ASEAN Enlargement: Impacts & Implications 9789812306036

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HSEHn Enlargement

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute's research programmes are Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). The Institute is governed by a twenty-one-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. An Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer.

RSERn Enlargement Impacts and Implications

Edited by ffiya Than and Carolyn L. Gates

I5EA5 Institute of Southeast Asian Studies Singapore

First published in Singapore in 2001 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614

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

© 2001 Institute of Southeast Asian Studies, Singapore.

The responsibility for facts and opinions in this publication rests exclusively with the editors and contributors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. ISEAS Library Cataloguing-in-Publication Data ASEAN enlargement : impacts and implications I edited by Mya Than and Carolyn Gates. Papers originally presented at the ASEAN Transitional Economies Roundtable, Singapore, 20-21 November 1997. 1. ASEAN countries-Economic integration-Congresses. 2. ASEAN countries-Foreign relations-Congresses. 3. Investments, Foreign-ASEAN countries-Congresses. 4. Free trade--ASEAN countries-Congresses. 5. ASEAN countries-Foreign economic relations-Indochina-Congresses. 6. Indochina-Foreign economic relations-ASEAN countries-Congresses. 7. ASEAN countries-Foreign economic relations-Burma-Congresses. 8. Burma-Foreign economic relations-ASEAN countries-Congresses. I. Mya Than. II. Gates, Carolyn L. III. ASEAN Transitional Economies Roundtable (1997: Singapore) HC441 A847 2001 sls2000038662 ISBN 981-230-081-3

Typeset by International Typesetters Pte. Ltd. Printed in Singapore by Seng Lee Press Pte Ltd.

Contents List of Tables List of Figures Acknowledgements Contributors Glossary

vii X

xi xii X ttl

1.

ASEAN Enlargement: An Introductory Overview Carolyn L. Gates and Mya Than

1

2.

ASEAN's Enlargement: Political, Security, and Institutional Perspectives Dewi Fortuna Anwar

26

3.

Impact and Implications of ASEAN Enlargement on Trade Nattapong Thongpakde

45

4.

ASEAN Enlargement and Foreign Direct Investment Nick]. Freeman

80

5.

European Union Enlargement: Lessons for ASEAN Rolf]. Langhammer

102

6.

The Greater Mekong Subregion: Co-operation in Infrastructure and Finance Mya Than and George Abonyi

128

7.

Cambodia's Accession to AFTA: Impact, Challenges, and Policy Implications Toshiyasu Kato

164

8.

Implications of Joining ASEAN/AFTA for Cambodia YouAy

200

9.

Economic Effects of Joining AFTA: The Case of the Lao PDR Emiko Fukase and Will Martin

213

Contents

vi

10.

ASEAN Enlargement and Myanmar Tin Maung Maung Than and Mya Than

249

11.

ASEAN Enlargement: Economic and Financial Implications for Myanmar Khin Ohn Thant

262

12.

Vietnam's Integration into AFTA: Theoretical and Empirical Perspectives Carolyn L. Gates

283

13.

The ASEAN Economic Model and Vietnam's Economic Transformation: Adjustment, Adaptation, and Convergence Carolyn L. Gates

322

Index

362

~ist of Tables 1.1 1.2 1.3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 5.1 5.2 5.3

3 Southeast Asia: Economic and Social Indicators 12 ASEAN-9 1998 CEPT Package 13 Initial CEPT Packages for Tariff Reduction: Vietnam, Laos, and Myanmar 47 ASEAN-10: Key Economic Indicators 48 ASEAN-10: Sectoral Share of GDP, 1995 49 Social Development Indicators 51 lntra-ASEAN Trade Major Trading Partners of ASEAN's New Members: Exports 52 Major Trading Partners of ASEAN's New Members: Imports 53 54 Principal Exports of Selected ASEAN Countries ASEAN-10: Export Products with a Revealed Comparative 56 Advantage Index Greater than 1, 1990-95 ASEAN's Stock of Inward Foreign Direct Investment, 82 1980-97 Cambodia's FDI Stock, by Country (as at November 1997) 84 Cambodia's FDI Inflows, 1994-97 84 Laos' FDI Stock, by Country (as at August 1997} 85 Laos' FDI Inflows, 1994-97 85 86 Laos' FDI Stock, by Sector (as at November 1997) Myanmar's FDI Stock, by Country (as at September 1997) 87 Myanmar's FDI Inflows, 1989-97 87 Myanmar's FDI Stock, by Sector (as at November 1997) 88 ASEAN's FDI Profile in the "Greater Mekong" Subregion 88 ASEAN Countries in Vietnam's FDI Rankings, 1994-97 96 ASEAN's FDI in Vietnam, as a Percentage of Total FDI 96 Stock, 1994-97 Vietnam's FDI Stock, by Country (as at November 1997} 97 Vietnam's FDI Inflows, 1988-97 97 Vietnam's FDI Stock, by Sector (as at November 1997) 99 Natural Resource Expansion resulting from EU and 105 ASEAN Enlargement, 1994-95 Human and Physical Resource Endowment and Standards 107 of Living Differentials in Europe and ASEAN Enlarged Tariff Reduction and Post-Uruguay Round Most-Favoured- 114 Nation Tariffs for the EU, ASEAN, and their Applicants

viii

6.1 6.2 6.3 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 7.14 7.15 7.16 8.1 8.2 8.3 9.1 9.2 9.3 9.4 9.5 11.1 11.2 11.3 11.4 11.5 11.6 12.1

List of Tables

Greater Mekong Subregion: Selected Social and Economic Indicators, 1996 Infrastructure Basic Energy Data Cambodia: Basic Macroeconomic Indicators Cambodia's Trade Patterns by Industry, 1995 and 1996 Cambodia's Trade Patterns by Country and Region, 1995 and 1996 Foreign Investment Projects Approved in Cambodia Skills-Land Ratio in Cambodia and Selected ASEAN Countries Revealed Comparative Advantage(RCA) of Exports Index: Cambodia and ASEAN Countries Inclusion List for CEPT/AFTA Cambodia: Structure of National Revenue, 1994-97 Share of Tariff Revenue for Major Commodities, 1995-97 Yields of Major Crops in Cambodia and ASEAN Countries, 1994/95 Intensity of Agricultural Input Utilization in Cambodia and ASEAN Countries, 1994/95 Distribution of Income, or Consumption in Cambodia and ASEAN Education Indicators in Cambodia and ASEAN Status of Health: Cambodia and ASEAN Investment Projects in Cambodia, 1994-98 Current Expenditure by Ministry Structure of Tax Revenue, 1995 Productivity for Natural Rubber, 1990 Yield of Natural Rubber in Cambodia The ASEAN-9 CEPT Package, 1998 Weighted Average MFN Tariff Rates for the ASEAN Countries Model Equations Variables and Parameters Key Results of Lao PDR Liberalization Foreign Direct Investment Inflow, 30 September 1997 Union of Myanmar: Distribution of Tariff Lines ASEAN CEPT Product Lines Myanmar CEPT Product Lists Exports of Myanmar by Country Imports of Myanmar by Country Commodity Composition of Vietnamese Exports, 1996

134 140 141 167 168 169 171 173 174 177 179 180 183 184 186 187 188 190 194 206 208 208 215 216 224 227 232 266 271 272 273 275 278 285

List of Tables

12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.10 12.11 12.12 12.13 12.14 12.15 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 13.10 13.11 13.12

Commodity Composition of Vietnamese Imports, 1996 Trade Intensity Index for Vietnam, ASEAN, and Selected Partners, 1990-94 Socio-economic Indicators, ASEAN-7 Vietnam-ASEAN Trade, 1990-96 Average Growth of Vietnam-ASEAN and Vietnam-World Trade, 1984-96 Vietnam's Product and Tariff Lines in the CEPT, 1996 Package Features of Vietnam's Trade and Tariff System, 1996 ASEAN-7 CEPT Tariff Packages (Lines and Average Tariff Rates), 1996 Projected Tariff Rates The ASEAN-9 CEPT Package, 1998 Effective Rates of Protection in Selected Vietnamese Industries, Before and After Liberalization Simple Revealed Comparative Advantages of Vietnam and its ASEAN-5 Bilateral Partners, 1995 Import-Export Duties as a Share of Tax and Government Revenues Import Revenues and Value Vietnam's Imports from ASEAN by CEPT Lists, 1996 Key Macroeconomic Data of Vietnam and the ASEAN-5 ASEAN-5: Savings-Investment and Resource Gap, 1975-95 ASEAN-5: Annual Average Change in Consumer Prices, 1981-97 Trade and Current Account Balances of the ASEAN-5, 1975-95 ASEAN-5:Foreign Direct Investment-Gross Domestic Investment Ratio, 1965-90 ASEAN-5: Human Resource Development Indicators, 1975-95 ASEAN-5: Shift of Sectoral Distribution of GDP, 1970-95 ASEAN-5: Human Development Index, 1970-94 Vietnam's "Big Bang": Adjustment of the Dual Price System, 1988-89 Vietnam's Foreign Direct Investment, 1988-95 Education and Human Development Index Indicators, Vietnam and ASEAN-5 Human Development Index, Vietnam and ASEAN-5, 1994

IX

286 289 289 292 293 294 296 298 299 306 311 315 315 315 327 331 332 333 334 336 339 339 343 347 355 355

~ist of Figures 6.1 7.1 8.1 9.1 9.2 9.3 12.1 12.2 13.1 13.2 13.3 13.4

Geopolitics and GMS Development Determinants of Comparative Advantage Tax Revenue by Sources Market for Goods Imported from ASEAN Market for Exports from the Lao PDR to ASEAN Market for Exports from the Lao PDR to its ASEAN Partners Vietnam's Imports and Exports, 1985-97 Change in ASEAN-U.S. Dollar Exchange Rates, June 1997 Budget Deficit-GOP Ratio: Vietnam, 1985-95 Change of Money and Prices: Vietnam, 1985-95 Vietnam's Trade, 1985-97 Savings-Investment Ratios in Vietnam, 1987-97

131 172 210 219 220 221 302 305 344 345 348 353

Acknowledgements The editors would like to express their sincere appreciation to all the contributors for their patience and dose co-operation in the publication of this volume. They are also grateful to the Konrad Adenauer Stiftung (KAS), Germany, for its generous financial support for the ASEAN Transitional Economies Roundtable 1997, on "ASEAN Enlargement: Impacts and Implications", from which this book has emanated.

Contributors Dr George ABONYI is Senior Advisor at the Asian Development Bank, Bangkok, Thailand. Dr Dewi Fortuna ANWAR is Head of the Regional and International Affairs Division, Centre for Political and Regional Studies, Indonesian Institute of Sciences, Indonesia. Dr Nick J. FREEMAN is a Fellow at the Institute of Southeast Asian Studies, Singapore. Dr Emiko FUKASE is a Consultant at the World Bank, Washington D.C. Dr Carolyn L. GATES is Senior Economist at the Foundation for Indochina Studies, Faculty of Economics and Econometrics, University of Amsterdam. Dr Toshiyasu KATO is a Research Fellow at the Cambodia Development Resource Institute. Cambodia. Dr KHIN Ohn Thant is Advisor to the National AFTA Unit, Ministry of National Planning and Economic Development, Myanmar. Professor Rolf J. LANGHAMMER is Head of Department, The Kiel Institute of World Economics, Germany. Dr Will MARTIN is with the World Bank, Washington, D.C. Dr MYA Than is a Senior Fellow at the Institute of Southeast Asian Studies, Singapore. Dr Nattapong THONGPAKDE is Research Director of International Economic Relations at the Thailand Development Research Institute, Bangkok. Dr TIN Maung Maung Than is a Fellow at the Institute of Southeast Asian Studies, Singapore. Mrs YOU Ay is Secretary of State at the Ministry of Women's Affairs and Veterans, Phnom Penh, Vietnam.

Glossarq AAA ADB AEMM AEMM AFTA AlA AICO AMM APEC ARF ASEAN ASEM BOT CAP CEEC CEFTA CEPT CES CET CIB CGE CIGE CLM CLMV CMEA DSM ECU EEA ERP EU EV FCDI FDI FEC FIL

Association of Association Agreements Asian Development Bank ASEAN Economic Ministers' Meeting ASEAN-EU Foreign Ministers Meeting ASEAN Free Trade Area ASEAN Investment Area ASEAN Industrial Co-operation (scheme) ASEAN Ministerial Meeting Asia-Pacific Economic Co-operation ASEAN Regional Forum Association of Southeast Asian Studies Asia-Europe Meeting build -operate-transfer Common Agriculture Policy Central and East European Countries Central European Free Trade Area Common Effective Preferential Tariff Constant Elasticity of Substitution Constant Elasticity of Transformation Cambodia Investment Board computable general equilibrium computable inter-temporal general equilibrium (model) Cambodia, Laos, and Myanmar Cambodia, Laos, Myanmar, and Vietnam Council for Mutual Economic Assistance dispute settlement mechanism European Currency Unit European Economic Area effective rates of protection European Union equivalent variation Forum for the Comprehensive Development of Indochina foreign direct investment Foreign Exchange Certificates Foreign Investment Law

XIV

FTA GATS GATT GDP GEL GMS GSP GT HPA HS ICN IDRC IPP JCC JSBs

KKN

MBDP MCIL MFN MIC MITI MOU MRC NAFTA NCGUB NGOs NIEs NLD NTR NTB ODA PECC PRC QRs RCA RCAX RTA SBV SEANWFZ SEOM SITC SL

Glossary

free trade area General Agreement on Trade in Services General Agreement on Tariffs and Trade gross domestic product General Exception List Greater Mekong Subregion Generalized System of Preferences Growth Triangle Hanoi Plan of Action Harmonized System Internal Co-ordination Network International Development and Research Centre independent power producer (programme) Joint Co-operation Council (ASEAN-EU) joint-stock banks corruption, collusion and nepotism Mekong Basin Development Plan Myanmar Citizens Investment Law most-favoured-nation Myanmar Investment Commission Ministry of Trade and Industry Gapan) memorandum of understanding Mekong River Commission North American Free Trade Agreement National Coalition Government of the Union of Burma non-governmental organizations newly industrializing economies National League for Democracy nominal tariff rates non-tariff barriers official development assistance Pacific Economic Co-operation Conference People's Republic of China quantitative restrictions revealed comparative advantage revealed comparative advantage for exports regional trade area State Bank of Vietnam Southeast Asia Nuclear Weapons Free Zone Senior Economic Officials Meeting (ASEAN) Standard International Trade Classification Sensitive List

Glossary

SLOCs SLORC SPDC TAC TEL TPRM UAPs UMCCI UNCTAD VAT

wco

WTO ZOPFAN

XV

sea lanes of communications State Law and Order Restoration Council State Peace and Development Council Treaty of Amity and Co-operation Temporary Exclusion List Trade Policy Review Mechanism unprocessed agricultural products Union of Myanmar Chamber of Commerce and Industry United Nations Conference on Trade and Development value-added tax World Customs Organization World Trade Organization Zone of Peace, Freedom and Neutrality

RSERN Enlargement: Rn lntroductorq Overview

1

CAROLYN L. GATES and MYA THAN

Initiating the long-awaited ASEAN enlargement process, Vietnam became the first of the four remaining mainland Southeast Asian countries to enter the Association of Southeast Asian Nations (ASEAN) in July 1995. Two years later, ASEAN admitted the Lao People's Democratic Republic (Lao PDR or Laos) and Myanmar as full members of the regional organization. At that time, it postponed the entry of Cambodia because of contested changes in its government - notably, the ouster of First Prime Minister Prince Norodom Ranariddh by Second Prime Minister Hun Sen - and the outbreak of factional violence as a result. After the restoration of a legal government and a semblance of political stability, Cambodia was admitted to the organization on 30 April 1999. ASEAN's historic decision to incorporate the new members was a paradigm shift in Southeast Asian affairs, although the door to membership had been (at least nominally) open for all countries in Southeast Asia from ASEAN's inception. Indeed, during the period before the end of the Indochina War in 1975, Cambodia, Laos, and South Vietnam had attended some ASEAN Ministerial Meetings (AMM) as observers. More recently, ASEAN's enlargement was endorsed by the heads of state of the ASEAN countries in the Bangkok Declaration of 1995: "ASEAN shall work towards the speedy realization of an ASEAN comprising all Southeast Asian countries as it enters the 21" century." Because the new members have very different systems and levels of economic, political and institutional development than the ASEAN-6

2

Carolyn L. Gates and Mya Than

{Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand), their integration into ASEAN may have significant political and economic impacts and implications for both sides. The political implications of an enlarged ASEAN involve regional stability and security concerns as well as international relations. As members of the ASEAN Regional Forum (ARF), the new members are expected to play a positive role in regional and international political and security affairs. At the outset, the most important economic shift for the new members is their accession to the ASEAN Free Trade Area (AFTA). Soon after the new members joined ASEAN, they became subject to the Common Effective Preferential Tariff (CEPT) scheme, the key instrument to pace and sequence tariff reductions to achieve AFTA. In addition to the effects of adjusting to AFTA, the new members have experienced external shocks from the East Asian financial and economic crisis. At the time that Laos and Myanmar were accepted as new ASEAN members, the currency crisis had just struck Thailand and was about to spread to Indonesia and beyond. Contagion and its effects, which have touched all ASEAN members to one extent or another, were transmitted to the new members primarily through the extensive trade and investment links they have forged with the ASEAN-6 economies. The ASEAN-6 has clearly recognized the potential strategic advantages and political and economic benefits of expanding the organization to the whole of Southeast Asia. Thus, an enlarged ASEAN can increase its diplomatic and economic weight in the international community. Secondly, it is likely to beef up ASEAN's strategic credibility, enabling it to address regional issues more effectively. Thirdly, ASEAN's market size will increase by 38 per cent (in terms of population) with the entry of the four new members, which can expand regional economies of scale. Fourthly, the regional division of labour is likely to intensify, which may stimulate greater productive specialization and efficiency, potentially reduce inflation pressures, and affect Southeast Asian migration patterns. While the ASEAN-6 keenly appreciates the advantages of broadening the organization, it also fears the development of a dual-track system that could breed greater divisions and ignite latent animosities between the "haves" -the richer, more developed and older members of ASEANand the "have nots", the newer members. With the emergence of the East Asian crisis from the second half of 1997, this previously simple equation has become complicated, as the growth path and political evolution of some of the older ASEAN members have been interrupted; and some like Indonesia and perhaps Malaysia are experiencing discontinuous change. Nevertheless, on the whole, the ASEAN-6 remains far ahead of the newer members in terms of economic development (gross domestic product per capita and general living standards), institutional development, technologies, integration in global trade and capital markets, among other things (see Table 1.1).

3

ASEAN Enlargement: An Introductory Overview

TABLE 1.1 Southeast Asia: Economic and Social Indicators

Population Area ('000 (million) sq km) 1995

Year Brunei indonesia Malaysia Philippines Singapore Thailand Cambodia Laos Myanmar Vietnam

0.28 195.3 20.1 70.3 3.0 59.4 10.2 4.7 44.7 74.0

Rural GNP Population Adult Life US$ in provertyb Literacy Expectancy" Million (yrs) 1980-91 rate' 1994 27 22 54 0 34

1905 330 300 1 513 181 237 677 332

82.9 82.2 94.2 90.3 93.6 35.0 54.6 82.4 92.5

85 40 60

63.0 70.9 66.5 74.9 69.2 51.9 51.3 57.9 65.5

n.a. 167,630 68,670 63,310 65,840 129,860 2,360 1,500 n.a. 13,780

GNP per Capita (US$) 1994

GDP Growth Rates Average 90-95

14,420 880 3,520 960 23,360 2,210 240 320 n.a. 190

n.a. 8.0 8.8 2.4 8.6 8.9 5.2 6.3 5.9 7.7

TABLE 1.1 (continued)

GDP Sector Shares

Inflation Rate Average 90-95

Exports US$ M 1995

Trade External Exports Imports Debt 1994 Growth US$ M GNP Degree Rate 1995 Ratio (1985-95) of 1994 Opennessc

2.4 8.7 3.8 11.1 2.7 5.0 92.2 15.3 21.5 31.3

3,367 44,700 74,045 17,316 118,265 55,375 856 347 846 5,220

1,362 44,576 79,853 28,192 124,507 68,554 1,188 587 1,272 7,125

Agriculture Industry Services 1995 199S 1995

Year Brunei Indonesia Malaysia Philippines Singapore Thailand Cambodia Laos Myanmar Vietnam

0.9 17.2 21.0 21.7 0.2 10.9 45.5 55.9 62.1 27.5

47.9 41.5 39.8 32.1 35.5 39.8 17.4 18.7 9.9 29.1

51.2 41.3 39.2 46.3 64.3 49.2 38.4 25.4 28.0 43.4

n.a. 57.4 36.9 59.3 11.9 43.1 83.5 135.6 n.a. 161.3

n.a. 0.39 1.71 0.56 2.88 0.68 0.55 0.62 0.04 0.87

-3.3 9.4 380 14.1

418 695 59.3 35.6 14.9 32.0

1993 data ESCAP Secretariat, January 1997 'Exports + lmports)/GDP

NOTES: '

h

SouRcEs: ADB, Key Indicators of Developing Asian and Pacific Countries, 1996; and World Bank, Social

Indicators of Development, 1996.

