Regional Outlook: Southeast Asia 2002-2003 9789812306593

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REGIONAL OUTLOOK Southeast Asia 2002–2003

© 2002 Institute of Southeast Asian Studies, Singapore

Institute of Southeast Asian Studies The Institute of Southeast Asian Studies 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 issues and challenges 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-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. An Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute’s chief academic and administrative officer.

REGIONAL OUTLOOK Southeast Asia 2002–2003 Editorial Committee Chairperson Professor Chia Siow Yue Editors Nick J. Freeman Tin Maung Maung Than Production Editor Roselie Ang This chapter is reproduced from Regional Outlook: Southeast Asia 2002–2003 , edited by Nick J. Freeman and T in Maung Maung Than (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced, translated, 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 < http://www.iseas.edu.sg/pub.html >

REGIONAL OUTLOOK Southeast Asia 2002–2003

INSTITUTE OF SOUTHEAST ASIAN STUDIES

First published in Singapore in 2002 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Road 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, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies. © 2002 Institute of Southeast Asian Studies, Singapore

The responsibility for facts and opinions expressed in this publication rests exclusively with the 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 Regional outlook: Southeast Asia. 1992–1993– Annual 1. Asia, Southeastern. DS501 S720 1992 ISSN 0218-3056 ISBN 981-230-153-4 Typeset by International Typesetters Pte. Ltd. Printed in Singapore by Seng Lee Press Pte. Ltd.

© 2002 Institute of Southeast Asian Studies, Singapore

sls91-209988

CONTENTS Preface Chia Siow Yue

vii

Introduction Tin Maung Maung Than, Nick J. Freeman

ix

I

POLITICAL OUTLOOK 2002–2003 The Asia-Pacific Geopolitical Setting Daljit Singh

2

The ASEAN-6 A.V.M. Horton, Anthony L. Smith, K.S. Nathan, Emiliano P. Bolongaita, Jr., Derek da Cunha, John Funston

6

II

Indochina and Myanmar Tin Maung Maung Than, Nick J. Freeman, Russell Heng

28

ECONOMIC OUTLOOK 2002–2003 Regional Economic Trends Nick J. Freeman

44

The ASEAN-6 Denis Hew, Soedradjad Djiwandono, Adrian Panggabean, Nick J. Freeman, Sakulrat Montreevat

53

Indochina and Myanmar Mya Than, Nick J. Freeman

79

Selected Sources of Data

92

The Contributors

93

© 2002 Institute of Southeast Asian Studies, Singapore

PREFACE

R

egional Outlook was first launched in 1992. Designed for the busy executive, professional, diplomat, journalist, and interested observer under severe time constraints, this annual offers a succinct analysis of political and economic trends in the countries of Southeast Asia and the outlook for the prospective two years. In this endeavour, it is impossible not to be overtaken by events. An analysis such as this serves best when it indicates patterns of development, offers some insight into the unfolding complex dynamics, and puts its finger on emerging issues and areas of change. In this way Regional Outlook looks to provide the necessary background for the reader to interpret new information and data. The year 2001 saw the economic recovery in Southeast Asia lose some of its momentum, weighed down by a worsening global economic backdrop and particularly the sharp slowdown of the U.S. economy. The banking and corporate sectors in a number of Southeast Asian economies remain relatively fragile, and ongoing reform programmes need to be sustained in 2002–2003. For the first time since the end of the Cold War, the region’s geopolitical landscape was reshaped by the 11 September terrorist attack on mainland United States, thereby highlighting new challenges for regional security, and adding complexity to the domestic political calculus of many regional states. The economic rise of China, its entry into the World Trade Organization (WTO) and the prospect of an ASEAN-China free trade area also pose new business and economic challenges for the countries of Southeast Asia. Regional Outlook 2002–2003 was written by a team from within the Institute and without. We thank Rajenthran Arumugam, Emiliano Bolongaita Jr., Derek da Cunha, Soedradjad Djiwandono, Nick J. Freeman, John Funston, Russell Heng, Denis Hew, A.V.M. Horton, Lee Hock Guan, Sakulrat Montreevat, Mya Than, K.S. Nathan, Adrian Panggabean, Ramkishen Rajan, Daljit Singh, Anthony L. Smith, and Tin Maung Maung Than for their contributions. We also thank Tin Maung Maung Than and Nick J. Freeman for editing the volume. Professor Chia Siow Yue Director Institute of Southeast Asian Studies 7 November 2001

© 2002 Institute of Southeast Asian Studies, Singapore

INTRODUCTION

F

or Southeast Asia, the year 2001 heralded a much less benign external backdrop than in previous years. World economic growth went from being fairly robust in 2000 to decidedly anaemic in 2001. China’s and Taiwan’s entry into the World Trade Organization (WTO) in November was one of the few good pieces of news emanating from the Asian region during the year. On the political front, both Indonesia and the Philippines saw changes of leadership in 2001, with Indonesian Vice-President Megawati Sukarnoputri replacing President Abdurrahman Wahid, and Vice-President Gloria Macapagal Arroyo succeeding deposed President Joseph Estrada. Singapore’s ruling party was returned to power with an overwhelming mandate that far exceeded expectations. The terrorist attacks in New York and Washington on 11 September 2001 and the subsequent U.S. campaign against Afghanistan have affected both domestic and regional security concerns. The U.S. call for a definitive stand in choosing sides in its war against terrorism in general, and its military campaign in Afghanistan in particular, has created both challenges and opportunities for the regional states. Many now realize that domestic and international issues in security and politics have become increasingly intertwined. Depending on the duration, extent and intensity of the U.S. campaign in Afghanistan, the region faces varying degrees of uncertainty and tension in 2002–2003. In last year’s Regional Outlook we noted that Southeast Asia’s economies remained vulnerable to externally induced shocks, even three years after the Asian financial crisis of 1997–98. We suggested that such shocks might include a bumpy landing for the U.S. economy, a pronounced downswing in the electronics sector cycle, or the withering of the green shoots of economic recovery in Japan. The year 2001 saw all three of these potential shocks become very apparent. Partly as a result of these, a number of Southeast Asian economies are currently hurting. Although the kind of finance sector-induced regional economic crisis of 1997–98 is unlikely to be repeated in 2002–2003, Southeast Asia is confronted with considerable new economic challenges, nevertheless. In the near term, these include maintaining — and in some cases, actually reviving — much-needed business and economic reform momentum, necessary to bolster the still fragile banking and corporate sectors in a number of countries. In the longer term, Southeast Asia’s policy-makers will need to re-evaluate the kind of economic development policy template that has served so well for the last 20–30 years, and consider whether new policy prescriptions are now required for the region in the twenty-first century. The increasing economic might shown by China, and its seeming ability to “hoover up” an increasingly large proportion of total capital inflows to Asia, is broadly perceived in Southeast Asia as a new economic challenge for the region. However, it will not be a zero-sum game, and over time China’s anticipated role as Asia’s largest workshop should also bring opportunities to neighbouring Southeast Asia, as well as competitive challenges. In this regard, Southeast Asian economies will need to find ways of leveraging off China’s economic growth trajectory, rather than positioning themselves as direct competitors. Deserved or not, post-crisis perceptions of ASEAN as an organization lacking much dynamism and unity of purpose still persist. The welcome fruition of AFTA (the ASEAN

© 2002 Institute of Southeast Asian Studies, Singapore

Free Trade Area) in 2003 is unlikely to wholly dispel such notions. However, it is conceivable that the challenges currently facing the organization may ultimately galvanize ASEAN into reinventing itself in the years ahead. Despite the rallying effort of the ASEAN leaders at the Brunei summit in November 2001, the organization faces a divisive future in 2002–2003 in relation to its members’ perceptions and responses to the challenge of globalized terrorism and U.S. actions. Different authors have contributed to this volume and we would like to thank them for their contributions. Tin Maung Maung Than Nick J. Freeman Editors 7 November 2001

© 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

·

2002-2003

;

POLITICAL OUTLOOK THE ASIA-PACIFIC GEOPOLITICAL SETTING Daljit Singh

T

he year 2001 began with concerns about a deteriorating U.S.-China relationship and serious problems in ASEAN. These anxieties eased as the year progressed and a cautious optimism was setting in before the terrorist attacks on the United States on 11 September. These attacks and their aftermath have generated new uncertainties and are altering the international relations of the region.

Before 11 September 2001

2 © 2002 Institute

I

n January 2001, the new Administration of George W. Bush assumed power in Washington. It lost no time in demonstrating its commitment to controversial missile defence plans, a firmer posture towards China, and a stronger military partnership with Japan. One early casualty was the critical U.S.–China relationship. The spy plane incident near Hainan Island, arms sales to Taiwan and President Bush’s remarks that the United States would do “whatever it takes to help Taiwan defend itself” added to U.S.–China tensions. The new Administration also adopted a tougher stance towards North Korea, in the process bringing to a halt, at least for the time being, the thawing of relations between the two Koreas since 1999 as a result of President Kim Dae Jung’s “sunshine policy”. These developments led to new concerns in Southeast Asia about U.S. unilateralism. The start of 2001 also saw ASEAN in continued disarray as key member countries remained mired in domestic political problems, economic weakness, and difficulties in bilateral relations. The international confidence in the Philippines had taken a battering because of kidnappings for ransom of businessmen, mostly ethnic Chinese; the widely publicized abductions of foreign tourists by the Abu Sayyaf rebels; allegations of cronyism and corruption on the part of President Joseph Estrada; and his impeachment by the House of Representatives and trial in the Senate. In Indonesia, the largest country in Southeast Asia, President Abdurrahman Wahid’s weak and erratic leadership had lost him support from most sectors of the domestic political spectrum as well as confidence from the outside world, rendering the prospects of economic recovery bleak. However, as the year progressed, the picture improved. U.S.–China tensions eased as the spy plane incident was resolved and as the new U.S. Administration demonstrated its intent to continue to engage China and support its entry to the World Trade Organization (WTO). It also became clear that the United States would continue to participate actively in the various multilateral organizations in the region such as the ASEAN Regional Forum (ARF), and the Asia-Pacific Economic Co-operation (APEC) forum. There were also changes in a positive direction in Southeast Asia. In the Philippines, President Estrada was ousted from office and a new start could be made to address the many problems facing the country under the leadership of President Gloria Arroyo Macapagal, the daughter of one of the country’s former Presidents. In Indonesia, the People’s Consultative

This chapter is reproduced from Regional Outlook: Southeast Asia 2002–2003 , edited by Nick J. Freeman and T in Maung Maung Than (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced, translated, stored in a system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, of retrieval Southeast Asian Studies, Singapore without the prior permission of the Institute of Southeast Asian Studies < http://www.iseas.edu.sg/pub.html >

THE ASEAN-6 SETTING

Assembly removed Abdurrahman Wahid from the presidency and elected in his place Megawati Soekarnoputri, the daughter of the first President of the Republic, an event which once again inspired hopes of better governance at home, and revived confidence on the part of foreign investors. The two new Presidents also seemed set to accord importance to ASEAN, something lacking during the administrations of their predecessors. There was also progress in the area of bilateral relations between the ASEAN member states, most notably between Singapore and Malaysia. Following Senior Minister Lee Kuan Yew’s second visit to Kuala Lumpur within about a year, on 2–5 September, an agreement in principle was announced resolving the main bilateral disputes in a package deal. Indonesia’s relations with Singapore, the Philippines, and Malaysia were also set to improve with the coming to power of Megawati in Jakarta.

H

owever, as with much of the rest of the world, the situation in Asia has been and will continue to be affected by the terrorist attacks on America and their aftermath. The degree of impact of these events on the international relations of the region will depend in part on how long the military campaign in Afghanistan (and possibly elsewhere) and the anti-terrorism campaign in general last. At the time of writing, some trends are already discernible. American foreign policy has been changing since 11 September. American friendship with and backing for other countries has become dependent upon the degree of their support for its anti-terrorism campaign. The overriding priority being accorded to this campaign means that certain countries and regions have become more important to the United States strategically, at least for the time being. South and Central Asia, and especially Pakistan, have undoubtedly acquired greater salience. Traditional military allies and friends in East Asia who support the U.S. military campaign by providing logistic support or transit facilities for U.S. forces would continue to be accorded importance. The two major Muslim countries of Southeast Asia, Indonesia and Malaysia, especially the former because it is the world’s largest Muslim country and sits astride vital sea lanes linking the Indian and Pacific oceans, would likely receive more attention. However, U.S. backing for Indonesia will depend importantly upon the degree of support and co-operation that Indonesia is able to extend for the anti-terrorist campaign. The events of 11 September 2001 and their sequel have put relations between the major powers in a flux. There is closer co-operation between Russia and the West over Afghanistan. If it leads to wider U.S.–Russia strategic co-operation, including an understanding on America’s plans for missile defence, the effects on global and Asian geopolitics could be considerable. For instance, China’s efforts of recent years to work with Russia to check U.S. global dominance could suffer a setback. The war against terrorism is providing Japanese Prime Minister Junichiro Koizumi with an opportunity to raise Japan’s profile in international security affairs. A new legislation pushed through Parliament in October 2001 allows the Japanese military to provide logistical support to the U.S. fleet in the Indian Ocean conducting military operations against

After 11 September…

3 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

Afghanistan, a war zone far from Japan. Military co-operation between the United States and Japan seems set to expand. Co-operation over the common terrorist threat has resulted in further improvement of U.S.–China relations. Yet important differences between the two countries — over issues such as Taiwan, transfer of missile technology, and human rights — are likely to remain. Nor will the long-term strategic competition between the United States and China disappear. However, the chances of a military crisis between China and the United States have receded, at least for the near term. This is not just because of China’s desire not to be too much out of line with the international coalition against terrorism but also America’s need for China’s co-operation in possible future efforts through the United Nations to establish a broad-based government in Afghanistan.

11 SEPTEMBER 2001: THE IMPACT ON SOUTHEAST ASIA By Daljit Singh

A

s long as the war on terrorism is the principal focus of U.S. foreign and security policy, relations with countries of the region will be viewed by Washington largely through the prism of the degree of co-operation and support it receives on the antiterrorism front. If the strategic importance of archipelago Southeast Asia has increased because of its sea lanes and the location of three Muslim majority countries, that of South Asia has increased even more. On the broader Asia-Pacific canvas, co-operation between the United States and China has improved. This is a plus for Southeast Asia. The war against terrorism is also serving as a catalyst for Japan to raise its profile in international security affairs, highlighted by its decision to send naval ships to join the American fleet conducting operations against Afghanistan from the Arabian Sea. However, the overall impact on Southeast Asia itself of the terrorist attacks of 11 September 2001 and their aftermath has been negative. The U.S. recession, which could be deeper and more protracted because of the events since 11 September, and the prospect of a synchronous global recession, will be damaging to regional export-oriented economies. Increased economic distress could generate more political

4 © 2002 Institute of Southeast Asian Studies, Singapore

discontent, testing the abilities of governments of predominantly Muslim countries to manage the sentiment of their domestic populations. On the face of it, the new security concerns about terrorism and political extremism should offer ASEAN a fresh opportunity to co-operate to enhance regional resilience. They suggest a greater congruence of interest on security threats among at least the six older members of the organization than at any time since the end of the Cold War. Yet, a closer examination shows that ASEAN has too many differences, even among the older six. Hence, the prospect of the organization’s ability to seize this opportunity remains uncertain. The immediate effect on individual countries has varied. On Indonesia it has been negative so far. Anti-U.S. agitation by extremist groups was a serious setback to investor confidence, jeopardizing hopes that the Megawati government would be able to make a new start for Indonesia. The government’s slowness in coming out with a coherent and consistent stand against terrorism, and its reluctance to take measures against extremist groups added to the sense of drift and disarray. Lately, however, government leaders have discouraged anti-U.S. agitation and forbidden Indonesian nationals from going to Afghanistan to

THE ASEAN-6 SETTING

China has been increasingly preoccupied with its modernization programme and has shown signs of adopting a more long-term approach to the Taiwan problem, on the assumption that economic convergence would ultimately pave the way for Taiwan’s integration with the mainland. China’s admission into the WTO in November 2001 was a historic event. It will accelerate change in the economic and institutional structures within the country towards international practices, and open the Chinese economy further to foreign investment and trade. Over the longer term, say beyond a decade, such deep and wrenching changes would not be without effect on Chinese society and politics. The almost simultaneous admission of Taiwan into the WTO can be expected to quicken the economic integration between the two territories. Thus, at the close of the year ASEAN and Southeast Asia were not very different from where they had started it, as hopes for a revival of the region’s fortunes were adversely affected by the United States and Japanese recession and a synchronous global economic downturn. Economic misfortune, combined with the repercussions on the Muslim majority countries of the war in Afghanistan, was also generating political uncertainty.

take part in the war there. Furthermore, leaders of the two largest Muslim organizations in the country have come out against the anti-American disturbances. Excessive pessimism may be unwarranted, however. The majority of the Muslims in Indonesia are moderate and extremist groups with proneness to violence are small in number. Nevertheless, without firm action, and if the bombing of Afghanistan continues, their ranks could grow. Indonesia has been promised stronger economic support by the United States in return for co-operation in the fight against terrorism. The question is whether Washington would regard the co-operation and support thus far from the Indonesian side as adequate. In Malaysia, despite the greater Islamic buzz, including talk of an Islamic state, and the adverse economic impact, the net political effect of events since 11 September 2001 could be positive. The earlier revelations about the plans for violence on the part of Kampulan Mujahideen Malaysia (KMM, the Mujahideen Group of Malaysia), headed by Nik Adli, the son of Parti Islam se Malaysia (PAS) leader Nik Aziz, and PAS’ calls for jihad (holy war) against the American war effort in Afghanistan would have strengthened

fears of PAS among non-Malays in the country. The situation also allows Dr Mahathir Mohamad to take security action against extremists with greater credibility and offers him an opportunity to wean away some moderate Malays who had switched their support to PAS in the last election. Although Dr Mahathir has continued to criticize the American bombing of Afghanistan, Malaysia’s relations with the United States have improved, reflected in part in U.S. confidence about Malaysia’s co-operation in the U.S.led anti-terrorist campaign. Philippine-U.S. relations seem set to strengthen. Manila has given strong support to America’s antiterrorist campaign and will receive assistance from the United States for the fight against its own extremist Islamic group, the Abu Sayyaf, which has had links with the bin Laden network. However, the defeat of the Abu Sayyaf and the eradication of terrorist cells may not be an easy task. The rest of Southeast Asia is relatively unaffected by the events connected with 11 September, except indirectly through the fallout from the global and regional economic downturn. Thailand has its own Muslim minority problem in its South, but it is much more manageable than that in the Philippines.

