area recognizes that the ever-changing world economic environment continues to pose new challenges as well as provide new opportunities. ASEAN thus needs to adjust its programme for economic co-operation. The conclusion of the Uruguay Round negotiations, the implementation of the World Trade Organisation commitments by ASEAN member countries, the implementation of the common effective preferential tariff scheme for an ASEAN Free Trade Area and the eventual implementation of the Asia Pacific Economic Co-operation action agenda on trade and investment liberalization and facilitation are all part of the responses to the change in the global economic landscape. ASEAN also realizes that some of the parameters upon which its existing industrial co-operation programmes were designed are no longer valid and has updated itself with the ASEAN Investment Area. Specifically, with the view to enhancing ASEAN’s industrial competitive edge and maintaining the attractiveness of ASEAN as an investment region and a premier global production base, ASEAN began looking for a new form of industrial co-operation scheme to replace the ASEAN Industrial Joint Venture and the Brand-toBrand Complementation Schemes. Learning from the shortcomings of these two schemes, the new scheme will retain some of the features of the ASEAN Industrial Joint Venture and the Brand-to-Brand Complementation Schemes, but will offer more in terms of tariff and non-tariff incentives. The 1996 ASEAN Industrial Co-operation (AICO) scheme is based on the common effective preferential tariff scheme for an ASEAN Free Trade Area, to promote investment from technology-based industries and enhance value added activities.

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The ASEAN Industrial Co-operation scheme aims at increased ASEAN industrial production, closer ASEAN integration, increased investments from ASEAN and non-ASEAN sources, increased intraASEAN trade, improved economies of scale in production and scope, enhanced technology base, internationally competitive ASEAN industries, increased private sector participation and increased industrial complementation. The ASEAN Industrial Cooperation scheme operates on principles of being mutually beneficial and equitable. It aims at simplified and uniform application, approval and administrative procedure, be private sector- driven, be attractive and manageable to small, mediumsized enterprises, offer incentives other than tariff and local content accreditation, promote resource pooling and sharing and be regionally acceptable and workable. Essentially, the ASEAN Industrial Co-operation scheme promotes joint manufacturing industrial activities between ASEAN-based companies. A minimum of two companies in two different ASEAN countries are required to form an “ASEAN Industrial Co-operation Arrangement” which is not a legal entity, but merely an “umbrella association” wherein the output of the participating companies will enjoy a preferential tariff rate in the range of 0–5 per cent. An ASEAN Industrial Co-operation arrangement should involve not only the physical movement of products between the participating companies and countries but also resource sharing/pooling and/or industrial complementation. The major privilege of the new scheme is that approved products as output of an ASEAN Industrial Co-operation arrangement enjoy the preferential tariff rates of 0–5 per cent immediately upon their approval. This tariff represents the final common effective preferential tariff rate to be reached by ASEAN by year 2003. Thus with the immediate application of the 0–5 per cent preferential

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tariff rate, this will provide a head start for ASEAN Industrial Cooperation products compared to non-ASEAN Industrial Cooperation products. Other incentives include local content accreditation where applicable and other non-tariff incentives to be provided by the participating member countries. Under the ASEAN Industrial Co-operation scheme, an approved product may be in the form of finished products, intermediate parts and components or raw materials. In any ASEAN Industrial Co-operation arrangement the approved products are categorized as ASEAN Industrial Co-operation final products, intermediate products and/or raw materials. Final products represent the final output of a specific ASEAN Industrial Co-operation arrangement and have unlimited access into the market of the participating countries. Intermediate products and/ or raw materials, on the one hand, can enjoy the same 0–5 per cent preferential tariff rate, but on the other hand, have limited market access. These products may only be imported and used as inputs in the manufacture of the approved final products in a particular ASEAN Industrial Co-operation arrangement. Participating companies must be incorporated and operating in any ASEAN country, have a minimum 30 per cent national equity and undertake resource sharing/pooling, or industrial complementation or other industrial co-operation activities that are accepted by the participating country. Although the national equity condition is imposed as a criterion, it is not as stringent as for the ASEAN Industrial Joint Venture scheme. The latter requires a minimum of two ASEAN countries’ equity participation contributing at least 40 per cent to the total equity of that ASEAN Industrial Joint Venture entity and that each of the participating country must hold a minimum of 5 per cent. Under the ASEAN Industrial Co-operation scheme, national equity holding of one ASEAN member country in each of the

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participating companies is sufficient. Since two companies are required to form an ASEAN Industrial Co-operation arrangement, each company must have its own national equity holding. For companies that cannot meet the equity condition, a waiver is possible if the proposing company meets other criteria imposed by the participating country in lieu of the 30 per cent national equity. Other incentives under the ASEAN Industrial Co-operation scheme include local content accreditation where applicable and investment incentives offered by the relevant national authorities.

IMPACT OF ASIAN CRISIS AND SERIAL CRISES The ASEAN crisis of 1997 affected Thailand, Malaysia and Indonesia in ASEAN more severely than it did others like financially sound Singapore or the less exposed economies of the Philippines and newer Indochinese ASEAN states. Both Thailand and Indonesia approached the International Monetary Fund for financial assistance while Malaysia took the unorthodox way of capital controls. Thailand has fully paid up for its International Monetary Fund packages, while Indonesia’s debt level is estimated at some 110 per cent of its gross domestic product. This is not the place for an in-depth examination of the Asian financial crisis, but more to highlight the impact of ASEAN economic integration, especially when the Asian crisis was followed by a series of other crises. Just as ASEAN economies were barely recovering from the Asian crisis, the U.S. economy’s dot-com crash by March 2001 created another slippage, followed by the more disastrous terrorist attacks in New York on September 11, 2001 (often referred to as 9/11) and the spread of the severe acute respiratory syndrome (SARS) of early 2003. Two bombings in Bali and Jakarta in 2002 and 2003 respectively, revealed al-Qeada related cells, Jemaah

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Islamiyah and Abbu Sayyaf in Southeast Asia. Travel-related industries, particularly tourism, took their toll from both terrorist/ security and health-related crises. After the Asian crisis, the 6th ASEAN Summit in Hanoi in December 1998 announced some “bold measures” to regain confidence in ASEAN. These were the acceleration of the ASEAN Free Trade Area to 2002 to enhance the investment climate and liberalize trade in services. But the surveillance process or an early warning system worked out with the assistance of the Asian Development Bank was not one of the bold measures. The ASEAN 2020 Hanoi Action Plan projected ASEAN to be outward-looking, for peace, stability, prosperity and caring. Because the U.S. Bush Administration characterized the terrorist attacks as “axes of evil” and there was religious sensitivity of al-Qaeda-related Muslim factions in Southeast Asia, ASEAN countries were more split in the terrorist-related crisis except for security measures at immigration checkpoints. Singapore was deemed to be pro-United States and its free trade agreement with the United States was taken to be a “reward” for its U.S. support (although the bilateral trade negotiations had started before September 11, 2001). Be that as it may, Singapore made no apologies for its pro-U.S. stand just as the United States realizes it has to give more attention to Southeast Asia as in its Enterprise for ASEAN Initiative. Co-operation on the challenges posed by the severe acute respiratory syndrome (SARS) was more solid, involving China as the source country as well. The SARS epidemic that started in early 2003 made every Asian state fully aware of its potential impact on the well-being and livelihood of the people, while causing a tremendous strain on the health systems and the economy. Greater efforts, individually and collectively, were made by the affected countries to implement effective measures to contain the spread