4

Carolyn L. Gates and Mya Than

The two groups are also divided by geography - between mainland Indochina and Myanmar and archipelago Southeast Asia (excluding Thailand) - history, and politicaVeconomic systems, which had led to hostilities in the recent past. The rise of a dichotomized ASEAN would affect its ability to work as an organization and to move towards its shifting objectives. It would also further erode its international credibility, particularly after the organization's ineffective handling of high-profile regional problems in the 1990s, such as the persistent cross-border "haze" outbreaks caused by fires in Indonesia, financial and economic crises, and its response to the challenges posed by Myanmar's and Cambodia's membership. The main concern of the older members about enlargement can be distilled into one fundamental question: Can an ASEAN-10 continue to function with a high (if not the same) degree of cohesion and trust built up among its original members in order to achieve its organizational objectives? Implicitly, the ASEAN-6 fear the evolution of a two-tier or dualtrack system, which would have negative consequences for the organization as a whole and for the realization of the objectives of individual members. To reduce the probability of such a development, the older members have recognized that they must help the new members to accelerate the processes of growth and structural change, and to move from a central management to a market system as quickly as possible. Consequently, initiatives have been taken by the organization and its older members to establish training and assistance programmes to integrate Cambodia, Laos, Myanmar, and Vietnam (CLMV) into ASEAN and to catalyse institutional change in and improve domestic conditions of the CLMV. However, the current crisis has taken its toll on the commitment of the ASEAN-6 to the newer members. To place in context some of the challenges and opportunities of ASEAN's ongoing integration and enlargement process, we will first discuss relevant aspects of the organization's thirty-year evolution and then look at the potential repercussions of injecting new members. ASEAN'S ORGANIZATIONAL EVOLUTION Regional Co-operation and Cohesion: Political and Security Issues A movement towards co-operation has taken place among the original ASEAN members over the last three decades, as the five, then six countries (Brunei since 1984) learned to work with one another and overcomeor effectively suppress - historical, political, economic, and social rivalries and differences. While ASEAN eschewed institution-building, it did develop its own style of dialogue, consultation and consensus-forging; a code of

ASEAN Enlargement: An Introductory Overview

5

personal behaviour that can be interpreted as either congeniality or Janusfaced comportment; and organizational conduct known more for talk than action. With ASEAN's largest member, Indonesia, implicitly accepting not to dominate the organization from its inception, ASEAN was able to develop into an organization of "unity in diversity" among its Southeast Asian members, and equality among an elite group of heads of states and foreign ministers. In the first twenty years of ASEAN's existence, during the height of the Cold War, rigorous demands of regional political and security cooperation developed within the ASEAN framework, in its opposition to "international communism" of regional players such as China, Vietnam, Cambodia, Laos, and proxies in their own countries. A third leg of cooperation involved ASEAN economic collaboration, which did not keep pace with the first two. This imbalance persisted, even though ASEAN specifically linked political security with economic stability and development. Throughout the 1970s and 1980s, ASEAN introduced an impressive array of initiatives to expand intra-regional economic cooperation in the highly-championed areas of trade expansion, co-operation on basic commodities, industrial and technological development, resource management, and infrastructure development. On the whole, however, their advancement was slow, partly because the approaches were inappropriate and partly because ASEAN did not have the capacity to deal with myriad concerns at the same time. Compared with ASEAN's political and security achievements, economic co-operation played a relatively small role in the organization's first two decades of existence. It was only in the early 1990s- after the signing of the Paris Peace Accords ending the Cambodian conflict, and the demise of the Cold War - that ASEAN made significant headway in reshaping its identity into its long-held but nominal goal of a regional economic grouping, thereby expanding beyond its de facto security and political raison d'etre. With a fundamental shift in the international strategic arena and greatly improved prospects for the region, a more confident ASEAN broadened its world-view. Despite its weak responses to Southeast Asian environmental problems (for instance, the so-called "haze" problem) and, more revealingly, the East Asian financial and economic crisis, ASEAN has reacted more vigorously to a new set of international demands of the 1990s: globalization, trade liberalization, and regionalism. For example, it has played high-profile roles in the Pacific Economic Co-operation Conference (PECC) and the Asia-Pacific Economic Co-operation (APEC). ASEAN's new-found confidence to broaden its reach has also been demonstrated by its members' participation in the birth and shaping of the World Trade Organization (WTO).

6

Carolyn L. Gates and Mya Than

Since the end of the Cold War, ASEAN has struggled to re-invent itself. It became apparent that under its old formula, the organization (and its regional niche) held little rele:~nce to t~~ ?o~t-Cold War world order. Among the most important dectswns and mltlattves that ASEAN has taken to restructure itself has been a shift towards economic issues and a movement towards including all of Southeast Asia in ASEAN. Both of these initiatives involve AFTA to some extent: AFTA is the most important and potent economic institution that ASEAN has ever introduced, and the association's enlargement process potentially has the largest economic impact on and implications for AFTA. Post Cold-War Redefinition of ASEAN: Economic Co-operation and the Establishment of AFTA In 1992, ASEAN formally initiated the ASEAN Free Trade Area. ASEAN had discussed the establishment of a free trade area for many years, but it became increasingly urgent as member states strove to make their economies globally competitive and as the organization began to redefine itself. At the outset, AFTA was to be realized within fifteen years from 1 January 1993. The main instrument to reduce tariffs imposed by members on all manufactured and processed agricultural products to 0 to 5 per cent by 2008 was the Common Effective Preferential Tariff. As such, the CEPT largely determines the pace (through normal and fast-track reduction of tariffs) and scope of trade liberalization within the group; and it provides for a phased reduction of tariffs. The CEPT consists of four lists. First is the Inclusion List (IL), which is composed of goods that are subject to immediate tariff reduction so as to fulfil the 0 to 5 per cent tariff target by the specified target date. Second is the Temporary Exclusion List (TEL) which permits a temporary exclusion of specified goods from tariff reduction, but they are to be transferred to the IL in stages, in five annual (and equal) instalments between January 1996 and January 2000, and reduced to the 0 to 5 per cent target range in the accelerated package by 2000. Third is the Sensitive List (SL) which is composed mainly of unprocessed agricultural products that are to be phased into the IL between 2001-2003 and reduced to the 0 to 5 per cent target range by 2010. Fourth is the General Exception List (GEL), which is consistent with World Trade Organization regulations (under Article XX of the General Agreement on Tariffs and Trade [GATT]). It permanently excludes from tariff reduction those goods that are of concern for national security, protection of public morals, health, human, animal and plant life, and protection of art, culture, environment, historical and archaeological heritage.

ASEAN Enlargement: An Introductory Overview

7

Concessions within the CEPT are awarded on a reciprocal productby-product basis. A product must fulfil three basic conditions to be eligible for CEPT concessions: it must be included in the IL of both importing and exporting countries; it must have an internal tariff of 20 per cent or below to receive all concessions (if it is above 20 per cent, then it is eligible for concessions only in member countries that also impose a CEPT rate above 20 per cent); and it must satisfy the local content requirement of 40 per cent. These rules provide incentives for member countries to include goods in the IL and to reduce tariffs to below 20 per cent. In addition to mandating tariff reduction, the CEPT requires that ASEAN members eliminate quantitative restrictions on products at the moment it receives CEPT concessions and abolish other non-tariff barriers (NTBs) within five years of acquiring the concessions. ASEAN has agreed upon a working definition of NTBs based on the UNCTAD (United Nations Conference on Trade and Development) classification: measures concerning price controls, finance, monopoly, para-tariff and technical features. At the 26th ASEAN Economic Ministers Meeting (AEMM) in September 1994, the trade deregulation process was accelerated by five years, whereby a new target deadline for the realization of the free trade area was set at 2003. In addition, the AEM agreed to expand CEPT coverage by including all unprocessed agricultural products in the scheme. Under the revised fast track, for goods with import tariffs of more than 20 per cent, the tariff was scheduled to be reduced to 0 to 5 per cent by 1 January 1998, and under the revised normal track, to 20 per cent by 1 January 2000. Similarly, for items with tariffs of less than 20 per cent, under the revised fast track, the tariff was scheduled to be reduced to 0 to 5 per cent by 1 January 1998, and under the revised normal track, to 0 to 5 per cent by 1 January 2000. In December 1998, at the Sixth ASEAN Summit, measures to accelerate the CEPT process were pledged by the ASEAN leaders: "Statement on Bold Measures" (Hanoi, 16 December 1998), and the Hanoi Plan of Action (HPA). If these two are implemented- ASEAN member country pledges are voluntary, not binding - CEPT trade liberalization should be accelerated and deepened by 2000, as indicated by the leaders' statement. To accelerate the ASEAN Free Trade Area, the Leaders agreed that the six original signatories to the Common Effective Preferential Tariff Scheme for the ASEAN Free Trade Area - Brunei, Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand - would advance the implementation of AFTA by one year from 2003 to 2002. They also agreed to achieve a minimum of 90 per cent of their total tariff lines with tariffs of 0 to 5 per cent by the year 2000, which would account for 90 per cent of intra-ASEAN trade.

8

Carolyn L. Gates and Mya Than . ·d ua 11 y, eac h cou ntry would commit to achieve a minimum of 85 per In d IVI . · n L1"st with tanffs of 0 to. 5. per cent by the year 2000. cent o f t h e Inc1us1 0 Thereafter, this would be increased to a mm1mum of 90 per cent of the Inclusion List in the 0 to 5 per cent tariff range by the year 2001. By 20~2, 100 per cent in the Inclusion List would have tanffs of 0 to 5 per cent With some flexibility. Member countries also agreed to deepen, as soon as possible, tariff reduction to o per cent and accelerate the transfer of products, which are currently not included in the tariff reduction scheme, into the Inclusion List. The new members of ASEAN shall maximize their tariff lines between 0-5 per cent by 2003 for Vietnam and 2005 for Laos and Myanmar, and expand the number of tariff lines in the 0 per cent category by 2006 for Vietnam and by 2008 for Laos and Myanmar. (ASEAN Website, 1999; and ASEAN Economic Bulletin 16, no. 1 (1999): 99)

Preferential trade liberalization among the ASEAN members is viewed as a means to encourage regional trade, foreign direct investment (FDI), economic growth and co-operation. But perhaps most importantly, it is seen as a mechanism to increase the competitiveness of ASEAN firms "as a production base for the world market" (Baldwin 1997, p. 2), especially as they face wider trade liberalization under APEC and the WTO. Although there was concern that some ASEAN members that had been affected by the Asian financial crisis since 1997 might seek to slow AFTA tariff reduction and trade deregulation, ASEAN has called for the acceleration of AFTA implementation and the liberalization of financial and other services through the HPA.

ENLARGING AND BROADENING ASEAN As ASEAN began to redefine itself in the post-Cold War 1990s, it moved towards its original goal of including all ten Southeast Asian countries in the organization. The task of broadening the organization was accompanied by a number of political and economic consequences and implications to all involved. In this overview, we will first address the political impact and implications of ASEAN enlargement from the perspectives of both the ASEAN-6 and the CLMV. Secondly, we will examine the challenging issue of integrating ASEAN's new members into AFTA. Despite ASEAN's efforts to improve its investment climate by providing foreign investors additional incentives (see ASEAN Economic Bulletin 16, no. 1 [1999]: 106-9) and by launching or expanding the ASEAN Investment Area (AlA), and the ASEAN Industrial Co-operation

ASEAN Enlargement: An Introductory Overview

9

(AICO) scheme (see ASEAN Website, 1999), among other things, AFTA has in fact evolved into the key economic institution of ASEAN. Moreover, AFTA is likely to have the biggest economic impact on the four new members and the enlargement process in general. Politics and Enlargement: The ASEAN-6 Perspective In the international political arena, there are two main areas that are or may be challenged by ASEAN enlargement: first, the ARF, a multilateral security dialogue composed of ASEAN and other Asia-Pacific countries; and second, the attitudes of ASEAN's Dialogue Partners towards the new members. The entry of the four new members into ASEAN has not yet brought significant change to the first of these, the ARF organization. The integration of the new members into the ARF has been ad hoc and incremental, and all four joined before they were formally admitted to ASEAN: Vietnam and Laos in May 1993; Cambodia in August 1995; and Myanmar in July 1996. ASEAN has sought to use enlargement to address its own inherent problems within the ARE Thus, within the post-Cold War strategic context, the enlargement may strengthen ASEAN, which has not been able to manage its own regional security order. Secondly, the enlargement helps to finesse the questionable notion that ASEAN comprises a significant and separate security challenge within East Asia, or the AsiaPacific, in the post-Cold War era. Similar to ASEAN participation in APEC, it has sought to ensure its weight and role within the ARE But ASEAN went beyond its formula for participation in APEC (by obtaining guarantees of its centrality before agreeing to its formation): it chose enlargement as a key mechanism to reinforce its own identity and uphold its role in the ARE Nevertheless, despite ASEAN's objectives to use an enlarged organization to bolster its position and status in the ARF, it has so far made little if any difference to the structure and functioning of the ARE In the second area, ASEAN's relations with its Dialogue Partners and more generally its international standing, the enlargement process has imposed substantial costs and will continue to have significant implications for ASEAN. There is no doubt that the admission of Myanmar into ASEAN - without ensuring significant progress on its human rights situation and democratization - has reduced ASEAN's reputation in the eyes of its western Dialogue Partners, particularly the European Union (EU) and the United States. Within a few months of its admission to ASEAN, a dispute developed between ASEAN and the EU over Myanmar's participation in formal meetings between the two groupings. In preparatory negotiations for the annual ASEAN-EU Joint Co-operation Council meeting in Bangkok, scheduled for November 1997, the EU insisted that Myanmar's attendance be downgraded to "passive presence", a condition that was

10

Carolyn L. Gates and Mya Than

unacceptable to ASEAN. The impasse led to the postponement of the meeting and a chilling relationship between the two groupings. Throughout 1998 and 1999, Europe maintained such policies towards Myanmar because of a "lack of progress to break the [domestic] political stalemate, the harassment of pro-democracy activists and the poor human rights record in Myanmar". Britain joined Denmark, Sweden, and Norway in refusing to allow Myanmar to attend an ASEAN-EU Foreign Ministers Meeting (AEMM) in Berlin on 30 March 1999. ASEAN responded by stating that "all the foreign ministers of ASEAN must be present" at the AEMM. Subsequently, no compromise was reached and the cancellation of the AEMM was announced by both sides. Despite affirmation that the ASEAN-EU dialogue is extremely important for both groups, it has come up against Myanmar's domestic political problems, as perceived by strong advocates of human rights and democracy in the EU member states. EUASEAN and US-ASEAN relations are unlikely to improve with the passage of time because the United States and the EU have taken more sustainable actions against Myanmar: the United States imposed an embargo on new investments by American companies in Myanmar; and the EU has scrapped GSP (Generalized System of Preferences) benefits for Myanmar's exports to the EU. The enlargement of ASEAN has thus injected a new negative element in its ties with traditional partners, as ASEAN becomes hostage to Myanmar's domestic conditions. For ASEAN, this could not have come at a worse time, faced as it is with the East Asian financial crisis and its need for stronger economic, technological and commercial ties with Europe. On a regional level, the political situation is less complicated by enlargement. Nevertheless, there are political and ideological differences and latent disputes between the older and newer members that could provoke intra-ASEAN tension in the future. Vietnam and Laos are still self-avowed "socialist" countries ruled by single party systems, while Myanmar and Cambodia struggle towards greater democratization and stability. By contrast, the political economies of the ASEAN-6 are capitalist; and most are moving rapidly towards more open democratic systems. Such differences may cause mistrust and tension among the ASEAN-10, particularly as ASEAN is not a rules-based organization, but determines its actions through dialogue and consensus. Beyond ideology and politics, the ASEAN-10 members are divided over territorial disputes, environmental, refugee, and migration issues. Regional disputes and crises have broken out with a vengeance over the past few years, highlighting the institutional weaknesses of ASEAN. Some of these have involved the CLMV; others, the older ASEAN members. ASEAN was unable to deal effectively with the violent coup in Cambodia in July 1997, which caused the organization to delay Cambodia's admission

ASEAN Enlargement: An Introductory Overview

11

to ASEAN at the twelfth hour. It also showed that an enlarged ASEAN could not deal with sensitive issues within its conventional framework of consultation and consensus. This and other concerns led Thailand and the Philippines to press ASEAN to become more pro-active in an area designated as "internal affairs" of member states, but this was roundly rejected by the majority. Furthermore, ASEAN has been mostly an absent player in the East Asian financial and economic crisis that broke out in Thailand in July 1997. This comes on the heels of its failure to address other serious regional problems, most notably environmental pollution and degradation that have affected tourism, economic growth, health and other concerns in the majority of the ASEAN countries since the mid-1990s.

Politics and Integration into ASEAN: The CLMV Perspective One important factor in the decisions of Cambodia, Laos, Myanmar and Vietnam to join ASEAN was their objective to gain greater international political credibility and legitimacy, which in turn, some assert, would promote internal stability and economic development. ASEAN membership can provide the new members a common regional identity and framework to develop and integrate into the region (East Asia Analytical Unit 1997, p. 321). Despite the negative factors discussed above, they can realistically expect better intra-ASEAN political relations, for several reasons. First, improved dispute resolution can be expected between the older and newer members as a result of the ASEAN organizational culture, which places strong emphasis on getting-to-know each other and confidence- and trustbuilding processes at the elite level. Secondly, with expanded cultural and informational exchanges at lower levels, the newer and older members are also likely to show greater tolerance for each other. Thirdly, the integration process is likely to have a positive impact on institutional change in the new member countries. Although the political systems vary significantly among the older ASEAN members, on the whole they are much more developed and open than those of the newer members. Through demonstration effects and quiet ASEAN internal pressure, the political institutions and behaviour of the newer members are likely to converge (albeit slowly) with those of the ASEAN mainstream. Moreover, the East Asian crisis - highlighting the downside of KKN (an acronym for corruption, collusion, and nepotism in Bahasa Indonesia) - has underscored the need for reform in the CLMV. At the international level, the CLMV (particularly Cambodia and Myanmar) also seek to gain greater legitimacy and weight through their association with ASEAN. It can be argued, however, that ASEAN is unlikely to play a major catalyst for that shift. The attitudes of most

Carolyn L. Gates and Mya Than

12

Western countries towards the CLMV will depend more on the extent of domestic reforms, or more specifically, on whether positive steps would be taken towards political pluralism and observance of human rights, as well as greater economic openness. Economic Impact and Implications: Integration of the CLMV into AFTA ASEAN is easing the newer members into the CEPT scheme through accommodation of their needs and permitting them a full decade to complete the tariff reduction process. Hence, the accelerated pace of tariff reduction adopted by ASEAN does not apply to the newer members. Based on their later dates of entry into ASEAN, Vietnam was given a target deadline of 2006 to accede to AFTA; Lao PDR and Myanmar, 2008; and Cambodia, 2010. Thus, the newer members have an additional four to eight years to liberalize trade, compared with the target of 2002 (or earlier) for the older members. Table 1.2 provides data on the 1998 CEPT packages presented by both the older and newer members. Vietnam was the first new member country to submit a package to the CEPT scheme: in 1996, it offered a list containing 857 tariff lines (some

TABLE 1.2 ASEAN-9 1998 CEPT Package (Number of tariff lines)

Brunei Indonesia Malaysia Philippines Singapore Thailand Vietnam Laos Myanmar Sub-total %of Total Tariff Lines

Inclusion*

Temporary Exclusion* *

Sensitive

General Exception

Total

6,060 6,597 8,690 5,099 5,738 9,033 1,497 533 2,356

220 593 406 589

14 23 137 58

74 1,127 2,820 2,987

7 23 96 21

236 45 60 28 120 26 165 102 108

6,530 7,258 9,293 5,744 5,858 9,140 2,812 3,551 5,472

45,603

8,816

379

890

55,688

81.89

15.83

0.68

1.60

100

NOTES: *As of 10 October 1997 **As of 14 October 1997

ASEAN Enlargement: An Introductory Overview

13

40 per cent) out of a total of 2,218 to the Inclusion List (see Table 1.3). Of these, 548 had zero tariffs and 309 were in the 1 to 5 per cent tariff range. There were 1,189 tariff lines placed under the Temporary Exclusion List, which will be phased into the CEPT in five annual instalments between 1 January 1999 and 1 January 2003. By 2003, more than 92 per cent of Vietnam's tariff lines will be in the CEPT scheme. Most of its tariff lines in the Sensitive List comprise unprocessed agricultural products that will be phased into the CEPT scheme between January 2001 and January 2010. The obligations of Laos and Myanmar to AFTA began on 1 January 1998 and will conclude on 1 January 2008. In April1997, ASEAN agreed on two groups of Sensitive Lists for the new members: Normal Sensitive and Highly Sensitive. Tariffs on products in the Normal Sensitive List will be reduced to 0 to 5 per cent by 1 January 2010, while those on the Highly Sensitive List will be reduced to 0 to 5 per cent by January 2015 (Menon et al., 1998). The Lao PDR submitted 533 tariff lines (about 15 per cent of the total) for goods already found in the tariff range of 0 to 5 per cent to an Immediate Inclusion List (see Table 1.3). Its TEL comprises 2,818 tariff lines or 80 per cent of all tariff lines; and these products will be phased into the IL between 1 January 2000 and 1 January 2005. The remaining lists show 119 tariff lines (or 3.35 per cent of all tariff lines) of unprocessed agricultural products in the Sensitive List; 112 tariff lines in the Normal Sensitive List; 7 tariff lines in the Highly Sensitive List; and 81 tariff lines in the General Exceptions List. Myanmar, which is also a founding member of GATT and WTO, offered 2,267 out of a total of 5,370 tariff lines (about 42 per cent of the total tariff lines) - for goods already found in the tariff range of 0 to 5 per cent- in the Immediate Inclusion List of the CEPT (see Table 1.3). TABLE 1.3 Initial CEPT Packages for Tariff Reduction: Vietnam, Laos, and Myanmar List

Vietnam

Immediate Inclusion Temporary Exclusion Sensitive General Exception Total

% ofTotal

Tariff Lines Laos

Myanmar

Vietnam

Laos

Myanmar

857

533

2,267

38.6

15.0

42

1,189 26

2,818 119

2,960 16

53.6 1.2

79.5 3.4

55

146

81

127

6.6

2.2

3

2,218

3,551

5,370

100

100.1 *

100

NoTE: *Due to rounding, total exceeds 100 per cent.

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Carolyn L. Gates and Mya Than

The remaining lists show 2,960 tariff lines (55 per cent) in the TEL; 16 tariff lines (less than 1 per cent of total) in the Sensitive List and 127 tariff lines (3 per cent) in the General Exceptions List. Compared with other new members, "Myanmar has been more ambitious in its initial submission of product lists, although this is partly a function of tariff lines that already carry rates between 0-5 per cent prior to membership" (Menon et al., 1998); and it may gain admission to AFTA before its ten-year grace period expires in 2008 (Nation, 13 October 1997). Does Enlargement of AFTA Promote Trade and Competitiveness Goals of the ASEAN-6? The new members are very unlikely to derail AFTA's trade deregulation process because their trade bureaucracies expect to gain more from regional free trade in the longer run than they give up. Constraints on tariff reduction and trade deregulation, however, focus on the short run: how to deal with the issues of fiscal and economic competitiveness arising from this process. Though tariff reduction may be more difficult for the newer members because of their rather large fiscal dependence on customs and related indirect taxes (see below), they are implementing administrative, tax, and fiscal reforms to adjust to the new conditions. In concert with their domestic reform programmes, the new members are attempting to tackle their problems at the source rather than prolonging adjustment by maintaining strong protectionism and import-substitution. Competition between highly inefficient state-owned enterprises in the new member states and more efficient and technologically-advanced firms in the ASEAN-6 may be a more protracted and difficult issue to address. However, the low competitiveness of these countries' firms and industries involves many aspects of their reform process, which the governments are committed to continue. Unless there is a great shift in attitude towards reform, this issue is unlikely to have much effect on AFTA's progress; and a dual-track system is unlikely to emerge in this area. Will AFTA benefit the future trade performance, welfare, and competitiveness of the ASEAN-10 as a whole? The answer must include an assessment of the free trade area's trade creation and trade diversion effects: do the former exceed the latter? (See Viner 1950.) For the ASEAN6 economies, which trade overwhelmingly with countries outside the region, trade may be diverted in the transitional stage of deregulation. However, at the same time that CEPT tariff reduction is progressing, ASEAN members have been reducing tariffs on a product or sectoral basis for both ASEAN and non-ASEAN trading partners; and they are attempting to improve their trade position and relations with the world as well as the region. In 1994-96, for example, all the ASEAN countries announced one

ASEAN Enlargement: An Introductory Overview

15

major and several minor packages of tariff reductions on a most-favourednation (MFN) basis (ASEAN Secretariat 1996). Moreover, with lower CEPT tariffs and strong economic growth until 1997, both intra-ASEAN and extra-ASEAN trade expanded. In 1995, intra-regional trade grew by a substantial14.5 per cent to US$133 billion, but it remained overshadowed by the 19.4 per cent growth in extra-regional trade to US$651 billion (Baldwin 1997 p. 80). Consequently, unless there are substantial policy changes to the approach and implementation of AFTA trade liberalization, it is unlikely that trade diversion will dominate in the longer run. When new members are added to the equation, there are several possibilities regarding trade creation and diversion. Raychaudhuri (1996) argues that with the extension of AFTA to include the CLMV, significant trade and investment diversion is likely. Considering the comparative advantages of these economies in unskilled labour-intensive manufacturing and resource extractive industries, investment diversion with the freeing of trade flows in Southeast Asia may occur in garments, leather products, gems and jewellery, and agro-based process products, to name a few (Raychaudhori 1996 p. 20).