5 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK THE ASEAN-6 A.V.M. Horton • Anthony L. Smith • K.S. Nathan • Emiliano P. Bolongaita, Jr. • Derek da Cunha • John Funston

Brunei

6 © 2002 Institute of

T

he main event of 2001 was Visit Brunei Year (VBY), which aims to diversify the hydrocarbon-dominated national economy. Capitalizing on the international publicity gained for hosting the 2000 APEC Summit, the strategic goal for the sultanate is to become a “Service Hub for Trade and Tourism” by 2003. The collapse of international confidence in air travel following the terrorist attacks on the United States on 11 September was not exactly what was required to make VBY a success, and a fortiori the Visit ASEAN campaign in 2002. Fortunately for Negara Brunei Darussalam (NBD), the main VBY programme had already been completed prior to the 11 September assault on the United States. Another negative factor during mid-2001 was the re-appearance of the haze resulting from forest fires overseas. VBY was officially launched by Sultan Hassanal Bolkiah on 13 January 2001, half-way through the week-long ASEAN Tourism Forum being held at Bandar Seri Begawan at that time. The idea was to appeal to the “right” kind of tourist, such as Muslims, ecologists, youth, gourmets; the “wrong” sort, such as low-spending Western beachcombers, was not required. It was hoped that eleven thousand jobs could be created from tourism in 2001 and 2002. The highlight of VBY was the International Islamic Exhibition in August, which drew more than fifty thousand persons during the two weeks it remained open; but not all of these people would have been foreign sightseers. VBY was overshadowed to some extent by the continuing Amedeo shambles. The nub of the affair is that the Amedeo Development Corporation Limited, a private company owned by Prince Jefri Bolkiah and his son, Prince Hakeem, carried out various construction projects using capital alleged to have been improperly acquired from the Brunei Investment Agency (BIA). The latter is a government body, of which Prince Jefri himself was chairman until 1998. When the alleged diversion of funds from the BIA was discovered and stopped, Amedeo collapsed in 1998. With Prince Jefri loudly denying any wrong-doing, liquidators were appointed to wind up the corporation’s affairs and to raise cash to reimburse the creditors, who were owed massive sums of money. In May 2000, an out-of-court settlement between His Majesty’s Government and Prince Jefri provided for the state to resume assets said to have been acquired by the prince using BIA funds. The Amedeo scandal has the potential to give rise to a mass of litigation. “Thousands” of civil suits world-wide are pending. Irate creditors of the defunct corporation continue to clamour for payment and have even set up their own website. A six-day auction of Prince Jefri’s effects in August 2001 brought the sultanate under the merciless spotlight of international media attention; but comparatively little money was raised. There is a possibility of further auctions of former Amedeo assets, involving real estate at home and abroad. Meanwhile, Prince Jefri himself spends much of his time overseas; but he returned to the sultanate in October 2000, in late May 2001, and again in late August 2001. This chapter is reproduced from Regional Outlook: Southeast Asia 2002–2003 , edited by Nick J. Fr eeman and Tin Maung Maung Than (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the priorStudies, permissionSingapore of the Institute of Southeast Asian Studies < http://www.iseas.edu.sg/pub.html > Southeast Asian

THE ASEAN-6

Brunei Land Area:

5,765 sq. km.

Population:

342,000 (preliminary result of June 2001 census)

Capital:

Bandar Seri Begawan

Head of State:

His Majesty Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaulah

Currency Used:

Brunei dollar

US$ Exchange Rate on 5 November 2001:

US$1 = B$1.83

Towards the end of the third quarter of 2001, a restrictive press law was introduced, which may not be entirely unconnected with the circumstances just outlined. Whatever the case, both the Internet version of the Borneo Bulletin and the government’s online news service ground to a halt on Thursday 27 September. New blood was infused into the Cabinet for the first time since 1989. On 28 May 2001 Dato Dr Ahmad Jumat, Deputy Minister of Education, was appointed to double as acting Minister of Development, in succession to Pengiran Dr Ismail Damit. No explanation was given for the change. There was some turnover of senior officials: a new Chief Justice was appointed, along with new chiefs of the police and the armed forces, and a new permanent secretary at the Ministry of Health. A further permanent-secretary post was added to both the Prime Minister’s Office (which now has four of them) and the Ministry of Development. The diplomatic corps was reshuffled, so that the sultanate now has a new Permanent Representative at the United Nations as well as fresh diplomats in several ASEAN capitals. In a birthday titah (15 July 2001) His Majesty the Sultan stressed the importance of a clean administration. The government has set up an audit committee to ensure that all state funds are managed properly in future. Wastage is to be curbed. An expansion of e-government is presaged. More than NBD$11 million had been allocated for the implementation of computer projects in schools and higher education institutions. His Majesty also reaffirmed his commitment to strengthen the faith of the ummah and to brighten the radiance of Islam in the sultanate. Steps taken towards this end include the Syariah Courts Act of 2001, which came into effect at the beginning of Hijrah 1422 (26 March 2001). His Majesty announced the appointment of a Chief Syariah Justice (namely, Pehin Abdul Hamid Bakal), various panels of Syariah judges, together with a group of officials to execute the new law. A Brunei Darussalam Islamic Library is to be founded.

7 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

There was a royal health scare in March. According to the Borneo Bulletin (online), Prince Abdul Azim (son of His Majesty), 18, was receiving treatment in Oklahoma City for an “irregular heartbeat”. After two days in hospital, the prince was discharged “in excellent condition”. One publication suggested that an even more exalted person was being treated; but since no source was given, judgement will have to be suspended. In diplomacy, special attention was given to upgrading links with the People’s Republic of China (PRC). Whether this was merely because the PRC succeeded NBD in the APEC chair, or whether it represents something more durable, remains to be seen. At any rate, there was an exchange of high-level visits. The Sultan and the Perdana Wazir were in the People’s Republic on separate occasions in May, and followed in late August by Princess Masna (ambassador-at-large). In return, Chinese premier Li Peng visited the sultanate in May 2001, thereby consolidating President Jiang Zemin’s state visit of 17–18 November 2000. Trade, investment, and tourism between the two countries are to be expanded. NBD has agreed to supply oil and halal meat to Beijing; while Royal Brunei Airlines would inaugurate twice-weekly flights to Shanghai on 9 October 2001. Taiwanese investment in the NBD hydrocarbon sector is also being encouraged. His Majesty quickly acquainted himself with incoming ASEAN leaders. Hence, President Arroyo of the Philippines paid a state visit on 22–24 August. The two countries signed a memorandum of understanding on defence co-operation as well as seven business agreements, mainly in the oil and airline industries. In the same month, the sultanate also played host to the new Prime Minister of Thailand and the new President of Indonesia. His Majesty did not make any state visit himself during the year, although there were several trips given a lower designation, such as an “official visit” to Sabah on 18–20 September. Military links were kept up during the year, particularly with the United States, Thailand, Bangladesh, and Singapore. On 27 October 2000, it was announced that a jungle police force branch was to be formed to combat crime in the interior, especially in areas bordering the international frontier. On the other hand, three people were detained in March 2001 under the Internal Security Act on charges of “disrupting religious harmony” in the country. NBD’s economy was expected to grow at 3.5 per cent in 2000 and at the same rate, or slightly lower, during 2001 (according to the Economist Intelligence Unit). Oil production by the Brunei Shell Petroleum Company averaged 190,000 barrels a day during 2000, the highest level achieved by the company for more than twenty years. The eighth National Development Plan anticipates annual growth of 4–5 per cent in 2001–05. Despite a buoyant oil market and a healthy trade surplus in 1999–2000, economic gloom persisted during 2001. A stubborn unemployment problem (8,500 in September 2001) co-exists with fears of a brain drain because of a lack of suitable opportunities locally for highly-qualified young people; the sultanate reportedly has the second-highest literacy rate in Southeast Asia after the Philippines. In an attempt to tackle this problem, an apprentice training scheme for graduates and HND-holders was introduced in the first quarter of 2001, but by September it was “in the doldrums”. The private sector remains “weak”. There was a downturn in the garment industry (NBD’s second-largest export-earner), and police had to be called in to deal with labour unrest. The crash of “pyramid schemes” resulted in heavy losses for unwary participants.

8 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

Yet, there were more positive developments. On 29 January 2001, the Crown Prince launched new petroleum areas, which represents “an important event in the history of exploration and production of oil and gas in NBD”. The Brunei International Financial Centre, launched in July 2000, continued to be fostered: the Islamic Development Bank, with headquarters in Jeddah, plans to establish its Infrastructure Fund for the Asian region in Brunei’s capital; ten financial and investment orders were enacted; and a new insurance law is being prepared. The sultanate started to mint its own coins and was awaiting a suitable opportunity to establish its own capital market. The Working Capital Credit Fund was established for small businesses. The Enterprise Facilitation Scheme and a Micro-Credit Financing Scheme were also put in place. Plans to produce computers were announced in June. To sum up, many of the basic structural problems facing the sultanate have not yet been addressed. The Amedeo affair is mired in a mass of litigation and threatens to bring the country into disrepute. Economic woes resist solution. Yet “Terrorist Tuesday” means that all these difficulties are having to be faced in the new context of global uncertainty, war scares, and fears of world-wide recession.

T

he accession of Megawati Sukarnoputri to the presidency of the Republic of Indonesia on 23 July 2001 cleared the political impasse that had virtually paralysed the executive, under Abdurrahman Wahid (or Gus Dur), since earlier in the year. Megawati has defied the low expectations many pundits had for her administration, and appointed a very credible Cabinet line-up — one that will appease the major factions while including enough professionals to please international and domestic capital. Megawati’s presidency brings far more political stability to Indonesia, in no small measure because of her being far less vulnerable to the process that removed Wahid. Market confidence has risen since the announcement of the new Cabinet. Talks with the International Monetary Fund (IMF) have also resumed. Megawati is already demonstrating a pragmatic style of governance, but faces a mammoth task to confront the host of economic and political problems. Regional issues are going to provide a formidable labyrinth for Jakarta. When Megawati took over the Indonesian presidency, many feared that Indonesia might have landed itself a super-nationalist leader, instinctively in favour of centrism, inclined to use a heavy hand in Aceh and Irian Jaya, close to the military, and possibly an economic nationalist. Much of the speculation was extrapolated from Megawati’s nationalist rhetoric, and a heavy conflation by many with her father’s policies. It is also clear that Megawati considers the presidency as a birthright, being the daughter of Indonesia’s founding father, rather than based on a coherent policy programme that she can offer the Indonesian people. However, on the current evidence Megawati is far less of an ideologue than many had predicted. Having lambasted her silence on practically all policy issues, many domestic commentators had concluded that she was not suitable presidential material. However, she has at least had the savvy to assemble a far stronger Cabinet than her predecessor. In August 2001, some two weeks after her selection by the Indonesian Upper House, Megawati unveiled the 32-member “gotong royong” [mutual assistance] Cabinet. With a few

Indonesia

9 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

Indonesia Land Area:

1,919,443 sq km

Population:

225 million (July 2000 estimate)

Capital:

Jakarta

Type of Government:

Presidential; based on the 1945 Constitution

Head of State:

President Megawati Sukarnoputri

Next Election:

June 2004 (parliamentary) November 2004 (presidential)

Currency Used:

Rupiah

US$ Exchange Rate on 5 November 2001:

US$1 = 10,911 rupiah

exceptions, the new Cabinet is a fairly talented one. Its professionals include: Co-ordinating Minister (Menko) for Political, Social, and Security Affairs, Susilo Bambang Yudhoyono, former Lieutenant-General and well-known moderate; Co-ordinating Minister for the Economy, Dorodjatun Kuntjoro-Jakti, economist and former ambassador to the United States; Finance Minister, Boediono, economist and former governor of Bank Indonesia; Minister of Industry and Trade, Rini Soewandi, successful businesswoman; and the Minister of Foreign Affairs, Hasan Wirayudha, a career diplomat with experience in the Cambodia settlement and as leader of the Republic of Indonesia negotiating team in Aceh. The Cabinet also includes appointees from Megawati’s own party, the Indonesian Democracy Party-Struggle (PDI-P), Golkar, Poros Tengah (Central Axis [of Muslim Parties]), and an olive branch was extended to Wahid’s National Awakening Party (PKB) with one important Cabinet post, for Matori Abdul Djalil as Minister of Defence. The military retain four positions, although a civilian heads the defence ministry. The controversial appointments are: Jacob Nuwawea, Manpower Minister, for alleged involvement with Preman [criminal] gangs; Ahmad Hendropriyono, National Intelligence Chief, notorious for his alleged involvement in extra-juridical killings; and the Attorney-General, Muhammad Abdul Rachman, whose background suggests that he cannot be expected to challenge corruption in the judiciary or elsewhere in any concerted way. Megawati presides over Indonesia’s largest party, PDI-P, which gained 30 per cent of the parliamentary seats in the last election. This does not give her absolute security of

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tenure, but puts her in a far stronger position than Wahid, whose party had only 10 per cent of the seats and failed to share power. Two other blocs have emerged as major players in the legislature — Golkar (with 24 per cent of seats) and the broad grouping of political Islam under the Poros Tengah. The military appointees in Parliament and the PKB are also factors, but have far less voting power. Once Megawati was appointed, a tussle developed between Golkar and Poros Tengah for the position of Vice-President. Hamzah Haz of the United Development Party (PPP) was successful, as PDI-P legislators threw their weight behind the moderate Muslim leader. Golkar is shaping up as the main challenge to PDI-P in the run-up to the 2004 elections, and thus the arrangement with Poros Tengah is an insurance policy for Megawati. In order to unseat the President there must be a two-thirds majority in the Upper House. Numbers indicate that Megawati can be deposed only if almost all other political factions vote against her. Thus, it would seem quite probable that Megawati will not only make it through to the 2002 Annual Session of the Upper House (where the President is held accountable) but through to the end of the current term in 2004. The presidency is Megawati’s to lose. Much needed constitutional reform is due to be discussed at the annual session of the Upper House. The key elements of reform on the agenda are direct presidential elections, a district electoral system, and the adoption of a genuine bicameral system. The first measure has been agreed to but the Upper House is unlikely to decide on the third measure as it would mean ending its own existence. (The current Upper House is really the Lower House plus 200 extra representatives, making it effectively unicameral.) The PDI-P believes that the status quo best suits its interests, and this represents a formidable obstacle to change. Megawati’s foreign policy has followed the central tenets of being a good regional and international citizen established by her predecessors. She has already embarked on the traditional new ASEAN leader’s tour of other ASEAN countries’ capitals. Foreign policy continues to be focused on ensuring Indonesia’s territorial integrity and securing resources to cope with the battered economy. Wahid’s jet-setting activism has been abandoned. The terrorist attacks in the United States have thrust another international role onto Megawati, which will require her to walk a tightrope. Megawati’s scheduled visit to the United States was not postponed in the wake of the attacks as many had thought, but given some prominence. Megawati condemned the attacks, accepted U.S. aid, but later opposed a U.S. counter-attack in Afghanistan. While Indonesia’s political élite, from most parties, have condemned the terrorist attacks, the domestic situation is somewhat more complex. Demonstrations, opinion polls, and newspaper commentary in Indonesia’s main dailies indicate that a significant portion of the Muslim population are deeply concerned about a U.S. counter-attack against other Muslim countries and are demanding that greater evidence be produced against Al-Qaeda. Apart from displays of co-religionist tendencies on behalf of the moderate mainstream, there are a number of small, but increasingly radicalized, Islamic groups who continue to be a cause for concern. The most well-known group is Laskar Jihad (Jihad Force) which has waded into the Maluku conflict through the contribution of armed militia, and is accused by the U.S. State Department of nefarious linkages to the Middle East. Other groups have engaged in “sweep” operations looking for