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of the epidemic. The collective efforts by all ASEAN countries bore fruit as the last case was isolated by May 2003. When the region was free of local transmission, travel advisories were lifted by the World Health Organisation and this helped to revive the ailing tourism industry in the ASEAN countries. The SARS epidemic and ensuing crisis alerted ASEAN and other Asian states on the value of co-operation and network initiatives in containing any contagious event which respects no borders. Health Ministers and senior officials had to facilitate communication in an emergency. A number of high-level meetings involving ASEAN and ASEAN Plus Three – that is including China, Japan and Korea – on labour, transport, tourism, information and health were speedily convened to cover the SARS issue. The learning curve and sharing of experience in a multi-sectoral response as the only effective way to deal with SARS was a good lesson for future crises of such a contagious, cross-border nature. The ASEAN Plus Three Ministers Meeting in 2003 was convered essentially to address the impact of SARS on labour, employment, human resources and occupational safety and health. However, a spin-off was the related role of the social partners in easing the impact of retrenchments, unemployment and worker protection. With large intra-regional flows of workers, both low-skilled and high-skilled, to-and-from poor and rich economies throughout East Asia, addressing such social concerns was timely. All in all, SARS was the catalyst within ASEAN to create greater epidemiological surveillance, strengthen capacity and quality assurance of diagnostic laboratories, disseminate information on the Internet, and generally to work together for all communicable crises as well. The more important outcome was the bridging of the mindset of official co-operation beyond national sensitivities.

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Chapter 4

Other ASEAN Co-operation Efforts INTRODUCTION In addition to trade and investment liberalization discussed in Chapters 2 and 3, this chapter looks at other ASEAN co-operation efforts. The role of the private sector in trade, investment and other economic co-operation efforts is presented. As ASEAN takes an increasingly more market-oriented approach to economic cooperation, appreciating the role and importance of the private sector is imperative. The physical infrastructural networks are discussed, followed by e-ASEAN, social development and cooperation efforts, including an ASEAN community.

ASEAN PRIVATE SECTOR EFFORTS While economic integration through government-to-government reduction of tariff and non-tariff barriers is at work, private sector participation is invaluable. The ASEAN Chambers of Commerce and Industry formed in 1972 takes part in ASEAN official meetings and projects. It has four tiers at the council governing and administration level, in regional commodity clubs, in national industry clubs and finally, in national commodity clubs. Again, these provide the platforms and occasions for ASEAN business and industry groups to get together for collaboration and shaping proposals for ASEAN 45

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leaders and officials. ASEAN Chambers of Commerce and Industry joint business and economic councils with dialogue partners provide the needed external extensions as well. Reinforcing economic co-operation, certain areas and the private sector also contribute to greater socio-cultural interaction. These include energy, rural youth development and disease research and training, as shipping, banking, tours and travel, and fisheries. More interestingly, growth triangles have evolved out of private sector efforts. Business relocation prompted by cost and other supply factors first prompted the migration of Singapore business into Johor in Malaysia in the late 1980s. This was extended to Batam in Riau, giving rise to the SIJORI configuration by 1989 before it was extended to more generic IndonesiaMalaysia-Singapore growth triangle. This in turn inspired the Indonesia-Malaysia-Thailand growth triangle and East ASEAN Growth Area covering Brunei-Indonesia-Malaysia-Philippines. The Greater Mekong Scheme has attracted Japanese interests since the late 1950s with the United Nations Development Plan’s financial assistance in transport and communication involving Thailand, Vietnam, Cambodia and Yunnan province in China. Myanmar is peripherally involved and the area covered is a large one, indeed. To make the Greater Mekong River Project more an ASEAN project and also more viable, a corridor concept, cutting across the four ASEAN states has come about. The genesis of growth triangles started by private sector impulses, followed by government and other official support especially in infrastructure, immigration and other crossborder issues has the distinct advantage of being market-led and driven. There are many problems that require government intervention and intercession. These include integrated development, unequal benefits across uneven development, inadequate infrastructure, complex decision-making structure and bureaucracy, areas running

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into sensitive security issues, labour mobility and welfare concerns. Even that may not always be easy or successful. Continued dialogues with the ASEAN private sector, other regional organizations, including non-governmental organizations engaged in new parameters like environment, become important. Another evolving area in private sector economic co-operation is in regional cross-border production networks from traditional textile and garments, footwear products to Toyataism and hightechnology clusters. Japanese carmaker, Toyota, has recognized the various strengths and comparative advantage of ASEAN countries under the industrial complementation scheme. It has accordingly spread a network of subsidiaries and associated companies across ASEAN as a pioneer model of cross-production networks. Over time, American multinational corporations especially in electronics, semiconductors, disk drives and such, have also moved into ASEAN to set up high-technology production clusters. Such regional cross-border production networks are also built on the comparative advantage of the leading multinational corporation in collaboration and with support from national agencies. Those that are keen to help technology transfer, nurture local enterprises as partners with a multinational corporation. The local enterprises in time become multinational corporations in their own right. Singapore’s Economic Development Board has been such an industrial developer and champion, as has the Malaysian Industrial Development Agency. The next phase would be collaboration in service, especially research and development. With information communication technology and the new knowledge-based economy focused on intellectual capital involving creativity and innovation, Singapore’s broadband infrastructure and Malaysia’s multimedia supercorridor stand them in good stead for the high-technology clusters in the new economy.

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INFRASTRUCTURAL NETWORKS Physical regional economic integration is being pursued through the development of the Trans-ASEAN Transportation Network consisting of major interstate highways and railways, principal ports and sea-lanes for maritime traffic, inland waterway transport, and major civil aviation links. With existing national networks already linking much of land-based ASEAN, it is only a matter of linking these up one more level for trans-ASEAN land communication. While there may seem to be more competition in seaports and airports based on a regional approach for economies of scale and hubbing strategy, they all contribute to an excellent and reliable transport system which reassures investors and businessmen operating in the region and beyond. The Trans-ASEAN Energy Networks, which consist of the ASEAN Power Grid and the Trans-ASEAN Gas Pipeline Projects, are also being developed. ASEAN is promoting the inter-operability and inter-connectivity of the national telecommunications equipment and services. These electronic highways are described in the next section on e-ASEAN, starting with government-togovernment activities in e-government.

e-ASEAN The e-ASEAN initiative proposed by Singapore is a burgeoning aspect of co-operation. Singapore is relatively more advanced in information and communication technology, where the rest of ASEAN has to catch up. In the first quarter of 2000, an estimated 276 million persons worldwide were users of the Internet with a growth rate of roughly 150,000 persons per day. Web pages totalled 1.5 billion with almost 2 million pages being added each day. Ecommerce, or business conducted over the Internet, is projected