However, empirical evidence does not support this view. The trade of the CLMV with the ASEAN-6 has been growing faster than with the rest

of the world: in 1985-95, CLMV's trade with ASEAN grew at an average annual rate of 40 per cent, compared with 2 7 per cent with the rest of the world. During the same period, the volume of trade between the CLMV and ASEAN grew by US$6.6 billion, while that with the rest of the world increased by US$14.4 billion. Thus, although the rate of change in trade was substantially faster for CLMV-ASEAN trade than CLMV-rest of the world, in absolute volume terms, it remained far less, indicating that more trade was being created among the ASEAN-10 than diverted from traditional CLMV trading partners. This appears to be a typical outcome of the expansion of a "natural" free trade area of neighbouring regions, because trade is influenced by the realities of geography {transport and transaction costs, information, knowledge, etc.) as well as comparative advantage. Lowered tariffs under AFTA will affect member economies in different ways. For example, as Singapore already has very low tariff rates (close to zero), the effect on Singapore's imports from its fellow AFTA members is not likely to be significant. However, for Malaysia, Indonesia, and particularly Thailand, which have higher protection (and have significant trade and investment ties with the CLMV), the effects could be large. With progressive trade deregulation under AFTA, Malaysia, Indonesia, and Thailand (and others from the ASEAN-6) can expect to export more

Carolyn L. Gates and Mya Than

16

oods and services, such as construction, engineering, manu fac t u red g . . . .on telecommunicatiOns, Consultancy, and education services Ortatl transp , . (Sieh and Loke 1996) to the CLMV, but at the same time, they are hkely to import much larger quantities of products that are currently heavily protected, including agricultural and lower value-added goods in which the CLMV have comparative advantage. CLMV Integration into ASEAN/AFTA: Economic Benefits and Costs to the New Members The CLMV anticipate general regional trade area (RTA) advantages from joining ASEAN and AFTA. These include greater trade and investment links with the region; increased foreign direct investment (FDI) as a result of greater attractiveness to non-regional investors; improved resource allocation from specialization according to comparative advantage; greater economies of scale in an enlarged regional market, which can enhance prospects for small and medium scale enterprises; the possibility of joint production of public goods; and spillover effects and infant industry learning effects resulting in improved quality control, design, and marketing and thus improved competitiveness in world markets (see Langhammer 1990). More specifically, they are likely to enjoy the following benefits: • • •

• • •

•

as tariff rates and NTBs are reduced under the CEPT scheme, the CLMV should be able to export higher levels of agricultural goods to the ASEAN-6; foreign investment confidence in the CLMV may be positively influenced by the relatively good reputation of the ASEAN-6 host countries (despite the recent crisis); membership in ASEAN will support reform in the CLMV countries by providing assistance for - and potentially locking in - their current programmes, promoting continuation of the reform process, and providing support against some vested interests; membership in AFTA and ASEAN can contribute towards easier access to world markets for the CLMV, and assist in trade negotiations; the ASEAN-6 can provide relevant economic development and policy advice; co-ordination of economic policies among the ASEAN-1 0, particularly in export industries such as textiles, garments, rice production, and agri-products processing, can expand both intra- and extra-ASEAN trade; and the enlargement may encourage subregional co-operation, particularly the Greater Mekong Subregion initiative, in which the CLMV countries are members.

ASEAN Enlargement: An Introductory Overview

17

The CLMV may also benefit from increased export competitiveness as a result of AFTA (Pham and Forbes 1996, p. 16). First, by lowering import tariffs, goods will be cheaper in ASEAN-1 0 markets and progressively replace inefficiently-produced domestic products. Resources would therefore be reallocated to more efficient and productive uses. The CLMV private and public sectors will be forced to focus their limited resources on (their natural comparative advantage of) la bour-intensive, export-oriented manufacturing projects, thereby improving competitiveness with more advanced producers in the ASEAN-6. Secondly, with its enlarged market, AFTA will create greater opportunities for the exploitation of economies of scale. Thus, firms from the CLMV countries will be encouraged to invest in research and product innovation, or to specialize in production. Finally, as a result of free trade, the international competitiveness of CLMV firms will gradually increase, as they gain opportunities to compete with other ASEAN firms in the regional market before entering world markets. Some politico-economic interests in the CLMV countries, however, question such a positive projection. They argue that their inefficient stateowned enterprises (which dominate these economies) cannot compete with the ASEAN-6 in manufacturing. Under AFTA, they will not be able to protect infant industries, which are mainly owned by the state. Moreover, their small-scale private enterprises cannot fill this gap, as they face shortages of capital, raw materials, power supply, spare parts, and entrepreneurship. From this perspective, there will be a long time lag before CLMV firms can begin to compete with ASEAN firms in most areas of manufacturing and higher value-added goods. Some logically conclude that the CLMV countries may even become a "new periphery" of an ASEAN/ AFTA centre: they will become colonial suppliers of raw materials to the more industrialized ASEAN-6 economies. Though this is counterfactual to what has happened in the region during the past three decades when such economies have moved up the technological and value-added ladder, such fears are fuelling discontent among some industrial and state interests in the CLMV. However, the outcome of CLMV competition greatly depends on how these governments and economies respond to the new challenges. If they accelerate reform, improve the investment and market environment, create opportunities for entrepreneurs to renovate their firms and advance their competitive positions, the CLMV will be able to follow in the steps of- or even leapfrog - their regional competitors. If not, they are likely to lag behind. The CLMV economies are facing additional adjustment costs from AFTA integration. First, state enterprise reform, which is likely to be accelerated by AFTA-induced trade deregulation, is creating labour dislocations in economies where unemployment (and underemployment) is already high and few, or no, social safety nets exist. Secondly, AFTA

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Carolyn L. Gates and Mya Than

requires significant fiscal adjustment in most of the CLMV countries, which have depended on customs revenues to finance a large part of the state budget. In 1996, Cambodian customs duties comprised 70 per cent of the government budget; in Laos, 31 per cent; in Myanmar, 16 per cent; and in Vietnam, 19 per cent. Consequently, they have little choice but to restructure tariffs, the overall tax base, and government expenditures so as to meet AFTA obligations, budget demands, and requirements to maintain macroeconomic stability. THE CHAPTERS IN THIS VOLUME The CLMV stand to benefit from joining ASEAN/AFTA, but they also face numerous transitional and perhaps longer-term challenges from regional integration. Similarly, the ASEAN-6 are confronting both the positive and negative impacts and implications of this process. The chapters in this volume examine these issues from three different perspectives: the region, the subregion, and the new member countries. At the regional level, the contributions focus on political and security issues (authored by Dewi Fortuna Anwar); trade (Nattapong Thongpakde); foreign direct investment (Nick J. Freeman); and a comparative analysis of the enlargement processes of the European Union and ASEAN (Rolf Langhammer). Secondly, Mya Than and George Abonyi write on the development of the Greater Mekong Subregion. From the perspective of the new member countries, the volume includes seven chapters on the impact of ASEAN integration. In Chapter 2 "ASEAN's Enlargement: Political, Security and Institutional Perspectives", Dewi Fortuna Anwar reviews ASEAN's very important political and security rationale and evolution and then looks to the future after enlargement. She examines the impact and implications of enlargement from the perspective of ASEAN's three main political and security objectives and functions: to "promote regional harmony and maintain peace and stability in Southeast Asia"; "to enhance regional security and promote the establishment of a more autonomous and indigenous regional order"; and to serve as an "important international bargaining instrument, which enhances the members' individual and collective stance vis-a-vis the outside world". The author argues that enlargement will have positive political and security implications for regional peace and stability, but it will also make it "more difficult for ASEAN members to reach a consensus- the favoured way for making decisions ... In fact, some difficulties may be more fundamental than formal style that can be overcome with time". Morever, she states that enlargement can increase ASEAN's bargaining position in the international world, but at the same time it has "brought new problems for ASEAN diplomacy, at least in the short run". She concludes that while "the inclusion of all Southeast Asian countries within one regional

ASEAN Enlargement: An Introductory Overview

19

organization ... will benefit the region as a whole", the main disadvantage is that it would be "much harder for ASEAN to reach a consensus because of the existing differences between the old and new members." Nattapong Thongpakde writes on "ASEAN Enlargement and Trade" in Chapter 3. Because AFTA is ASEAN's key economic and commercial institution, the author focuses on the integration of the new members into the Free Trade Area. To do this, he first compares various conditions and indicators of the old and new members: socio-economic development; ASEAN trade patterns, and comparative advantages. Nattapong then examines the potential impact of ASEAN enlargement on AFTA, first in terms of trade creation, then on trade diversion. He finds that enlargement should have positive effects on trade creation because of the expanded market size, but because of low endowment diversification in the ASEAN economies, "trading with non-member countries will remain important for the ASEAN-10". He further argues that "trade diversion should not be a major concern in ASEAN enlargement" because "most tariff rates imposed on the products in the Inclusion Lists of the new members are less than 5 per cent and the impact of tariff reduction in the first stage is small." In addition to AFTA's objectives to increase intra-regional trade and international competitiveness, it aims to make ASEAN a more attractive investment and tourism area. The author argues that enlargement will contribute to the latter. Finally, he examines the potential adjustment problems for the new members as a result of their integration into AFTA. This includes negative fiscal effects (rising budget deficits owing to reduced tariff revenues); rising current account deficits; increasing foreign competition because of lower tariffs and protectionist measures. The author concludes that ASEAN enlargement will bring about complementary trade and investment activities between the old and the new members. However, he warns that any delay in market deregulation and institutional adjustment in the new member countries will undermine the process of ASEAN cooperation. Therefore, it is crucial for the new members to commit to AFTA and greater economic liberalization. The old members can assist the new members to pursue economic restructuring and reduce the adjustment costs to accelerate the deregulation process.

Nick Freeman's contribution in Chapter 4, "ASEAN Enlargement and Foreign Direct Investment" first presents a baseline FDI profile of Cambodia, Laos and Myanmar (CLM), which shows that in all three countries, ASEAN-invested capital stock comprises a large share of total FDI. He then examines indirect factors by which ASEAN enlargement may augment investment inflows into the CLM countries: improved regional relations and understanding; improved information flows; "trickle down"

20

Carolyn L. Gates and Mya Than

business initiatives; "demonstration effects"; an ASEAN "conduit" role between the new members and the international community; the pull of AFTA; and the establishment of the ASEAN Investment Area. At the same time, there exist factors that may prevent enlargement from augmenting FDI inflows into the CLM. First, the domestic market environments of the CLM have not improved sufficiently to attract large investments. While ASEAN membership may encourage positive domestic institutional changes, the countries themselves must make the improvements. Secondly, the toll of the current economic crisis may prevent the ASEAN-6 countries from raising their investment in the CLM for a number of years, despite continuing interest in these markets. The author then presents evidence from Vietnam as "an interesting pilot case study for the CLM countries, on the likely impact that membership of the regional grouping may have on future FDI inflows". Freeman concludes: that a number of relatively intangible 'macro' factors stemming from the enlargement of ASEAN may play a broadly indirect role in promoting foreign investment inflows into the CLM countries ... they will probably not be as significant as a smaller number of- but more directly pertinent- FDIspecific factors that each of the CLM countries will need to embrace if they are to successfully increase their future inflows of foreign investment.

Rolf J. Langhammer contributes a comparative analysis of two regional groupings, in "European Union Enlargement: Lessons for ASEAN" in Chapter 5. He finds a persuasive parallel of the enlargement of the EU in ASEAN, based on the international political context: the demise of "USSRruled socialism" and the end of the Cold War "paved the way for enlargement of the two groupings". However, there are very obvious differences between the two: "dissimilarities in growth and adjustment speed between allegedly sclerotic and overly-institutionalised continental Europe and dynamic, yet vulnerable Southeast Asia". He proposes different analogies of the two integration processes: the integration of the Central and East European countries (CEEC) into the European Union is like "a long engagement without setting a wedding date"; by contrast, the entry of the CLMV into ASEAN has been a "Las Vegas jump-start wedding". Furthermore, Langhammer finds key differences between the EU and ASEAN economies, which have different impacts and implications for enlargement. At the same time, he notes that there are important similarities among the new members of the EU and ASEAN: "they are low-income countries, have strong agricultural sectors and suffer from poor infrastructure". Consequently, the entry of the CEEC in the EU and the CLMV in ASEAN will change the economic landscape of the two regions. He presents economic and social data to support these positions. In conclusion, he states that the experience of EU enlargement for ASEAN has become a moot point

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because political realities have overtaken the ASEAN integration process. In an ideal world, he argues, the two could have learned from each other because both enlargement experiments have shown positive and negative outcomes; and both were "economically flawed". Therefore, he concludes: In the EU, greater speed and political determination in the integration of new members to the European family would have supported the reform momentum in the CEECs and put pressure upon the EU to reform itself. In Southeast Asia, less speed and more pre-accession preparation might have served both the interests of ASEAN and Indochina better.

Chapter 6, "The Greater Mekong Subregion: Co-operation in Infrastructure and Finance", by Mya Than and George Abonyi focuses on subregional aspects of ASEAN enlargement. In the first part of the chapter, Mya Than presents an overview of the history, initiatives for cooperation, and infrastructure needs of the Greater Mekong Subregion (GMS). He argues that there are many potential implications of ASEAN enlargement on GMS countries, including greater political stability and confidence-building; expanded trade and investment flows within the region; higher FDI flows from outside the region; improved resource allocation from specialization; enhanced industrialization prospects of small and medium enterprises; spillover and learning effects. In part two, George Abonyi discusses a variety of financial and related microeconomic and technical issues involved in developing GMS infrastructure. He examines the impact of the regional economic crisis and ASEAN co-operation on financing the GMS development programme. Abonyi concludes that: regional and international institutions can play an important role as facilitators of subregional co-operation in infrastructure and finance. They may be a key source of technical and financial support, including helping to mobilize international financing, both official and private, and in helping to reduce risk to investors ... Moreover, the joining of the six participating countries of the GMS in ASEAN will create a more conducive environment for such co-operation, and the credibility of ASEAN as a good place for investment will definitely complement and supplement it.

The third section of this volume, focuses on the integration of the new members into ASEAN and AFTA. It begins with Chapter 7, "Cambodia's Accession to AFTA: Impact, Challenges and Policy Implications" by Toshiyasu Kato. The author argues that Cambodia's integration into AFTA will have a significant impact on its trade, investment, and growth in the long run, but negligible effects in the short run. The short-term impact will be insignificant because the government is attempting to minimize the immediate loss of tariff revenues, which is viewed as a major short-term constraint of AFTA integration. Integration is anticipated to bring

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significant benefits to Cambodia: an enlarged market in one of the highest growth regions in the world; the potential of becoming a platform for FDI from non-ASEAN countries; and using its membership as a signal that it wants to integrate into the global economy, which should attract FDI. At the same time, integration poses five main challenges: 1) maintaining sound macroeconomic fundamentals; 2) eradicating poverty; 3) achieving equitable growth; 4) maintaining the momentum of growth; and 5) regenerating the environment. Employing a comparative analysis approach to examine Cambodia's current conditions with respect to the ASEAN economies, the author then places into context Cambodia's deregulation and integration process. After discussing Cambodia's economic conditions, including its pattern of trade and investment, and comparative advantages, he examines, inter alia, Cambodia's preparations and strategies for AFTA integration, including its approach to the five challenges noted above. The author goes on to look at some policy implications of integration: the demands of adjusting domestic expenditures; developing an appropriate institutional framework and legal system; establishing policy coherence and ministerial co-ordination. In concluding, the author recommends a number of policy reforms to confront these challenges and to further other Cambodian economic objectives. These include raising national expenditures for education, health, agriculture, and rural development and reducing defence spending; as well as "overhaul[ing] and upgrade[ing] the civil service and legal systems, by developing human resources, reforming incentive mechanisms, and mitigating pressures from politics and business". A second contribution on Cambodia, "Implications of Joining ASEAN/ AFTA for Cambodia" is presented by You Ay in Chapter 8. This piece, which was written before Cambodia was admitted as a full member of ASEAN, examines Cambodia's preparation process to enter ASEAN and AFTA. After providing a brief socio-economic background of Cambodia, the author discusses the measures Cambodia has been instituting to join the regional organization, including institutional and organizational arrangements, structural adjustments and legal reforms, technical and specialized tasks, and training activities. She then addresses the political, economic and security aspects of Cambodia's integration into ASEAN. Similarly, You Ay discusses the implications of Cambodia joining ASEAN and the Free Trade Area, which pose both opportunities and challenges. The chapter concludes: "Cambodia cannot postpone these tasks. Its handling of these challenges could mean victory or defeat in the battlefield of development." Next, Emiko Fukase and Will Martin write on the "Economic Effects of Joining AFTA: The Case of the Lao People's Democratic Republic" in

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Chapter 9. To evaluate the AFTA integration process on the Lao economy, this chapter presents a simple computable general equilibrium model to quantify the gains from trade creation (additional trade with ASEAN partners, which is welfare improving) and losses caused by trade diversion. The model includes one productive sector and twenty-two trade sectors; and the welfare changes occurring with trade liberalization are decomposed into three components: "welfare gains resulting from efficient resource allocation, welfare loss with decreases in tariff revenues, and terms of trade gains provided by the ASEAN partner countries". Before introducing the model, they discuss the evolution of AFTA and Laos' adaptation to various phases and mechanisms of the CEPT process. From their model, they conclude that the Lao PDR will economically benefit from accession to AFTA. They argue "that the Lao PDR gains as the scope of AFTA widens and it gains the most if it expands the scope on a non-discriminatory basis." Secondly, their results show (with other things being equal) that "AFTA has positive effects on the Lao PDR's most important export industries, namely, wood and wood products and garment sectors". Sectoral analyses presented in this chapter also reveal that AFTA integration presents substantial potential gains for sectors such as processed foods, apparel, and shoes, hats, and umbrellas. Finally, Fukase and Martin note that the "model used in this study is simple and subject to several limitations". In particular, it is static and therefore does not capture the dynamic effects that the Lao PDR is likely to gain from increased foreign direct investments, improved productivity, and changes brought about by accelerated domestic reforms. Tin Maung Maung Than and Mya Than present "ASEAN Enlargement and Myanmar: An Overview" in Chapter 10. The authors discuss three main political implications of Myanmar's entry into ASEAN: ASEAN's relations with the West; ASEAN organizational matters; and the country's domestic political development. They argue that the United States and the European Union have created obstacles to co-operation between ASEAN and them by trying to penalize Myanmar for alleged human rights violations and lack of progress in democratization. In particular, it has resulted in an impasse between ASEAN and the EU in their bloc-to-bloc meetings because the EU has repeatedly placed conditions on Myanmar's participation. They also assess the economic implications of joining AFTA in terms of international trade, FDI, government revenues, and the country's comparative advantage. They conclude that Myanmar's membership in the regional grouping will have a positive impact in the short and medium term with regard to its economic development. To benefit it in the longer term, the country must deepen its reform programme and liberalization efforts.