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POLITICAL OUTLOOK

American citizens, or making threats to the U.S. Embassy and its personnel. Greater pressure will come on the Indonesian Government to control or shut down these groups, some of whom are believed to be linked to terrorist networks outside the country and are deeply antagonistic to both the West and pluralism and secularism, and continue to cause havoc in their own country. Despite the serious independence challenges in Aceh and Irian Jaya, and the communal violence in Maluku, Kalimantan, and central Sulawesi, Indonesia is in no immediate danger of breaking up. The handling of regional issues, and centrifugal forces in the periphery, will determine the question of Indonesia’s long-term future as a state. However, Indonesian nationalism remains, on the whole, quite strong. Aceh has quickly become Indonesia’s most serious regional problem, with 2001 being the worst year on record for conflict deaths as a result of the effective breakdown of peace talks and the full-scale resumption of the police-led security campaign since April 2001, with presidential approval. In both Aceh and Irian Jaya, the military and the police have demonstrated a propensity to deal violently with “treasonous” elements, often involving the targeting of unarmed government critics, and the human rights abuses of the past have not ended. The security forces have operated without effective civilian control, but there are signs that key members of the Megawati government are pushing strongly for an end to the military “solution”, while stressing negotiations, greater autonomy, devolution of resources, and the re-establishment of law and order. The security forces have also been unable, or unwilling, to properly contain the simmering horizontal conflicts mentioned above. While special autonomy arrangements (on the face of it, somewhat generous with the return of resources) are being prepared for Aceh and Irian Jaya, the other regions are subject to the standard regional autonomy deal. This means devolution to the district level (below the provincial level) of all government functions except defence, foreign affairs, justice, overall monetary and fiscal policy, religious affairs, and the development of strategic and natural resources. The regional autonomy package is confusing and flawed, but represents a major step forward from the previous centralization. Many districts in resource-rich areas are already doing far better in terms of social development, while a dark cloud hangs over the resource-poor provinces with a shrinking centralized public purse. Investment and concession rules are still in need of clarification. President Megawati Sukarnoputri has now inherited a position which requires her to govern one of the world’s most complex nation-states, compounded by the multidimensional crisis that now afflicts it. There are signs of improvement, with a stronger economy being the most obvious means to potentially diffuse unmet expectations and improve social conditions. The flaws of regional autonomy have not been addressed so far. However, the devolution of resources is a step in the right direction as the total centralization of capital and power in Indonesia is an idea whose time is over.

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EAST TIMOR: BRAVE NEW SOCIETY By Anthony L. Smith

E

ast Timor (Timor Lorosa’e) continues to forge ahead to independence, most likely in mid-2002. It is currently under the aegis of the United Nations Transitional Administration in East Timor (UNTAET), headed by Special Representative of the United Nations Secretary-General, Sérgio Vieira de Mello from Brazil. Elections on 30 August 2001 established the constituent assembly to draw up a new constitution and form the basis for East Timorese rule. The elections in August 2001 threw up one clear winner, Fretilin — which has played a historic role in anti-colonial resistance. Even prior to the elections Fretilin had acted as though it was the rightful party of government, unveiling a constitution well before the ballot. Fears that Fretilin would gain an unhealthy hegemony did not, in the end, amount to much. Fretilin won 55 of the 88 seats in the elections, and fell shy of the 60 seats required to pass a constitution. However, Fretilin remains in the driving seat and will find it easy to co-align with a choice of three smaller parties — aligning with just one will give it the necessary majority. (The other historic independence party of East Timor, UDT, was crushed in the elections and is no longer a factor in East Timorese politics.) Fretilin looks set to be the natural party of government in the future, with party leaders Marí Alkatiri and Lú-Olo (aka Francisco Guterres), the political power-brokers, as Chief Minister and Speaker of the Constituent Assembly, respectively. Fretilin has moved a long way from the hardline socialist party — largely inspired by Afro-Marxism — of the 1970s. There is no suggestion that the restrictive economic nationalism that blighted Portugal’s former colonies in Africa will be repeated in East Timor. Fretilin seems intent on building a constitution that is semi-presidential, much like that of Portugal and France (although apparently with influences from

Mozambique, where Alkatiri lived for many years). Elections for the presidency will occur in 2002, with East Timor’s most popular leader, Xanana Gusmão, who has carefully remained non-partisan, being a certainty to assume the top job. Having claimed for two years that he was not interested in the position of the presidency, Gusmão reversed his stated stand just before the elections after some pressure. Most of the sixteen parties in the August 2001 elections declared that they would support Gusmão for president — an indication of Gusmão’s near universal appeal. Gusmão remains a leader of wide appeal across political and ethnic factions, commanding strong respect owing to his former leadership of the Falintil resistance to Indonesian rule. East Timor’s foreign and defence policy is beginning to take shape, and has become the domain of José Ramos Horta, East Timor’s Foreign Minister and Nobel Peace Prize Laureate (Ramos Horta has no party affiliation). Discussion about joining the Pacific Islands Forum has been dropped, and East Timor is trying to gain full membership or some kind of observer status within ASEAN. Ramos Horta has reassured Indonesia of its territorial integrity via a statement which explicitly stated that Irian Jaya was part of Indonesia and that East Timor would not support the province’s independence. Despite East Timor’s attempts to work with the Indonesian élite, real problems remain. A questionable ballot process saw more than 90 per cent of the remaining (circa 80,000) East Timorese refugees living in West Timor opting to remain in their camps. Justice for past crimes is also a problem for relations with Indonesia, although the East Timorese leadership is split between the Gusmão position of forgiving the past, and Bishop Belo’s position of holding truth and reconciliation trials. The defence of East Timor’s land border remains crucial, with militia elements

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POLITICAL OUTLOOK

EAST TIMOR : BRAVE NEW SOCIETY (continued)

continually probing without apparent restrain from the other side. The Peacekeeping Operation is committed until 2002, when it will be considered for renewal, with core contributors Australia, New Zealand, and Singapore undertaking renewed commitments. Under former Falintil commander Taur Matan Ruak (now Brigadier-General), the East Timor Defence Force (ETDF) was established as a light infantry force. Eventually, ETDF will have a combined strength of 1,500 regulars and 1,500 reservists who will increasingly assume the role of securing the border region in the eventual Timorization of security. In other respects, East Timor’s foreign policy has addressed a number of human rights concerns — particularly within Indonesian territory and the Afghan refugee situation — which reflects Ramos Horta’s influence and resembles the transnational interests shown by most democratic states. Ramos Horta has also committed East Timor to backing the United States in its response to the terrorist attacks on U.S. soil. East Timor faces an arduous development path. Traditional exports such as coffee, sandalwood, and marble, may be supplemented in time with tourism and the exploitation of offshore mineral resources. In 2001, UNTAET negotiated, on behalf of East Timor, a very favourable reworking of the Timor Gap Treaty. The new treaty splits the revenue from the Timor Gap with Australia at a ratio of 90/10 in East Timor’s favour. The reserves of gas and oil will provide East Timor with a resource boom at some point in the future — handling this infusion of capital with prudence will be a great challenge. Despite the Marxist origins of the dominant parties and personalities in East Timor’s polity, it will be open to trade and investment. The International Monetary Fund (IMF) and the World Bank, among others, will be on hand to provide advice to the new government where needed, and East Timor will not be short of specialist advice. For investors, and for local economic activity, property rights are a tangled

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web of conflicting claims under four different types of valid legal claim (traditional possession, Portuguese law, Indonesian law, and current occupancy). Not only was East Timor spitefully destroyed in 1999, but it lost the major part of its bureaucratic class and the vast majority of its teachers. Human resource development will pose a large question mark over East Timor’s future. An issue that relates to the education of East Timor’s people is the language policy of the territory. Portuguese is the language of its colonial past (and many of the East Timorese leaders and some connected to the Church), Tetum-Dili is the local lingua franca promoted by Fretilin since the 1970s, Indonesian is the language spoken by anyone who went through the education system after 1975, forming the majority of the educated intelligentsia, and English is considered by many to be important in order to plug into global communication and commerce. Some painful choices will have to be made unless all four languages are to be taught, which may place a terrible strain on a weak education system. Choosing a currency also entails a series of dilemmas. An independent currency would appear not to be an option and East Timor has been “dollarized”. Although using the U.S. dollar brings its own problems (a peg to a strong currency and a lack of uang kecil [small money]) it is probably the only workable choice. East Timor’s development is, for the United Nations, without precedent. UNTAET, with substantial help from East Timor’s leadership, have had to recreate governance in East Timor from scratch. Despite the development problems, East Timor does have a functioning democratic system (albeit in its infancy), and will have a stable government and leadership. In Gusmão, East Timor has an undisputed candidate for the presidency. Factions, ethnic and personal, will inevitably rear their ugly heads — in fact, this is barely below the surface now — but Gusmão’s political capital will put him in good stead to overcome divisions in the immediate future.

THE ASEAN-6

M

alaysia’s leader Mahathir Mohamad completed twenty years in office on 16 July 2001, thus setting a record as the longest-serving Prime Minister of this multi-ethnic, multi-religious, and multicultural nation. He has throughout his twenty-year rule proved his capacity for being politically tenacious in pursuing his vision for the country, and very firm in dealing with his political opponents, especially from the opposition. The political threat from Mahathir’s one-time ally and deputy, Anwar Ibrahim — who is now serving a fifteen-year jail sentence for sodomy and abuse of power — is not insignificant, given the latter’s populist appeal and the perceived injustice done to him. Yet, his attempts to seek justice through the legal system, including his latest threat to sue the government on defamation charges for referring to him in the local television media as “an immoral leader and Islamic extremist” is likely to follow the path of earlier suits, the verdicts of which were invariably not in his favour. The two opposition Malay-based parties, keADILan (National Justice Party), and PAS (Pan-Malaysian Islamic Party) have basically rejected Mahathir’s invitation for Malay unity talks, arguing that the idea that only UMNO (United Malays National Organization) can protect Malay rights is flawed. The opposition Islamic party (PAS) is likely to face stronger challenges in the next general elections in view of UMNO’s determined efforts to re-engineer itself and regain Malay mass support that had drifted to PAS and keADILan. Moreover, the apparent major split in the Barisan Alternatif (BA) — between PAS and the Democratic Action Party (DAP) — over the issue of creating an Islamic state in Malaysia is unlikely to be resolved. Indeed, the expected parting of company materialized on 22 September 2001, when the DAP officially withdrew from the BA, leaving behind its three other partners — PAS, keADILan, and PRM (People’s Party of Malaysia). This fundamental fracture in the opposition camp bodes well for the ruling secular-oriented Barisan Nasional (BN or National Front) and indeed strengthens the prospect of another BN victory in the next general election. The mounting fear among non-Malays, as well as sections of the Malay community, towards the establishment of an Islamic state — viewing it as unconstitutional and threatening the democratic and pluralistic way of life enjoyed by all Malaysians — would also work against PAS. In view of the DAP’s pullout from the BA, UMNO’s efforts to rejuvenate itself have clearly been boosted. Mahathir will capitalize on this latest development by claiming that he has always been reminding the people that, despite some imperfections in the BN system of governance, the ruling coalition provides the best guarantee of a more inclusive, secular, open, and democratic form of government that best addresses the needs, problems, and aspirations of this multiracial nation, besides promoting development, peace, and prosperity for Malaysians in the coming years. This was also his message to the Malays at the 55th UMNO General Assembly held in Kuala Lumpur from 21 to 23 June 2001. The 27 September 2001 state polls in Sarawak, in which the BN won 60 out of 62 state assembly seats, undoubtedly provided a psychological boost to the ruling coalition in Malaysia. The impact of the 1997 Asian financial crisis is still being felt. Attempts, sometimes halfhearted, to restructure the banking and financial sectors, which were being increasingly led by figures closely connected to the Prime Minister and UMNO (which essentially controls the government) have not been entirely successful. Nevertheless, there is evidence that Mahathir has taken some tough decisions in removing such figures as Tajudin Ramli (in

Malaysia

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POLITICAL OUTLOOK

February 2001), head of the national carrier Malaysian Airlines (MAS), and Halim Saad (in July 2001), executive chairman of the heavily debt-ridden UMNO-controlled conglomerate, Renong. Additionally, divisional heads have been barred from vying for government contracts in an effort to delink politics from business — that is, to rid UMNO of money politics. These are encouraging trends in the direction of good governance. In recent months, the government has arrested several people with PAS sympathies, suspected of being involved in an international terrorist network operated by Saudi dissident, Osama bin Laden. In the light of the 11 September 2001 terrorist attacks on the World Trade Centre and the Pentagon in the United States, the government would feel emboldened in its policy of using the Internal Security Act (ISA) to crush would-be trouble-makers, arsonists, terrorists, and political dissidents who pose a “real” danger to public order, internal peace, and national security. Thus, the call by the government-appointed human rights panel, SUHAKAM (or Malaysian Human Rights Commission) in August 2001 to heed the people’s demand for greater civil rights and political liberties, will, in the circumstances be ignored. The arrest and detention of eleven persons allegedly belonging to the Kumpulan Mujahideen Malaysia (KMM), including Nik Adli, the son of Kelantan Chief Minister Nik Aziz, are indicative of the tough stance taken by the Mahathir administration against domestic and international terrorism. On 25 and 26 September 2001, Nik Adli, a former religious teacher, and eight other Muslim militants were ordered to serve a two-year detention under the ISA

Malaysia Land Area:

330,434 sq. km.