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to amount to over US$7 trillion by 2005. These developments reflect the activity of less than 5 per cent of the world’s population. The issue is of uneven speed and impact. The gross disparity in the spread of the Internet and the benefits derived from it have become a matter of concern. While the digital revolution brings individuals, firms and countries closer together at an unprecedented pace, those without the capability for or access to technology run the risk of not only being marginalized, but completely bypassed. The digital divide is within ASEAN and between ASEAN and others in the Asia-Pacific region. Estimates indicate that in 1999, the combined individual Internet users in five ASEAN countries (Indonesia, Malaysia, the Philippines, Thailand and Singapore) were only 3.74 million or 1 per cent of their population. The challenge is to promote universal and affordable access to information and communication services, including the Internet. The e-ASEAN Initiative is to ensure ASEAN countries embrace information communication technology, its development and use, in order to sustain economic growth and remain competitive in the global market place. The e-ASEAN Initiative establishes a region-wide approach to making comprehensive use of information and communications technologies in business, society and the government. In November 2000, ASEAN entered into the e-ASEAN Framework Agreement to facilitate the establishment of the ASEAN Information Infrastructure (the hardware and software systems needed to access, process and share information) and promote the growth of electronic commerce in the region. A highlevel private-public sector taskforce formulated the framework. The e-ASEAN Initiative binds the member countries to facilitate interconnectivity and technical inter-operability among their telecommunication systems and equipment. A high-level private-

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public sector taskforce, which was set up at the end of 1999, formulated the framework. As envisioned, the ASEAN Information Infrastructure would link ASEAN with other major information communication technology efforts in the region and in the world, such as the Asia-Pacific Information Infrastructure and the Global Information Infrastructure. It would build upon the information communication technology plans of individual ASEAN member countries, such as Brunei’s RaGAM 21, Indonesia’s Nusantara 21, Malaysia’s Multimedia Super Corridor, IT21 of the Philippines, and IT2000 or Singapore ONE (One Network for Everyone). ASEAN governments commit themselves to foster a favourable legal and policy environment for the development and use of information communication technology. The e-ASEAN Initiative aims for the liberalization of trade in information communication technology products and services. It also promotes investment in the production of information communication technology products and in the provision of information communication technology services. ASEAN countries will eliminate duties and non-tariff barriers on intra-ASEAN trade in information communication technology products in three tranches. Liberalization will be completed over a three-year period beginning on 1 January 2003. Cambodia, Laos, Myanmar, and Vietnam will undertake the same measures beginning on 1 January 2008. Moreover, ASEAN will conclude mutual recognition arrangements covering information communication technology products. Subject to the provisions of the ASEAN Investment Area Framework Agreement of 1998, ASEAN economies will immediately open their information communication technology sector to investments by ASEAN investors. They will also immediately extend to ASEAN investments in information

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communication technology treatment no less favourable than those accorded to their own national investors. Electronic commerce will be facilitated through the adoption of laws and policies based on international norms. These norms are intended to promote trust and confidence of the general population and, in particular, those who transact business over the Internet. This task will involve the establishment of a system of mutual recognition of digital signatures, secure electronic transactions, payments and settlements, protection of intellectual property rights arising from e-commerce, measures to promote personal data protection and consumer privacy; and dispute settlement mechanisms. A Certification Authority Forum has been organized to look into cross-border certification issues, including mutual recognition of digital signatures. A private sector-led ASEAN Internet Service Providers (ISP) Forum has been convened to explore ways of promoting the more efficient flow of Internet traffic, including the setting up of national and regional Internet exchanges and Internet gateways. The e-ASEAN Working Group, through its sub-working group on legal infrastructure, has been established to promote coordination in the formulation of e-commerce laws and regulations, in place by 2003. To promote an e-ASEAN community, member countries will encourage the development of peoples’ knowledge and proficiency in using information communication technology, particularly the Internet. This will be done through formal education, training for professionals, and community learning institutions. The more advanced member countries with information communication technology training facilities will offer training courses for less developed member countries. The e-ASEAN initiative demonstrates ASEAN’s recognition that information and communication technology stand out as the driving force of today’s economy. The information revolution has

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created challenges and opportunities for all countries in the increasingly global economy. They are potential integrators of an increasingly seamless global village. Information and communication technology can promote economic growth, social development and better governance. They enhance access to information and news, enlarge employment opportunities, increase economic output, protect consumers. This technology provides more efficient access to a range of government services, makes distance education and training more effective, improves delivery of health services, reduces election fraud and promotes transparency in public procurement. In effect, more people are empowered, more people are reached, especially in rural areas. Information communication technology allows access to information sources worldwide, transcending borders, languages and cultures and helping spread knowledge about “best practices” and experience. The e-ASEAN Task Force has approved a number of private sector-funded pilot projects, aimed particularly at small and medium-sized enterprises and individual entrepreneurs. Pilot projects are also expected to promote skills building and increase awareness of and trust in the Internet. At the dawn of the new millennium, advances in information and telecommunication technology are changing the way people work, live and think. These innovations are certain to create opportunities that will make profound contributions to sustaining economic development and improving the quality of life. The e-ASEAN project will give Southeast Asia a blueprint for plugging itself into the global e-space. The development of e-ASEAN will create many opportunities for foreign direct investment, which continues to play an increasingly important role in the region’s greater economic growth and integration.

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However, a reality check as in Table 4.1 shows the uneven level of Internet penetration and use. There are many levels of the digital divide: infrastructure and hardware, the availability and affordability of telecommunication and electricity charges, and software and computer literacy skills. Slowly, the mindset will need to change in order to adopt information communication technology in everyday life, at work and in social and private lifestyles. TABLE 4.1 Internet Connectivity in ASEAN and Asia Pacific, 1999 Country

ASEAN Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Non-ASEAN Australia China* Hong Kong India Japan Korea New Zealand

Internet hosts per 10,000 inhabitants

Internet users per 10,000 inhabitants

Estimated PCs per 100 inhabitants

43.49 0.14 1.01 Negligible 27.03 Negligible 1.66 459.72 6.60 0.02

317.46 0,000.67 0,014.54 Negligible 0,0367.82 N.A. 0,0020.56 2,945.92 0,033.17 0,001.29

N.A. 0.09 0.82 N.A. 5.98 N.A. 1.51 45.84 2.16 0.64

576.63 0.57 166.89 0.23 208.41 60.99 707.86

2,643.94 0,070.25 1,000 (1998) 0,005.09 1,323.42 0,668.32 1,575.42

41.11 0.89 25.42 0.27 23.72 15.68 28.88

Note: *China excluding Hong Kong. Source: ITU website .

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SOCIAL DEVELOPMENT IN ASEAN Admittedly, the social side of ASEAN may be a poorer cousin to economic and political development. However, the focus is now to manage social changes brought about by the forces of globalization and trade liberalization in the region. To contribute to narrowing the development gap in ASEAN, several human resource flagship programmes are being developed. Although cost-sharing is increasingly used as a modality for funding regional activities, ASEAN’s dialogue partners, such as the United Nations specialized agencies, the World Bank and other institutions, continue to support projects on labour, health, education, women and children. Collaboration with the East Asian partners, which currently covers the field of labour, will soon be extended to health, social welfare and development, and rural development and poverty eradication. The outbreak of SARS brought out a new level of attention and co-operation. On disease surveillance, ASEAN will implement two projects on tuberculosis control. The expansion and assurance of quality coverage have already been initiated. The ASEAN Secretariat, with the assistance of the World Health Organisation, has also prepared an initial five-year programme of activities to operationalize the regional action plan on healthy ASEAN lifestyles, which has been adopted by the ASEAN Health Ministers. The control of tobacco consumption is a central priority of this regional action plan. An ASEAN workshop held in Myanmar in 2003 focused on “Development of a Regional Protocol on Epidemiological Assessment of the Needs and Resources for the Frail Elderly People and Development of Regional Strategies for Planning Implementation, Monitoring and Evaluation of CommunityBased Health Care Services for the Elderly”. The workshop established a network to exchange information on community-