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Khin Ohn Thant writes on "ASEAN Enlargement: Economic and Financial Implications for Myanmar" in Chapter 11. The author states that changing domestic as well as external conditions convinced Myanmar to join ASEAN, in contrast to its decision in 1967 to remain non-aligned. Although Myanmar expects significant benefits from regional integration, the author states that Myanmar "does not expect a hand-out". She then reviews Myanmar's economic reforms and how they will fit into the CEPT tariff reduction and trade liberalization schemes. She concludes that Myanmar can benefit from AFTA only if it is able to promote trade and foreign investments effectively. The author also calls for greater assistance by ASEAN and its Dialogue Partners - for example, in institutionbuilding, training and development policy advice- during Myanmar's transition. Two chapters on Vietnam's integration into ASEAN and AFTA are contributed by Carolyn L. Gates. In Chapter 12, "Vietnam's Integration into AFTA: Theoretical and Empirical Perspectives", the author examines various theoretical perspectives on trade and their applicability to Vietnam; Vietnam-ASEAN trade patterns; and Vietnam's process of integration into AFTA. She then analyses the potential impact and implications of Vietnam's accession to AFTA, broader-based trade liberalization on structural change; potential effects on Vietnam's industrial competitiveness; and the fiscal impacts of tariff reduction. Gates concludes that: Vietnam is moving towards a more liberal trade regime, even as policy-makers are confronted with demands from the still powerful 'import-substitution lobby'. While Vietnam cannot go back to the old CMEA days, there is still a question about whether it will be able to fulfil AFTA (and future trade liberalization) commitments, if investment patterns and industrial policies continue to favour import-substituting industries .... Vietnam must quickly remove its institutional bias towards import substitution in favour of more export-oriented development. The regional economic turmoil presents Vietnam both an ideal time and a demanding agenda to accomplish this challenge. Chapter 13 on "The ASEAN Economic Model and Vietnam's Economic Transformation: Adjustment, Adaptation and Convergence" is the second one on Vietnam. After discussing theoretical and empirical issues of convergence, Gates briefly compares the resources, fundamentals, and economic systems of Vietnam and the original ASEAN members. She then examines: the key factors that contributed to the ASEAN economic model; Vietnam's market transformation process, which is now allowing it to compete and co-operate with ASEAN; and Vietnam's market-based development strategy, comparing it with that of ASEAN. The chapter concludes:

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Vietnam remains very far from ASEAN's average income levels, even though incomes in many of the ASEAN-5 plummeted in U.S. dollar terms in 1998, and many are likely to recover from the regional crisis only after four or five years or more. Even if Vietnam manages to sustain high growth rates of above 6 per cent, and investment ratios of more than 25 per cent per year, it will still take several decades to reach a standard of living acquired by Thailand in the mid-1990s. Vietnam is likely to face very strong challenges for many years to come in its efforts to converge with even a weakened ASEAN. It remains to be seen whether it can step up economic restructuring and institutional reform to accelerate its "catch-up" with its more developed ASEAN partners. References

ASEAN Economic Bulletin. "Hanoi Declaration of 1998, 16 December 1998". Vol. 16, no. 1 (April1999): 95-105. ASEAN Secretariat. AFTA Reader, Vol IV: The Fifth ASEAN Summit. Jakarta, 1996. ASEAN Website (1999). http://www.asean.or.id/ Asian Development Bank. Key Indicators of Developing Asian and Pacific Countries, 1996. Manila: ADB, 1996. Baldwin, P. Planning for ASEAN: How to Take Advantage of Southeast Asia's Free Trade Area. London: Economic Intelligence Unit, April 1997. East Asia Analytical Unit. The New ASEANs: Vietnam, Burma, Cambodia and Laos. Barton, ACT (Australia): Department of Foreign Affairs and Trade, 1997. Langhammer, Rolf J. Regional Integration among Developing Countries: Opportunities, Obstacles and Options. Kiel Germany: Institut fiir Weltwirtschaft an der Universitat Kiel, 1990. Menon, Jayant, Manuel Montes, and Joseph Tan. "Trade Patterns, Trade Cooperation and AFTA". Unpublished paper. Singapore: ISEAS, 1997. Nation (Bangkok), 13 October 1997. Pham Hoang Mai and D. Forbes. "The ASEAN Free Trade Area and its Potential Impact on Vietnam's Economy". Paper presented at the conference on "Development Dilemmas in the Mekong Subregion", Melbourne, 1-2 October 1996. Raychaudhori, B. "Probable Enlargement of the ASEAN Free Trade Area and Implications for Investment Flows in South-East Asia". Paper presented at the Conference on "Enhancing of Trade and Investment Cooperation in South-East Asia: Challenges and Opportunities for ASEAN10 and Beyond", organized by ESCAP, in Jakarta, 19-21 February 1996. Mimeographed. . Sieh Lee M.L. and W. H. Loke. "Cambodia, the Lao PDR, Myanmar and Vietnam: Preparing for Cooperation in Trade and Investment within ASEAN". Paper presented at the conference on "Enhancing Trade and Investment Cooperation in South-East Asia: Challenges and Opportunities for ASEAN-10 and Beyond", organized by UN/ESCAP, in Jakarta, 19-21 February 1996. Mimeographed. Viner, Jacob. The Customs Union Issue. New York: Carnegie Endowment for International Peace, 1950. World Bank. Social Indicators of Development. Baltimore: Johns Hopkins University for the World Bank, 1996.

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DEWIFORTUNAANWAR

Introduction

As its name suggests, the Association of Southeast Asian Nations (ASEAN) was meant, from the very beginning, to encompass the whole of Southeast Asia. Nevertheless, when the Association was established in Bangkok on 8 August 1967 by five countries, comprising Indonesia, Malaysia, the Philippines, Singapore and Thailand, the ideal of one Southeast Asia seemed like an impossible dream. ASEAN was born at a time of intense conflict in Southeast Asia, much of which was an offshoot of the wider global confrontation between the communist and the Western blocs. While the Soviet Union was the superpower of the communist camp, the People's Republic of China emerged as the dominant communist power in Asia. Following its radical policy at home during the time of its cultural revolution, China actively tried to export "national-liberation " movements overseas, by, for example, giving support to communist insurgencies in Southeast Asia. In Vietnam, the war between the communist North against the non-communist South was at its height, with the United States committing an ever greater number of troops to shore up the tottering regime in Saigon. 1 Although it was not the intention, the establishment of ASEAN in fact divided Southeast Asia into two distinct, but not necessarily, antagonistic subregions. ASEAN was founded by five non-communist countries which shared common perceptions regarding the danger of communism to their 26

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internal stability, and the belief that the best way to combat this threat was through economic development. Many of these countries had been antagonists only a year earlier, and relations among them continued to be difficult during the first few years of ASEAN. Yet these countries were able to bury their differences in the face of what was perceived to be a much greater threat to their national and regional security, namely, the fear of communist expansion, whether through subversion and insurgencies or through more conventional means. 2 On the other side of the divide were the rest of the Southeast Asian countries which remained outside ASEAN for various reasons. Despite the fact that ASEAN was founded by five non-communist Southeast Asian countries which had developed close relations with the West, ASEAN was not an anti-communist regional organization as such. ASEAN was established as a "non-denominational" regional organization, in which the criteria for membership was primarily geographical rather than political. Nevertheless, Vietnam was not invited to join in the first wave because the founding fathers of ASEAN believed that the war in Vietnam would make it impossible for that country to become a member of the Association. The same situation applied to Laos, which had become a party to the Indochina conflict since the early 1960s. In 1967, Brunei was not eligible for membership because it was still a British protectorate. Burma and Cambodia, however, were solicited to join the new regional body, but both countries refused the invitation. As members of the Non-Aligned Movement, Burma and Cambodia were afraid that participating in ASEAN would compromise their neutral status, despite the fact that Indonesia, a founding member of the Non-Aligned Movement, was one of the founders of ASEAN. The more important reason for Burma's and Cambodia's reluctance to be associated with ASEAN was their fear of offending China, the giant communist neighbour to their north, with whom both countries share a long border. China viewed the newly established ASEAN as nothing more than an American tool aimed at containing communism in Asia in general, and China in particular. 3 Although ASEAN was not an anti-communist regional association, its members and main agenda clearly pushed the Association closer into the Western orbit, particularly as most of its members were parties to Western military alliances. The Philippines and Thailand were members of the Southeast Asian Treaty Organization (SEATO), an American-led defence pact created as part of a global strategy for containing communist expansion. Malaysia and Singapore had close military relations with Britain, Australia, and New Zealand, which in 1971 evolved into the Five Power Defence Arrangements. Although Indonesia was not a member of a defence alliance, the New Order government under President Soeharto

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was virulently anti-communist, banning the Communist Party at home, freezing its diplomatic ties with China and developing close relations with the United States and its allies. 4 This pro-Western stance of ASEAN, on the one hand, and the increasing dominance of communism in Indochina, on the other, divided Southeast Asia into two separate subregions throughout the Cold War. But ASEAN had not wanted to maintain such a chasm. Soon after the communists won the war in Vietnam, ASEAN invited the victorious communist state to join the Association. Flushed with its victory, however, Vietnam refused the offer. In fact, Vietnam looked down on ASEAN, regarding the Association as less than independent vis-a-vis the major Western powers which provided it with political and economic support. While not wholly adversarial or antagonistic, it was unavoidable that relations between ASEAN and Indochina would be less than cordial, particularly during the Vietnamese occupation of Cambodia between 1979 and 1990.5 It must be admitted that ASEAN's success as a regional organization, particularly in terms of promoting regional peace and stability, maintaining intra-regional harmony, and providing a conducive regional environment for economic growth, stood out in sharp relief against the conflict and underdevelopment in the rest of the region. Moreover, the events occurring in the neighbouring countries acted as a spur for ASEAN members to cooperate to achieve collective national and regional resilience. While ASEAN has always maintained its inclusive nature vis-a-vis the rest of Southeast Asia, for twenty-five years its raison-d'etre was to some extent defined by the existence of the other Southeast Asia, while its effectiveness was to a considerable degree measured by its success in dealing with the Indochina conflicts. The end of the Cold War has closed the ideological and political gaps that had existed between ASEAN and the rest of the region, and made it possible for the countries that had chosen to remain outside ASEAN finally to join the Association. The enlargement of ASEAN to encompass the whole of Southeast Asia will clearly have important implications for ASEAN co-operation as a whole. Given the fact that political and security considerations dominated the thinking behind the establishment of ASEAN, and until recently had continued to be the primary focus of ASEAN political co-operation (notwithstanding the fact that the Association does not carry out multilateral ASEAN security co-operation), the entry of Vietnam, Laos, Myanmar, and Cambodia into the Association will undoubtedly have wide-ranging political and security implications. ASEAN's enlargement is also likely to have some impact on the Association's institutional structure.

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The Political and Security Implications of ASEAN Enlargement In analysing the political and security implications of ASEAN enlargement, one must clearly identify the primary political functions or dimensions of the Association, and from there attempt to gauge the extent to which these functions will be affected by the expansion in membership. Seen from the political and security perspectives, which are closely interrelated, given the comprehensive nature of security, ASEAN has at least three main functions. The first and probably the most important function of ASEAN is to promote regional harmony and maintain peace and stability in Southeast Asia. Secondly, ASEAN is expected to enhance regional security and promote the establishment of a more autonomous and indigenous regional order. Finally, ASEAN serves as an important international bargaining instrument, which enhances the members' individual and collective stance vis-a-vis the outside world. 6 ASEAN and Regional Harmony The primary political function of ASEAN, and undoubtedly its most successful, has been its promotion of harmonious relations among its members, and maintaining regional peace and stability. ASEAN's success in this field can be gauged by the fact that in the past thirty years, the ASEAN sub-region has been a haven of peace, particularly in comparison to the situation in Indochina, and in contrast to the earlier bilateral tensions and conflicts among some ASEAN members. Although many bilateral disputes remain unresolved- and bilateral relations have sometimes been strained by newly-arising bilateral disagreements - military clashes among the original members of ASEAN are becoming unthinkable. Most analysts agree that the ASEAN subregion has developed into a kind of security community, as embodied in the 1976 ASEAN Treaty of Amity and Co-operation in Southeast Asia/ in which the use or threat of force is no longer considered legitimate. ASEAN's role in promoting regional harmony and in maintaining peace and stability have to a certain extent been executed through indirect means. Bilateral disputes have never been discussed in ASEAN fora, and the Association has never mediated in intra-regional conflicts, let alone become directly involved in settling disputes. Furthermore, ASEAN is not a security body which engages in regional defence and security co-operation. Despite the existence of the Treaty of Amity and Co-operation, which is the most important regional code of conduct, ASEAN cannot really enforce peace among the signatories, because the treaty has no such provisions. Nor has ASEAN economic co-operation developed to the extent of actually integrating the subregional economies so that it would be extremely costly for any member to risk breaking ties. 8

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Nevertheless, the indirect role played by ASEAN in preserving regional harmony has been real and significant. Although it has not resolved conflicts, ASEAN has been mostly successful in defusing conflicts among its members, so that existing disputes have not on the whole disrupted regional co-operation. During the early years, open conflicts over longrunning bilateral disputes were mostly avoided through acts of self-restraint by members, since none of them wanted to endanger the survival of the new regional organization. Over time, growing familiarity and the habit of mutual consultation, as well as common participation in regional cooperation, helped to remove suspicion and build confidence among the members. As the value of the Association increased and members attached greater importance to their relations with each other, the ASEAN countries discovered that their unresolved bilateral disputes had become much less important and less intractable, so that on several important occasions they were able to arrive at mutually agreed solutions. Thus, growing ties between Manila and Kuala Lumpur led the Philippines to relinquish its claim to Sabah, while both Singapore and Malaysia as well as Indonesia and Malaysia have agreed to take their disputes over overlapping territorial claims to the International Court of Justice, and to abide by the Court's decisions on the issues. In neither of these cases was ASEAN ever directly involved, yet the looming presence of ASEAN has clearly defused potential conflicts by transforming intra-regional relations from zero-sum to positivesum equations. 9 It is clearly unrealistic to expect that the existence of ASEAN will remove all bilateral disagreements. In fact, besides bonding countries closer together, increasing interaction can also lead to more friction. Among the ASEAN countries, the growing movement of migrant workers from labour surplus to labour shortage members has been a major source of friction. This was clearly demonstrated by the diplomatic crisis between the Philippines and Singapore in early 1995, sparked by the execution of a Filipino maid accused of murder in Singapore, and the massive outcry from the Philippine public against both Singapore and its own government. This bilateral crisis was the worst in ASEAN since the 1968 crises. 10 Yet, despite the seriousness of the situation, which led to the mutual recalling of the two countries' ambassadors, ASEAN unity was never seriously jeopardized, and relations between Manila and Singapore returned to normal within a very short period, with no seemingly negative aftermath. This clearly proves that the ASEAN code of conduct for peaceful resolution of conflicts has become strongly embedded in the regional consciousness, and testifies to the growing resilience of ASEAN as a cohesive regional body. The enlargement of ASEAN to encompass the whole of Southeast Asia, a cherished ideal since the founding of the Association, will help to promote peace and stability in the wider Southeast Asian region. By becoming

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members of ASEAN, Vietnam, Laos, Myanmar, and Cambodia show that they share the Association's commitment to regional peace and stability, seen as a prerequisite for economic development, which is the first national priority of all its mem?ers. ~iven the fact that ASEAN is already an established force at the t1me of 1ts enlargement, and that the new members expect real benefits from their membership in the Association, one may be confident that the new members will abide by ASEAN's rules and regulations, and more importantly by the unwritten norms and practices of the "ASEAN Way", which has enabled the original members to live harmoniously together, notwithstanding their differences. This "ASEAN Way" includes the ability to disagree without being disagreeable, always striving to arrive at a consensus through deliberation, avoiding open conflict or confrontation, and giving as much importance to process as to outcome. The time-honoured "ASEAN Way" is also "to make haste slowly". It is hoped that the new members will not find it difficult to adopt and adapt to this "ASEAN Way", since this ensures that each member can have a voice and a veto in the organization. It is to be expected that the enlargement of ASEAN is closing the political chasm that has divided the two subregions of Southeast Asia for so long, so that we may look ahead to a more harmonious, peaceful and stable regional order. Of equal importance, common membership in ASEAN will undoubtedly stabilize relations among the mainland countries of Southeast Asia. Adherence to the ASEAN code of conduct, which includes respect for each other's territorial integrity, non-intervention in each other's internal affairs, and the renunciation of the use or threat of force, can be expected to transform bilateral relations among these new members of the Association. Smaller countries, which in the past had often been victims of aggression from their more powerful neighbours, will become more secure within the Association where every state, regardless of size, is treated as equal. Nevertheless, without diminishing the very positive political and security implications of ASEAN enlargement for regional peace and stability, the members should remain vigilant and not take the bright prospects for granted. Many have pointed to the fact that with a larger and more diversified membership it will be more difficult for ASEAN members to reach a consensus- the favoured way for making decisions within the Association. In fact, some difficulties may be more fundamental than formal style that can be overcome with time. As mentioned earlier, ASEAN's role in preserving regional harmony has been largely indirect, and potential conflicts have been defused mostly through the exercise of self-restraint by the parties concerned, so as not to endanger ASEAN unity. While the Treaty of Amity and Co-operation binds the members to certain acceptable norms of behaviour, this code of

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conduct is still primarily based on the members' goodwill to abide by the rules with no provision for dealing with transgressions. Besides the natural attachment of the founding members to ASEAN so that they have always been careful to nurture it, the impetus for maintaining ASEAN unity had mostly emanated from the existence of common external threats. The situation has now changed, as there are no dearly defined threats which may act as a glue for the ASEAN members. Furthermore, the perceptions and expectations of the new members regarding the Association may be different from those of the original members. It should be kept in mind that the original members did not really expect ASEAN, as an association, to actually do something for them, beyond providing a conducive regional environment for their individual efforts to set their own house in order. In contrast, the new members see ASEAN as an influential and wealthy association, and they look to ASEAN to help them deal with their domestic problems, particularly in the economic field. The question is: will the new members become as committed to ASEAN as the original members, through thick and thin? Or will their support for ASEAN be conditioned upon concrete benefits that the Association is expected to yield? In other words, is ASEAN enlargement a marriage of minds and hearts, or is it just a marriage of convenience which may dissolve when the union is no longer beneficial? The test will come when national interests collide, such as the flaring of disputes over national boundaries between some of the mainland countries of Southeast Asia, and when regional interests seem to go against some members' national interests. In such cases, goodwill and self-restraint may be severely tested, and it is a moot point whether a bilateral crisis of the same magnitude as the Manila-Singapore spat, involving a new member of ASEAN, will end as happily for the Association. There are also concerns that the historical suspicions that have characterized relations among some of the mainland countries of Southeast Asia will not be easily eradicated, and may in turn infect ASEAN, particularly given the large number of new members. At the same time, the habit of resorting to force to resolve conflicts, conditioned by prolonged involvement in wars, cannot be assumed to have been neutralized just because these countries have signed the Treaty of Amity and Co-operation, and that all members adhere to the ideals of ZOPFAN (Zone of Peace, Freedom and Neutrality) in Southeast Asia.U It is important, therefore, that confidence-building measures and preventive diplomacy continue to be enhanced within the ASEAN family, and to inculcate a real sense of belonging towards the Association among the new members so that they do not feel like guests who can leave when they feel like it. Moreover, while cherishing the ASEAN ways of informality and emphasis on consensus, there is also a growing need for the ASEAN

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members to move towards more rule-based relations with each other, so that regional peace and harmony are not simply left to the goodwill of individual members. This means that ASEAN should be given the means to ensure that the regional code of conduct is strictly adhered to by all members. As Muthiah Alagappa argued: "Merely to urge states to renounce the use of force without giving sufficient teeth to the dispute resolution mechanism and not instituting arrangements for the collective management of power makes ZOPFAN vulnerable to the criticism of being a Utopian 'fair weather system"' Y In other words, the Treaty of Amity and Co-operation in Southeast Asia needs to be given more teeth, both in promoting compliance to the pacific settlement of disputes and in providing a mechanism for the resolution of conflicts. The time-honoured ASEAN way of sweeping problems under the carpet, and hoping that time will brush them away, will become increasingly untenable, given the growing diversity in membership and the emergence of new generations of leaders whose approach will be more straightforward and businesslike and, therefore, less patient with ASEAN's indirect approach. ASEAN as a Promoter of Regional Security and Autonomous Regional Order Although ASEAN was never designed as a defence or security alliance, and in fact the founding members deliberately eschewed regional security co-operation, one of the most important functions of the Association was, nevertheless, to enhance regional security in the face of external aggression. Given the political and security environment surrounding the birth of ASEAN, it is not surprising that security concerns dominated regional thinking. While conventional military threats were not completely ruled out, most of the ASEAN countries were worried about non-conventional threats, particularly in the forms of communist subversion and insurgency. From the very beginning, therefore, the ASEAN countries developed the concept of comprehensive security, encompassing political, social, economic, and military aspects. Thus, the military component is only one of many aspects of security. ASEAN aims to develop national and regional resilience. To some extent, its objectives have been achieved by the members, despite the persistence of various internal weaknesses. Most of the ASEAN countries had been fragile entities with underdeveloped economies, facing both internal challenges and external threats. Over the past thirty years, the ASEAN states have become more resilient and self-assured, mostly because of the relative stability that the subregion has enjoyed and the great strides that the ASEAN countries have made in the economic field.

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The maintenance of harmonious relations among members of ASEAN has clearly been one of the most important components of regional stability. Such relations have not only removed the danger of political and military threats from fellow ASEAN members, but equally important, have ensured that other countries cannot employ one ASEAN state to threaten another ASEAN member. The presence of ASEAN, therefore, has to some extent acted as a cordon sanitaire insulating the members from external security challenges. Nevertheless, as long as Southeast Asia was divided into two different camps, the ASEAN subregion was never totally secure, particularly when there were continuing conflicts in Indochina which spilled over into ASEAN territory, notably into Thailand as the front-line state. These conditions also made it impossible for ASEAN to realize its ideal of creating a more autonomous regional order free from external interference as envisioned by the ZOPFAN concept. The ideal of a zone of peace, freedom and neutrality for the whole of Southeast Asia, first introduced in 1971, was aimed at reducing external interventions in the affairs of the region, as these interventions were mainly responsible for most conflicts and divisions that had taken place. Nevertheless, during the Cold War, this ideal remained a remote dream since the major powers with interests in the region opposed the ZOPFAN concept, while the other Southeast Asian countries did not share ASEAN's vision. The ASEAN members themselves, moreover, also differed in their interpretations of ZOPFAN. The end of the Cold War has removed the obstacles that had divided ASEAN from other countries in the region. The entry of Vietnam, Laos, Cambodia and Myanmar into the Association will undoubtedly usher in a new era of security for Southeast Asia. By becoming members of ASEAN and adhering to the various rules, regulations and norms of the Association, these new members will be expected to uphold regional stability and maintain harmonious relations between one another and with the rest of ASEAN. Although some dangers remain, one may realistically hope that Indochina will no longer be a source of regional insecurity. In the past, ASEAN's sense of insecurity was not only caused by the potential threat from a militarily powerful and expansive Vietnam, but equally or perhaps more urgently, the ASEAN countries felt threatened by China. There was, therefore, a considerable degree of apprehension that China would use the countries with which it had close relations, such as Cambodia under Pol Pot, and Myanmar, as a conduit for expanding its power and influence to Southeast Asia. With the enlargement of ASEAN, this fear has been considerably allayed. Common membership in ASEAN will lead to a greater homogeneity of the members' perceptions regarding regional security. Although ASEAN does not have a common foreign and security policy

ASEAN's Enlargement: Political, Security and Institutional Perspectives

35

like that in the European Union, in practice the members of ASEAN have developed the habits of close consultation with one another, regarding their respective external initiatives, so that their foreign policies are harmonized to a relatively high degree. This means that even in launching unilateral initiatives, an ASEAN state will normally seek the support of other members of the Association, ensuring that a unilateral initiative would not be detrimental to the regional interests as a whole. The enlargement of ASEAN will, therefore, spread the trend towards the harmonization of foreign and security policies from the ASEAN subregion to the whole of Southeast Asia. Such a situation will clearly reduce unpredictability and minimize the opportunities for foreign intervention, or for an external power to play one Southeast Asian state against another. The development of common security perceptions will also facilitate the efforts to realize the ideal of ZOPFAN in Southeast Asia. No longer divided among themselves, the Southeast Asian countries can now present a united front towards the outside world and seek international recognition for the realization of the zone of peace, freedom and neutrality in Southeast Asia, which is the primary objective of ASEAN's political co-operation agreed upon in the 1976 Declaration of ASEAN Concord. In fact, a major step in this direction has already been taken. In December 1995, the heads of states/governments from all ten Southeast Asian countries met for an informal summit for the first time. The meeting, which took place in Bangkok, not only agreed on a tentative timetable for the entry of Cambodia, Laos and Myanmar into ASEAN, but of equal importance, the leaders also signed the Treaty on the Nuclear Weapon Free Zone for Southeast Asia (SEANWFZ), which is an important component of ZOPFAN. The end of the Cold War, however, may shift the relevance of ZOPFAN. ZOPFAN tends to be exclusionary vis-a-vis the major powers' security involvement in Southeast Asia, while the reality is that the security of Southeast Asia cannot be separated from that of the Asia-Pacific as a whole. The trend is towards the development of a wider co-operative security structure, as manifested in the ASEAN Regional Forum (ARF). By forming the ARF, ASEAN implicitly recognizes that the major powers have a legitimate role to play in the security of Southeast Asia. Nevertheless, it can also be argued that the end of the Cold War and the establishment of the ARF do not necessarily make ZOPFAN irrelevant. For instance, Soedjati Djiwandono argued that "with the end of the Cold War, ZOPFAN in fact assumes even greater significance and has become even more relevant" for three major reasons. Firstly, there is uncertainty as to the emerging world order and the possibility that the new power constellation in the Asia-Pacific may create new security problems. Secondly, in the