Population:

24 million (2001 estimate)

Capital:

Kuala Lumpur

Type of Government:

Federated parliamentary democracy with constitutional monarch

Head of State:

His Majesty the Yang di-Pertuan Agong Tuanku Syed Sirajuddin Syed Putra Jamalullail

Prime Minister:

Dato’ Seri Dr Mahathir bin Mohamad

Next Election:

By November 2004

Currency Used:

Ringgit

US$ Exchange Rate on 5 November 2001:

US$1 = RM3.8

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THE ASEAN-6

for, according to Malaysian police, leading a militant plot to overthrow the Mahathir government, planning assassinations, and sending fighters to take part in religious clashes in Indonesia’s troubled Maluku province. These nine detainees will join six members of Parti KeADILan Nasional, detained for two years since June 2001 for hatching “a militant plan to overthrow the government”. On the other hand, Mahathir has pledged support for U.S. efforts to eradicate this evil for it threatens the very foundations of the civilized world. However, he denied American media reports that Osama bin Laden’s terrorist networks have stashed away money in Malaysia’s financial institutions. The threat of Islamic militancy in Malaysia was also discussed during Singapore’s Senior Minister Lee Kuan Yew’s visit to Malaysia (2–5 September 2001). In fact, the visit, which resulted in broad agreement to resolve all outstanding issues affecting bilateral relations, appears to herald a closer relationship between the two states in the near future. The Kampong Medan incident in March 2001, involving clashes between working-class Malays and Indians, underscored the fragile nature of inter-ethnic relations in the context of a Malay-led government that was seen to be pandering to the rich Malay élite and marginalizing the poorer Malays and non-Malays as well. Appeals by the Malaysian Indian Congress (MIC) President Samy Vellu, a partner in the ruling BN, to implement a quota system for Indians in the public service to stem the tide of marginalization of the Indian community have thus far come to naught and are likely to go unheeded in the foreseeable future, given the government’s pro-Malay agenda. Earlier, the proposals put forward by the Malaysian Chinese Association’s Election Appeals Committee (Suqiu) for removing discrimination against non-Malays were met by strong rebuke from Mahathir and UMNO stalwarts who apparently interpreted the Suqiu’s seventeen-point proposal as a demand to abolish constitutionally-enshrined Malay rights and privileges. However, Mahathir has always been cognizant of the fact that non-Malay support played a crucial role in the UMNO-led BN coalition’s victory in the 1999 elections — and hence the need to placate the non-Malays, especially the Chinese, by conceding to the establishment of an MCA-run university (Universiti Tunku Abdul Rahman, named after Malaysia’s first Prime Minister). Knowing the sensitivities of Chinese and Indian Malaysians regarding their right to vernacular education, Mahathir assured both communities that the presence of many Chinese and Tamil schools in the country was “solid proof of the government’s commitment to protect the interests of all races especially in educational development”. Two cases of arson in universities in June 2001 — the burning down of the Dewan Tunku Chancellor (the University of Malaya’s Great Hall where annual convocations are held), and the outbreak of fire in the Mathematics and Computer Science Building of Universiti Putra Malaysia, in Serdang — have raised speculation regarding what the Prime Minister believes are anti-government activities of university students and lecturers. Mahathir responded strongly by stating that firm action will be taken against those academic staff and students involved, with an additional warning that guilty students and staff would be expelled. Dr Mahathir also threatened to allocate unfilled university seats reserved for Malay students to non-Malays, citing that the Malays were abusing the opportunities given them by focusing on anti-government activities rather than gaining knowledge. He cautioned against the blind continuation of such Malay privileges as it made them complacent and uncompetitive

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POLITICAL OUTLOOK

vis-à-vis the non-Malays. Henceforth, a merit-based system of university recruitment and performance will be introduced in stages to urge Malay students to strive for academic excellence like their non-Malay counterparts. In any event, both incidents have extended official oversight to monitor activities inside university campuses — to ensure that governmentfunded institutions stick to their role as centres of learning, knowledge, and research. There is little doubt that these restrictions are also designed to limit the influence of the opposition PAS, which has made significant inroads into the leadership of student union bodies in most public universities, and to check further erosion of Malay support for UMNO. The outlook for 2002–2003 would be most certainly influenced by the tragic events of 11 September 2001 in the United States. The deepening recession there is likely to affect the manufacturing and electronics industries in Malaysia in view of the fact that the economy is export-led, and a sizeable portion of national income is derived from these two sectors. Further job layoffs can be expected, especially with sharply declining revenues from tourism and travel, while the labour movement has warned that at least 120,000 Malaysian workers — especially in the electronics, industrial, and transport sectors — would be unemployed by end 2001. The resulting economic hardship would pose additional problems, which could have political ramifications especially from the Malay community, given the narrow mandate commanded by UMNO in the present National Front coalition government. The next general election could be held earlier than November 2004 depending on Mahathir’s assessment of the country’s economic performance in the next two years.

Philippines

I

n her inaugural address in January 2001, President Gloria Macapagal Arroyo outlined four key areas for action: fighting poverty, improving governance and controlling corruption, fostering a new politics of party programmes, and leadership by example. Given the widespread poverty in the Philippines, the persistence of personality politics, the extent of presidential plunder, and the records of poor leadership, Arroyo’s agenda showed she was serious. When Arroyo assumed the presidency following the ouster of President Joseph Estrada through a popular uprising that eventually secured military support, expectations were high for a turnaround in the country’s fortunes. Although there were contending views about the constitutionality of the unscheduled but non-violent transition, the government did receive the imprimatur of the Supreme Court. The new government’s political capital rested in part on popular revulsion over allegations of widespread corruption among Estrada’s family and friends as well as accusations of presidential involvement in illegal gambling and racketeering. The new government also received strong support from key players, namely, the military, big business, the Roman Catholic Church, and civil society groups. Mrs Arroyo’s training as an economist and experience in trade and industry issues was a welcome contrast to the former President’s predilections. The expectation that she could govern for nine years, because she could run for the Presidency in 2004, added to Mrs Arroyo’s appeal.

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However, no sooner had the government started planning for a long-term agenda than political troubles erupted. A few weeks after the unceremonious arrest of Estrada, the government found itself battling a popular mobilization of pro-Estrada supporters, allegedly led by opposition leaders bent on toppling the government. At the same time, the government was caught off-guard by another brazen kidnapping of tourists and Filipinos by the Abu Sayyaf group in the southern Philippines. Contrary to its pronouncements of immediate resolution, the military was unable to crush the bandits. Although the incidents occurred in the remote southwest periphery of the archipelago, media coverage of the incident blanketed the country in clouds of uncertainty. However, by projecting a forceful response to these crises, President Arroyo was able to create a silver lining for the government. Its popularity was boosted and the government’s candidates secured a majority in both the Senate and the House in the May 2001 national elections. Historically, this result was not surprising, because mid-term congressional elections in the Philippines have always been in favour of the President. Nevertheless, the electoral victory did not yield the expected fruit of political stability. Congress soon found itself embroiled in one corruption scandal after another. This time the target was newly elected Senator and former police chief Panfilo Lacson. Perhaps in keeping with Arroyo’s avowed goal to fight corruption, the Intelligence Service of the armed forces revealed it was pursuing charges of corruption, drug smuggling, and kidnapping against Lacson. Lacson claimed political harassment, saying that the attacks were intended to sideline him from being a prospective contender in the 2004 presidential elections. While the charges carried weight in part because of the credibility of military intelligence chief Colonel Victor Corpus, the Senate was clearly divided, as well as distracted from its legislative responsibilities. Lacson, in turn, levelled charges of corruption against the President’s husband, Mike Arroyo, as well as the Secretary of Justice, Hernando Perez. Lacson linked the former to misappropriation of funds in the Philippine Charity Sweepstakes Office, while the latter was targeted for his alleged involvement in a controversial energy contract. In many ways, these episodes threatened to sidetrack the President’s anti-corruption agenda, which had received a boost when well-known graft-buster Haydee Yorac accepted the President’s offer to head the Presidential Commission on Good Governance. More troublesome for the Arroyo government were the allegations of collusion by army officers with leaders of the Abu Sayyaf, which would explain the military’s inability, despite its overwhelming numerical superiority, to apprehend the bandit group. This incident comes on the heels of accusations of irregularities in weapons and equipment procurement in the élite Philippine marines. To some, these episodes highlight the endemic corruption in the country, and make the government’s proposals for combating corruption a tall order. The government’s objective of fighting poverty has been clearly articulated but is seen as unlikely to be achieved in the face of structural and behavioural obstacles. Given the government’s refusal to challenge the Catholic Church’s edict against artificial contraceptives, the economy certainly needs to grow much faster than its 25-year average of 3 per cent. With a tarnished reputation for internal security, inadequate infrastructure facilities, and relatively poor business environment, the country is finding it difficult to compete with its neighbours

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POLITICAL OUTLOOK

Philippines Land Area:

300,000 sq. km.

Population:

77 million (1998 estimate)

Capital:

Manila

Type of Government:

Presidential democracy

Head of State:

President Gloria Macapagal-Arroyo

Next Election:

May 2004 (national and local)

Currency Used:

Peso

US$ Exchange Rate on 5 November 2001:

US$1 = 51.9 peso

in attracting foreign direct investment to create the jobs needed to reduce poverty. Moreover, multilateral institutions have pledged to the country sizeable amounts for anti-poverty and development projects, but the government has been unable to utilize these funds efficiently and effectively, compared with the rest of the region. There are, however, areas in which some success has been achieved that have antipoverty effects. For example, in the Department of Education, Secretary and former Senator Raul Roco has implemented innovations in management and procurement that appear to have significantly curtailed corruption and improved the morale and performance of teachers. Owing to the country’s established network of universities and schools, education is one of the key areas where the Philippines has a strong competitive advantage. Developing this edge can help the administration move towards its goal of fighting poverty. Another example is the recent passage of the Anti-Money Laundering Law in September 2001. It had long been proposed, ever since the Philippines was cited by the Financial Action Task Force (FATF) of the Organization for Economic Cooperation and Development (OECD) as being “uncooperative” in the fight against money laundering. Early in 2001, the FATF had issued a 30 September deadline, warning that the Philippines would suffer from sanctions by international financial institutions for its inaction in this area. Under international pressure, Philippine legislators took time off from their political infighting to pass a law, however weak, which appears to meet some of the FATF requirements. In this regard, the Arroyo government was able to show that it could pursue — as previously declared by President Arroyo — a politics of party programmes, not of personalities. To many, however, these events seem to be isolated episodes that do not break the pattern of weak party politics and unprincipled political officials.

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Transforming the party system requires changing electoral rules that presently favour weak parties and promote personalities and “showbiz” politics. Mrs Arroyo, however, has said that she is against any type of constitutional change, and has not expressed interest in electoral reforms. It is unlikely that during her tenure there will be meaningful changes. As such, Mrs Arroyo will actually be imposing a handicap on her government because of the lack of a strong party system that can help her execute the government’s agenda. This is unfortunate because Mrs Arroyo has significant support in both Houses of Congress that can be mobilized for electoral and other major policy reforms. Her reluctance stems in great part from opposition to any constitutional change by Cardinal Sin, the influential prelate of Manila, and former President Corazon Aquino, both of whom were instrumental in placing Arroyo in the presidency. Arroyo’s political party, Lakas-NUCD, has seen stronger days during the time of former President Fidel Ramos, but it was largely due to the managerial skills of Ramos and not to any inherent organizational strength. Unlike Ramos, Mrs Arroyo is more comfortable with policy ideas than with party building and mobilizing to secure reforms. This is partly the reason Arroyo decided to support Jose de Venecia to be re-elected Speaker of the House of Representatives. De Venecia proved his mettle in the same position during the Ramos era in building a reformist legislative coalition. Recently, the Arroyo government’s troubles with the Abu Sayyaf group have taken a graver dimension, with the U.S. Government’s declaration that the group — together with other Muslim Filipino organizations — is directly or indirectly linked with the network of Osama bin Laden and will therefore be targeted as part of the “war on terrorism”. In this regard, the United States will be sending military “advisers” to work with the Philippine armed forces in combating these groups. Depending on the consequences of the war, and specifically on the tactics employed in the Philippines, the political situation in the southern Philippines may be polarized to the point of instability, if not renewed violence. This scenario will pose an added challenge to the Arroyo government because of its likely repercussions on an already pressured economy. However, in the end, as Arroyo herself has declared, it will be leadership by example that will be crucial to accomplishing her government’s agenda. To date, her decisions and actions with regard to the objectives she outlined in her inauguration — fighting poverty, combating corruption, establishing a new kind of politics, and exemplary leadership — have produced at best mixed results. In the near term, the government needs to leverage its scarce political capital and limited economic resources to demonstrate success, however incremental, in poverty alleviation, anti-corruption, and development and conflict management in the southern Philippines. Otherwise, the chances for reforms will become narrower while the risks and resistance inherent in the country’s political economy will increase as the country heads closer to the 2004 elections.

T

wo phenomena characterized the political-economic landscape of Singapore in 2001. One was the fact that the republic slipped into a significant recession — said to be its worst since independence — without initially the kind of observable

Singapore

21 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

impact (government projections for the economy in the earlier part of the year were not especially downbeat) that had characterized other occasions of national economic malaise, such as in 1985 and during the broader Asian financial crisis of 1997–98. The other phenomenon was the near-lack of excitement or interest that would normally have attended expectations of an impending general election. Indeed, not since the 1970s has there been such political apathy displayed by Singaporeans. The two phenomena are interlinked and are illustrative of the state of Singapore politics. In fact, 2001 was probably a defining moment for Singapore politics in advance of a general election, which eventually took place on 3 November. This is the curious paradox: normally a general election would define the future trends in, and the directions of, politics. However, in Singapore, in 2001 the trends and direction seemed to be defined in advance of the general election, which would explain the relative political disinterest and lack of excitement. The general election held on 3 November might well be described as a political nonevent. The ruling People’s Action Party (PAP) retained all its seats, but more significantly was able to increase considerably its share of the popular vote in contested constituencies — by some ten percentage points to 75.3 per cent. This merely reinforced the PAP’s overwhelming dominance of Parliament, securing 82 out of 84 parliamentary seats. This result came at a time when political pluralism has been more the rule than the exception in countries around Singapore. The political trends apparent in 2001 were merely a follow-on from those subsequent to the 1997 general election, an election which saw the already threadbare political opposition being further reduced in significance. In the years that followed the 1997 general election, the governing party, the PAP, continued to narrow any scope for an opposition revival. This was to the extent that Prime Minister Goh Chok Tong could, in April 2001, confidently say that he saw no pressing issues for the next general election. The Prime Minister was, in a sense, correct in his analysis — meaning to say that while there were, in fact, some issues of concern to the electorate, their effect was minimized simply because the political opposition was in an extremely weakened state to capitalize on them. Those issues that were of concern to, or at least rankled, the electorate, included: the rise in the cost of living, which had a particularly acute impact on those at the lower end of the socio-economic spectrum; the increasing numbers of foreign expatriates in Singapore, as part of the government’s foreign talent policy, which was widely perceived as taking away some jobs from Singaporeans; and the continued paternalistic attitude displayed by the government towards any outward expressions of dissent. In most other democratic countries, governing parties would fear the effect that these issues would have on their electoral prospects. In Singapore, apart from a very weak opposition, the PAP’s position has been made fairly secure by the electoral system — largely revolving around the election of teams of parliamentary candidates in so-called Group Representation Constituencies (GRC) — which it has put in place, and which tends to favour the incumbent party. With the opposition not having much electoral prospects, the electorate in 2001 was hardly astir with interest in politics despite it being an election year. This situation obtained even though long-serving opposition Member of Parliament (MP), Chiam See Tong, attempted to strengthen opposition prospects by trying to cobble

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together a unified opposition to contest the PAP at the general election. He was to come up with the Singapore Democratic Alliance (SDA), an umbrella grouping which was to bring together four political parties, Chiam’s Singapore People’s Party, the National Solidarity Party, the Singapore Malay National Organization, and the Singapore Justice Party. Although the idea of this unified opposition grouping made eminent sense, it seemed to have had limited appeal to the electorate. The reason for this was because, apart from the respected Chiam himself, the opposition parties under this umbrella grouping were largely minor ones and were therefore unable to galvanize voter interest or support. The SDA did not include the two more prominent opposition parties, the Singapore Democratic Party and the Workers’ Party, which would otherwise have given it a more heavyweight profile. This significant exclusion arose despite Chiam’s attempts to bring in these two parties into the SDA. However, as a further reflection of the bedevilling problems afflicting the opposition parties, personality clashes among prominent opposition leaders were the reason for the lack of co-operation in facing the common adversary — the PAP. The dismal state of the political opposition during 2001 was further manifested when Non-Constituency Member of Parliament, J.B. Jeyaretnam, a long-time opponent of the PAP, had to vacate his parliamentary seat as a result of being made a bankrupt consequent to a lawsuit arising out of a 1995 defamation action filed against him by PAP parliamentarians. The year was also to see the relinquishment of Jeyaretnam’s leadership of the Workers’ Party, when his colleague, MP Low Thia Khiang, assumed the position of Secretary-General of the party. The two events were seemingly interlinked.

Singapore Land Area:

660 sq. km.