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based healthcare services for the elderly. ASEAN has endorsed the project on “Home Care for the Older People in the ASEAN Countries” which aims to develop volunteer-based homecare programmes based on the Korean experience. Korea has extended technical assistance to this project which champions the Asian family and community way to care for the elderly. The ASEAN Working Group on Technical Co-operation in Pharmaceuticals exchanges information in such areas as drug safety and access to needed medicines. This is part of the World Trade Organisation’s Doha Declaration on the Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS) and public health. Pharmaco-economics covers drug regulatory activities and pharmaceutical practices. Related to this is the need for ASEAN to strengthen its capacity on good clinical practice and clinical trials. Arising from the impact of globalization and trade liberalization on the health sector, ASEAN and the General Agreement on Trade in Services have collaborated in the field of health services in 2002 in Jakarta. The need to develop a workplan focusing on research, advocacy and strengthening of accreditation for medical education is noted. ASEAN and the World Health Organisation have agreed to extend their Memorandum of Understanding (MOU) for another five years from April 2002. Also, ASEAN Plus Three, namely China, Japan and Korea, have agreed on co-operation in areas such as the development of health care systems, the provision of medical care services, and health care financing, including health insurance. On rural development and poverty eradication, an ASEAN action plan on social safety nets has proceeded well with the assistance of AusAID and the United Nations Development Plan. The Asian crisis was a trigger. Training of community-based facilitators on rural development and poverty eradication, coordinated by Indonesia has been implemented.

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ASEAN ministers have met on rural development annually, with concern regarding the possible impact of globalization and trade liberalization on the question of poverty in the region. The Ministers have requested the ASEAN Secretariat to undertake a comprehensive review of regional co-operation on poverty eradication and rural development. The aim is to chart strategic directions to respond to emerging trends, especially with respect to emerging global concerns and their impact on current plans of action as well as focus co-operation on issues that are transboundary. The review also looks at how the current institutional mechanisms for co-operation could be further streamlined and improved, including the mobilization of the resources of members for priority regional projects. ASEAN countries, in collaboration with the World Bank and the Japanese Foundation for Advanced Studies on International Development (FASID), have engaged in an exchange of experiences in promoting community participation approaches for rural poverty reduction since 2003. The project aims to share lessons learned in addressing the exclusion and vulnerability of rural populations and in devising economic activities to assist them. New initiatives in social welfare and development include those in the Work Programme on Social Welfare, Family and Population (2003–06). This programme identifies priorities for regional co-operation, taking into account emerging challenges arising from demographic developments and the implications of the changing structure of the family. In other areas, HIV/AIDS and enabling disabled persons to access information and communication technology, are explored. ASEAN and the United Nations have agreed to formulate a work-plan on the welfare of children and young persons as a guide for long-term co-operation. Early childcare and development, women’s advancement and gender equality, youth unemployment

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in the wake of the economic and financial crisis of 1997-98 are all considered as part of social development. Collaboration with the International Labour Organisation and World Bank in joint programmes on mainstreaming social development are important. Strong linkages among the national education system and the labour market are explored. This includes labour market information available for educational planning and to minimize the mismatch between the supply and demand of labour. It would facilitate the transition between school and work. The role of the private sector has to be strengthened to integrate young people into the labour market with the possibility of establishing a network for sharing youth unemployment in ASEAN countries. Successful models for integrating youth development into the national development agenda are exchanged. These include eight priority activities under the ASEAN Labour Ministers Work Programme and the flagship Technical Assistance Programme for the Cambodia-Laos-Myanmar-Vietnam (CLMV) countries. On industrial relations, there is a consultative process where specific needs of ASEAN countries are canvassed for inclusion into a regional programme. Specific policy areas include labour management laws and regulations, industrial relations involving wages, productivity, and competition and harmony of industrial relations with technological innovation and economic integration. Tripartite participation, with Japan providing the financial and technical support, has been successful. In fact, in the area on human resources development, China and Korea have also collaborated with ASEAN, as well as the European Union. The European Union shares its experience on integrated social protection for workers. On education, greater ASEAN awareness in primary and secondary schools has been initiated. Now, in its eighth year, the

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ASEAN University Network (AUN) continues to promote collaborative studies and research programmes among its 17member educational institutions. Activities include student and faculty exchange programmes, scholarships for graduate students in ASEAN countries, information networking among ASEAN universities and collaborative research. On the environment, smoke haze affected Southeast Asian countries during the dry seasons in 1991, 1994 and 1997. ASEAN countries in particular Brunei Darussalam, Indonesia, Malaysia, and Singapore, were badly affected by smoke haze caused by land and forest fires. The severity and extent of the smoke haze pollution was unprecedented, affecting millions of people across the region. This has meant enormous economic losses. Indeed, the long-term loss from such an environmental disaster has yet to be fully determined. Several economic sectors, including air, water and land transport, shipping, construction, tourism, forestry and agriculture, were similarly severely affected. The haze pollution had a considerable impact on the health of the people of the countries affected. Since 1995, ASEAN Environment Ministers have agreed on an ASEAN Co-operation Plan on Transboundary Pollution. This Plan contains broad policies and strategies to deal with satellite imagery, wind charts, visibility information, air quality information and other meteorological and environmental information. The Plan on Transboundary Pollution should reassure foreign investors that ASEAN has the capability and capacity to handle the situation, including fire-fighting. To build a community of caring societies, the ASEAN leaders resolved in 1995 to elevate functional co-operation to a higher plane. The aim is to bring shared prosperity to all its members. The Framework for Elevating Functional Co-operation to a Higher Plane was adopted in 1996 with the theme, “Shared prosperity

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through human development, technological competitiveness, and social cohesiveness.” The Framework embraces the ASEAN Plan of Action on Social Development, ASEAN Plan of Action on Culture and Information, ASEAN Plan of Action on Science and Technology, ASEAN Strategic Plan of Action on the Environment, ASEAN Plan of Action on Drug Abuse Control and ASEAN Plan of Action in Combating Transnational Crime. More projects on functional co-operation are discussed in the ensuing chapters.

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Chapter 5

ASEAN External Co-operation INTRODUCTION This chapter has two main components. One is the ASEAN Regional Forum which complements and supplements ASEAN cooperation efforts with non-ASEAN members. It serves as a political and security parallel of ASEAN post-ministerial meetings with ASEAN dialogue partners. The other component focuses on ASEAN external co-operation in consideration of the emerging new regionalism. This also covers the growing free trade arrangements between ASEAN and non-ASEAN trade partners. Monetary cooperation arrangements like ASEAN Plus Three and its impact on ASEAN consider whether ASEAN is challenged or stands to be marginalized. Thus, the question in the concluding section is whether free trade arrangements constitute a building block or a stumbling block to the ASEAN Free Trade Area.