36

Dewi Fortuna Anwar

multipolar balance of power, the great powers are likely to continue to engage themselves in a competitive relationship because of the nature of international relations dominated by sovereign and independent states. Finally, seeds of domestic and regional conflicts remain. In Djiwandono's view, ZOPFAN may be attained if it becomes more inward than outwardlooking. He stressed that the regional countries should put their own house in order, become less dependent on major powers for their security, and promote good neighbourly relations.u The impact of ASEAN's enlargement on regional security, particularly with regard to external threats and the ongoing development of a more autonomous regional order are overwhelmingly positive. Of course, it can be argued that the larger membership will make it more difficult for ASEAN to come to a consensus. Nevertheless, differences of opinion within a single ASEAN family are clearly qualitatively different from those between countries which are not members of the same grouping. The entry of new members into the Association, however, will bring additional challenges to security co-operation among the ASEAN members, which are currently being carried out at the bilateral or trilateral levels, outside the ASEAN context. Although there is no ASEAN-wide security co-operation, the existing bilateral security arrangements and military exercises have created a network of security relations which underpins ASEAN's peace and stability. These multiple sets of dyadic relations have taken many years to nurture and cannot be easily duplicated by the new members. It will clearly take more time, effort and resources for the old and new members of ASEAN to create new sets of bilateral security cooperation which can be extended to all members. To facilitate closer security co-operation among all the ASEAN countries, both old and new, the time has come to consider the possibility of establishing ASEAN-wide security co-operation, without eliminating the existing bilateral and trilateral security ties. By establishing an ASEANwide security forum, all members can take part in various security-related activities, such as joint military exercises, military exchanges, and seminars. In such a way, efforts to build confidence will be greatly enhanced, as close co-operation among military personnel is the most effective way to remove mutual suspicions and promote transparency. By promoting closer security ties among themselves within a more cohesive framework, the ASEAN countries will also enhance their collective defence capability and strengthen their position in the ASEAN Regional Forum. Although the security of Southeast Asia is closely linked to that of the wider Asia-Pacific region, which explains the need for the ASEAN Regional Forum, there a:re nevertheless security issues which are intrinsically limited to the Southeast Asian region, and should be solved by these countries

ASEAN's Enlargement: Political, Security and Institutional Perspectives

37

themselves. Moreover, to maintain its core position in the ASEAN Regional Forum, ASEAN also needs to develop and strengthen its own security core. One way to do this is to develop a framework for ASEAN security co· operation. To take an economic analogy, ASEAN needs to develop an ASEAN Free Trade Area as a preparation for participating in the much larger trade liberalization under APEC (Asia-Pacific Economic Cooperation). Unlike economics, where regionalism is always regarded as second best, and the first preference is for an unhampered global trading system, in security, the reverse is true. Internationalization is not always the best way to deal with a security problem. Instead, security problems should be localized as far as possible, thereby giving special importance to subregional organizations and other limited forms of security arrangements. Suggestions for ASEAN to include co-operation on regional security as part of its agenda are not new, although official response to these suggestions was mostly negative in the past. As early as 1990, for instance, J usuf Wanandi wrote that there was a "need for ASEAN to develop a multilateral military cooperation which is defensive in nature". Wanandi argued that ASEAN could seek assistance from Japan both in the acquisition of technology and financing. ASEAN military co-operation could be specifically directed to guard and secure the sea lanes of communication (SLOCs) in Southeast Asia from pollution, collision, or piracy. 14 An ASEAN security arrangement, designed to address immediate ASEAN security concerns, can be viewed as a sub-system within the wider ARF, in the same way that the bilateral alliances between the United States and Japan or between the United States and South Korea, or the multilateral alliances of the Five Powers Defence Arrangement can be regarded as sub-systems within the wider regional framework. ASEAN as an International Bargaining Tool One of the greatest successes of ASEAN has been in the area of regional and international diplomacy. The collective weight of ASEAN has made this regional association a force that has to be taken seriously, even by the major world powers. ASEAN's role as an international bargaining tool has not only benefited its members collectively, but the Association has also been deployed successfully to support individual member's negotiating positions in the international arena. ASEAN's international influence extends well beyond the cumulative power of its members, if judged by their economic and military capabilities alone. The increasing importance of ASEAN can be seen from its central role in the recently established ASEAN Regional Forum, the first forum for multilateral security dialogue in the Asia-Pacific. Within this forum,

38

Dewi Fortuna Anwar

ASEAN is regarded as an actor that must be taken into account, alongside the major players in the Asia-Pacific region, which include the United States, China, and Japan. In Southeast Asia, ASEAN's authority has mostly been unchallenged, as external powers defer to ASEAN's positions on many crucial issues, including the Cambodian question. Similarly, ASEAN occupies an important position in APEC. APEC, which was first proposed by Australia, would not have taken off if ASEAN had remained opposed to the idea. The special position that ASEAN occupies in APEC can be gauged from the fact that the annual APEC meetings rotate from an ASEAN country to a non-ASEAN country. The launching of the Asia-Europe Meeting (ASEM) also enhances ASEAN's international role, particularly in its dealings with the European Union. The enlargement of ASEAN to cover the whole of Southeast Asia, with a total population of around 500 million people, will undoubtedly add more weight to ASEAN and consequently enhance its position vis-a-vis the outside world. A united stance by the whole of Southeast Asia on various political and security issues, such as those involving Cambodia, the South China Sea, nuclear disarmament, or the security of the sea lanes, will strengthen ASEAN's negotiating positions. External powers also need to pay much more attention to ASEAN, particularly on issues concerning the Asia-Pacific as a whole. Yet, the enlargement has also brought new problems for ASEAN diplomacy, at least in the short run. The controversy over Myanmar's entry has affected ASEAN's relations with its Western Dialogue Partners, since the latter have refused to deal with Myanmar before democracy is restored in that country. ASEAN's insistence on admitting Myanmar at the same time as Laos in July 1997 drew sharp criticism from the United States, the European Union, and other Western Dialogue Partners of ASEAN. These Dialogue Partners insist that Myanmar be excluded from various ASEAN projects funded by the former. Britain, the host of a recent ASEM meeting, also excluded Myanmar from its invitation list. This was possible because participation in ASEM is based on individual country membership, despite the fact that most of the members belong to two regional organizations, ASEAN and the European Union. Until its international reputation is restored, which is dependent on its domestic political performance, Myanmar may prove to be a liability for ASEAN, particularly in the Association's relations with the Western countries. At a time when international attention is focusing more and more on issues such as democratization, good governance, and the protection of human rights, ASEAN's political image has been tarnished by its embrace of Myanmar, as it gives the impression that the Association is insensitive to these issues. Of equal importance, ASEAN has come under strong criticism from pro-democratic forces in the region, including from

ASEAN's Enlargement: Political, Security and Institutional Perspectives

39

Aung San Suu Kyi and the opposition in Myanmar, who fear that Myanmar's membership in ASEAN will only serve to strengthen the military regime by giving it regional legitimacy. For its part, ASEAN has a strong argument on these issues. ASEAN firmly believes that its policy of constructive intervention will speed up political and economic reform in Myanmar. After all, Myanmar had embraced self-imposed isolation for so long that further isolation of the country is unlikely to improve the situation there. By allowing Myanmar to participate in regional affairs and showing it the many advantages of regional co-operation, which in turn will open the door for wider international interaction, ASEAN hopes to induce the Myanmar Government to change its ways and adopt a more reconciliatory approach towards its political opponents. In the meantime, ASEAN's reputation is on the line. The world is waiting to see whether ASEAN's policy of constructive engagement will indeed bring about the desired results, or whether the sceptics will be proven right. It is now up to Myanmar, with active encouragement from ASEAN, to confound the sceptics and show that its membership in ASEAN will not only be beneficial for the region as a whole, but that it will usher in a new era of stability and prosperity for Myanmar itself. Otherwise, ASEAN's hard-earned international standing may suffer irreparable damage from its close association with a country which is still viewed by many as a pariah state. The Institutional Implications of ASEAN's Enlargement It is difficult to determine whether ASEAN's enlargement will lead to significant changes in ASEAN's institutional structure. Since its establishment as a loose regional association with limited forms of cooperation without any central body in 1967, ASEAN has gradually grown to become a much more structured organization with an ever widening and deepening area of co-operation. The ASEAN Secretariat, established in 1977 as nothing more than a glorified post office and headed by the Secretary-General of the ASEAN Secretariat, has been transformed into a much more influential body. Since 1992, the position of Secretary-General has been promoted to become the Secretary-General of ASEAN, with ministerial rank. To facilitate ASEAN economic co-operation and the establishment of an ASEAN Free Trade Area, the various ASEAN economic committees, which had formerly been overseen by the ASEAN Economic Ministers' Meetings (AEMM), have been consolidated, and their activities are co-ordinated by the ASEAN Secretariat. This move has given more influence to the ASEAN Secretariat, although ASEAN is still a long way from becoming an integrated regional organization with supra-regional

40

Dewi Fortuna Anwar

l"k the European Union. The evolution of ASEAN's institutional

powe;ur~ ~as been stimulated by the growing scope of ASEAN regional str~:peration, particularly in the economic and functional fields. The ~~largement of ASEAN, without a further intensification of ASEAN co-

operation, will not necessarily lead to a strengthening of the organization. Nevertheless, certain changes are likely to occur as a consequence of ASEAN's enlargement. In cognizance of the limited means of the new members, efforts are likely to be made to streamline ASEAN activities. Presently, there are well over 200 ASEAN meetings annually, reflecting the proliferation of ASEANrelated projects. Given their limited qualified manpower and financial resources, some new members will find it difficult to participate in every ASEAN meeting or project. Ways and means must, therefore, be found to enable the new members to benefit from the various ASEAN activities without being overburdened by their regional obligations. Yet at the same time, they must not be made to feel like second-class members. To increase ASEAN's effectiveness, particularly during an economic crisis, not only should activities and programmes be streamlined, but ASEAN's capacity for decision-making and collective action should be enhanced through procedural reform and institutional renovation. At the same time, special efforts are needed to encourage the participation of nonstate actors in ASEAN activities, particularly the private sector and nongovernmental organizations. Such participation would broaden and deepen ASEAN's functional linkages. Although the preferred method of decision-making in ASEAN is deliberation to reach a consensus, ASEAN's enlargement and increased diversity in membership will undoubtedly make that more difficult than before. To ensure that ASEAN does not become mired in endless talks in which agreements will be of the lowest common denominator, ASEAN may have to resort to voting more frequently in the future, applying the nine or ten minus x formula. ASEAN is, in fact, quite flexible in this respect, particularly on economic and functional issues. The staggered timetable for the new members' obligation to join AFTA is an indication of that flexibility. Such flexibility, however, is unlikely to be extended to the political and security fields where consensus is likely to remain the rule. Furthermore, the ASEAN Secretariat is unlikely to play a role in this area. The enlargement process has, nevertheless, given a more central role to the ASEAN Secretariat in several fields. The Secretariat has been assigned the role of teacher and mentor to the prospective/new members, familiarizing them in the various aspects of ASEAN and inducting them in the ASEAN ways. Consequently, from the very beginning, the new members have been conditioned to become more dependent on the ASEAN Secretariat. This is a very different situation from the relations between

ASEAN's Enlargement: Political, Security and Institutional Perspectives

41

the original members and the Secretariat. It took the original ASEAN members many years to agree to the establishment of the ASEAN Secretariat, and even then, they were reluctant to give any meaningful power to the Secretary-General. The ASEAN governments are happy that the Secretariat can now do most of the studies needed for implementing ASEAN co-operation, as few of the officials in the respective ASEAN countries have the continuity of assignments to develop expertise on ASEAN, or the time to prepare the paper-work for the numerous ASEAN meetings. Nevertheless, ASEAN is still regarded as a dependent variable, so that the ASEAN Secretariat is not allowed to assume a decision-making role, which remains the exclusive domain of the national governments. While it is also highly unlikely that the new members would wish to see a more supra-national role for ASEAN, their expectations of concrete economic benefits from the Association and the important role that the ASEAN Secretariat is playing in helping them cope with their new status, will probably mean that the former will be more sympathetic to the strengthening of the ASEAN Secretariat. The new members' positive view of the active role of the ASEAN Secretariat, however, has mostly been due to the fact that the (then) Secretary-General, Dato Ajit Singh, was a strong champion of their early entry into ASEAN. However, if in the future, the Secretary-General were to support the policy of constructive intervention towards these countries, by calling for domestic political reforms, democracy and the protection of human rights, their enthusiasm for a more active ASEAN Secretariat may diminish. ASEAN is likely to continue to be a rather loose regional organization with no supranational authority, compared with the European Union, but the growing integration of the ASEAN region is probably unavoidable. The recent regional crises, such as the spread of haze from forest fires in Indonesia, and the contagion effect of the currency crisis in Thailand to other members of ASEAN and beyond, call for more concerted regional efforts to contain them. The political crisis in Cambodia has also led ASEAN into unchartered waters, with its policy of "constructive intervention". Without too much fanfare and formal debate, the ASEAN institutional structure will very likely continue to evolve naturally, in response to various regional and international events, making ASEAN into an ever more structured and powerful organization than its original founders had ever conceived. In fact, the prolonged economic crisis can act as a powerful new glue bonding the ASEAN members closer together. As a way of reducing the members' dependence on foreign currencies, particularly the U.S. dollar, the ASEAN Summit in Kuala Lumpur in December 1997 called for an increase in the use of local currencies in intra-regional trading. The ASEAN

42

Dewi Fortuna Anwar

leaders even considered the possibility of introducing an ASEAN unit of payment as well as establishing an ASEAN Fund. To its Dialogue Partners, the enlargement of ASEAN is seen in mixed light. Now that the Cold War is history, and there is no longer any need for the major powers to foster proxy relationships among countries in Southeast Asia, ASEAN's enlargement is viewed as inevitable and even welcomed. The prospect for greater peace and stability covering the whole of Southeast Asia encourages greater potential for economic development in areas that had in the past been ignored by foreign investors. The promise of a large ASEAN market of about 500 million people after AFTA is realized is another factor that makes the Dialogue Partners look favourably towards the enlargement. On the other hand, most of the Western countries have opposed Myanmar's entry into ASEAN. ASEAN's increasing assertiveness, mostly because of its past political and economic successes but also bolstered by its growing membership, has also led to some differences with Western Dialogue Partners over other issues, especially those on democracy and human rights. This may change as a result of ASEAN's present economic predicament, which will make the ASEAN leaders less prone to preach about the superiority of "Asian values". However, if the crisis were to deepen further - which ASEAN may blame on Western capital speculation and domination - the Association's relations with its Western Dialogue Partners could come under further strain. Conclusion The enlargement of ASEAN brings about various political and security implications, and to some extent, may affect the Association's institutional structure. On the whole, however, the inclusion of all Southeast Asian countries within one regional organization, as envisaged by the founders of ASEAN, will benefit the region. An expanded ASEAN will promote regional harmony by reducing intra-regional tensions and disputes. It will also enhance regional security as the members' perceptions and policies on regional political and security issues become more convergent, which in turn will reduce the opportunities for external intervention in regional affairs. The enlargement of ASEAN also enhances the Association's geopolitical weight in global and regional affairs, and increases its leverage in dealing with the major powers, such as the United States, China, Japan, and the European Union. All of these factors will forge a new sense of regional self-confidence and identity. The enlargement of ASEAN may also bring disadvantages to the Association. The most obvious disadvantage is the danger that it will become much harder for ASEAN to reach a consensus, because of the

ASEAN's Enlargement: Political, Security and Institutional Perspectives

43

existing differences between the old and new members. The absence of a common external threat, which had acted as an effective glue for ASEAN during the Cold War, may also slow down the forging of a more cohesive ASEAN. There is also some danger that the historical suspicions between certain countries may infect ASEAN. The fact that many of the new members have been involved in protracted conflicts, in which threats and use of force were commonplace, throws some doubt on their ability to conform easily to the ASEAN code of conduct, which insists on the pacific settlement of disputes. On a more immediate basis, the enlargement of ASEAN to include Myanmar is causing some complications in ASEAN's relations with its Western Dialogue Partners, particularly the United States and the European Union. To minimize the risks and capitalize on the gains, ASEAN should carry out certain measures to strengthen the Association and to ensure that regional stability is not totally dependent on the political will of the respective members. ASEAN needs to explore the possibility of expanding its political and security co-operation to enable the region to develop into a real security community with an assured, rather than a conditional, peace. Towards this end, there is a need to give more teeth to the Treaty of Amity and Co-operation in Southeast Asia so that its enforcement is not simply based on a best-case scenario situation as it is now. There is also a growing need to develop an ASEAN-wide security co-operation, not only to integrate the new members into the existing security networks among the ASEAN countries, but equally important, to strengthen the ASEAN core in the ASEAN Regional Forum. Notes 1 Much has been written about the early days of ASEAN. See, for example, Bernard K. Gordon, "Regionalism in Southeast Asia", in Man, State and Security in Contemporary Southeast Asia, edited by Robert 0. Tilman (London: Pall Mall, 1969). 2 See Michael Leifer, "Problems and Prospects of Regional Cooperation in Asia: The Political Dimension", Indonesian Quarterly 4, Special Issue (1976): 92104. See also Charles E. Morrison and Astri Suhrke, Strategies of Survival: The Foreign Policy Dilemmas of Smaller Asian States (St Lucia: University of Queensland Press, 1978). 3 Ulrich Grundler, "China's Future Role in Southeast Asia", in New Directions in International Relations in Southeast Asia, edited by Lau Teik Soon (Singapore: ISEAS, 1973), pp. 53-60. 4 For Indonesia's policy towards ASEAN, see Dewi Fortuna Anwar, Indonesia and ASEAN: Foreign Policy and Regionalism (Singapore: ISEAS, 1994). 5 See Robert 0. Tilman, The Enemy Beyond. External Threat Perceptions in the ASEAN Region, Research Notes and Discussion Paper no. 42 (Singapore: !SEAS, 1984).

44

6 7 8 9 10 11

12

13 14

Dewi Fortuna Anwar See Anwar, Indonesia and ASEAN, especially chapter 5. Estrella D. Sollidum, Towards a Southeast Asian Community (Quezon City: University of Philippines Press, 1974 ). See Hans H. Indorf, Impediments to Regionalism in Southeast Asia. Bilateral Constraints among ASEAN Member States (Singapore: ISEAS, 1984). Dewi Fortuna Anwar, "Twenty-Five Years of ASEAN Political Cooperation", in ASEAN in a Changed Regional and International Political Economy, edited by Hadi Soesastro (Jakarta: CSIS, 1995). Dewi Fortuna Anwar, "Maid Issue Tests ASEAN Unity", Jakarta Post, 10 April 1995. For a discussion of the costs and benefits of an expanded ASEAN, see Carlyle A. Thayer, ASEAN's Expanding Membership, Submission to the Foreign Affairs Sub-Committee, Joint Standing Committee on Foreign Affairs, Defence and Trade (ASEAN Inquiry), Vol. I, Nos. 1-7, Canberra, March 1997. Muthiah Alagappa, "Regional Arrangements and International Security in Southeast Asia: Going Beyond ZOPFAN", Contemporary Southeast Asia 12, no. 4 (March 1991): 291. J. Soedjati Djiwandono, "ZOPFAN: Is It Still Relevant?", Indonesian Quarterly 19, no. 2 (1991): 115-30. Jusuf Wanandi, "Peace and Security in Southeast Asia", ASEAN ISIS Monitor, Workshop Report (Bangkok, 10-13 May 1990), pp. 12-13.

Impact and Implications of RSERN Enlargement on Trade

3

NAITAPONG THONGPAKDE*

Introduction ASEAN (Association of Southeast Asian Nations) leaders proclaimed in the Bangkok Declaration of 1995 that "ASEAN shall work towards the speedy realization of an ASEAN comprising all Southeast Asian countries as it enters the 21st century." This indicates clearly that the enlargement of ASEAN to cover the entire Southeast Asian region is a priority and the ultimate objective of ASEAN regional co-operation. Subsequently, in July 1997 ASEAN accepted the Lao People's Democratic Republic (PDR) and Myanmar as full members of ASEAN. Owing to internal political conflict, Cambodia was not granted membership at that time, but was integrated later in April 1999. The new members joined the Common Effective Preferential Tariff (CEPT) scheme, which is the key mechanism to integrate the ASEAN economies into the ASEAN Free Trade Area (AFTA). However, they have been given additional time to adjust their tariff schedules: Vietnam started reducing tariff rates in January 1996 and will reach the target in 2006, while the Lao PDR and Myanmar will have to complete their tariff reduction by 2008, eight years after the ASEAN-6 members.