Population:

4,017,733 (3.2 million Singaporeans) (2000 census)

Capital:

Singapore

Type of Government:

Parliamentary democracy

Head of State:

President S.R. Nathan

Prime Minister:

Goh Chok Tong

Next Election:

By 2007

Currency Used:

Singapore dollar

US$ Exchange Rate on 5 November 2001:

US$1 = S$1.82

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POLITICAL OUTLOOK

Notwithstanding the public perception of a withered and inconsequential political opposition, the opposition parties gamely made attempts to rejuvenate their ranks by seeking younger members. Three opposition political parties were especially active in this endeavour. They were the National Solidarity Party, the Singapore Democratic Party, and the Workers’ Party. The injection of new blood in the party ranks was reflective of the generational change taking place within the opposition. As mentioned, the SecretaryGeneralship of the Workers’ Party passed from the veteran Jeyaretnam to his younger colleague, Low, while some young and prominent civil society activists decided to enter the party political fray by nailing their colours to the opposition mast. Significant in that regard were a few members of the civil society group, Think Centre, including its vocal founding member, James Gomez, who formally announced his joining the Workers’ Party. The fact that some of those in Singapore’s embryonic civil society movement had decided to move from the fringes and into the centre-stage of party politics, is reflective of the state of civil society in the island-republic. What great hopes that civil society activists harboured in the mid-1990s of making their mark by imbuing in Singaporeans an increased political awareness and in having some impact on policy-making, seemed to have waned considerably by the turn of the new millennium. Some of these activists were to conclude that they were just not getting anywhere; there was too little interest at the grassroots level to whatever they were attempting to achieve. Thus, some decided to abandon their work in civil society and attempt a more direct approach, by joining opposition political parties. Others, however, faded out of activist work altogether, having come to the conclusion that all their efforts amounted to very little other than a dispiriting exercise. One of those individuals was Dr Tan Chong Kee, who had been the moderator of the Website, Sintercom, well known for offering an uncensored forum on Singapore politics and society. After eight years at the helm, Dr Tan ended his involvement with Sintercom in August 2001, saying that his heart was not in it anymore and that civil society in Singapore was a lost cause. To a large extent, that sentiment summed up the political atmosphere prevalent in Singapore at the start of the twenty-first century. It is an atmosphere where quite a number of Singaporeans are accepting of the fact that no real political change can be effected in the island-republic. This is for two reasons: the PAP government’s continued steps, largely through legislative means, to staunch the growth of the political opposition to its rule, and the fact that the opposition continues to come across to the electorate as inept, lightweight, and by no means ready to provide a credible challenge to the ruling party. The curious thing about elections in Singapore is that the ruling party tends to do well when the economy is either buoyant or depressed. When the economy is buoyant, the PAP, as the incumbent party, benefits from the general “feel-good” factor. On the other hand, when the economy is doing badly, the PAP also benefits as it has shown itself able to instill fear in voters by convincing them that the PAP is the only viable choice to get the economy out of the rut and back onto the growth path. The PAP is persuasive in that regard since it generally runs on an outstanding record of economic achievements. With such a situation, where the PAP can win overwhelming electoral support in both good and bad economic times, it is hardly surprising that elections in Singapore have essentially become non-events, a condition that is unlikely to change for the foreseeable future. This also tends to highlight

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the conservative nature of the Singaporean electorate — an increasingly middle-class electorate, which unlike the new middle classes in other countries, is more interested in stability than significant political change. Thus, an unexciting, but stable, political environment will be the norm in Singapore for some time to come.

P

rime Minister Thaksin is part of an East Asian regional phenomenon. Tired of stagnant or crisis-hit economies, people are looking for a saviour on a white horse — often with an indigenous, anti-foreign flavour. Japan has charismatic Junichiro Koizumi. Indonesia propelled Megawati Sukarnoputri to leadership in a wave of nostalgic longing for the imagined glories of Sukarno. The Philippines led the trend with the landslide election of President Estrada in 1998, though his fate is a cautionary tale. Thaksin, a telecommunications billionaire, is popular. His Thai Rak Thai (Thais Love Thais, or Thai Patriotic Party) won nearly half the seats in the January 2001 general election. This eclipsed all previous electoral wins, and was the first time a party gained support in Bangkok and throughout the country. After merging with a smaller party, and allying with others, Thaksin controls some 70 per cent of the House of Representatives. There were several reasons for this electoral success, but prominent among them was the populist appeal to the poor — 30 baht (US$0.65) health treatment and a 1 million baht fund for each village — together with promises of a quick solution to major economic problems. Many Thais simply admire Thaksin for being rich, and trust that he can make the nation rich as well. His popularity has continued to rise, despite an indictment by the National Counter Corruption Commission (NCCC) for concealing assets of around US$200 million when he was a minister in an earlier government. (The Constitution requires public declaration of assets by all ministers, with a penalty of removal from office if found guilty.) As the Constitution Court considered his case, numerous popular demonstrations of support took place, and 1.44 million signatures were collected requesting that Thaksin be pardoned. Even individuals who had previously played a critical role in political reform supported him — arguing that an exception should be made since Thaksin had the potential to save the nation. From the outset Thaksin was gaff-prone. Notable examples included blaming an explosion of a Thai Airways jet on an assassination attempt (faulty electrical wiring was later implicated); hasty identification with an incredulous claim that vast amounts of Japanese gold had been discovered which, he suggested, might pay off all Thailand’s debts; and being caught on a luxury holiday in New Zealand just after telling Thais they should vacation in their own country. However, even these setbacks failed to dim Thaksin fever. In August, Thaksin pulled off another remarkable victory with a narrow (8–7) acquittal by the Constitution Court for non-declaration of his assets. This result had not been predicted by Thai legal experts, who had felt that the case against him was overwhelming. The verdict appeared to defy legal precedent and came amidst bizarre circumstances, including rumours of pressure on judges.

Thailand

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POLITICAL OUTLOOK

Thaksin’s response was to warn that the Constitution should be changed so that honest persons like himself would not be troubled again by institutions like the Constitution Court. He thanked only the eight judges who had voted for him, and questioned the motives of the nation’s top judge. With the Court’s favourable verdict, his domination of Parliament, and enormous popularity, many analysts saw Thaksin’s position as impregnable. However, his most difficult trials may be just beginning. The public will now demand the economic benefits promised. Whatever the virtues of the various populist initiatives — and many are now being questioned — they have not spurred economic growth. Even before the dramatic terrorist attacks in the United States on 11 September, demand for Thailand’s exports was feeble. In such an environment, there cannot be a quick fix to Thailand’s myriad post-crisis economic troubles. Growth has declined to about 1 per cent, and projections for 2002 are at about the same level. Unemployment is rising. Public debt levels are also escalating sharply, to meet high spending election promises and fiscal pump priming. Apart from economic problems, Thaksin has also to face growing conflict with civil society. Non-government organizations which had initially been prepared to make an exception for the Prime Minister have begun to have second thoughts. His negative response to the Constitution Court, and in many eyes the verdict itself, were a direct challenge to the Constitution and the rule of law. Several other developments have heightened civil society concerns. Freedom of the media was an issue even before the general election, when Thaksin’s family took over the only independent television station, iTV. The controversial sacking of 23 iTV staff in February reinforced concerns. As the year progressed, several independent or critical programmes were removed from government radio and television. Just prior to the Constitution Court verdict, the Special Branch strongly warned two newspapers that had published a Reuters report including speculation on the consequences if Thaksin was found guilty — an action which veteran journalists compared with media censorship in the bad days of military dominance. Related to this were efforts to amend the Official Information Act in ways that implied a reduction of people’s rights to government information. In addition to the media, perceptions of a conflict of interest surfaced in other areas. A company owned by the Thaksin family received several government advertising contracts. Some in the government moved to legitimize a family-owned golf course and housing estate, built on land illegally transferred from a Buddhist temple, by retrospectively declaring the transfer legal. A personal financial adviser to Thaksin was appointed to head both the Thai Asset Management Corporation (tasked with the critical role of buying up all non-performing loans from banks) and the National Economic and Social Development Board. Thaksin also intervened in a manner which gave rise to concerns of patronage in the military and public service. Dispensing with a tradition that had left military promotions in service hands, some eighty positions were altered after intervention by Thaksin and Defence Minister Chavalit, causing protests from the military as well as civil society. Holders of top positions in the Bank of Thailand, Finance, Commerce, Interior, the Office of the Prime Minister, and the Police were changed at ministerial instruction — in ways that generally left analysts concluding that political loyalty rather than competence was the key consideration.

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Thailand Land Area:

514,000 sq. km.

Population:

60.6 million (2000 census)

Capital:

Bangkok

Type of Government:

Parliamentary democracy with constitutional monarch

Head of State:

King Bhumibol Adulyadej

Prime Minister:

Dr Thaksin Shinawatra

Next Election:

2005

Currency Used:

Baht

US$ Exchange Rate on 5 November 2001:

US$1 = 44.68 baht

The administration also increasingly moved to short-cut environmental concerns where these were perceived to clash with economic needs. It agreed to resume logging (banned since the 1980s), build tourist hotels in national parks, and supported prawn farming in ricegrowing areas — hitherto disallowed because of salinity problems — until the King indicated his opposition. Foreign policy reverted to a more traditional, personalized form. The previous Chuan government had pursued a cautious, principled approach, that left policy in the hands of foreign ministry professionals, and sought to align Thailand with new global concerns in areas such as human rights. Thaksin’s diplomacy relied on himself, Defence Minister Chavalit, and other military leaders to smoothen bilateral problems and conduct commercial deals. Serious military clashes along the border with Myanmar early in 2001 tested this approach, but relations improved in the second half following visits to Yangon by Thaksin and Chavalit. Thaksin’s CEO-style leadership, reinforced by a series of special workshops, delivered results in some areas. He reinvigorated anti-drug measures and quickly established new institutions to implement promises in areas such as health and rural credit. He gained popularity for a campaign against the sex industry led by Interior Minister Purachai. However, he made little impact in addressing basic economic problems, and in other critical areas such as education, over which he assumed ministerial responsibility in June but relinquished it three months later.

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POLITICAL OUTLOOK

Thaksin also presided over a retreat from political reform, rather than adhering to his campaign promise of “think new, act new”. Forced to cater to diverse factional interests in the Thai Rak Thai and coalition partners, he has leaned heavily on traditional discredited politicians. Independent institutions set up to guard public interest and the Constitution — including the Constitution Court, the National Counter Corruption Commission and the Electoral Commission — have been pressured and compromised. Towards the end of 2001, public opinion polls recorded a gradual decline in Thaksin’s support. It is not too late to retrieve that, but with mounting economic problems Thaksin fever could evaporate quickly in 2002, unless he moves to re-emphasize his links with civil society and give greater priority to the rule of law.

INDOCHINA AND MYANMAR Tin Maung Maung Than • Nick J. Freeman • Russell Heng

Cambodia

P

rime Minister Hun Sen’s undisputed power and the Cambodian People’s Party’s (CPP’s) stranglehold of the legislature have ensured political stability in Cambodia in the aftermath of the 1998 national elections. Although Sam Rainsy, the leader of the opposition SRP (Sam Rainsy Party) remained a pebble in Hun Sen’s shoes, the former appeared to have been marginalized. Even the aborted attack on the Defence Ministry in Phnom Penh by the expatriate Cambodian Freedom Fighters (CFF, whose reputed leader lives in the United States) on 24 November 2000 failed to generate serious repercussions. The subsequent government measures on the CFF organization in Cambodia resulted in the conviction of thirty suspects in June 2001, and the trial of another twenty-seven persons on charges of terrorism and membership of an armed group began in mid-October. Neither the explosion of a bomb outside the Vietnamese embassy in April 2001 nor the two bomb explosions (one hour apart) in central Phnom Penh in July significantly affected the domestic political situation. Cambodia’s border disputes with neighbouring Thailand and Vietnam remained unresolved but, in July 2001, Phnom Penh managed to secure agreements with both countries to tighten security along the shared borders. The new Thai Government also promised assistance to Cambodia for infrastructure construction and military training. In view of such positive developments, Cambodia’s relations with its immediate neighbours are likely to improve in the near future. However, there are several issues related to the continuing saga on the long-awaited Khmer Rouge trials, the forthcoming commune elections, good governance, and delayed military demobilization that could affect the domestic political situation and the nation’s international standing in the coming years. The government’s attempt to formulate a tribunal to try former Khmer Rouge leaders deemed responsible for the genocide under the late Pol Pot’s regime made some progress in

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2001. After a delay of several months, the Cambodian National Assembly passed the revised draft trial law on 11 July. The Senate quickly endorsed it and the Constitutional Council formally approved the law in August. Finally, King Norodom Sihanouk promptly signed the law and by mid-August all the formalities on the kingdom’s part were completed. Once the memorandum of understanding (MoU) between the Cambodian Government and the United Nations (UN) on the conduct of the trial is signed, the process of convening a credible tribunal could be accelerated. However, in January 2001, the UN Chief Legal Counsel had reportedly sent a list of objections to some of the clauses in the law, none of which had been addressed in the legislation. The contentious issues appeared to be the selection and quota of international judges for the tribunal, guarantees to ensure that the sentences handed out would be enforced, and the problem of dealing with the earlier amnesty given to key Khmer Rouge leaders on their surrender. In fact, at the end of June, both Hun Sen and National Assembly President Prince Ranariddh denounced “UN interference” of the trial, and the former threatened to “go it alone” even if an agreement with the United Nations on the tribunal process could not be reached. On the other hand, some believed that further negotiations would resolve the apparent problems. The politicization of the proposed tribunal with its potential for instability and violence has resulted in dividing the nation on the issue of prosecuting top Khmer Rouge leaders who had made peace with the government. Though Hun Sen had reportedly stated that former Foreign Minister Ieng Sary (pardoned by the government) could be tried, CPP top leaders had also qualified that “finding justice must not affect solidarity and political stability”. In interviews with Asiaweek in July 2001, all three top leaders of the disgraced Khmer Rouge (“Brother No. 2” Noun Chea, Ieng Sary, and former head of state Khieu Samphan) denied any knowledge of the genocide. Meanwhile, Hun Sen in his first speech since the King’s signing of the law assured former Khmer Rouge commanders in August that they had nothing to fear from the tribunal since charges “will be brought against the ten or more who were most responsible” for the killings. Given such controversies over the identification of potential defendants and the huge technical and logistic hurdles involved (it is not clear who would foot the multi-million dollar bill for the trial), it is highly unlikely that the tribunal could be convened by the end of the year, as predicted by Hun Sen in June. If everything turns out well, the earliest is likely to be the summer of 2002, after the completion of the commune elections. As preparations for the February (2002) commune elections progressed towards the registration of candidates in mid-October 2001, initial fears that the run-up to the elections would see an escalation of coercion and violence and confrontation between the two coalition partners turned out to be unfounded. In fact, according to news reports, “closer ties with the CPP was a key theme” at the annual congress of the Funcinpec (National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia) party led by Prince Ranariddh, held in March 2001. Apparently, in order to strengthen party organization, both parties made some changes in personnel at the top echelon. Prince Norodom Sirivudh (half-brother of King Sihanouk), who had gone into exile for three years after being accused of plotting to assassinate Hun Sen

29 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

Cambodia Land Area:

181,040 sq. km.

Population:

12 million (2000 estimate)

Capital:

Phnom Penh

Type of Government:

Parliamentary democracy with constitutional monarch

Head of State:

King Norodom Sihanouk

Prime Minister:

Hun Sen

Next Election:

3 February 2002 (commune or local) July 2003 (national)

Currency Used:

Riel

US$ Exchange Rate on 5 November 2001:

US$1 = 4,023 riel

in 1996, made a political come-back in July 2001 when he was appointed the secretarygeneral of Funcinpec. Observers believe that the rehabilitation of Prince Sirivudh, who had returned to Cambodia in 1999 after being pardoned by the King, was part of an attempt to rejuvenate the party with new blood and benefit from his royal roots. This was followed, in August, by the replacement of (Funcinpec) governors and deputy-governors in several provinces and the appointment of two new Funcinpec ministers. The CPP, which celebrated its fiftieth anniversary in 2001, also added the national police chief to its twenty-member Standing Committee of the Central Committee at its annual meeting in July. In August, the CPP endorsed the appointment of a party nominee as Minister of Agriculture, Forestry and Fisheries. The party, which claimed to have over three million members, also hinted that up to one-third of its incumbent commune chiefs might be replaced in the candidature list to boost the popularity and efficiency of its local cadres. On the other hand, election monitoring organizations (EMO) were disappointed by the “lower than expected” registration of voters in the September exercise. Of the estimated six million eligible voters, some 83 per cent registered — a 10 per cent drop from that in the 1998 national election. The drop was attributed to poor organization, time constraints, lack of resources and education, and procedural irregularities. Preliminary (for 22 out of 24 provinces) reports indicated that the CPP fielded over 16,000 candidates for some 70 per cent of the 1,621 seats; Funcinpec had nearly 14,000 candidates for 61 per cent of the total; the SRP nominated over 13,000 candidates for 55 per cent of the available seats; and the three smaller parties barely managed to put up a few dozen altogether for several communes.