ASEAN REGIONAL FORUM The end of the Cold War had altered the configuration of international relations in East Asia. The new environment presented historic opportunities for the relaxation of tensions in the region through multilateral consultations, confidence building, and eventually the prevention of conflict. In 1992, the ASEAN Heads of State and Government declared that ASEAN 61

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should intensify its external dialogues in political and security matters as a means of building co-operative ties with states in the Asia-Pacific region. The ASEAN Regional Forum (ARF) was thus established in 1994. It aims to promote confidence-building, preventive diplomacy and conflict resolution in the region. The present participants include Australia, Brunei, Cambodia, Canada, China, European Union, India, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, Mongolia, New Zealand, Papua New Guinea, Philippines, the Russian Federation, Singapore, Thailand, the United States and Vietnam. ASEAN has taken the lead in the ASEAN Regional Forum. Paradoxically, ASEAN itself seems to have gone a full cycle, back to security and political matters. The ARF is a post-Cold War arrangement to mirror or act as a parallel to ASEAN post-ministerial meetings. The Forum involves the same set of dialogue partners and is meant to engage in constructive mechanisms to keep peace and stability in the region. Beside the two Koreas, cross-strait issues between China and Taiwan, and India-Pakistan nuclear proliferation, there are many territorial disputes in Southeast Asia to be resolved. The dispute over the Spratly Islands extends beyond the ASEAN states, involving China as well. Through political dialogue and confidence building, no tension has so far escalated into armed confrontation among ASEAN members since its establishment more than three decades ago. In July 1996, the ASEAN Regional Forum adopted criteria for participation which include: 1. commitment as sovereign states, 2. relevance, with an impact on the peace and security of the “geographic footprint” of key activities in Northeast and Southeast Asia and Oceania, 3. gradual expansion to ensure the effectiveness at a manageable level,

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4. consultations. The Forum’s work is complemented by a nonofficial “track two” process led by non-government research institutes and think-tanks. Since its inaugural meeting in Bangkok in July 1994, the ARF has taken an evolutionary approach extended over three broad stages. The first is in the promotion of confidence building among participants, the second in the development of preventive diplomacy and finally, the elaboration of approaches to conflicts. This approach enables the Forum participants to deal constructively with political and security issues that bear on regional peace and stability, including new issues that have emerged as a result of globalization. That ASEAN takes the lead in its ability and readiness to resolve political differences affecting its members and other countries in the Asia Pacific region, is not surprising. In a way, ASEAN’s commitment to political co-operation is also put to the test. More often than not, that commitment has been affirmed and the ASEAN approach to solving potentially explosive issues has been vindicated. These issues include territorial and jurisdictional disputes in the South China Sea, self-determination for East Timor, nuclear proliferation in Northeast Asia and South Asia, weapons of mass destruction and the impact of globalization. A balance of Southeast Asian security issues with those in Northeast Asia has to be maintained. At the 7th ASEAN Regional Forum in July 2000, the Democratic People’s Republic of Korea participated for the first time, a significant step in the rapid evolution of the situation on the Korean Peninsula affecting the security environment of the Asia-Pacific region. North Korea’s membership in the ASEAN Regional Forum provides additional opportunities for dialogue and exchanges between North Korea and those ARF countries with key roles in the Korean situation. ASEAN essentially acts as a buffer between the North and South

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Korean leaders, even balancing the United States and China to some extent. A broader agenda of the ASEAN Regional Forum on the challenges of globalization also unfolded at the 7th ASEAN Regional Forum. While the overall security outlook for the region remained positive, uncertainties and challenges of globalization would increasingly require attention. Thus, matters regarding the economic, social and human components of security and the need to promote regional co-operation in dealing with regional security issues were considered. Both positive effects and the repercussions of globalization or globalization backlash are possible with greater economic interdependence among nations. The multiplication of security threats like transnational crime and money laundering require cross-border co-operation. In fact, more and more non-traditional security issues, ranging from piracy on the high seas to pollution and environmental degradation are some of the effects of interdependence and globalization. These are deemed international public goods, and with security, fall under official co-operation programmes for their resolution or minimization to reduce collateral damage. The ASEAN Regional Forum can be an effective mechanism for nations to strengthen their individual and collective capacities to meet the challenges affecting their common security.

NEW REGIONALISM AND GEOPOLITICS: ENLIGHTENED ASEAN REGIONALISM ASEAN is widely recognized in the international community as an exemplar of enlightened regionalism. It has survived remarkably for more than three decades despite much cynicism of previous attempts at organization in the complex and hostile regional

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situation. Three decades later, the situation is vastly different. Despite pockets of instability and economic difficulty, the countries of Southeast Asia now make up one of the most stable and prosperous regions in the developing world. ASEAN’s apparent and relative success may be because other developing country groups have done much worse, such as those in Southern Asia, Latin America and Africa. Nonetheless, ASEAN is a sub-regional grouping, recognized not only in its own region, but also in the world as one of the most successful regional co-operative schemes. The relative peace, security and stability that ASEAN has helped maintain in Southeast Asia, as well as in the Asia-Pacific region, have been good for economic growth and development. ASEAN and the ASEAN Regional Forum, in particular, have created a political environment where rapid and sustained economic growth has become possible. Economic development in turn has brought about social progress and human development. ASEAN has been successful precisely because its very development oriented, recognizing that economic, political and social development is holistic. In other words, they complemented and supplemented each area. ASEAN is also pragmatic in its approach; ideology has never been a problem. ASEAN has not allowed theoretical political differences to interfere in its efforts to co-operate for the common good. This is best illustrated by its widening of membership to the four new Indochinese states. ASEAN realizes that periods of rapid social and economic progress are often accompanied by basic shifts in power relations among states. If not managed well, such realignments could lead to conflict. At the same time, increased economic globalization, accompanied by structural adjustments of national economies, could create challenges to social order. With rapid economic development, ASEAN also faces wider issues of resource conservation, including environmental protection. Greater

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mobility of people, goods and capital also demands more sophisticated management of flows across borders and closer collaboration among ASEAN members. Appreciating prosperity and realizing that tensions and armed conflict make bad economics, the ASEAN consensus principle or “ASEAN Way” is both a bane and a boon. It helps that both the Asia-Pacific Economic Co-operation (APEC) and the Asia-Europe Meeting (ASEM) processes accept ASEAN as the core element in effectively promoting a more constructive and co-operative approach to international relations in the region. However, impatience with the glacier speed and not confronting some issues as in Cambodia and Myanmar the way the more democratic Western world would, has caused tensions. Realizing the vision of ASEAN’s founding fathers of an association of all Southeast Asian countries is not the end of ASEAN history. A lot more work is required for a renewed commitment to broader regional solidarity among the peoples of Southeast Asia amidst these tensions.

ASEAN’s Role in New Regionalism ASEAN has played an important caucus role in three other interregional fora, namely, Asia Pacific Economic Co-operation (APEC) set up in 1989, Asia-Europe Meeting (ASEM), 1995 and Forum for East Asia-Latin America Co-operation (FEALAC), 1997. All three represent the desire of East Asia including ASEAN to engage in constructive economic dialogues with countries outside the region. The Asia-Pacific Economic Co-operation (APEC) involves North America (the United States and Canada), Latin America with a Pacific coastline (Mexico, Argentina and Peru), Australasia, ASEAN and Northeast Asia especially both China and Taiwan. While not a trade block or free trade area, the 21-member APEC does aim to free trade and stimulate economic co-operation in many areas.