* The author would like to thank Dr. Srawooth Paithonpong and Dr. Wisarn Pubhavesa for helpful comments. 45

Nattapong Thongpakde

46

AFTA has become a main instrument to fulfill ASEAN's objective towards free trade and investment, and an easing on the movement of people. ASEAN is not a homogeneous group: there are considerable differences among the members with respect to size, history, and level of industrialization and development (Ariff 1995). The inclusion of the new members aggravates the differences. These new members are still in the process of adjusting their institutions towards market-orientation. Furthermore, they have limited experience in international economic fora. Although the enlargement of ASEAN can create trade and economic opportunities, the new members may have difficulty restructuring their economies to take advantage of them. Such problems could also delay greater resource mobility within ASEAN. To enhance ASEAN co-operation, it is important to assess the positive impact of incorporating the new members and to identify the obstacles to future co-operation. This chapter aims to examine both, with special reference to trade issues. It will explore economic structures, trade patterns, and comparative advantages of the ASEAN members in order to analyse the impact and implications on trade of an enlarged ASEAN, and the potential for the future co-operation of ASEAN. In this chapter, the term ASEAN-6 refers to the "old" members: Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. The term "new members" refers to Cambodia, Lao PDR, Myanmar, and Vietnam. The term "ASEAN-10" is loosely used to include the present members. COMPARISON OF SOCIO-ECONOMIC DEVELOPMENT Income, Population, and Structure of Production The economies of the new ASEAN members are much smaller compared with the older ones, although Vietnam and Myanmar have larger gross domestic product (GDP) than Brunei, the smallest economy in the ASEAN-6. In 1994, Vietnam's GDP, the largest of the new members, was $15,570 million, compared with that of the Philippines, the smallest of the ASEAN-5, which was $64,162 million (Table 3.1). The Lao PDR's GDP was only $1,534 million in 1994. Including new members, therefore, increases the variation of the size of the ASEAN economies. The coefficient of variation of GDP rises from 0. 70 for the ASEAN-6 to 1.11 for the ASEAN-10. Table 3.1 shows the differences in per capita income. The Lao PDR's per capita GDP was $320 in 1994, which was only one-fourth of the per capita GOP of Indonesia, and one-seventh of Singapore's. The ASEAN-6 also show disparity of income per capita: the coefficient of variation of GOP per capita of the ASEAN-6 members is 1.19. The variation will be

Impact and Implications of ASEAN Enlargement on Trade

47

significantly reduced if Singapore is excluded. However, for the ASEAN10 the coefficient of variation rises to 1. 67. The GOP growth rates of the ASEAN members were quite high compared with other developing countries. The average growth rate of GDP of Malaysia, for instance, was 8.4 per cent per annum during 1990-94. The growth rates were 8.3 per cent, 8.2 per cent, 7.6 per cent for Singapore, Thailand and Indonesia, respectively, during the same period. Only Brunei and the Philippines had disappointing growth rates of less than 2 per cent per annum. The growth rates of the new members were satisfactory although they were not as high as those of some older members. The GDP growth rates were: 8 per cent per annum for Vietnam, 6.2 per cent per annum for Lao PDR, and 5.7 per cent per annum for Myanmar. While the economies of these new members are small, their populations are not negligible. Myanmar, Vietnam, Thailand, and the Philippines have TABLE 3.1 ASEAN-10: Key Economic Indicators

Population GDP Growth Rate

Countries

(Mil. US$)

GDP per Capita (US$)

Brunei Indonesia Malaysia Philippines Singapore Thailand ASEAN-6 Coef. of variation Cambodia Laos Myanmar Vietnam ASEAN-10 Coef. of variation

3,900 174,640 70,626 64,162 68,949 143,209

17,000 880 3,480 950 22,500 2,410

0.3 7.6 8.4 1.6 8.3 8.2

195.3 20.1 70.3 2.99 59.4

0.7012424 2,376 1,534 10,368 15,570

1.196332497 241 320 236 200

6.2 5.7 8

10.2 4.71 44.74 73.96

1.1132822

1.668663991

GDP

1990-94

1995

SouRCE: World Bank, World Development Report, 1996 (New York: Oxford University Press, 1996). For Brunei, from John Andrew, The Economist Pocket Asia (UK: Profile Books Ltd, 1997). For Cambodia and Myanmar, from Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries (New York: Oxford University Press, 1996).

Nattapong Thongpakde

48

similar numbers of people. The population in the ASEAN-10 is 38 per cent larger than the ASEAN-6, amounting to 481.6 million persons. Regarding the structure of production in the ASEAN economies, agriculture is the dominant sector in the new members. The share of agriculture in GDP is as high as 63 per cent for Myanmar, 47 per cent for Cambodia, and 51 per cent in the case of the Lao PDR. The share of agriculture in Vietnam is only 28 per cent, but that is still higher than those of the older members. The shares of agriculture in Singapore and Brunei are negligible. The Philippines' agricultural sector constitutes 22 per cent of GDP, the highest among the ASEAN-6, followed by Indonesia at 17 per cent (Table 3.2). Social Development Table 3.3 presents selected social indicators. Among the new members, Vietnam has better indicators on education and healthcare. Adult literacy rate in Vietnam was 94 per cent in 1995, the same ratio as Thailand's and second to Singapore's. Myanmar also has a high adult literacy rate. Vietnam's gross secondary school enrolment ratio was better than that of Thailand, which has the lowest rate among the older members. The Lao PDR and Cambodia face problems in education as well as healthcare, while

TABLE 3.2 ASEAN-10: Sectoral Share of GDP, 1995 (In per cent)

Agriculture

Manufacturing

Other Industry

Service

Brunei Indonesia Malaysia Philippines Singapore Thailand

2 17 14 22 0 10

46 24 32 23 27 29

8 17 12 10 9 11

44 42 42 45 64 50

Cambodia Laos Myanmar Vietnam

47 51 63 28

7 13 7 22

9 5 2 7

37 31 28 43

SouRcE: ADB, Key Indicators of Developing Asian and Pacific Countries (New York: Oxford University Press, 1996). For Brunei and Cambodia, from John Andrew, The Economist Pocket Asia (UK: Profile Books Ltd, 1997).

TABLE 3.3 Social Development Indicators Gross Secondary School Enrolment Ratio (%) (1995) Male

Brunei Indonesia Malaysia Philippines Singapore Thailand Cambodia Laos Myanmar Vietnam

48 56 71 69 38

...

31 23 43

Adult Litercy

Life Expectancy at Birth**(1995)

Population per Doctor**

Female

Rate* *(1995)

Male

female

1995

39 61 75 71 37

88 84 83 95 91 94

72.6 61 69 65 73 66

76.4 65 73 69 78

1323 7238 2656 1016 753 4361

72

No. of People per Telephone* 1995

5.1 166 10.1 74 2.8 36.4

;:::

1:\...

......

~

~

:::-.

0 ;:t

"'

~ ;:r..

""' tr1 ;:r..

z tr1

;:t

i:>

...

19 23 40

.."'... ..

~

~

57 83 94

49.5 50 54 63

52.4 53 58 68

27000 6495 3040

790 450 501 537

SouRCES: ADB, Key Indicators of Developing Asian and Pacific Countries (New York: Oxford University Press, 1996).

*John Andrew, The Economist Pocket Asia (UK: Profile Books, 1997). * * United Nations, Statistical Yearbook for Asia and Pacific (New York: United Nations, 1996).

~

"'~ "';:t,.,. 0

~

.,~

1:\...

"'

~

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Nattapong

50

Thongpak~

life expectancy at birth of these two countries are lower than that of Myanmar and Vietnam. The Lao PDR has 27,000 persons per doctor, while in Vietnam, there are 3,040 persons per doctor, which is high and comparable to some older members. From these indicators, one may conclude that Vietnam is not much different from some older members of ASEAN, while other new members are lagging behind. However, infrastructure in Vietnam is much less developed. Nevertheless, it had one telephone line for 537 persons in 1995, almost three times higher than Indonesia which had the highest ratio among the older members. The ratios in Cambodia, Lao PDR, and Myanmar were also very high. In summary, although the ASEAN-6 is not homogenous, the incorporation of new members widens the difference in social and economic characteristics. ASEAN TRADE PAITERNS Intra-ASEAN Trade Trade data in Table 3.4 show that intra-ASEAN trade is greater among the ASEAN-6 than with the new members, even though the share of trade with the new members rose between 1990 and 1995. Trade among the ASEAN-6 represented 93 per cent of exports and 97.7 per cent of imports in 1995. The corresponding shares were 98.3 and 97.5 respectively in 1990. The new members depend more on trade with the old members than among themselves. The ASEAN-6 are important to the new members for both markets and supplies. Thailand's share of trade with the new members is higher than that of other old members, though it is not much higher than those of Indonesia and Singapore. Nevertheless, intra-ASEAN trade is moderate. Intra-ASEAN exports of the ASEAN-6 as a percentage of total exports was 23.6 per cent in 1995. The share was as low as 6 per cent in the case of Indonesia and as high as 30 per cent in the case of Singapore in the same year. Import dependence within ASEAN has been less than export dependence, with the exception of Brunei. Consequently, the ASEAN-6 have depended on imports of machinery and materials from the industrialized countries for production; and ASEAN does not provide major markets for the old members, although intra-ASEAN trade has been rising. Compared with the ASEAN-6, the new members depend more on the ASEAN market. For Cambodia, the share of exports to ASEAN was 64 per cent; while it was 54 per cent, 25.7 per cent, and 13.8 per cent for the Lao PDR, Myanmar, and Vietnam, respectively. Cambodia and the Lao PDR have stronger trade relations with ASEAN than Myanmar and Vietnam. The share of ASEAN imports of the new members was higher

-

TABLE 3.4

~

Intra-ASEAN Trade

"1::)-

"'';),.

1990 Countries

With ASEAN-6

With New members

(%)

(%)

Export Import Export Import

Value Intra-ASEAN Trade

% Intra-ASEAN Trade

With ASEAN-6

With New members

(%)

(%)

Export Import Export Import Export Import

;:>

Value lntra-ASEAN Trade

~

%

Intra-ASEAN Trade

Export Import Export Import Export Import

"1::)-

[

:::-. 0 :::&

"'

~

Brunei Darussalam Indonesia Malaysia Philippines Singapore Thailand

100.0 98.4 99.3 98.2 98.1 95.4

100.0 97.6 98.6 90.2 99.4 93.6

0.0 1.6 0.7 1.8 1.9 4.6

0.0 2.4 1.4 9.8 0.6 6.4

462 2556 8664 396 11796 2750

422 1857 5561 1394 10436 4369

20.9 10.0 29.4 7.3 22.4 11.9

42.2 8.4 19.1 10.7 17.1 13.1

100.0 91.9 97.2 93.2 91.7 89.9

100.0 97.0 98.7 98.8 97.4 96.6

0.0 8.1 2.8 6.8 8.3 10.1

0.0 2.0 1.3

Total ASEAN-6

98.3

97.5

1.7

2.5

26824

24039

19.0

15.0

93.0

97.7

Cambodia Laos Myanamar Vietnam

78.1 90.9 99.1 92.8

58.3 80.0 100.0 97.8

21.9 9.1 0.9 7.2

41.7 20.0 1.0 2.2

32 44 116 349

24 90 174 541

76.2 68.8 27.8 13.8

42.9 60.4 26.0 19.0

90.9 38.8 100.0 84.0

Toral New Members

93.2

95.2

6.8

4.8

541

829

18.0

22.3

82.6

SOURCE:

"'I:>.

1991

::t:. ~ ::t:.

2.6 3.4

484 2536 20441 2306 35851 11973

2006 2165 13537 2897 27704 9252

22.7 5.9 27.6 13.4 30.3 21.1

58.2 5.5 17.4 10.2 22.3 12.5

~ '1>

7.0

2.5

73591

57561

23.6

16.6

;::

91.0 94.0 100.0 95.3

9.1 61.2 0.0 16.0

9.0 6.0 0.0 4.7

219 188 312 754

1162 464 1070 3176

64.0 54.0 25.7 13.8

75.4 70.3 46.7 27.4

95.2

17.4

4.8

1473

5872

24.7

36.5

1.2

~ l:l"J

;::

~

:!

'1>

'0"" :::&

~

"'

~

International Montary Fund, Direction of Trade (1996).

"'......

Nattapong Thongpakde

52

than that of exports, at 75.4 per cent, 70.3 per cent, 46.7 per cent and 27.4 per cent in the case of Cambodia, the Lao PDR, Myanmar, and Vietnam, respectively. Trading Partners of the New Members Tables 3.5 and 3.6 present data on the major trading partners of the new members. Within ASEAN in 1995, Singapore was the biggest market TABLE 3.5 Major Trading Partners of ASEAN's New Members: Exports Rest of the Japan Malaysia Singapore Thailand Vietnam World

Exporters

Year

USA

Cambodia

1989 1990 1991 1992 1993 1994 1995

0 0 0 0 0 1 5

2 3 5 8 79 8 7

7 15 9 13 12 24 13

7 19 29 38

1989 1990 1991 1992 1993 1994 1995

1 0 2 6 8

7 5 4

Lao PDR

Myanmar

Vietnam

SouRCE:

2 9 10 85 95 115 146

4 7 5 6 7 16 20

6 8 28 46 51 47 113

0 0 0 0 3 10

0

40 40 43 37 57 63 63

3 4 33 7 38 94 115

44 15 0 43 70 239 123

1 1

166 275 185 528 628 628 757

0

0 0

10

9

28 27

0 0 0 0 0 1 0

1989 2 9 1990 1991 227 1992 38 1993 46 1994 66 1995 79

18 28 45 43 65 69 86

5 9 16 17 52 25 63

21 46 81 98 101 128 192

2 49 0 0 0 29 37

1989 0 1990 0 1991 0 1992 0 1993 0 1994 95 1995 191

261 340 719 834 937 1179 1560

2 5 14 68 56 65 115

71 195 425 402 380 593 408

15 52 58

11 11

IMF, Direction of Trade (1996).

71 72

98 39

0

0 0 0 0

2122 1932 973 1543 1540 2024 3158

53

Jrnpact and Implications of ASEAN Enlargement on Trade

TABLE 3.6 Major Trading Partners of ASEAN's New Members: Imports

Importers

Year USA

Rest of the Japan Malaysia Singapore Thailand Vietnam World

Cambodia 1989 1990 1991 1992 1993 1994 1995

0 0 0 18 20 8 30

4 5 7 252 55 71 84

1 0 2 9 144 51 84

0 0 0 276 406 421 550

197 286 367

10 7 7 106 85 105

Lao PDR

1989 1990 1991 1992 1993 1994 1995

0 1 1 1 5 6 2

27 22 23 31 41 37 32

0 0 0 0 1 1 1

0 0 0 5 11 31 45

70 72 84 133 193 321 390

Myanmar

1989 1990 1991 1992 1993 1994 1995

12 19 26 5 14 12 18

76 111 91 106 110 75 173

5 32 74 99 114 244 255

11 119 296 289 368 430 701

1 20 4 0 0 98 63

Vietnam

1989 0 1990 1 1991 1 1992 2 1993 4 1994 44 1995 278

106 169 158 239 452 586 1014

1 1 6 36 25 66 295

41 497 722 822 1058 1146 1969

2 17 14 41 100 226 515

SouRCE:

0 1 5

72

12

35 40 601 117 53 229 322

18 4 18 16 23 28

3

29 36 42 70 85 222 162

0 0 0 0 0 0 0

89 367 577 559 642 730 1083 2881 2156 1582 1887 2285 3758 7515

IMF, Direction of Trade (1996).

for Myanmar, followed by Malaysia and Thailand. Myanmar exports to the United States and Japan were larger than to Malaysia and Thailand. With respect to imports, Singapore and Malaysia were the two major suppliers to Myanmar, with an import value of US$701 million from Singapore and US$225 from Malaysia, which was greater than imports from Japan.

Nattapong

54

Thongpak~

In the case of Vietnam, Singapore and Malaysia were the principal ASEAN markets, although they were less important than Japan. However, with respect to import trade, Singapore was the largest supplier of Vietnam, while Japan was the second. Among ASEAN suppliers, Thailand was second, followed by Malaysia. The picture was quite different for the trading patterns of Cambodia and the Lao PDR. These two countries relied more on ASEAN markets, especially Thailand, which was the major market for Cambodia and second to Vietnam for the Lao PDR. Thailand was the major supplier for the Lao PDR, but second to Singapore in Cambodia. However, the trade statistics do not include informal cross-border trade, which is significant between Thailand and the new members, and also among the new members themselves. Major Exporting Products Table 3. 7 summarizes the major exports of the new members. These include natural resources, especially wood products, rice, vegetable, fish, minerals, and agricultural products. Some countries have also begun to export manufacturing products, such as vehicle tyres and garments. Finally, electricity is a very important export for the Lao PDR.

TABLE 3.7 Principal Exports of Selected ASEAN Countries Countries

Major Export Products

Cambodia

Rice, fruit and vegetables, timber, vehicle tyres, gemstones, agricultural products, electronic equipment, cigarettes, alcohol, and construction materials

Laos

Timber and timber products, hand-made products, bamboo, coffee, tea, minerals, forest products, animal products, and electricity

Myanmar

Rice, tin, crude rubber, timber, precious stones, fibre and animal feeds, fish and fish products, vegetables, ores, manufactured goods, and telecommunications equipment

Vietnam

Oil, rice, peanuts, beans, rubber, steel, marine products, timber, corn, cashew nuts, black pepper, coal, tin, salt, cattle hide, rattan, jute, hand-made products, tea, fresh fruits, and vegetables

Impact and Implications of ASEAN Enlargement on Trade

55

Comparative Advantage Analysis To examine the comparative advantage of the ASEAN members, revealed comparative advantage (RCA) indices were calculated at the two-digit standard international trade classification (SITC) level. RCA is defined as the share of a product group in one country's exports divided by that group's share of world trade. T hus RCA = (X/X )/X/X ) ~'

1]

lj

IW

J

W

where X = exports i =sector j =country w =world A value of greater than one indicates that a country has revealed comparative advantage in that particular product, and vice versa. An increasing RCA value is interpreted as a country gaining advantage in that product, relative to the world market. Table 3.8 presents findings on the ASEAN-10 members for export products with an RCA value of greater than one for at least one year during 1990 and 1995. Brunei exports are very concentrated, with a strong advantage in natural gas and petroleum products, and, to a lesser extent, photographic equipment, and miscellaneous manufacturing products. In 1995, the products that showed comparative advantage for Cambodia were crude rubber, cork and wood, textiles and garments, crude animal and vegetable materials, and fish. Comparative advantage declined in coffee, hides, and minerals. The Lao PDR had strong competitiveness in cork and wood products, and in more recent years, garments. It also showed export advantage in other natural resources, such as coffee, animal hides, and crude animal and vegetable materials. Myanmar's and Vietnam's competitiveness was more diversified than those of Cambodia and the Lao PDR. Myanmar's exports for which the RCA was greater than one in 1995 were cork and wood, vegetables and fruit, fish, oil seeds, sugar, crude rubber, cereals, animal feed, hides, oil seeds, minerals, and garments. In the same year, products that showed comparative advantage for Vietnam were resource-based products such as coffee, fish, cereals, oil seeds, crude rubber, minerals, crude animal and vegetable materials, coal and petroleum products; and labour-intensive products such as garments, travel goods, furniture, and footwear. From the RCA analysis, it is apparent that the new members had comparative advantage in resource-based industries and some labour-

"'

TABLE 3.8 ASEAN-10: Export Products with a Revealed Comparative Advantage Index Greater than 1, 1990-95 Export Countries

SITC

BRUNEI

33 34 41 88 89 95 99

CAMBODIA

03 07 21 22 23

Description

Petroleum, petroleum products, and related materials Gas, natural and manufactured Animal oils and fats Photographic apparatuses, equipment and supplies, and optical goods, and watches Miscellaneous manufactured articles Armoured fighting vehicles, arms of war, and ammunition thereof Non-identified products Fish (not marine mammals), crustaceans, molluscs and aquatic invertebrates, and preparations thereof Coffee, tea, cocoa, spices, and manufactures thereof Hides, skin and fur-skins, raw Oil seeds and oleaginous fruits Crude rubber (including synthetic and reclaimed)

1990

1991 1992 1993 1994

0\

1995

6.60 7.03 7.77 6.63 7.32 8.24 47.12 46.22 39.92 43.29 57.11 69.75 1.53 0.00 0.00 0.00 0.00 0.00 0.01 0.01

0.01 0.05

0.85 1.36

2.12 2.48 3.17 3.18

1.47 1.28

0.00 0.00

0.00 0.06 0.00 11.67

1.04 0.07 0.00 0.00

0.04 0.00

3.08

2.68

0.67

0.98 1.42

0.12 5.93 13.62 3.58 22.52 18.77

0.06 1.58 2.21

0.05 0.03 0.55 0.24 0.07 1.58

~ ..... $1

'1::)-

a

~

;2 a

128.12 46.28 32.67 33.31 64.35

~ $:>

?:-

f}

TABLE 3.8 (continued) ASEAN-10: Export Products with a Revealed Comparative Advantage Index Greater than 1, 1990-95 Export Countries

~

;:I

SITC

24 26 28 29 83 84 93 99 MALAYSIA

l """... "'I:
..

~

~

. (':)

'-.l .....

72

Nattapong Thongpakde

intensive industries, especially garments. For the old members, the advantage was in manufactured products. Singapore had the advantage in high-technology products, such as computer and telecommunications equipment, electrical machinery, and photographic equipment. Malaysia showed competitiveness in manufacturing products, such as computer goods, electrical machinery, furniture, telecommunications equipment; and in some resource-based products, such as crude rubber, wood, vegetable fat, and petroleum. Thailand, the Philippines and Indonesia had similar patterns in export comparative advantage, showing comparative advantage in agriculture, resource-based, and labour-intensive products. In addition, Indonesia showed strong competitiveness in petroleum products. Table 3.8 shows that Thailand's export products whose RCA values were greater than one in 1995 were crude rubber, fish, garments, sugar, meat, cereal, vegetables and fruit, dyeing materials, leather, yarn, computer goods, telecommunications equipment, electrical machinery, furniture, and travel goods. The Philippines had a variety of products that showed an RCA greater than one in 1995. They included vegetable fats, fish, vegetables and fruit, sugar, animal feed, minerals, crude animal materials, fertilizer, telecommunications equipment, electrical machinery, furniture, and travel goods. In addition to petroleum, Indonesia had a comparative advantage in the following exports: fish, coffee, crude rubber, cork and wood, pulp and paper, metals, coal, animal and vegetable fat, fertilizer, cork and wood manufacturing, yarn, garments, footwear, and furniture. Even among the older ASEAN members, export comparative advantage was not unique. Singapore showed strong comparative advantage in hightechnology products while Malaysia showed strong advantage in highskilled industries and some natural resources. Thailand, the Philippines, and Indonesia had stronger agricultural sectors than Singapore and Malaysia, and were also competitive in labour-intensive products. Thailand also exports some high-skilled products, such as computer parts and electronics.

ASEAN ENLARGEMENT AND AFTA This section discusses the potential impacts of ASEAN enlargement on the ASEAN Free Trade Area. This issue can be viewed in two ways. On the one hand, it increases economic opportunities and activities within ASEAN. On the other hand, it may undermine the process of the implementation of AFTA. Both issues will be investigated below.