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Despite the relative calm and stability up to the end of October, there is no assurance that the forthcoming commune elections will not become confrontational and turn ugly nearer to the election date as competition heats up. The ruling CPP will not take kindly to the challenge to its undisputed local power base of the last two decades. It had been accused of coercion and intimidation using state apparatus in past elections. Other parties might also challenge the election results if they lose badly. It is not encouraging that, in early October, the national election committee rejected a list of nearly 7,000 election monitors put up by a leading EMO. Tens of thousands of monitors would be needed for the 12,535 polling stations, and it would be quite an undertaking to identify, nominate, and train these volunteers in time. Issues of poor governance have frequently been raised by external observers and aid donors, especially those related to resource allocation, corruption, human rights, and rule of law. Given that external contributions made up some 16 per cent of the nation’s gross domestic product (GDP for 2000), the perceptions of donors have some impact on the government’s response to those issues. Although the international donor community pledged US$615 million (US$550 million for the government alone, compared with the US$500 million requested) in June 2001, it voiced concern and disappointment over the apparent lack of progress in judicial, anti-corruption, and civil service reforms. Human rights groups had also lamented about the mounting problem of land-grabbing by the élites, the continuation of vigilante killings and mob rule, and the unsatisfactory performance of the police and the court system. All these reflect poorly on the government and might provoke donors to put more pressure on the government, and actual disbursement might be less than the pledged amount, thereby jeopardizing the government’s development plans. The government’s plan to demobilize the bloated military has been behind schedule. It failed to deliver its promise to discharge 15,000 (out of a total target of 30,000) troops in mid-2001. The new schedule announced in October was to demobilize 15,000 troops in the last quarter of 2001, and a further 15,000 in 2002. The programme was expected to cost more than US$25 million, with the World Bank contributing more than 70 per cent of the cost. Apart from dissent among the troops because of uncertainty about their livelihood, it is likely that cost overruns and logistic and monitoring problems would constrain this ambitious exercise, and the schedule could slip by a year or so. Moreover, paring the senior ranks where positions are tied to political obligations could turn out to be a more contentious issue. Thus far, Cambodian politics has exhibited remarkable stability despite occasional violence and less-than-satisfactory rule of law. However, it is still not assured that Cambodians will find closure to the trauma of the Khmer Rouge era through a credible and fair trial of the perpetrators behind the “killing fields”. The United Nations and the Western powers may still disagree with the government on the finer points of the trial law and/or the conduct of the tribunal, which might take a long time to convene. If it drags on till 2003, the political imperatives of the national elections may complicate the situation further. The fierce competition in the commune elections could also create political instability and confrontation between the ruling party and its contenders. It will probably require all the political skills of Hun Sen, as well as the willing co-operation of the Funcinpec leaders, to steer Cambodian politics out of harm’s way in the near future.

31 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK Laos

A

fter a series of small-scale terrorist attacks in 2000, the year 2001 proved to be more tranquil for the Lao People’s Democratic Republic (PDR). The main event of 2001 was the Seventh Party Congress of the Lao People’s Revolutionary Party (LPRP), held in early March, surprisingly ahead of the Ninth Party Congress in neighbouring Vietnam. The spate of minor bombings that rocked the normally sleepy capital in late 2000 prompted the LPRP to maintain very tight security throughout the brief three-day Congress. Even the opening date of the Congress was kept under wraps. The Party Congress saw a number of changes to the senior leadership line-up in Vientiane, including an expansion of the LPRP Politburo from eight members to eleven, and an increase in the Central Committee from 49 to 53 members. Three new faces joined the Politburo, with no sitting members removed. All sixteen provincial chiefs are now represented in the new Central Committee, lessening the chances that any regional dissatisfaction could arise in a country where domestic communications and transport are fairly rudimentary. At the Congress, General Khamtay Siphandone (aged 77) maintained his paramount position as both General Secretary of the LPRP and State President, which came as a surprise to those expecting him to relinquish one of these posts. Shortly after the Party Congress, the 99-person National Assembly met to approve a Cabinet reshuffle, including the appointment of former Deputy Prime Minister and Finance Minister Bounnyang Vorachit (aged 64) as the new Prime Minister of Laos. This was also surprising, with several pundits anticipating that Foreign Minister Somsavat Lengsavad (aged 56) — the architect of Laos’ entry into ASEAN in 1997 — might assume the premiership, together with a seat on the Politburo. Regarded by many Lao watchers to be broadly pro-China in his outlook, Somsavat Lengsavad also failed to get a Politburo seat. Persistent foreign media speculation since 2000 that a schism had developed within the LPRP, broadly along pro-Vietnam and pro-China factions, has almost certainly been oversimplified, and probably overdone. However, the decision by Khamsay Souphanouvong, a former minister and son of the LPDR’s revered first President, to claim asylum in New Zealand is an indication that the LPRP may not be wholly harmonious within. However, any falling out may stem as much from business or personal conflicts as from ideological or policy differences. To what extent will the senior leadership changes in 2001 result in a shift in government policy direction? The answer is probably none at all. Laos continues to remain an avowedly communist state, in which the LPRP enjoys a monopoly on political power. A substantial proportion of the senior leadership are serving or retired military officers (eight of the eleven Politburo members have senior military officer rank), and the army enjoys a high profile in numerous spheres, including business. Much-needed economic reforms formally remain on the agenda, if only to please the various external agencies that help to support the Lao economy (roughly 80 per cent of public investment is funded by foreign agencies), but their implementation is conducted at a pace that could be described as glacial. Some commentators have suggested that the appointment of Bounnyang Vorachit may result in an acceleration in the pace of economic reform in Laos. If so, we still await clear and tangible evidence that this is the case. (In terms of major up-coming events, February 2002 will see elections for the National Assembly.)

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THE ASEAN-6 INDOCHINA AND MYANMAR

Laos Land Area:

236,800 sq. km.

Population:

Approximately 5.5 million

Capital:

Vientiane

Type of Government:

Communist party-led people’s republic

Head of State:

General Khamtay Siphandone

Party Secretary:

General Khamtay Siphandone

Prime Minister:

Bounnyang Vorachit

Currency Used:

Kip

US$ Exchange Rate on 5 November 2001:

US$1 = 9,510 kip

International donor reaction to the appointment of Bounnyang Vorachit as premier was broadly positive, viewing him as a pro-reformer whom they probably can do business with. In the month after the Party Congress, the International Monetary Fund (IMF) announced that it was resuming lending activity to Laos, after a five-year hiatus, with a new US$40.2 million three-year loan. Like many IMF loans, this facility comes with a number of conditions attached, which go some way towards setting a business liberalization and economic reform agenda over the next three years. Recent years had seen a growing sense of frustration expressed by international donors (both bilateral and multilateral) towards Vientiane, and what they perceived to be a marked reduction in the leadership’s appetite for economic reform activity. This may have prompted some concern in Vientiane’s corridors of power, and conceivably have had some limited impact on decisions made — and personnel appointed — at the recent Party Congress. (See the Laos section in the Economic Outlook part of this volume for details of the 2001–2005 five-year economic plan, unveiled at the Party Congress.) However, even if foreign donors become more assured of Laos’ stance towards economic reforms, their concerns over human rights issues appear to be marginally increasing. In February 2001, the European Parliament passed a resolution on the human rights situation in Laos, and called upon Vientiane to: ratify two United Nations human rights conventions it had signed in late 2000; release prisoners of conscience; “undertake changes necessary for the move towards democracy”; and guarantee press freedom. The resolution cited the case of a number of Lao “political prisoners” which Europe asserts are “being detained without trial and in conditions which are a violation of international rules”. This sentiment broadly

33 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

echoed those of the U.S. State Department, published in its annual country report on human rights practices, which described Laos’ human rights record as “poor”. This explains in part the recent delay in Washington to appoint a new U.S. ambassador to Vientiane. The United States has also been pressuring Laos to do more about drug production and trafficking within its territory. Vientiane introduced the death penalty for drug trafficking in April 2001, and has boldly pledged to eradicate all opium growing — as well as all slash-and-burn cultivation — in Laos by 2005. Concerns over human rights in Laos have not been expressed by its two communist neighbours, China and Vietnam, which appear to be in mutual competition to increase their respective influence over landlocked Laos. Whilst Hanoi’s influence dates back several decades and is well-established, Beijing has increased its overtures towards Vientiane in recent years, partly taking advantage of the economic retreat of Thai business capital from Laos since 1997. Although visits by Vietnamese senior leaders to Laos are fairly frequent, Jiang Zemin’s visit in late 2000 was the first ever by a Chinese head of state. The main Chinese “carrot” would be investment and assistance on a scale that greatly exceeds Vietnam’s capabilities; it is widely believed that the sudden stabilization of the imploding Lao currency in 1999 was the result of Chinese trade credits and loans. This state of fraternal rivalry between China and Vietnam for Laos’ favours seems destined to continue in the coming years, but is unlikely to get out-of-hand, with Vientiane seeking to keep both neighbours relatively contented. Relations with Thailand continue to be fairly hit-and-miss, with a number of minor incidents and flashpoints posing occasional difficulties. Most recently, a planned Thai historical movie has revived long-held Lao perceptions of how they are commonly regarded in neighbouring Thailand. Laos has also not been happy at what it regards as foot-dragging by the Thai Government in handing over 28 persons (mostly Thai nationals) alleged to have been responsible for the July 2000 raid on a Laos border crossing, during which a number of people were killed (in early 2001, Bangkok and Vientiane signed an extradition treaty). Moreover, various outstanding border claims — largely focusing on the Mekong river — provide a seemingly constant backdrop of distrust between Bangkok and Vientiane that appears unlikely to evaporate in the near term. The above notwithstanding, Prime Minister Thaksin Shinawatra’s brief visit to Vientiane in mid-2001 appeared to establish some degree of rapport with the Lao leadership, which may bode well for the future. Although anti-LPRP elements among the relatively substantial overseas Lao communities in the United States and Thailand will continue to be an occasional annoyance and legitimate security concern for Vientiane (not to mention foreign tourists and businesses), there have been no new bombings in Laos since the January 2001 attack on the Friendship Bridge. The fact that the spate of bomb attacks, together with the armed raid on the border post, have had no long-term impact illustrates the extent to which no effective opposition to the current government is apparent within Laos itself. Nor does it seem likely that such an opposition will develop in the foreseeable future. The resumption of relative tranquility in Laos hopefully will allow the government to concentrate on the most fundamental and pressing challenge — overcoming the stubbornly low level of economic development that exists. This will necessitate the introduction of new economic reform measures.

34 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6 INDOCHINA AND MYANMAR

M

ore than eleven years after the May 1990 elections, in which the National League for Democracy (NLD) won convincingly, the ruling military junta, now known as the State Peace and Development Council (SPDC) has yet to announce the time-table for a return to civilian rule. Nor has the National Convention, whose professed objective is to establish the fundamental principles for an “enduring” state constitution, reconvened (it has been in recess since the end of March 1996). However, in the last quarter of 2000, Malaysian diplomat Razali Ismail, the United Nations (UN) Secretary-General’s special envoy, appeared to have brokered a breakthrough in the decade-long impasse in Myanmar politics by facilitating “landmark talks” between the junta representatives and NLD leader Daw Aung San Suu Kyi. When Ambassador Razali revealed in January 2001, that “secret talks” had been going on since October 2000 it surprised both the supporters and detractors of the Myanmar military regime. This came after the upbeat pronouncements on Myanmar made by Malaysia’s Prime Minister Mahathir Mohamad, who visited Yangon in early January 2001, and the receptive mood surrounding the visit of Ambassador Razali that immediately followed Mahathir’s trip. Following the revelation of the talks, scores of NLD members were released from detention in the last week of January, and NLD Vice-Chairman ex-General Tin Oo was returned to house arrest from the detention centre. Thereafter, more NLD elected representatives, party activists, and some literary personnel were released in several batches, totalling 174 persons by early October. “Restrictions” on NLD Chairman (ex-Brigadier) U Aung Shwe and Vice-Chairman (ex-General) U Tin Oo were also lifted on 26 August, allowing them to resume party functions. On the other hand, detractors claimed that there

Myanmar

Myanmar Land Area:

678,675 sq. km.

Population:

51 million (mid-2001 estimate)

Capital:

Yangon

Type of Government:

Military

Head of State:

Chairman of State Peace and Development Council (SPDC), Senior General Than Shwe

Prime Minister:

Senior General Than Shwe

Currency Used:

Kyat

US$ Exchange Rate on 5 November 2001: Average for October 2001:

US$1 = 650 kyat (parallel market rate) US$1 = 6.65 kyat (official rate)

35 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

remained over one thousand “political prisoners” (the government refuses to acknowledge that there are political prisoners but repeatedly asserts that there are only those either under preventive detention to safeguard national security or serving sentences for crimes) and pointed out that Daw Aung San Suu Kyi was still under house arrest (the government claims that her isolation is consensual; to preserve the integrity of the secret dialogue process). The state-run newspapers have also stopped denigrating and ridiculing Daw Aung San Suu Kyi and the NLD since the beginning of 2001. Moreover, since June, the NLD has been allowed to reopen township offices and reinstall signboards in eighteen townships in Yangon Division. Up to end September, twenty-one township offices had reopened (out of hundreds that were closed during the last three years). Apparently, these measures were taken by the party’s Central Executive Committee on a case-by-case basis, with the government’s consent. Speculations were rife on the possible reason behind the junta’s decision to engage a much-maligned person, whose reinstatement to the Secretary-General post of the NLD in 1995, after being expelled by her own party prior to the general election of 1990, was not officially recognized. Anti-regime commentators have come up with several proximate reasons — namely, economic crisis; political crisis; Western pressure through sanctions and boycotts — all of which were dismissed by various government spokespersons. Friendly persuasion by leaders from ASEAN (Association of Southeast Asian Nations) and other regional states (who are seen as supportive and understanding) probably tipped the balance in the face of challenges posed by globalization, and constraints on state capacity imposed by Western ostracism. As for the talks proper, thus far, nothing but generalized optimistic comments and vague allusions to “confidence-building” have been reported. It seems that the Office of Strategic Studies (OSS, a strategic think-tank staffed with military intelligence personnel), headed by SPDC Secretary 1, Lt. Gen. Khin Nyunt, has been handling the secret negotiations. OSS officials are believed to have been involved in liaising with Daw Aung San Su Kyi since the early 1990s. At this stage, the outcome of the dialogue remains uncertain despite several occasions when “imminent breakthrough” involving various “power sharing” formulae had been bandied about by commentators. The interpretation that the no-show of Daw Aung San Suu Kyi on 19 July for the commemoration of the assassination of her father and his Cabinet colleagues symbolizes a protest for the lack of progress was refuted by the government. Subsequently, Myanmar’s military government insisted that the talks were on track. According to wire service reports, Myanmar Foreign Minister U Win Aung told reporters on arrival in Hanoi for the ASEAN Ministerial Meeting (held on 23–24 July) that: “It has not stalled”. “It is progressing and on track”. In late August, after meeting Daw Aung San Suu Kyi immediately after his release, NLD Vice-Chairman U Tin Oo told Reuters that he was “more optimistic about the talks” and believed that there had been “more understanding” as a result of the negotiations. A United Nations statement issued after Ambassador Razali’s fifth visit to Yangon in the last week of August stated that “all parties … in Myanmar remained committed to the process of national reconciliation and expressed hope about the possibility of further progress”. Nonetheless, sceptical observers who had been repeatedly disappointed by what they perceived as the junta’s “hot” and “cold” tactics remain unconvinced. Pointing out that there