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ASEM (Asia-Europe Meeting) is specifically to draw in the European Union. The Forum for East Asia-Latin America Cooperation represents a south-south forum of developing countries in economic co-operation. ASEAN economic integration is not explicitly challenged by these three extra-regional groupings – in fact, ASEAN has provided a united front in these meetings. The dysfunctional multilateral trade liberalization system at the World Trade Organisation (WTO), best illustrated when antiglobalization demonstrations derailed the 1999 Seattle meeting, has set the momentum for a new regionalism. Distinguished from old regionalism focussing on economic regionalization, the political economy of the new regionalism is driven by a twofold thrust. On the one hand is globalization, information technology, and the knowledge-based economy, deregulation, while on the other is strategic security interests (since the mid-1980s). More regional trade agreements have been been notified to the World Trade Organisation as a response to mismanaged multilateralism, perceived or otherwise. New regionalism is also seen in the expanding European Union into central, eastern European countries. Another example is the North American Free Trade Agreement which is expanding to a Free Trade Area of the Americas by 2005. Partly as a legacy of the Asian crisis, when Japan’s proposal for an Asian Monetary Fund was rejected by the United States and the International Monetary Fund, currency swaps initiated ASEAN Plus Three (APT), among ASEAN-10, China, Japan and Korea. In particular, if ASEAN Plus Three moves further into some trade liberalization, the ASEAN Free Trade Area may well be marginalized. While the ASEAN Free Trade Area remained uncompleted by 2002, a renewed effort to reverse the backsliding is the ASEAN Economic Community by 2020 proposed by Singapore and supported by Thailand at the 2002 ASEAN Summit in Bali. This is

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deemed a free trade area-plus, not quite a customs union, but with some common market features of free flow of trade in goods and services and freer flow of capital. Free movement of labour is highly unlikely. However, even this may muddle through without strong political will, much like the ASEAN 2020 vision enunciated at the 1998 ASEAN summit.

BILATERAL FREE TRADE AGREEMENTS Ironically, the geographical value of Southeast Asia seems to have increased in the eyes of bigger countries and trade blocs. ASEAN’s geographical and buffer value between rising China and eclipsing Japan has attracted many offers of Free Trade Agreements (FTAs). Such offers for ASEAN have come from the Common Economic Relations (CER, Australia and New Zealand as a free trade area), Japan, India and the United States. In the case of Japan’s offer of a Comprehensive Economic Partnership, it is an extension of its bilateral free trade agreement with Singapore signed in 2000. The U.S. offer of an Enterprise for ASEAN Initiative is a reflection of interest revived by the United States since the terrorist attacks of September 11, 2001. India’s “Look East” policy prompted its economic pact with ASEAN; for ASEAN, this brings collaboration in soft information communication skills. How ASEAN responds to each offer as a united front, without diluting ASEAN itself, to draw out the maximum benefits, will require ASEAN leadership but this does not seem forthcoming. It does not help that Singapore has in a way started the trend on bilateral free trade agreements, starting with New Zealand, the Japan-Singapore Economic Partnership Agreement, free trade pacts with Australia, the European Free Trade Area (comprising Switzerland, Iceland, Liechtenstein and Norway) and the United States. Singapore is negotiating the Singapore-India

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Comprehensive Economic Cooperation Agreement, and a similar bilateral free trade agreement negotiation with Canada, Mexico, Chile, Korea, Jordan and Sri Lanka with others still coming on stream. Not all are economic in orientation and design – security interests figure as well, such as the pact with Jordan. Whether exemplary or stirring the pot, Singapore’s actions have been followed by Korea and Japan which have also initiated their own bilateral free trade area in negotiation with other countries in similar pacts. Singapore, Japan and Korea are most active in bilateral free trade agreements, but Thailand is becoming a quick study. Thailand’s aim as a halal food centre has motivated its free trade agreement with Bahrain. Thailand is also negotiating a free trade area deal with China to liberalize some agriculture and food products. The U.S.-Thailand free trade area intends to have an “open skies” accord promising Thai Airways and U.S. FedEx more cargo business – two-fifths of Asia-Pacific trade is carried by air. In security terms, the liaison with the United States has earned Thailand a first as the United States’ first non-North Atlantic Treaty Organization ally. Thailand has signed a free trade agreement with Australia and is negotiating with New Zealand. Malaysia initially resisted Singapore’s free trade agreements, but its instinctual competition with Singapore and the new regionalism have prompted Malaysia towards its free trade agreement with Japan. In summary, as Asian regionalism begins to take shape to parallel regionalism in Europe and North America, ASEAN has to look at its own economic integration more introspectively to see what its role should be. If it continues to muddle through even in the new initiative of the ASEAN Economic Community, it may end up being driven on by stronger regional giants especially, China – even if Japan remains unrevived or passive as a regional leader. It would be

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a shame and waste if ASEAN continues to drift along even if its buffer value is important in growing Asian regionalism.

ASEAN PLUS THREE The biggest challenge for ASEAN that has had a monopoly in the region for more than 35 years, is the Northeast Three which started the momentum for ASEAN Plus Three, following the Chiang Mai initiative in 2000. The ASEAN Plus Three Summit after ASEAN’s 2002 Phnom Penh Summit was aimed at greater regional economic co-ordination – without explicitly stating the natural and logical extension to an East Asian Free Trade Area. Malaysia even offered to set up a secretariat for ASEAN Plus Three. But this was opposed by ASEAN itself as eroding the ASEAN Secretariat. ASEAN Plus Three has stopped short of a formal free trade area though there was general implicit consensus by Korea and Japan in 2001. However, there is no agreement on timing and details. Singapore chorused the same sentiments in 2003 for a single ASEAN market, progressing to an East-Asian-wide market. As it stands, ASEAN Plus Three’s currency swap arrangements have marginalized similar deals signed among ASEAN states, but never activated. With only Singapore and Brunei as cash cows or with high reserves, even they cannot single-handedly support big ASEAN neighbours like Indonesia, Malaysia or Thailand. Beside issues of lack of transparency and accountability as in bad governance, neither Singapore nor Brunei can impose conditionality on other ASEAN states, unlike the International Monetary Fund. In terms of economies of scale and size, ASEAN Plus Three in a free trade area is not an unattractive proposition as shown in Tables 5.1 to 5.3. As a single market, however it is defined, an ASEAN Plus Three free trade area will have larger welfare gains

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TABLE 5.1 Changes in Welfare (Equivalent Variation Basis) (As % of Initial GDP)

Singapore Malaysia Indonesia Australia Japan China Korea

North Asia Three

ASEAN+3

APT+ANZCER

⫺0.87 ⫺0.70 ⫺0.15 ⫺0.05 ⫺0.25 ⫺2.09 ⫺0.80

⫺4.12 ⫺1.24 ⫺0.89 ⫺0.11 ⫺0.34 ⫺1.96 ⫺1.18

0.92 1.74 0.71 1.05 0.57 1.94 1.20

Source: Robert Scollay and John Gilbert, New Regional Trading Arrangements in the Asia Pacific, p. 68. Washington, D.C.: Institute for International Economics, 2001.

than the three alone (China, Japan and Korea) that have some unresolved historical and political issues. ASEAN Plus Three plus the Australia and New Zealand Common Economic Relations works for Australia and New Zealand, but less so for ASEAN as shown in Table 5.1.