Impact and Implications of ASEAN Enlargement on Trade

73

Trade Creation

Increasing Market Size and Resource Endowment Diversification ASEAN enlargement will raise the population from 355.2 million, for the ASEAN-6, to 481.6 million for the ASEAN-10. This expanded market size will raise intra-ASEAN trade. While the average income in each new member is still low, their GDP growth rates are satisfactory. Therefore, the prospect of trade creation, taking advantage of the market size, is quite good. Another factor that will stimulate intra-ASEAN trade is resource diversification. The structure of the ASEAN-6 economies is quite similar, and thus the scope of exchange is limited. By contrast, the new members differ from the ASEAN-6 with respect to factor endowment and pattern of production. These new members are rich in natural resources and have low-wage labour, while the older members have higher-skilled labour and more capital. Classical trade theory suggests that trade between two countries stems from the differences in comparative advantage, which is determined by factor endowment. For example, countries with abundant natural resources will export resource-intensive products, and countries where capital is relatively abundant will export capital-intensive goods. Economic integration has stronger trade creation effects when the resource endowment is more diversified among members because the patterns of production are complementary among them. In the previous section, the analysis showed that new members have comparative advantages in agriculture, processed agricultural commodities and raw materials; while the older members show a strong comparative advantage in manufactured goods. Therefore, AFTA integration can widen the scope of exchange and raise intra-ASEAN trade. The volume of trade of the new members is relatively small. Therefore, its impact on intra-ASEAN trade will not be significant after integration. The trade data in 1995 (Table 3.4) show that the new members have stronger trade linkages with ASEAN than the older members. However, the share of intra-ASEAN exports in total exports rose from 23 .6 per cent for the ASEAN-6 to only 25 per cent for the ASEAN-10; and the corresponding share of intra-ASEAN trade (exports and imports) increased from 20 per cent to 21 per cent. One can see that even with enlargement, trading with non-member countries will remain important for the ASEAN-10. The formation of a free trade area can also create trade diversion. This occurs when a country imports a good from a member country which was previously imported from the outside world because of the shift in tariffs, quotas or other trade barriers. Joining AFTA will, to some extent,

74

Nattapong Thongpakde

divert the trade of the new members towards the old members. The net welfare gains will depend on the share magnitude of trade creation and trade diversion. In the case of the ASEAN-1 0, it is likely that trade diversion and its effects will be small since their shares of trade with the old members are already large. In 1995, the old members supplied more than 70 per cent of the Lao PDR's and Cambodia's imports; while intra-ASEAN imports for Myanmar and Vietnam were 46 per cent and 27 per cent, respectively, which were higher than the intra-ASEAN trade of the old members. Moreover, most tariff rates imposed on the products in the Inclusion Lists of the new members are less than 5 per cent and the impact of tariff reduction in the first stage is small. Therefore, trade diversion should not be a major concern in ASEAN enlargement. AFTA, which entails the elimination of tariff and non-tariff barriers, was launched in 1993, and the main mechanism of AFTA is the Common Effective Preferential Tariff scheme. At the beginning, the AFTA agreement had a timetable of fifteen years for tariff reduction; it was shortened to ten years at the fifth meeting of the AFTA Council in 1994. That meeting also admitted unprocessed agricultural products into the CEPT scheme. Under the present scheme, the fast-track tariff reduction will be completed by the year 2000 and the normal-track tariff reduction will end in 2003. AFfA allows sensitive items to be excluded from these two tracks. Products in the Temporary Exclusion List have been transferred to the Inclusion List in five equal instalments annually since 1 January 1996 to allow sufficient time for tariff adjustment. Besides the Temporary Exclusion List, there is a permanent Exclusion List for sensitive products (ASEAN Secretariat 1995). According to the agreement, the old members will reduce tariff rates to 0 to5 per cent by 2003. New members must commit to AFTA within the same time-frame (ten years) of the previous agreement. Therefore, Vietnam will lower tariff rates to 0 to 5 per cent in the year 2006 and the Lao PDR and Myanmar in 2008. The total number of tariff lines in the Inclusion List is 44,642, while there are 3,685 tariff lines in the Temporary Exclusion List. Vietnam placed 857 tariff lines in the Inclusion List, the smallest of the ASEAN-7. Its Temporary Exclusion List includes 1,189 tariff lines, the second largest after Indonesia. The products in the Temporary Exclusion List will be phased in from 1 January 1999. Vietnam's CEPT package consists of 70 per cent of the total tariff lines, with an average CEPT tariff rate of 0.88 per cent, which is lower than those of the old members, with the exception of Brunei and Singapore. In the Inclusion List, Vietnam has included products whose tariff rates were already less than 5 per cent. Similarly, most products in Myanmar's and Lao PDR's Inclusion Lists have

Impact and Implications of ASEAN Enlargement on Trade

75

tariff rates already under 5 per cent. Therefore, tariff reduction with respect the Inclusion List will not be a problem for the new members. However, a large number of products are on the Exclusion Lists (2,818 tariff lines for the Lao PDR, and 2,722 tariff lines for Myanmar) and some products have very high tariff rates. The next stage of tariff reduction will therefore be more difficult. Regional tariff reduction should increase trade among members based on comparative advantage. However, to get the most from tariff reduction, the ASEAN members should commit to accelerate the pace of tariff reduction. In addition, because new members' major exports are unprocessed agricultural products, primary materials and labour-intensive goods, the ASEAN-6 should lower tariffs on major products which the new members export. For example, the tariff rates on many goods that new members export are higher than 20 per cent, including live animals, food, furniture, footwear, vegetables, and fruit (Vu Tuan Anh and Bui Tat Thang 1997, pp. 54-55). For agricultural products, 20 per cent of tariff lines is in the Temporary Exclusion List and 12 per cent is in the Sensitive List. In addition, the timetable for tariff reduction on these goods can surpass 2003, and the final rates may be greater than 5 per cent. Furthermore, some major agricultural products are on the Sensitive List (ASEAN Secretariat 1995). Therefore, the scope of tariff reduction for agricultural products should be expanded to provide market access for new members. to

Trade Diversion Tariff reduction will also decrease informal trade since it makes smuggling less attractive. Reported border trade between Thailand and the neighbouring countries will increase, although real activity may not change significantly. While data on informal trade are not reliable, some studies estimate that it may be as much as 40 per cent higher than official border trade data. Enhancing Investment and Tourism The principal objective of AFTA is not to increase intra-regional trade. Rather, it is to make ASEAN an attractive investment area. The new members present new opportunities to expand investment and tourism: they offer a larger market, more diversified natural resources, abundant labour, lower wage costs, and additional tourism sites. Investment in these countries will stimulate trade through imports of materials and machinery, and exports of finished products. Infrastructure development, which requires large investments, is needed in these countries. It also creates

76

Nattapong Thongpakde

demand for raw material imports. For example, investment in construction in the Lao PDR increases the export of cement and petroleum from Thailand. Tourism creates trade in services and demand for locallyproduced souvenirs. Stimulating the Process of Liberalization and Internationalization of New Members The Indochinese countries are transforming their economies from socialism to capitalism. AFTA forces the new members to adjust trade practices up to international standards; and it makes tariffs uniform in term of rates and classification. Non-tariff barriers must be reduced and conform to international regulations. The AFTA agreement also includes co-operation in customs by, for example, formulating a uniform ASEAN tariff list, building a green corridor for commodities participating in the CEPT, and co-ordinating customs procedures. Entry into ASEAN is a first step for new members to participate in other international fora, as it assists them in institutional adjustment. Vietnam has joined the Asia-Pacific Economic Co-operation (APEC) forum; Cambodia and the Lao PDR have clearly stated that they wish to join the World Trade Organization (WTO) (AFTA Monitor, July 1997). The enlargement also helps ASEAN in trade negotiations, as ASEAN always seeks to negotiate as a group. Representing a larger number of countries and population, ASEAN's negotiating position is strengthened. AFTA will also increase competition in ASEAN, particularly for the newer members, whose economies have been closed for many years. Competitive external forces will promote greater efficiency and more competitive goods and services in these economies in the long run. However, the adjustment process of deregulating domestic markets may prove difficult in the short run. Potential Obstacles to AFTA

Concerns over Tariff Revenue and Current Account Deficit In the new member countries, there is a concern that reduction of tariff rates will decrease customs revenues, as the state budgets are highly dependent on these taxes. In the Lao PDR the percentage of customs revenue in government revenue was 20.1 per cent in 1995. The corresponding shares were 28.3 per cent for Vietnam, and 54.1 per cent for Cambodia (Motoyoshi Suzuki 1997, pp. 17-18). For this reason, policymakers may delay tariff reduction, which will then undermine regional trade creation. They are also concerned that tariff reduction will stimulate imports and worsen their trade and current account deficits. In 1997,

Jrnpact and Implications of ASEAN Enlargement on Trade

77

Vietnam increased tariff rates on automobiles, motor-cycles, and consumer oods to reduce imports and improve its trade position. g However, it is important to recognize that tariff reduction may actually increase government revenues. The government can collect more taxes if economic activities are increased. A study by Vietnam's Ministry of Finance indicates that if import value remains the same, the CEPT agreement will lower import-export tariff revenues by 9.4 per cent in 2006 from the 1995 level. However, if imports continue to grow at the current level of 20 per cent per annum, tariff revenues in 2006 will rise despite the reduction.

Resistance from Domestic Producers Trade liberalization is typical1y resisted by domestic producers who seek protection. Even in the old member countries, some producers lobby the government to put their industries on exclusion lists and delay tariff reduction. The problem for the new members is more serious, however, because the domestic producers include public enterprises, which are still important to these economies' output and labour. The share of public enterprise production in GDP was 40.2 per cent, 22.2 per cent, and 15 per cent in Vietnam, the Lao PDR, and Myanmar, respectively. Moreover, public enterprises are often managed by well-connected people who are able to influence government decisions. The process of liberalization depends on political will to overcome the resistance from actors and organizations that benefit from trade protection.

Difficulty in Liberalizing Trade in Services and Investment ASEAN's Vision 2020 advocates regional co-operation by creating the ASEAN Investment Area (AlA) by 2010 and creating an integrated ASEAN Economic Region by 2020, with zero tariffs and a free flow of capital and services. To achieve the goal of Vision 2020, the liberalization of investment and trade in services is necessary. ASEAN has set up the Coordinating Committee on Services to negotiate trade in services; and it has employed the WTO's General Agreement on Trade in Services (GATS) framework. Members will present a Schedule of Commitments, listing sectors and activities that provide market access, and national treatment to other members according to the mode of supply. Any limitations will be indicated in the Schedule of Commitments. The ASEAN framework will be GATS-plus (that is, the scope and coverage of the commitments must be an improvement over the GATS commitments). ASEAN members, excluding the Lao PDR and Myanmar, have presented initial Schedule of Commitments. The scope of this process is still limited because under GATS there are still many constraints on both market access and national

78

Nattapong Thongpakdc

treatment; and the coverage of negotiations includes only tourism~ telecommunications, finance, maritime transport, air transport 1 construction and professional services, with an emphasis on the first three sectors. The negotiations on trade in services and investments are more difficult than trade in goods issues. The CEPT scheme on tariff reduction is well established and under implementation, while the framework on trade in services and investment is at an early stage in ASEAN (as well as in other international fora). Because trade in services usually requires the establishment of foreign firms and movement of people, significant adjustment is necessary, especially with regard to laws, accounting systems, government regulations, and tax systems, and visa procedures, among others. Because prevailing institutions under socialist systems are very different from market-oriented systems, time is required for these countries to adjust to international practices. Conclusion With ASEAN's enlargement, new members will complement old ones in trade and investment. This should enhance intra-ASEAN trade, even though the volume of trade of the new members is still small. Therefore, ASEAN trade and economic activities with non-members will remain important, perhaps even dominant, in the foreseeable future. Because extra-ASEAN trade is important, unilateral liberalization is a key strategy for economic development in the ASEAN-10. AFTA must be viewed as an instrument to increase ASEAN member competitiveness in international markets and to attract foreign investment. Therefore, most-favoured-nation (MFN) tariff reduction will benefit members more than preferential tariff reduction in ASEAN. To achieve the goals of ASEAN's Vision 2020, the CEPT will not be adequate. Further liberalization in trade in services and investment is critical, especially because ASEAN lags behind other regional groupings in these areas. However, ASEAN enlargement may also make it more difficult to advance in these areas because of the differences in development and institutions between the two groups. Any delay in market deregulation and institutional adjustment in the new member countries will undermine the process of ASEAN co-operation. Therefore, it is crucial for the new members to commit to AFTA and greater economic liberalization. The old members can assist the new members to pursue economic restructuring and reduce the adjustment costs to accelerate the deregulation process.

Impact and Implications of ASEAN Enlargement on Trade

79

References AFTA Watch. "Regional Cooperation: Vision 2020 Plan Takes Shape". AFTA Monitor 5, no. 7 (July 1997): 1-3. Andrew, John. The Economist Pocket Asia. UK: Profile Books Ltd, 1997. Ariff, Mohamed. "The Prospects for an ASEAN Free Trade Area". WorldEconomy: Global Trade Policy 1995, pp. 53-64. Oxford: Blackwell Publishers, 1995. ASEAN Secretariat. AFTA Reader: Questions and Answers on the CEPT for AFTA. Jakarta: ASEAN Secretariat, 1995. Asian Development Bank (ADB). Key Indicators of Developing Asian and Pacific Countries. New York: Oxford University Press, 1996. Bank of the Lao PDR. Annual Report, 1995. International Monetary Fund (IMP). IMP Economic Review 1994. Washington, D.C., 1994. ____ . Government Finance Statistics Yearbook. Washington, D.C., 1995. - - - · Direction of Trade. Washington D.C., 1996. McCarty, Adam, and Vu Quoc Huy. "Vietnam's Economic Reform, 1986-95". Paper prepared for the Sectoral Economic Program, Thailand Development Research Institute, 1997. Suzuki, Motoyoshi. "Laos: Challenge for Development- Cost and Benefit Analysis of Joining ASEAN". Paper presented at the 5th Joint Research Conference on Asia-Pacific Relations, organized by the Foundation for Advanced Information and Research and Thammasat University, 26-28 February 1997. United Nations. Statistical Yearbook for Asia and Pacific. New York: United Nations, 1996. Vu Tuan Anh, and Bui Tat Thang. "ASEAN Economic Cooperation and Vietnamese Economy: A Country Study". Mimeographed. Thailand Development Research Institute, 1997. World Bank. World Development Report 1996. New York: Oxford University Press, 1996.

RSERN Enlargement and Foreign Direct Investment

4

NICK] . FREEM AN

Introduction

In late July 1997, Laos and Myanma r were permitte d to upgrade their status within the Association of Southeas t Asian Nations (ASEAN), from that of being observer s - a position held by Laos since 1993, and Myanma r since 1996- to full members. An earlier decision to also admit Cambodi a as a full member of the regional grouping was postpone d at the eleventh hour, following the outbreak of civil conflict in the country's capital in early July. As a consequence of Laos' and Myanma r's entry, the ASEAN market adopted a further 52 million people and expanded by about 913,000 sq km. Cambodi a gained full membership in April 1999, resulting in the ASEAN market growing by an additiona l 10.5 million people and 181,000 sq km. This most recent enlargem ent process is in addition to the 75 million people and roughly 330,000 sq km. that entered the regional grouping in 1995, when Vietnam joined ASEAN. The inclusion of Cambodi a fulfilled ASEAN's long-held aspiration that the regional grouping should ultimatel y span the entire ten countries of the Southeas t Asian region. With the ASEAN enlargem ent process fully completed, the regional grouping has grown by a cumulative "Greater Mekong" market of 138 million new citizens (albeit of low average per capita gross national product) , representing an increase in ASEAN's total citizenry of almost 40 per cent. 1 Quite clearly, this is a substanti al enlargem ent in a relatively short space of time, and may well have marked implicati ons for various fields of 80

ASEAN Enlargement and Foreign Direct Investment

81

economic and business endeavour in the Southeast Asian region, including foreign direct investment (FDI) activity. The growth of FDI flows and venture capital activity across the globe in recent years has been quite remarkable. 2 Between 1980 and 1995, the cumulative stock of FDI in the world blossomed from about US$514 billion to US$2,658 billion, a more than fivefold increase in just fifteen years. Pacific Asia's share of this rapidly expanding global FDI "pie" has also grown more than twofold, from 6. 7 per cent to 13.6 per cent over the same time period. However, ASEAN has seen its own share of Asia-Pacific FDI drop from 71 per cent in 1980 to 47 per cent in 1995, largely as a result of greater flows heading for mainland China, following the latter's opening up to foreign venture capital in 1979. Nonetheless, ASEAN's total stock of FDI grew more than sixfold over the same fifteen-year period (1980-95), and by just over 75 per cent in the first five years of the 1990s. Furthermore, in recent years we have witnessed burgeoning FDI outflows from Malaysia, Singapore- and to a lesser extent Thailand, Indonesia, and the Philippines - to neighbouring countries within Southeast Asia (that is, intra-ASEAN FDI flows), and beyond. For example, Vietnam has been a notable recent recipient of substantial FDI inflows from Singapore, so that the island city-state now ranks as the largest single foreign investment source (as measured by capital inflow pledges), ahead of such regional rivals as Hong Kong, Taiwan, Japan, South Korea, as well as the United States and the Eurpean Union (EU) member states. The development of such intra-ASEAN FDI flows has been ~ited as an indication of the growing economic maturity of the Southeast Asian region -no longer solely the passive recipient of investment flows from the industrialized countries, but an economic and business force in its own right. However, ASEAN should not be complacent for the emerging markets of Eastern Europe and the former Soviet Union, Latin America, and even Sub-Saharan Africa are posing increasingly convincing challenges as worthy host regions for new overseas venture capital flows. Furthermore, the most recent figures indicate that whilst FDI flows to Asia continue to increase - by 25 per cent between 1995 and 1996- the rate at which global flows of FDI increased between 1995 and 1996 declined to 10 per cent (compared with an average of 17 per cent over the last five years). Moreover, FDI flows to Asia are increasingly less equitably distributed. Within Asia, China alone was the recipient of 52 per cent of the entire region's total FDI inflows in 1996, followed by Singapore and Indonesia. Together, these three countries took a staggering 79 per cent of total FDI flows in Asia in 1996. Whilst it remains far too early to tell what the full impact of ASEAN's recent enlargement will be, both for ASEAN's long-standing members and its newest recruits, this chapter attempts to give an overview of the likely

Nick

82

J. Freemt.llii

TABLE 4.1 ASEAN's Stock of Inward Foreign Direct Investment, 1980-97 (In US$ millions)

Brunei Indonesia Malaysia Philippines Singapore Thailand Vietnam

':1

1980

1990

1995

1996

1997,,

19 10,724 6,078 1,225 6,203 981 7

26 38,883 14,117 2,098 32,355 7,980 216

62 50,603 36,778 7,158 58,622 17,236 4,096

71 56,797 41,450 8,678 68,062 19,504 6,252

62,147 45,20l 9,931 78,06.2 23,104 7,452

7()

SouRCES: Mirza, Bartels and Hiley (1997); and UNCTAD, World Investment Report 1996, and 1997.

implications for FDI flows and venture capital activity in the region. First, the current FDI profile in Cambodia, Laos, and Myanmar (CLM) will be examined, followed by the factors, mostly indirect, stemming from ASEAN enlargement that may augment FDI inflows into the CLM countries. The analysis then takes a somewhat contrary perspective, and assesses the, arguably more direct, factors which would act to ensure that ASEAN's recent enlargement has relatively little impact on the CLMs' ability to attract greater foreign investor interest. Evidence in support of these views will be cited from the precedent set by Vietnam's entry into ASEAN in 1995, and the impact this has had on the former's FDI inflows. Given the constraints of space, this work is almost wholly written from the perspective of the CLM countries, and does not involve itself with the likely impact of ASEAN enlargement on the FDI profiles of the more established ASEAN member countries. It perhaps goes without saying, therefore, that the focus will be on FDI inflows into CLM, as there is relatively little in the way of intra-CLM investment flows at present, and even fewer investment outflows from the CLM to othe~; more affluent, members of ASEAN. But this may change over time. Current FDI Profile in Cambodia, Laos, and Myanmar All four "Greater Mekong" countries have witnessed dramatic increases in foreign venture capital activity since they commenced a transitional process, away from less centrally-planned and towards more marketoriented economies, in the late 1980s. The promulgation of a foreign

ASEAN Enlargement and Foreign Direct Investment

83

·nvestment law has been a key pillar for each of these countries in

~upporting their transition process, and drawing in crucial inputs of capital,

technology, expertise, and other valuable inputs commonly associated with FDI inflows. As the cumulative quantity of FDI disbursements has grown in each of these countries, the contribution that foreign venture capital is making to their national economies (for example, industrial output, export earnings, and so forth) has grown considerably. In the case of Vietnam, industrial output from foreign-invested businesses is currently growing at around 21 per cent per annum; markedly ahead of output growth in both the country's private and state domestic enterprises. In Cambodia, despite the continued political tensions that overshadow the country, FDI inflows had, until relatively recently, increased markedly in recent years. In the three years between 1994 and end-1996, the cumulative stock of pledged foreign venture capital increased more than sevenfold. Indeed, in 1995, cumulative foreign investment pledges were almost four times greater than the equivalent figure for the previous year, although they then dropped in 1996, and new FDI pledges have come to a virtual halt since the destabilizing events of mid-1997. ASEAN has been the primary source for much of Cambodia's FDI inflows, representing about 80 per cent of total pledges, with Malaysia alone pledging an astounding 73 per cent of total foreign investment in the country (or 91 per cent of total ASEAN investment). Among the CLM, Cambodia's reliance on one country, Malaysia, as the dominant source of foreign venture capital is unrivalled. 3 There is scant data on the sectoral breakdown of FDI stock, although it is believed that the garment and textile industry has witnessed some foreign venture capital input, as has the hotel and tourism sector. An estimate of the disbursement rate for FDI (that is, the proportion of total pledged or approved investment that has actually been invested in tangible projects) in Cambodia is, however, relatively low, at around 25 per cent. For Laos, ASEAN has been the source of about 44 per cent of the country's total FDI inflow pledges, with Thailand representing 41 per cent of all approved foreign venture capital (or 93 per cent of total ASEAN investment). The rate of FDI inflows into the country since 1988 has been erratic, with 1994 being the peak year for FDI pledges, to date. As of mid-August 1997, Laos had approved cumulative FDI inflow pledges of around US$6.8 billion (spanning 656 projects), which on a per capita basis is three times greater than that of Vietnam. However, the energy sector has been the principal recipient of foreign venture capital attention by far (66 per cent of total FDI pledged), with a heavy emphasis on a series of planned hydropower projects. As most of these hydropower projects have yet to start, the proportion of disbursed capital as a percentage of pledged inflows in Laos is perhaps as low as 10 per cent. The second largest

Nick ]. Freemalt

84

TABLE 4.2 Cambodia's FDI Stock, by Country (as at November 1997) (In US$ million)

FDI Stock Malaysia USA Singapore Taiwan Korea Hong Kong Thailand France China Britain Australia Sweden Indonesia Others

3,222

Total

5,039

407

233

207 198 127 120 115 92

68 22

12 1

216

SouRCE: Council for the Development of Cambodia.