36 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6 INDOCHINA AND MYANMAR

had been several false starts in the past that had failed to materialize and the military has yet to relax its grip on power and control, they accused the junta of moving at a “glacial” pace and waging a sophisticated “psychological warfare against the opposition”. Ethnic groups opposing the regime also decry that only “tripartite” talks incorporating them could be a genuine dialogue leading to a truly national reconciliation and alleged that the junta was implementing a “divide and rule” strategy. Even the ethnic-based parties allied with the NLD had complained that the political space created by the dialogue process was not extended to them but enjoyed solely by the NLD. Several scenarios may be contemplated about the outcome of the dialogue process. First, it could be the beginning of the end of the impasse and the launching of a long journey towards reconciliation and civilian rule. Although most desirable, it is not assured at this stage. Secondly, it could be the beginning of the end of Western censure where “sanctions fatigue” appears to be already setting in. The NLD would rejoin the National Convention and the present power configuration would be maintained, with the junta setting the agenda of political transition. Thirdly, this could be the beginning of the end of unity in the loose coalition representing the democratic opposition, with ethnic groups breaking ranks on the perception that “Bamar” nationalists had sold them out to the “Bamar” military by unilaterally accepting a “deal” for a Bamar-dominated unitary state. Clearly, there have been voices of discontent from among the ethnic opposition about the lack of transparency and their exclusion. The fourth or “worst-case scenario” portends the breakdown of negotiations. Perhaps the stakes are now too high and all sides will suffer tremendous credibility deficits if that happened. At this juncture, it is hard to say which of these four scenarios would come about. However, if past trends in Myanmar’s political culture are any indication, and given the historical baggage carried by the leading protagonists, the likely outcome would probably be a mixture of the first two scenarios, though one cannot rule out the third as well. However, there are signs that the adversarial relations between the junta and its Western detractors have changed for the better since the “talks” began. The junta’s concession that allowed Professor Pinheiro (from Brazil), the new Special Rapporteur for the United Nations Commission on Human Rights (UNCHR), to visit Myanmar in April 2001 and again in October is seen as positive by the international community, especially as the government had blocked his predecessor’s attempts to visit Myanmar (on account of being biased against the state). In fact, Professor Pinheiro’s interim report to the United Nations General Assembly on Myanmar’s human rights situation (dated 20 August) acknowledges that there had been “positive signals” indicating some progress in the government’s human rights record. Similarly, the unprecedented co-operation accorded by the government to the International Labour Organization’s (ILO’s) fact-finding mission in September has also created a favourable impression of the government. The European Union (EU), which is one of the regime’s staunchest critics, although extending its 1996 sanctions for another six months (at the European Council of Ministers meeting in Luxembourg in early October), commended the junta for its progress towards political reform. According to the BBC, it also decided to increase its aid for the United Nations programme to combat HIV infection in Myanmar and dropped its objection against

37 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

Myanmar’s future participation in EU-ASEAN meetings. On the other hand, Britain and the United States had also expressed some optimism over the dialogue process. With their recent preoccupation with their “war on terrorism”, these two harshest critics of the junta are not expected to put any substantive pressure on Myanmar in relation to human rights and democracy issues. Myanmar’s good relations with its regional neighbours are expected to improve further despite the uncertainty brought about by the consequences of the 11 September terrorist attacks on U.S. soil. Myanmar’s relations with Thailand, damaged by border conflict in the first few months of 2001, rapidly improved after the change of government in Thailand. The new Prime Minister Thaksin Shinawatra and his Defence Minister General Chavalit had employed personal diplomacy and renewed military-to-military ties to forge a close rapport with the junta. Closer co-operation in trade, investments, and the anti-narcotics campaign, together with promised assistance from Thailand for Myanmar in infrastructure building and other relevant economic endeavours appear to be on a promising track. All in all, in the short term, Myanmar’s junta will continue to accommodate the dialogue process and keep its onslaught on the armed opposition. The political climate is expected to improve unless the talks break down, which seems unlikely. However, one cannot expect a quick-fix solution either. The international community would probably move towards engagement rather than isolation of Myanmar. However, tangible progress is needed soon for the level of engagement to be enhanced so that Myanmar can reap substantive benefits that would increase its capacity to tackle the complex problems of economic and political transition, with its attendant humanitarian issues relating to health, education, and social welfare.

Vietnam

C

ome April 2002, Vietnam will have experienced a full year of Nong Duc Manh at the helm of the ruling Vietnam Communist Party (VCP). Pundits seeking to give a progress report on this new party General Secretary are going to be at a loss for things to write — which is to say, do not expect too much from this new man at the top in Vietnam. There are several reasons not to be too optimistic about the new leader delivering quick results in Vietnam. The first is that Manh was not chosen as a leader for that reason. He was a dark horse candidate, settled upon at the last hour by the various contending groups within the political élite because they could not accept other candidates. Manh is an enigmatic figure: a member of an ethnic minority group and rumoured to be an illegitimate child of the country’s founding father Ho Chi Minh. Some people may think such a background gives him some cachet, but it remains to be seen. Manh first entered the national limelight when he became Chairman of the National Assembly in 1992. Some foreign media are crediting him with having run the Assembly as the most liberal talk-shop in town, where Cabinet Ministers had to think on their feet while elected representatives hurled tough probing questions at them. The problem is that the accolades are only coming as hindsight after Manh’s ascension to the top party post, and it is not well-informed hindsight at that. Those

38 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6 INDOCHINA AND MYANMAR

who have been following Vietnamese politics more closely will say that the National Assembly was already a party-endorsed venue for some robust policy debate that would not be suffered elsewhere. The boisterous democratic show-and-tell began even before Manh was given the National Assembly job. The performance just got better with time. Manh has been hailed as the first VCP leader to have a university education. In a broad sense, this puts a technocrat on the job rather than somebody who has the right revolutionary credentials, or ideologically-correct status. However, during the nine years of Manh’s leadership in the National Assembly, from 1992 to 2001, no story has circulated about the sparkle of his intellect. There is a view abroad that authoritarian societies need liberal innovators. Vietnamwatching for 2002 will be very much about looking for signs of a fresh impetus to be given to the old reforms agenda, popularly dubbed as doi moi (renovation), which ran out of steam around 1995. The popular question of the moment is: will Manh preside over a doi moi II and what will the Vietnamese be gaining from it. The prevailing agenda is to make Vietnam’s business environment more appealing to investors, both foreign and domestic. The lessons of the economic downturn appear to have been learned and, to a man, the political élite is singing the pro-business tune. Even before Manh assumed his top position, the legislature and government bureaucracy had been introducing a steady stream of presumably business-friendly reforms. The year 2002 will see more of this. Some measures may even impress with their seeming boldness — for example,

Vietnam Land Area:

330,000 sq. km.

Population:

76.3 million on 1 April 1999 (Vietnam General Statistics Office figure)

Capital:

Hanoi

Type of Government:

Socialist republic

Head of State:

Tran Duc Luong

Party Secretary:

Nong Duc Manh

Prime Minister:

Phan Van Khai

Currency Used:

Dong

US$ Exchange Rate on 5 November 2001:

US$1 = 15,062 dong

39 © 2002 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

the move to give Ho Chi Minh City more powers and responsibilities in some areas relating to socio-economic development, which Manh has been quick to endorse. This is a nascent form of local autonomy that the VCP has never been comfortable with but the current pro-business mood propels it. On the official time-table is the privatization of many financedraining inefficient state-owned enterprises (SOEs). The Third Party Plenum in August 2001 was devoted to looking at the issue. This will set the tone in 2002 and help sweep away some, but only some, of the ideological cobwebs that have been obstructing the endeavour. All in all, we can expect economic rationalism to set the tone for the country’s politics, in equal measures of rhetoric and practice. Manh is likely to ride this tide. Manh’s leadership will also be measured by its ability to reduce the endemic levels of bureaucracy and corruption. Given the pro-business agenda, the procedure for setting up business will probably see some improvement in 2002, as it already has in recent years. However, the beast of bureaucracy has by no means been slain. Corruption will prove more difficult to tackle. If Manh wants to be an effective leader and deliver quick results, he will need more than just a congenial pro-business mood among his political colleagues. The fractious political culture of the VCP is a major hurdle for any aspiring leader. In 2002, this will take more of Manh’s energy and resourcefulness than anything else. Politics in Vietnam requires two main things of a leader. Firstly, he must have an ability to make deals with the various interest groups represented in the Politburo. That only takes care of national level politics. Regional politics adds more twists and turns to the labyrinth of policy-making and implementation. A system like this does not encourage quick and radical policy reforms even when it is necessary. The decision-making process is a laborious passage of negotiating with various interest groups for a final consensus that everybody can more or less live with. A policy that is filtered through so many layers of interests tends to be slow in the offing and confused as the final product. Secondly, he must have what the Vietnamese called an e kip scattered throughout key institutions to make sure that his own interests are not sabotaged or neglected (e kip is a transliteration of the French word “equipe” which means “a team”). Within the political lexicon of Vietnam, an e kip is a coterie of supporters and henchmen that a powerful leader is able to gather around him. The dynamics of e kip building is enmeshed with the problem of corruption and bureaucracy. All three thrive on each other. This is the political culture that Manh is part of. Even if he wants to change the rules of the game, it will take time. However, there is no indication yet that he wants to change those rules. What this means is that Vietnam will get a very public form of politics, which seems to be based on a broad consensus and commitment to come to grips with the country’s myriad socio-economic problems. A less visible and more fractious form of politics takes over beneath the surface, however, which is the more potent of the two. As it stands, Manh does not come with the depth of experience in the establishment to have developed an e kip of any strength. In this regard, he is no match for his two predecessors, Do Muoi and Le Kha Phieu. So the e kip building will begin, subject to the extent that key interest groups at the apex of the party will allow Manh a free hand. This will be reflected in appointments and promotions of cadres in key positions. Muoi lasted

40 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6 INDOCHINA AND MYANMAR

one-and-a-half terms and Phieu less than one. If Manh wants to keep his job longer, one of his main priorities in 2002 must be to start working on these political challenges that are intrinsic to the VCP. Foreign policy will not pose much of a problem for 2002. The most important part of foreign relations will be to continue to court the United States with a view to getting as much access as possible to the U.S. market for Vietnamese goods. Human rights consideration on the part of the United States will continue to plague this relationship but it is nothing which the Hanoi government cannot overcome. Over the years, the Vietnamese have also become more adept and tactical at handling U.S. pressure. The U.S. campaign against terrorism will get some bland expression of support from Hanoi to the effect that Vietnam is against international terrorism. Vietnam will be careful not to say anything to upset the Islamic countries, especially those with whom it shares a residual suspicion of the U.S. strategic agenda. In reality, however, Vietnam has restive Muslim minorities on its territory and will be quietly pleased if the United States can check the spread of Islamic extremism. Internal security problems may emerge in 2002 as it did the year before rather dramatically in the Central Highlands of the country, and in 1997 in Thai Binh province in the north. These were all instances of aggrieved citizens pushed to the brink by corrupt local cadres, although in the case of the Central Highlands, the ethnic factor was also relevant. In the final analysis, however, Vietnam is unlikely to face any secessionist movement that can sustain itself militarily to achieve its goals. Grassroots discontent is framed by the issues of corruption and poverty, and these are problems that will continue to be politically managed although not completely eradicated in the near term.

41 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

2002-2003

f

ECONOMIC OUTLOOK REGIONAL ECONOMIC TRENDS Nick J. Freeman

A

fter being fairly benevolent to Southeast Asia in 1999 and 2000, the global economy became a much more hostile environment in 2001. The robust global growth and trade flows that had helped support Southeast Asia during the difficult 1999–2000 post-crisis recovery process largely evaporated in 2001. Not only did demand (and therefore prices) for high-end electronic and manufactured goods dip sharply, but so did demand for oil and basic commodities, in a double whammy for the Southeast Asian economies. Looking to the immediate future, the region will have to rely much less on external support in the ongoing bid to revive its economic fortunes, as global economic growth remains fairly anaemic in 2002. This will almost certainly make the economic restructuring and recovery process in Southeast Asia more difficult, and yet even more necessary. Policy-makers will also be obliged to confront economic reforms that have been postponed in recent years. Reflecting the recent lack of tangible progress on this front, it is worth noting that the major international ratings agencies have generally not improved their sovereign ratings for the Southeast Asian countries over the last year. Only Malaysia saw a slight upgrade in its ratings for long-term bonds and notes (from Baa3 to Baa2), and for long-term bank deposits (from Ba1 to Baa3) by Moody’s during the year. All the other countries in Southeast Asia saw their sovereign ratings remain constant, with Indonesia, the Philippines, and Vietnam still at sub-investment grade levels. Are the economic challenges currently facing Southeast Asia purely externally-induced and cyclical ones that will ease in time? Or are these challenges more home-grown and structural in nature, which will compel Southeast Asian countries to formulate and adopt

Moody’s Sovereign Country Ceilings for Southeast Asia (as at October 2001)

Indonesia Malaysia Philippines Singapore Thailand Vietnam

Long-term Bonds and Notes

Long-term Bank Deposits

B3 Baa2 Ba1 Aa1 Baa3 B1

Caa1 Baa3 Ba2 Aa1 Ba1 B3

Investment grade (highest to lowest): Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3. Speculative grade (highest to lowest): Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. SOURCE: Moodys.com

44 © 2002 Institute of

This chapter is reproduced from Regional Outlook: Southeast Asia 2002–2003 , edited by Nick J. Freeman and T in Maung Maung Than (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, Southeast Asian without the priorStudies, permissionSingapore of the Institute of Southeast Asian Studies < http://www.iseas.edu.sg/pub.html >

THE ASEAN-6 REGIONAL ECONOMIC TRENDS

new policies intended to overcome them? (Or perhaps a cocktail of both?) Morgan Stanley’s economists clearly see fundamental problems confronting Southeast Asia, with “a number of structural headwinds to long-term growth, including a more competitive China, a digital/ technology divide that separates Northeast Asia from Southeast Asia, and simmering political instability in such nations as Indonesia and the Philippines. … Against this backdrop, Southeast Asia stands at a critical juncture”. It is argued that these sorts of challenges are keeping substantial sums of foreign capital — on which Southeast Asia has been heavily reliant in recent decades — away from the region. What the region needs, some observers suggest, is a whole new reformulation of the East Asian Development Model (with its heavy reliance on foreign direct investment), which served Southeast Asia well for much of the 1980s and 1990s, but is deemed no longer appropriate for the global economy of the twenty-first century. Prime Minister Thaksin Shinawatra of Thailand has talked of the need to move away from a singletrack, export-oriented economic development policy, reliant on foreign investment from overseas multinational companies, and towards a dual-track policy, adding a larger “domestic dimension” to the East Asian Development Model. He envisages the “strengthening and creation of a qualitative chain for [Thailand’s] domestic enterprises, in order to build up a new generation of entrepreneurs that can serve as the backbone and stimulus of [Thailand’s] economy”. A number of other Southeast Asian countries may also come to the same conclusion in the next few years, particularly if foreign capital continues to remain aloof from the region. However, while many policy-makers in the Southeast Asian region may concur that the existing economic development model is in need of an overhaul, if not a complete revamp, opinions on what the new economic development model should entail are likely to be more diverse. Indeed, each country in the region may have to search for their own unique economic model in the years ahead, whilst pursuing common economic goals and regional integration and co-operation within ASEAN. Such a scenario would be compatible with the advent of the AFTA (ASEAN Free Trade Area) in 2003, which should prompt some reconfiguration of the business landscape in Southeast Asia. In particular, we will probably see the development of more cross-border production networks in the region, with increasing numbers of products being manufactured and assembled at different locations. Such a process should cause countries in the region to focus more acutely on their own very specific comparative advantages, relative to their neighbours (and beyond). For example, the days of automobiles being assembled in each and every ASEAN-6 country are probably numbered, with perhaps just one or two countries performing this role in the future. Recently, it seems that every year brings with it a new perceived threat to Southeast Asia’s economic revival. In 1998, it was the concern about a possible devaluation of the Chinese renminbi, following the sharp currency depreciations in Southeast Asia during late 1997. In 1999, it was the anticipated pricking of the “tech-related” asset price bubble in the United States (an event which partially occurred in the first half of 2001). In 2000, it was the spectre of crude oil at over US$50 per barrel, together with the first signs of a dip in the business cycle for IT (information technology) products. In 2001, perhaps the chief concern for Southeast Asia’s policy-makers — beyond the general global economic slowdown — was the rise of China’s economy. The competitive threat posed by China’s economy is discussed in the box.

45 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

GDP Growth in Southeast Asia, 1995 to 2002F 15.0

10.0

-5.0

F

F

20

02

01 20

20

19

00

99

98 19

19

19

97

96

95

0.0 19

% change

5.0

Indonesia Malaysia Philippines Singapore Thailand Vietnam

-10.0

-15.0

SOURCE: World Bank.

GDP Growth Rates of the Transitional Economies in East Asia, 1995 to 2002F 12 10

% change

8 6 China 4

Cambodia Laos

2

Vietnam 0 1995

1996

1997

1998

1999

SOURCE: World Bank.

46 © 2002 Institute of Southeast Asian Studies, Singapore

2000

2001F

2002F

THE ASEAN-6 REGIONAL ECONOMIC TRENDS It remains too early to tell what impact the terrorist attacks on the United States in 2001, and the ensuing “war on terror” will have on Southeast Asia’s economies. Clearly, general risk premia for doing business in emerging markets have increased, and this is likely to deter some foreign investment activity in the region. Investor appetite for foreign investments may also be quelled. Those countries in Southeast Asia that rely in part on tourism revenues will also be adversely impacted. It goes without saying that should the war on terrorism contribute to a more protracted global economic downturn, this will not be good news for Southeast Asia. Conversely, should a co-ordinated bid by policy-makers around the world to avoid a synchronous global slowdown be enacted (using various fiscal and monetary stimuli), it is conceivable that Southeast Asia will benefit from a more pronounced “V-shaped” global economic recovery in 2002–2003 than might have been anticipated before the events of 11 September 2001. Such a prospect is, however, far from certain, and recent events have served to underline the need for policy-makers in the region to focus on ways of bringing about a more “home grown” and sustainable economic revival in Southeast Asia. Having largely failed to seize the opportunity of doing so during the post-crisis 1999–2000 period, policy-makers in the region are now faced with having to enact a spectrum of structural economic reforms against a much less benign external backdrop during 2002–2003.