ASEAN RISING TO THE OCCASION OR MARGINALIZED? There is a perception that ASEAN is marginalized, with East Asia de facto more integrated through trade (as shown in Tables 5.2 and 5.3). Whether this is more real than apparent is difficult to validate as there are both the macro and microeconomic as well as political economy aspects of ASEAN as a group or East Asia as a larger unit. If South Asia is included in Asia, the impact becomes even wider and more extensive for ASEAN. Table 5.2 shows that intra-East Asian trade is strongest among various combinations and permutations of regionalism in East

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TABLE 5.2 Intra-regional Trade, 1970–2000 (Exports within a regional trading block as % of total exports) Regional bloc

1970

1980

1990

1996

1998

1999

2000

APEC ASEAN ASEAN+3 All East Asia Bangkok Agreement EU NAFTA Mercosur

57.8 22.9 – – 2.7

57.9 18.7 31.6 33.8 3.7

68.3 19.8 27.5 40.4 3.7

72.1 25.4 37.0 50.4 5.3

69.7 21.7 29.0 43.0 5.1

71.9 22.2 31.5 44.8 5.3

– 23.1 32.0 46.3 –

59.5 36.0 9.4

60.8 33.6 11.6

65.9 41.4 8.9

61.4 47.6 22.7

57.0 51.7 25.0

62.6 50.6 20.5

62.1 54.9 –

Source: Eisuke Sakakibara and Sharon Yamakawa, “Regional Integration in East Asia: Challenges and Opportunities”, background paper for the East Asia Project, World Bank: Washington, D.C., 2002.

Asia, including the oldest free trade area, the Bangkok Agreement since 1975 involving India, Korea, Sri Lanka, Bangladesh and Laos with China joining in 2002 (barring Asia Pacific Economic Cooperation). Still, East Asian trade is a long way off from the depth of intra-regional trade in the European Union and North America. Table 5.3 shows trade intensity in East Asia. Japan has the highest intensity – higher than the United States. China will indeed catch up as it depends on ASEAN for much of its food, energy and other imports of agricultural products and raw material. Interestingly, China runs a trade deficit with East Asia including ASEAN, but a trade surplus with the United States, implying that Chinese exports to the United States finance China’s imports from East Asia. Over time, deeper economic co-operation in ASEAN must move on to other political economy issue. These include intellectual property rights (IPR), human rights, labour standards, environment, competition policy, government procurement,

N.A. 11.1 1.6 1.8 3.2 0.9 0.5 1.2 1.2 –

6.2 N.A. 0.9 1.6 1.9 1.4 1.5 1.8 1.6 6.6 1.5 0.8 N.A. 2.3 3.2 2.9 0.7 4.3 3.7 2.0

Source: Sakakibara and Yamakawa (2002).

China Hong Kong Indonesia Japan Korea Malaysia Philippines Singapore Thailand Taiwan 2.8 1.0 3.8 N.A. 1.9 2.1 2.6 1.3 2.7 1.8 1.7 0.7 3.0 2.5 N.A. 1.4 1.3 1.5 0.8 1.0 0.7 0.7 2.5 2.2 2.1 N.A. 3.5 14.0 3.2 1.9 1.1 1.8 2.4 3.6 3.9 2.9 N.A. 4.4 2.9 3.6 1.1 1.2 5.7 2.0 1.5 8.9 3.6 N.A. 4.6 1.7

0.7 1.0 2.0 3.0 1.3 3.7 2.8 4.8 N.A. 2.0

0.8 1.0 2.0 3.5 2.3 2.3 4.0 2.1 1.9 N.A.

1.3 1.2 0.8 1.6 1.1 1.2 1.8 1.0 1.2 1.4

0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.4 0.5 0.4

China Hong Kong Indonesia Japan Korea Malaysia Philippines Singapore Thailand Taiwan US EU

TABLE 5.3 Trading Intensity in East Asia, 1998–2000

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governance, and transparency. Such issues need to be addressed for greater economic integration. The proposed ASEAN Economic Community may have to re-look at some community issues as in social security, welfare protection and social safety nets involving migrant labour as a start. Foreign labour movement across ASEAN, involving rich and poor states, from low skills to high skills, present socio-political issues beside economic ones. These trends and development do pose as threats for the marginalization of ASEAN. ASEAN had a clear field between 1967 and 1997 – at least before East Asia as an economic co-operation entity came into bloom, triggered by the Asian crisis. In other words, if ASEAN was a laggard, took too much time to “muddle through” or was complacent to external drivers as it tried to deal with internal ASEAN political economy, the time to wake up and take charge of its new direction and role in the context of new regionalism is well past. The ASEAN Economic Community may be like old wine in a new bottle as the packaging is still to operationalize a single market for goods and services in ASEAN. Capital is already globalized, and to a lesser extent, so is technology transfer and diffusion within the intellectual property rights regime. Free movement of labour in ASEAN will still have socio-political constraints, unlike the European Union of a truly single market for free movement of all factors. ASEAN has to be more credible and demonstrative in terms of the set and stated goals in trade, investment and the ASEAN Economic Community. The newly elected leaders in Indonesia, Malaysia, Singapore and Thailand may yet open a new chapter for ASEAN.

Chapter 6

Prospects and Prognosis INTRODUCTION A stocktaking of the first five chapters seems to suggest that if early ASEAN between 1967 and 1976 was deemed disappointing in terms of tangible economic results, the achievements since 1976 appear no better. Granted that some strides have been made in moving from the ASEAN Preferential Trade Arrangement (PTA) to the ASEAN Free Trade Area (FTA) in the first instance, one very notable feature of ASEAN’s success is that it is due more to national achievements than an overarching ASEAN economic framework as in the case of European integration. While ASEAN infrastructural and institutional frameworks provided the necessary conditions for the region to enjoy a fair amount of stability and cohesion, whether as one voice in international, multilateral settings as in the United Nations or as a caucus as in the Asia-Pacific Economic Co-operation (APEC), the sufficient conditions for ASEAN as a whole come from the national contexts. Until the 1997 Asian crisis, even Indonesia was deemed to be a model for developing economies by the World Bank. Singapore is among the first generation newly-industrializing economies together with Taiwan, South Korea and Hong Kong. Malaysia and Thailand are among the second generation newlyindustrializing economies with China following behind in time,

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but certainly not in terms of momentum and performance. All the successful ASEAN economies have very clear, consistent and credible economic targets. The rest, including the newer ASEAN members have their own national plans and would enjoy the brand name ASEAN has provided thus far. Some lingering doubt remains on how more efficacious and effective ASEAN will be in view of new and rising domestic and external challenges. The track record, while not as luminous and excellent as desired, has truly been a rather exemplary one given the obstacles early ASEAN faced and since the emergence of China as an economic and political economy and regional, if not yet, international powerhouse. Compared with other developing country groups in South Asia, Latin America and Africa, ASEAN has not scored badly at all.