TABLE 4.3 Cambodia's FDI Inflows, 1994-97

FDI inflows (US$m) Cumulative FDI stock (US$m)

1994

1995

1996

Nov 97

585

2250 2835

4365

1530

674 5039

585

SouRCE: Council for the Development of Cambodia.

recipient of FDI inflows in Laos has been the hotels and tourism sector, accounting for just under 9 per cent of total approved overseas venture capital stock. Finally, among the CLM countries, Myanmar has also experienced an erratic flow of FDI pledges since foreign venture capital activity commenced in the late 1980s. However, the broad trend has been one of growing FDI stock, from a mere US$450 million in 1989/90 to US$6,440 million

85

ASEAN Enlargement and Foreign Direct Investment

TABLE 4.4 Laos' FDI Stock, by Country (as at August 1997)

Thailand

us

South Korea France Australia Malaysia Taiwan Norway China Britain Hong Kong Canada Russia Singapore Japan Indonesia North Korea Sweden Germany Vietnam Macau

US$m

No. of FDI Projects

2,377 1,736 592 318 303 189 65 54 39 29 28 18 17 12 8 5 3 3 3 3 3

233 40 16 68 42 11 31 n.a. 60 13 23 14 15 16 16 n.a. n.a. 7 7 10 n.a.

SouRcE: Foreign Investment Management Committee.

TABLE 4.5 Laos' FDI Inflows, 1994-97

FDI inflows (US$m) Cumulative FDI stock (US$m)

1988-90

1991

1992

1993

1994

1995

1H96

129

1,586

328

355

2,598

615

200

129

1,715

2,043

2,398

4,996 5,611

SouRcE: Foreign Investment Management Committee.

5,811

Nick f. Freemaf

86

TABLE 4.6 Laos' FDI Stock, by Sector (as at November 1997)

Sector

Capital Pledged (US$m)

Electricity power Hotels, tourism Telecommunications, transport Industry, handicrafts Wood processing Mining, oil exploration Banking, insurance Garments Trading Construction Agri-business Services Consultancy

4,500.8 605.5 561.6 476.8 165.6 125.6 73.8 72.6 62.5 60.0 59.3 34.6 5.0

Percentage of Total FDI

66.1 8.9 8.3 7.0 2.4 1.8 1.1 1.1 1.0

0.9 0.9

0.5 0.1

SouRCE: Foreign Investment Management Committee.

by mid-1997, a more than fourteenfold increase in roughly eight years. ASEAN has contributed about 49 per cent of Myanmar's FDI inflow pledges, with Singapore and Thailand being the second and third largest investor sources, respectively. Britain's ranking as the largest single investor in Myanmar is somewhat misleading, as it includes investments pledged by venture capitalists of various origins, but registered in the British Virgin Islands. Therefore, it is quite likely that Singapore is actually the largest single source of FDI inflow pledges in Myanmar, thereby duplicating its pole position in Vietnam's foreign investment rankings. Broken down by sector, the oil and gas industry has been the primary recipient of foreign investment interest (36 per cent of total FDI stock), followed by the manufacturing, property development, and hotel sectors. Given the above FDI profiles for the CLM countries, it is interesting to note that in all four countries of the "Greater Mekong" subregion, an ASEAN member is the largest single source of FDI: Singapore in the case of Myanmar and Vietnam; Thailand in the case of Laos; and Malaysia in the case of Cambodia. Furthermore, in both Laos and Myanmar, the ASEAN-6 countries are the source of just under half of the total FDI inflow pledges, whilst in Cambodia they account for a significant majority of total foreign investment pledges. It is clear that the "Greater Mekong"

ASEAN Enlargement and Foreign Direct Investment

87

TABLE 4.7 Myanmar's FDI Stock, by Country (as at September 1997)

Britain Singapore Thailand

us

France Malaysia Netherlands Indonesia Japan Austria Korea Hong Kong Australia Canada Panama China Germany Denmark Philippines Bangladesh Macau Sri Lanka

US$m

No. of Projects

1,322 1,226 1,157 582 470 524 238 236 203

30 57 42 16 3 23 5 8 16 2 15 19 13 11

72

83 111 76 35 31 29 15

1 9

1

1

13

1 2 1 1

7

3

2 1

SouRcE: lNG Barings.

TABLE 4.8 Myanmar's FDI Inflows, 1989-97 1989/ 1990/ 19911 1992/ 1993/ 1994/ 1995/ 19961 1H97 90 91 92 93 94 95 97 96 FDI inflows (US$m) Cumulative FDI stock (US$m)

449

281

6

449

730

736

SouRCE: lNG Barings.

104

377

1,352

668

840 1,217 2,569 3,237

2,814

387

6,052 6,439

Nick f. Freem

88

Table 4.9 Myanmar's FDI Stock, by Sector (as at November 1997) Sector

Percentage of Total FDI Stock

36 19 14

Oil and gas Manufacturing Real estate Hotels Mining Transport Fishing Industrial estates

12 8 4 4 3

SouRCE: Myanmar Investment Commission.

TABLE 4.10 ASEAN's FDI Profile in the "Greater Mekong" Subregion Percentage of Total Registered FDI sourced from ASEAN

Cambodia Laos Myanmar Vietnam

80 44 49 28

per per per per

cent cent cent cent

Notes: Malaysian FDI =73 per cent Thai FDI = 41 per cent SouRCE: lNG Barings.

countries are enjoying the fruits of the recent trend, noted above, that ha seen the more advanced members of ASEAN beginning to enact fairl considerable FDI outflows. Positive Impact of ASEAN Enlargement on FDI Inflow into Cambodia Laos, and Myanmar There is a spectrum of broadly indirect factors, stemming from ASEA:l' enlargement, that could cumulatively act as a fillip to FDI flows withi1 the region, and in particular, increase foreign venture capital inflows int1

ASEAN Enlargement and Foreign Direct Investment

89

the eLM countries. On the broadest possible level, any degree of greater understanding and improved relations between the ten ASEAN memberstates, as a result of increased collaboration within the regional grouping, will provide a more conducive environment within which FDI flows can burgeon. A tangible example of this would be Laos' decision, in anticipation of its subsequent entry into the regional grouping, to establish diplomatic representation in those ASEAN member states with which it previously had none. Any reduction in political risk factors should also have a positive impact on FDI flows in the region, thereby making the cost of investment capital cheaper; permitting acceptable internal rates of return to become longer; and the overall volition of venture capitalists to invest in other emerging markets should become greater. Furthermore, any process by which ASEAN enlargement improves the quantity and accuracy of information flow between the member countries should reap some rewards in terms of the scale, quality, and cost of foreign venture capital for the CLM countries. Whilst ASEAN remains a relatively informal organization, and its structures (such as the Jakarta-based Secretariat) are relatively small in scale, the regional grouping does provide an effective series of fora for government officials from the member countries to meet and discourse on a wide range of issues. Given the close relations between the respective governments and state- and quasi-state firms in both the CLM and most other ASEAN countries, the potential for "trickle down" effect of business initiatives from ASEAN gatherings to the business community may be considerable. It does not require a giant leap of imagination to conceive that some FDI projects initiated by major ASEAN corporates in the region particularly those with links to their respective state leaderships - have at least partially stemmed from governmental "encouragement", even though they may be wholly commercial enterprises. Conversely, host country licensing approval for some FDI projects by ASEAN corporates may have been assisted in part by discreet lobbying from the home country government of the foreign investor. Therefore, it is reasonable to argue that the enlargement of ASEAN to include the CLM countries will move these countries further towards the process of such networking. The ASEAN fora could also play an extremely useful role in what might be termed the "demonstration effect". Through the interface of numerous ASEAN meetings, the government leaders of the grouping's newest members will see at first hand, from the experience of the ASEAN-6, the utility - and some potential adverse side-effects - of FDI inflows. In particular, it will enable them to further appreciate some of the crucial non-financial inputs that also tend to follow such FDI inflows, as well as gain added insight into the means by which foreign venture capital can be

90

Nick ]. Free11tatt

best attracted and fully harnessed. Moreover, foreign investment does not solely result in an inflow of foreign capital per se, but also provides a chance for a developing country to garner equally important inputs of expertise and training, new technology and know-how, employment, and assistance in accessing new export markets, among various other factors. A number of the ASEAN-6 countries now have a wealth of knowledge on the motivations, consequences, and benefits of FDI inflows, which the CLM countries can tap, as part of their effort to integrate better with the global business community. 4 Taking this argument one step further, ASEAN may also have the potential to provide a useful conduit role, both between the CLM countries and the international business community beyond Southeast Asia, and even within the domestic frameworks of the CLM countries themselves. Whilst much emphasis has been given recently to ASEAN's apparent long-held reluctance to interfere in the domestic affairs of member states, the grouping arguably has an even more consistent track record as being a pragmatic organization, able to re-orientate its medium-term strategies and objectives as and when circumstances warrant (and the grouping has the consensus to do so). For example, any positive role that ASEAN could play to promote an improvement in the strained domestic political situations in Cambodia and Myanmar should ultimately translate into greater venture capital activity by foreign investors in these two countries. Similarly, it appears that the considerable natural reserves of Myanmar have sparked immense interest among various Japanese corporate entities, quite possibly greater than has been evident in Vietnam in the last ten years. Yet to date, partly in order not to provoke the ire of the United States, Japanese firms have largely held back from investing substantial sums in Myanmar. However, should a resolution of domestic issues in Myanmar permit Washington to re-appraise its stance towards the country, a surprisingly substantial inflow of FDI would follow from Japan, as well as the United States itself. In the case of Cambodia, FDI inflows in the second half of 1997 all but dried up, following events in June that year. Yet the resolution of domestic issues in Cambodia would also permit a resumption of foreign venture capital activity in what many observers view to be the most liberal foreign investment regime among the "Greater Mekong" countries. 5 In both cases - Myanmar and Cambodia - ASEAN could play an important role in improving the host country environments for foreign capital inflows. If that were achieved, ASEAN could then play the role of introducing U.S. and EU corporates to the host country attractions of these countries, notably through the process of seeking coinvestors for projects. Indeed, ASEAN's enlargement could provide the CLM states with an opportunity to increase their exposure to the wider

ASEAN Enlargement and Foreign Direct Investment

91

global business community, and thereby dilute their current dependence on a small number of neighbouring Southeast Asian countries for much of their trade and investment flows. Although this factor may have been perceived to be of limited utility prior to mid-1997, the adverse regional economic events of 1997-99 will have served to make this point of markedly greater relevance now. For example, Laos' very considerable exposure to Thailand for venture capital inflows and external trade flows means that it will be adversely affected by the economic recession that is under way in its southern neighbour. Similarly, any further downturn in the Malaysian economy could pose considerable problems for Cambodia, given its heavy reliance on this country for much of its FDI inflows (and a reliance that has arguably increased since the termination of most external assistance to Cambodia). Therefore, the enlargement of ASEAN may have a positive impact in improving the scale, diversity, and quality of FDI inflows into the CLM countries. Another factor that might possibly act as a fillip in encouraging greater FDI flows into the CLM countries from outside Southeast Asia is the prospect of the ASEAN Free Trade Area (AFTA), whereby import tariffs across a range of goods (and eventually services) within ASEAN will be brought below a 5 per cent ceiling, by a set date. That set date for most ASEAN members is 2003, for Vietnam it is 2006, and for Laos and Myanmar it is 2008. As Cambodia only joined ASEAN as a full member in April 1999, Phnom Penh might expect to be given a deadline of 2010. Of all the "Greater Mekong" countries, complying with AFTA would arguably be the most challenging for Cambodia, as the country's dependence on import tariffs for budget revenues is believed to be markedly greater than the other countries. (In 1996, a remarkable 48 per cent of Phnom Penh's total government revenues was reportedly sourced from customs duties.) Clearly, if intra-ASEAN trade is conducted at low tariff rates, then the attractiveness of serving the cumulative ASEAN market from one or two sites - as opposed to having a presence in each separate member-country - becomes a far more feasible proposition for major companies. However, although ASEAN as a whole may benefit from this move towards encouraging a greater flow of trade, it does not automatically mean that the cumulative stock of FDI in the regional grouping will increase markedly, or that greater FDI flows will target the CLM states - with their relatively poor infrastructure - as the chosen sites to service the wider ASEAN market. Indeed, it is conceivable that the CLM countries and Vietnam could lose out in any such consolidation of venture capital as a result of AFTA, as non-ASEAN investors seek to service these markets from sites in other ASEAN countries where infrastructural support is more advanced. Similarly, ASEAN venture capitalists might see less utility in

92

Nick ]. Freema,.

investing in the CLM countries after 2008, as servicing these markets frorn the home country becomes a cheaper process after the elimination of tariff barriers. Whilst the recent trend towards vertical and horizontal integration of production within multinational enterprises across national borders means that decision-making on which host countries to inject investments has become a complex process, it should be recognized that a relatively large proportion of FDI projects in the "Greater Mekong" countries have been undertaken in order to service these domestic markets, as opposed to being export-oriented. Some of these investments would have been undertaken solely in order to circumvent punitively high tariff barriers.6 Thus, the dismantling of these tariff barriers would certainly prompt a re~ evaluation of project viability for at least a share of proposed FDI projects in the CLM countries. Furthermore, the relatively high rates of return still expected by most venture capitalists entering the "Greater Mekong" region mean that AFTA deadlines of 2006 or 2008 are still a sufficiently distant prospect for them to have little immediate impact on foreign investor sentiment. Finally, it should be noted that the fifth ASEAN summit, held in 1995, had proposed the establishment of an ASEAN Investment Area (AlA). The proposed AlA remains an unknown entity, as does its launch date. Therefore, it is hard to envisage how this might impact on FDI flows within ASEAN in general, and towards the CLM countries in particular, beyond suggesting that it would be designed to act as a fillip for investment activity within the Southeast Asian region. Negative Impact of ASEAN Enlargement on FDI Inflows into Cambodia, Laos, and Myanmar Having discussed the various factors stemming from ASEAN enlargement that may have a beneficial impact on FDI flows to the CLM countries, let us now examine the extent to which other factors can act to ensure that ASEAN's recent enlargement will have relatively little impact on the "Greater Mekong's" ability to attract, receive and harness greater foreign investor interest. It is valid to argue that the inclusion of the CLM countries into ASEAN may provide increased investment opportunities for major companies in the ASEAN-6 to enter markets at a notably different (lower) level of economic development, and thereby attempt to harvest any apparent business synergies. Such a move will also allow ASEAN-6 investors to gain exposure to the relatively rapid economic growth rates currently being recorded in the "Greater Mekong" sub-region. However, whilst it is possible that ASEAN enlargement may prompt the governments of the

ASEAN Enlargement and Foreign Direct Investment

93

ASEAN-6 to promote FDI ventures more actively in the CLM countries, motivated in part by a sense of pan-ASEAN solidarity, the same business synergies and growth opportunities should have been evident in the CLM countries even before ASEAN enlargement. Beyond some of the more intangible issues discussed in the previous section, the CLM countries' entry into ASEAN does not now qualify ASEAN-6 corporates for new or greater political risk guarantees, better access to debt financing, wider export credit cover, or other forms of incentive that would be of practical support in conducting FDI in the "Greater Mekong" subregion. Although the volition of the ASEAN-6 governments to increase their respective countries' investment activities in the CLM countries still persists (and may have grown as a consequence of the enlargement process), the considerable battering that their domestic currencies, stock markets, companies, and overall economies have taken since mid-1997 will undoubtedly have reduced their ability and appetite to do so. For example, despite having been a major source of venture capital in the "Greater Mekong" subregion in recent years, Thailand is now unable to greatly increase its corporate exposure to the CLM countries. Indeed, quite the reverse. A fair number of approved FDI projects by Thai companies in the CLM countries are now unlikely to be taken to fruition, and ambitious investment plans for the power, telecommunications, building materials, and various other industry sectors in Laos and Myanmar will have to be scaled back significantly, at least in the short term. Foreign investment in the power sector of the CLM countries is likely to be hit by a double blow. First, some Thai companies will find it hard to have access to the necessary scale of financing required to start many ambitious power projects. And secondly, even if this first hurdle is overcome, the intention had been to export the power generated back to Thailand, which may now be revising downwards its future energy demands as a result of the economic downturn. This is potentially very alarming for Laos, where Thailand represents just over 40 per cent of all foreign investment, and where the power sector is the recipient of two-thirds of total FDI inflow pledges. Quite clearly, foreign investors have a range of perceived and real host country risks that they encounter when assessing the merits and opportunity costs of investing in emerging and transitional markets, such as the CLM countries. A desire to take advantage of the business opportunities that are apparent in these exciting new markets will be offset in part by foreign investor anxiety over typically excessive bureaucracy and red tape; foreign exchange convertibility constraints; high corruption levels; political risk; a paucity of infrastructural support; inadequate and evolving business legislation, and the associated peril of arbitrary decision-making by host

94

Nick ]. Freemt~~~

country authorities; infant financial sectors and the lack of financial instruments; and so on. Although the "Greater Mekong" countries ha-q made very significant strides in many of these respects in the last ten yea" there remains a great deal of work to be done to further improve what are still extremely opaque business environments, as they can greatly undermine the recognized competitive advantages of the CLM countries, such as cheaper labour, untapped natural resources, virgin consumer markets, and so forth. 7 Potential foreign investors must evaluate this dichotomy of domestic host country factors, in order to decide whether or not to invest (and the opportunity costs of selecting one host country over another). These host country factors are by far the most important determinant in the FDI or market entry decision-making process for foreign venture capitalists, above and beyond the regional affiliations that a host country may enjoy, or may recently have acquired. How then can ASEAN's enlargement assist the CLM countries in reducing their host country liabilities and enhancing their host country competitive advantages? For this author, ASEAN enlargement does not appear to contribute much, beyond the broad factors discussed in the previous section. Whilst participation within ASEAN may grant the leaders of the CLM countries an opportunity to better understand the dynamics of foreign investment, as experienced by their ASEAN-6 counterparts, the act of improving their own host country business environment is something that they can only do themselves. Having joined ASEAN as a full member in mid-1995, Vietnam provides an interesting pilot case study for the CLM countries, on the likely impact that membership of the regional grouping may have on future FDI inflows. According to Hanoi's own official figures, Vietnam's new FDI inflow pledges had consistently increased each year - measured both by the number of individual projects and the cumulative quantity of capital approved- from their commencement in 1988, through to 1996. In that period, foreign capital inflow pledges rose from a mere US$363 million in 1988 to US$8,538 million in 1996, a twenty-threefold increase in just nine years. In fact, total FDI inflow pledges for Vietnam actually began to decline marginally in 1996, if one discounts two mega-property projects that were licensed in the final week of that year (in what some observers have postulated was a rather jaundiced attempt by the Ministry of Planning and Investment to buoy-up that year's foreign investment figure, which was about to register a figure below that of 1995). 8 In 1997, Vietnam recorded its first ever official decline in FDI inflow pledges since the country promulgated its foreign investment law - a decline by about a third. It should be noted, however, that actual disbursements of foreign venture capital continued to rise in Vietnam, as earlier foreign investment pledges

ASEAN Enlargement and Foreign Direct Investment

95

began to materialize. Interestingly, the downturn in FDI pledges for Vietnam occurred in the two years immediately following the country's acceptance as a full member of ASEAN, in mid-1995. Whilst it would be wholly disingenuous to postulate that entry into the regional grouping would result in a drop in FDI inflows, based on the evidence from Vietnam, it can be suggested that ASEAN membership is no automatic guarantor of greater cumulative foreign investment inflows for new members. Furthermore, the volume of FDI inflows that Vietnam sourced from the ASEAN countries did not pick up markedly after the former's entry into the regional grouping. Rather, the established (that is, pre-ASEAN membership) trend of slowly rising ASEAN-sourced FDI inflows into Vietnam continued throughout the entry period and the subsequent eighteen months. Figures for ASEAN-sourced FDI into Vietnam only began to measure a significant rise in early 1997, almost wholly as a result of increased venture capital activity by Singapore alone. Although the relatively recent rise of Singapore to the top of the ranking of foreign investors in Vietnam might suggest that greater FDI inflows sourced from within the regional grouping can be attained after membership, the figures for FDI activity by the other ASEAN member countries is far more lukewarm. Finally, the events of late 1997 and early 1998 have undoubtedly taken their toll on the corporate and macroeconomic health of some of the ASEAN-6 members, which in turn has impacted on investor confidence levels- both within Southeast Asia and outside- as to the region's shortand medium-term future. Although much of the region may well begin recording relatively impressive gross domestic product (GDP) growth numbers again within just a few years, it is not inconceivable that the very high growth rates of the recent past may be a matter of history for some Southeast Asian countries. What this means for the CLM countries and Vietnam, in terms of FDI inflows, is that they will have to gird themselves for what is likely to be a period of reduced cumulative foreign investment flows within Southeast Asia. Therefore, the "Greater Mekong" countries might be best advised to contain any lingering sense of euphoria at having joined ASEAN, and rapidly focus attention on increasing the proportion of FDI inflows from beyond ASEAN. In addition, the recent currency turmoil in the region has left some of the ASEAN-6 with local currencies that are now markedly lower in value against the U.S. dollar. 9 This in turn may have some knock-on effects for the structure of their domestic economies, and the export competitiveness of certain industries. In particular, some industries in the ASEAN-6 that were deemed to have become "sunset" may be about to enjoy a new dawn, instead of relocating to other economies further down the value-added chain, such as the CLM

TABLE 4.11 ASEAN Countries in Vietnam's FDI Rankings, 1994-97

Singapore Malaysia Thailand Indonesia Philippines

Dec-94

Apr-95

3 7 13 14 19

3 7 13 19 22

Aug-95 Nov-95

4 8

Feb-96 May-96

4 7 13 17 20

14

17 20

4 7 12 18 17

5

7 13 18 17

\D

0\

Aug-96 Nov-96 Feb-97

3 7 9 17 19

3 7 9 17 19

4 7 9 16 18

May-97 Aug-97

1 7 8 17 18

1 7 8 18 17

SouRcE: ING Barings.

TABLE 4.12 ASEAN's FDI in Vietnam, as a Percentage of Total FDI Stock, 1994-97 Aug-94 Dec-94 Apr-95 Aug-95 Nov-95 Feb-96 May-96 Aug-96 Nov-96

Singapore Malaysia Thailand Indonesia Philippines ASEAN-6

6.3 6.1 2.4 1.7 n.a. 16.6

SouRCE: ING Barings.

9.5 5.2 2.1 1.4 0.5 18.7

10.3 4.6 2.1 1.3 0.4 18.3

8.6 4.1 2 1.2 0.4 16.4

9 4.7 2.4 1.1 0.4 17.6

7.9 4.5 2.5 1.1 1.1 17.2

9 4.5 2.4 1 1.1 18.1

11 4.3 3 1.1 1 20.5

10.9 4.3 3 1 0.9 20.3

Feb-97 May-97 Aug-97

9.7 4.1 3.7 0.9 0.8 19.3

17.4 4 3.6 0.9 0.9 26.9

18.2 4.2 3.8 0.8 1.3 28.4

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60% 0-200%

Import Commodities Raw materials and investment goods Essential consumer goods Standard consumer goods Motor vehicles