POLITICAL WILL AND COMMITMENT A most fundamental issue before reviewing ASEAN’s prospects and its ability and capacity to deal with future challenges is one of political will and commitment rather than economic wherewithal. As a region, ASEAN-10 is rich in natural resources and sufficiently large to be efficient in terms of economies of scale, institutional and organizational capabilities. It is politics which will cast the die between how ASEAN will hang together in riches or in rivalry. It may not be over simplistic or impractical, but clearly, there is strength in numbers if ASEAN-10 as a group is poised against China, on the assumption that some competition will remain between Northeast and Southeast Asia even with ASEAN Plus Three. Considering the broadest dysfunctional multilateral level, ASEAN may increasingly be pitted with the developing countries in traditional agriculture and manufacturing trade barriers. Since the inaugural World Trade Organization meeting in Singapore in

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1995, the so-called “Singapore Issues” on trade facilitation and government procurement are classical trade barrier issues to strengthen provisions, reduce bureaucratic and obscure trade obstacles, and introduce minimum visibility into the public tender process. Investment and competition are two new Singapore issues which developing countries including ASEAN do not really want to negotiate. To be effective as a caucus group in the World Trade Organization, ASEAN must focus on its own priorities and interests in order to take its place among emerging developing country groups. ASEAN has proven itself as quite the most successful group of developing countries in economic integration, even if the results are more qualitative than quantitative. But ASEAN is a formidable group of some 500 million in population, rich in natural resources and has a few success stories as in Singapore, Malaysia and Thailand which have made their place in global and regional affairs. Even to its newer Indochinese members, the older ASEAN members have provided much needed support in technical assistance. Since the Asian crisis, surveillance or advance warning systems and processes have been initiated even if the “ASEAN Way” may yet mean that strong political commitment is to be forthcoming. But more important, the most critical missing element in ASEAN integration is leadership and a clear vision of ASEAN in the context of evolving Asian regionalism among others. With the spate of free trade arrangements or areas involving many ASEAN members individually or as a group, ASEAN needs a direction and plan of where it is generally headed and preparing itself for evolving new multilateralism, regionalism and bilateralism. A number of areas may be identified which will change the prospects of ASEAN economic integration. First, how does ASEAN bolt together the chaotic spate of free trade agreements which have been partly due to the

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disenchantment with the multilateral World Trade Organization, and partly spurred by political economy and security issues in the new regionalism. Individual ASEAN members, especially Singapore, and ASEAN as a group, have all been involved in free trade agreements. In theory, if they are consistent with the principles of the World Trade Organization, these FTAs involving regional and even cross-regional alliances could be building blocks to add on to the World Trade Organization, that is, be complementary and supplementary to what cannot be achieved at the multilateral level. The numbers have increased to make consensus at multilateral trade liberalization difficult, not helped when a north-south divide has occurred with more developing members. Second, ASEAN remains a developing country group for all intents and purposes with interests primarily in traditional trade liberalization in the agriculture and manufacture sectors. Singapore may be an exception. It can lead in matters related to trade in services, beginning with ASEAN’s own Framework Agreement on Services and at the level of the General Agreement on Trade in Services. This includes new areas entering trade in services such as the information communication technology revolution that characterizes the new knowledge-based economy. ASEAN must profile itself in all matters old and new, especially those evolving from trade liberalization. Research and development studies must be taken seriously to make ASEAN’s role relevant and robust. Third is the concern with political and security issues. Without political stability, economic growth and prosperity in ASEAN may be jeopardized. While ASEAN has generally remained non-aligned with ASEAN’s Treaty of Amity and Co-operation (TAC) and the Zone of Peace, Friendship and Neutrality (ZOPFAN) to preserve political stability and security, it may have to rethink hard on a more responsible role in these areas. Myanmar remains a test case in ASEAN and gentle persuasion is not working. Yet ASEAN has

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no precedence of trade sanctions, embargoes or in the worst case scenario, ejecting a member. How it handles such situations and political, democratic and even human rights issues would go a long way for its continued credibility and reputation. Fourth, in terms of its own progress towards the ASEAN Economic Community by 2020 as a single market (as recommended by the McKinsey group in a study commissioned by the ASEAN Secretariat), it has to be credible as well. It has to consider new areas and be more creative and innovative in completing a single market. Going beyond the 15 major commodity groups for zero-duty, non-tariff barriers will prove a challenge. New non-tariff barriers in the form of better trade facilitation is in the area of customs and elimination of technical barriers. Trade facilitation which takes goods from ports to consumers’ doorsteps means lowering business costs. For a start, this has been directed at simplification and harmonization of customs procedures. Specifically, harmonizing tariff nomenclatures and accelerated implementation of the World Trade Organization valuation agreement, have to be pushed. A lot of work remains to be done. With an ASEAN harmonized tariff nomenclature, ASEAN is seeking to develop product-specific mutual recognition arrangements in conformity assessment. This is to ensure that product-related standards and regulations do not become technical barriers. ASEAN has agreed to align national standards with the international, like International Standard Organisation (ISO), International Electrotechnical Commission (IEC) and International Telecommunications Union (ITU) for 20 priority groups. Not only has ASEAN to catch up with everchanging information communication technology, it will have to pay attention to what is deemed as deep integration, i.e., beyond trade liberalization into areas involving human resources and labour standards, the environment, intellectual property rights

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and competition policy. These are not straightforward areas and developing countries in ASEAN will face a further divide, both in “hardware” and “software” issues. Finally, all this implies that the ASEAN Secretariat needs a more professional and robust team to undertake all that the ASEAN Economic Community is promising to deliver by 2020. Statistical resources have to be beefed up. More economic indicators have been developed since the Asian crisis to improve surveillance and provide an early warning system. By the same token, more data for in-depth sectoral and country research and studies is the only way to ensure timely and professional inputs for policy-makers. Better co-operation with both the ASEAN private sector, including academic and research institutes across the region, as well as industry stalwarts and chambers of commerce is needed. Similar co-operation with other regional bodies as in the Asian Development Bank or the Organisation for Economic Cooperation and Development (OECD) to provide role models, benchmarks and best practices would be vital to jumpstart the ASEAN Secretariat. Leadership and vision are crucial to all the areas and issues identified in this book. Unfortunately these are in short supply. Either individual ASEAN economies are beset with restructuring and transformation of their own which have occupied the time and minds of their leaders, or even if there are a few enlightened ASEAN leaders, the mood seems to be missing. There are many distractions with the new regionalism and other groupings in East Asia. ASEAN Plus Three, in particular, could be ASEAN’s biggest challenge. ASEAN must rise to the occasion as a more or less equal partner to the potential leadership of China and Japan. However, realistically speaking, an ASEAN Plus Three structure has the economies of scale in both economics and politics, and ASEAN should claim its rightful place and use the momentum to regain its own trajectory.

Selected References

Selected References ASEAN Secretariat. ASEAN Economic Co-operation Transition and Transformation. Singapore: Institute of Southeast Asian Studies, 1997. Sakakibara, Eisuke and Sharon Yamakawa. “Regional Integration in East Asia: Challenges and Opportunities”. Paper for the East Asia Project, Washington, D.C., World Bank, 2002. Sheng Lijun. “China-ASEAN Free Trade Area: Origins, Developments and Strategic Motivations”. ISEAS Working Paper on International Politics and Security Issues no. 1. Singapore: Institute of Southeast Asian Studies, 2003. Sreekumar-Siddique. “FEALAC Trans-Pacific Trade and Investment: Overcoming Obstacles and Impediments”. An independent study submitted to Ministry of Foreign Affairs, Singapore, October 2002. Yusuf, Shahid, ed. Innovative East Asia: The Future of Growth. Washington, D.C.: World Bank and Oxford University Press, 2003.

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