Southeast Asia’s FDI Inflows Compared, 1992 to 2000

SE Asia’s FDI Inflows as % of China’s (LHS) SE Asia’s FDI Inflows as % of developing countries’ (LHS)

Percentage

100

SE Asia’s FDI Inflows as % of world total (RHS)

80

9 8 7 6 5

60

Percentage

120

4 3

40

2 20 1

1992

1993

1994

1995

1996

1997

1998

1999

2000

SOURCE: UNCTAD.

47 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

Relative Performance of the ASEAN-5 Currencies to US Dollar, 1995 to 2001

120

100 = January 1995

100 80 60 40

Rupah to USD Ringgit to US Dollar Peso to USD S’pore Dollar to USD Thai Baht to USD

20

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-95

Jan-96

0

SOURCE: CEIC Data.

Relative Performance of the ASEAN-5 Main Stock Market Indices, 1997 to 2001 140

Jakarta Composite KLSE Composite Manila PSE Composite S’pore Straits Times 55 Bangkok SET

100 = January 1997

120 100 80 60 40 20

SOURCE: CEIC Data.

48 © 2002 Institute of Southeast Asian Studies, Singapore

Sep - 01

May - 01

Jan - 01

Sep - 00

May - 00

Jan - 00

Sep - 99

May - 99

Jan - 99

Sep - 98

May - 98

Jan - 98

Sep - 97

May - 97

Jan - 97

0

THE ASEAN-6 REGIONAL ECONOMIC TRENDS

CHINA’S BURGEONING ECONOMY: CHALLENGING OR OPPORTUNITY FOR SOUTHEAST ASIA? By Nick J. Freeman

I

n November 2001, China finally gained entry into the World Trade Organization (WTO), after fifteen years of negotiation. In doing so, China is committed to enacting a raft of new business liberalization measures roughly within the next five years, and thus, its accession marks an important new phase in the country’s ongoing economic reform process. Accession to the WTO poses both significant challenges for China’s corporate community (particularly inefficient stateowned firms) in terms of greater foreign competition in the domestic market, and equally significant opportunities to participate further in global business. China’s accession also poses challenges and opportunities for its East Asian neighbours, as well as its direct competitors for export markets and capital inflows. For the ASEAN countries, the main opportunities arising from China’s accession to the WTO will largely pertain to greater access to the China market, and the main challenges will largely stem from increased competition from Chinese firms in exporting to third countries. (For example, in the case of textiles, apparel, machinery, and electrical appliances, firms from ASEAN and China compete directly in exporting to the United States, the European Union, and Japan markets.) In recent years, there has been mounting concern about the increasingly competitive threat posed by China for the Southeast Asian economies, with the former vacuuming up an increasingly large proportion of East Asia’s total foreign investment inflows (see chart). In the first nine months of 2001, China saw a 30 per cent increase in foreign direct investment (FDI) pledges (of US$49 billion) and a 20 per cent increase in FDI commitments (of US$32 billion). The latter figure was almost two-and-a-half times more than the FDI inflow figures for all ten ASEAN countries in 2000. With a diverse and continental-sized economy able to compete on different levels with each and every economy in

Southeast Asia — firms in Yunnan province competing with companies in Vietnam, Guangdong with Malaysia, Shanghai with Singapore, and so on — China will divert foreign investors’ interest (and their capital) away from the region, so the argument goes. The United Nations Conference on Trade and Development (UNCTAD) notes that already, “nearly 400 of the Fortune 500 companies have invested in over 2,000 projects in China. The world’s leading manufacturers of computers, electronics, telecommunication equipment, pharmaceuticals, petrochemicals, and power-generating equipment have extended their production networks in that country”. China is now regarded by some as Asia’s industrial and manufacturing workshop of choice, and its dominance in East Asia’s FDI inflow statistics is unlikely to diminish in the near term. While it is true that Southeast Asian countries certainly should not be complacent about the increasingly convincing competitive challenge posed by China’s substantial and rapidly expanding business community, it is unlikely to be a simple, zero-sum game of “winner takes all” in East Asia. The eventual outcome will depend in large part on how well Southeast Asia’s economic planners respond to this new challenge. Crucially, they will need to find ways of better positioning their economies to take advantage of the economic growth trajectory in China, rather than be victims of this growth trajectory. In other words, the ASEAN countries will need to position themselves inside China’s economic slipstream, and not stand in front of the oncoming “Chinese economic express train”. This will necessitate thinking smart about their precise comparative advantages in relation to China, and finding niches in which they can individually leverage off the growth momentum expected to be generated by China’s burgeoning corporate sector (consisting of both local firms and foreign investors).

49 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

CHINA’S BURGEONING ECONOMY: CHALLENGE OR OPPORTUNITY FOR SOUTHEAST ASIA? (continued)

FDI Inflows in Asia: Top 10 Countries, 1999 to 2000 70,000

US$ millions

60,000 50,000 40,000 30,000 20,000 1999 2000

10,000

es pin

Ph

ilip

ia

m na Vie t

Ind

d an Th

ail

an Ta iw

ys M

ala

ap ng Si

Ho

ia

or e

re a Ko

ina Ch

ng

Ko

ng

0

SOURCE: UNCTAD.

ASEAN and China’s FDI Inflows Compared, 1980 to 2000

50,000 45,000

US$ millions

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000

ASEAN total China

0 1980

1982

1984

1986

1988

1990

1992

SOURCES: UNCTAD, and various sources.

50 © 2002 Institute of Southeast Asian Studies, Singapore

1994

1996

1998

2000

THE ASEAN-6 REGIONAL ECONOMIC TRENDS

In the long-term, a robust Chinese economy and burgeoning corporate community should provide a new additional source of foreign capital inflows for Southeast Asian economies, to follow in the tracks of U.S., Japanese, and European investors that have gone before. In the medium term, we may see some of the “China fever” cool down a little, if and when the currently excessive expectations of foreign investors are not fully met, resulting in a gentle sobering of foreign business sentiment towards China. (Although less volatile than their portfolio investor counterparts, direct investors also tend to display a herd mentality at times, blowing hot and cold on particular host countries.) In the near term, foreign investors in Asia are very unlikely to put all their eggs in the China basket, and a rapid hollowing out of the existing — and substantial — foreign investment stock in Southeast Asia also seems distinctly unlikely. Conversely, it is likely that some of Southeast Asia’s larger corporates will also be looking to begin investing — or expand existing investments — in China, perceiving the latter’s accession to the WTO more as a business opportunity than a competitive threat; a view shared by numerous U.S. and European companies. One brief note of caution. It is easy to become somewhat mesmerised by the big numbers that pertain to China’s massive economy today and its future potential, its huge consumer market, and the commendable “headline numbers” (such as GDP growth and aggregate FDI inflows) that are currently cited. However, as Southeast Asia discovered during the 1997– 98 financial crisis, a preoccupation with macroeconomic “headline figures” can be perilous if one does not also keep at least one eye on the microeconomic data at the corporate and banking level. Sometimes the devil can

be in the detail, and some of China’s corporate and banking details are worthy of close monitoring in the years ahead, particularly if economic growth should start to slow. The decision made at the ASEAN summit in Brunei, in November 2001, to pursue the notion of a free trade area that encompasses all of Southeast Asia and China — first mooted by Prime Minister Zhu Rongji just twelve months before — has given an additional twist to the relationship between ASEAN and China. During 2000, total trade between ASEAN and China was valued at just under US$40 billion. China is currently ASEAN’s sixth largest trading partner (accounting for almost 4 per cent of ASEAN’s total trade in 2000). ASEAN is presently China’s fifth largest trading partner (over 8 per cent of China’s total trade in 2000), after Japan, the United States, the European Union, and Hong Kong. A recent study conducted by the ASEAN-China Expert Group on Economic Co-operation suggests that a free trade area between ASEAN and China is feasible, and would effectively create “an economic region of 1.7 billion consumers, a regional GDP of about US$2 trillion and total trade estimated at US$1.23 trillion”.1 The broad aim is to have the free trade area between China and ASEAN functioning within ten years. Such a deadline would be well ahead of APEC’s Bogor goal to have free trade and investment among APEC’s developing economy members by 2020. However, while an ASEAN-China free trade agreement is feasible, concerns in some ASEAN countries — particularly those transitional economies with a direct land border with China — of being flooded with imported Chinese goods will need to be allayed.

1

The full report, entitled “Forging Closer ASEAN-China Economic Relations in the Twenty-First Century”, can be found at: www.aseansec.org/newdata/asean_chi.pdf

51 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

WHITHER THE U.S. ECONOMY? By Nick J. Freeman

I

n 1999 and 2000, an extremely robust U.S. economy did much to assist the Southeast Asian countries in reviving their post-crisis economies, with U.S. consumers — buoyed by the wealth effect of their rapidly rising shares and house prices — and corporates playing a supporting role in buying many of the products exported by the region. In 2001, however, the asset bubble in the United States was finally pricked, and the wider economy faltered, registering around 1 per cent gross domestic product (GDP) growth (after 4.1 per cent GDP growth in 2000). With neither the Japanese nor major European economies able to take up the slack, Southeast Asia soon began to feel the ripple effects of the U.S. economy steadily slipping into recession. (Although the terrorist attacks on the United States have been cited as the reason for tipping the U.S. economy into recession, it was already beginning to contract prior to 11 September 2001.) Understandably shaken by the terrorist attacks of September, mounting job lay-offs and a steady fall in share prices, U.S. consumer confidence declined sharply in the latter part of 2001. U.S. corporates, now struggling with a capacity overhang after several years of expansion, also saw no need to initiate new capital investment programmes. Looking ahead, most Southeast Asian countries are hoping for some sort of improvement in the U.S. economy in 2002 or 2003, which should herald a revival in either consumer or corporate spending in the United States. As a major export market for Southeast Asian products — from computers to textiles to commodities — and a major source of foreign investment, the importance of the U.S. economy to the region should not be underestimated. This is particularly true given Japan’s apparent inability to pull itself out of the economic doldrums, as Tokyo’s policy-makers currently face their fourth recession in a decade, and less than convincing economic performance is being registered in much of Europe. Opinions on precisely when the U.S. economy will recover are fairly diverse, although few anticipate a marked improvement in the first half of 2002. Some observers expect a return to positive growth towards the middle of 2002, as the rapid and substantial fiscal

52 © 2002 Institute of Southeast Asian Studies, Singapore

and monetary stimuli enacted by Washington in late 2001 begin to fully “kick-in”, resulting in a short recession and a “V-shaped” recovery for the economy. (The Federal Reserve cut the fund lending rate by an unprecedented 450 basis points during 2001, taking U.S. interest rates to just 2 per cent by November 2001 — the lowest in almost forty years.) Other observers point to the challenges posed by a synchronous recession in the United States, Europe and Japan, together with heightened risks across the globe, and suggest that any sustained economic recovery in the United States could take much longer to achieve. The virtuous cycle of globalization in the 1990s, it is argued, could now become a vicious cycle in the first decade of the twentyfirst century, with all the major engines of global growth apparently slowing in unison. It remains to be seen whether the optimists or pessimists will be proved right on the timing and nature of an economic recovery in the United States. The United States will probably undergo a fairly wide-ranging corporate restructuring process in the near term, purging the excess capacity that was built up during the rapid ICT-led growth experienced throughout much of the 1990s and the asset price bubble that had developed in recent years. The propensity of the United States to undertake the necessary scale of corporate restructuring is probably greater than in many countries, where the country’s large capital markets — on which most major U.S. firms are listed — and institutional investors tend to be tough task-masters, and the sort of socio-political hurdles that have prevented a similar restructuring process occurring in Japan during the 1990s are much less evident. Consequently, we are quite likely to see increased merger and acquisition (M&A) activity in the United States during 2002, as a corporate shake-out in various business sectors moves fairly swiftly. If this comes about, it may have a marked impact on those Southeast Asian corporate communities where U.S. companies are well represented. In these days of mega-mergers and acquisitions, even ostensibly domestic M&A deals in the United States can have major consequences for subcontractors, affiliates, and subsidiaries across the globe, including those in Southeast Asia.

THE ASEAN-6 THE ASEAN-6 Denis Hew • Soedradjad Djiwandono • Adrian Panggabean • Nick J. Freeman • Sakulrat Montreevat

B

runei’s oil and gas sector dominates the economic landscape and accounts for over half of the country’s gross domestic product (GDP). Past economic performance has been rather erratic, and highly dependent on oil exports (which accounts for about 80 per cent of government revenue). While most crisis-affected ASEAN economies rebounded in 1999, Brunei’s economy registered a contraction of 0.5 per cent as a result of depressed oil prices and the financial collapse of Amadeo Development Corp. In 2000, the Brunei economy recovered and grew at 3.5 per cent, boosted by the sharp rise in oil prices during the year. In 2001, the economy is expected to achieve 3 per cent growth, driven by robust oil prices and high petrochemical production. However, economic performance in 2002 looks less promising. The terrorist attacks in the United States on 11 September 2001 have led to increased price volatility in the crude oil market. At the Organization of Petroleum Exporting Countries (OPEC) meeting on 26 September 2001, the cartel resolved to maintain oil production and stabilize crude oil prices at around US$25 a barrel. However, oil price movements will depend largely on demand. The global economic downturn will dampen consumer demand for crude oil, probably resulting in an oversupply that will keep oil prices down in the coming year. Consequently, Brunei’s economy will not get that much-needed boost, as oil prices are likely to trend downwards in the next two years. The government has continued to implement recommendations contained in the report by the Brunei Darussalam Economic Council (BDEC). The BDEC report — unveiled in July 2000 — declared that Brunei’s economy was not sustainable over the long term, and recommended the restructuring and diversification of the economy. Since the BDEC report, the government has spent B$200 million as part of its short-term strategy to revive the domestic private sector, particularly the construction sector, which was severely affected by the collapse of Amadeo Development Corporation. To date, however, government stimulus packages have shown little success, with private sector growth remaining sluggish. Other BDEC recommendations include greater transparency and inter-departmental co-ordination, and reduced government red tape and regulation. As part of its long-term economic strategy, the government plans to move away from its over-dependence on the oil and gas sector towards manufacturing, information technology, tourism, and services (including downstream petrochemicals and financial services). In the area of services, the government is planning to make Brunei a major international financial centre and tourist destination. However, the poor physical and human infrastructure will remain a major hindrance to achieving these ambitious long-term goals. As for the Amadeo Development Corporation financial scandal — in which the Sultan of Brunei’s brother, Prince Jeffri, is accused of misappropriating US$14.8 billion of state-owned Brunei Investment Agency’s (BIA’s) funds during his term as Chairman — it seems unlikely

© 2002 Institute

Brunei

This chapter is reproduced from Regional Outlook: Southeast Asia 2002–2003 , edited by Nick J. Freeman and T in Maung Maung Than (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, of Southeast Asian without the prior Studies, permissionSingapore of the Institute of Southeast Asian Studies < http://www.iseas.edu.sg/pub.html >

53

ECONOMIC OUTLOOK

that most of this amount will ever be recovered. The BIA is responsible for investing Brunei’s oil revenues and represents a substantial proportion of the country’s foreign reserves. Gains from the recent auction of Prince Jeffri’s luxury assets was a small fraction of the amount that he has promised to return to BIA. The official unemployment rate of 6 per cent will rise in the next few years. The government, the biggest employer in Brunei, has not been able to encourage fresh graduates to join the private sector. As a result of recent budget cutbacks, the government has also not been able to absorb fresh graduates coming out of local and overseas universities. It is reported that more than a quarter of school-leavers are unable to find work. Rising unemployment and the scaling back of social welfare programmes might lead to growing disenchantment among the public, with possible long-term implications on the government. Depleted financial reserves, a lacklustre private sector, and falling oil prices set the stage for a rather gloomy economic outlook for Brunei in 2002 and 2003. Moreover, the economic slowdown in the United States and Japan (major export markets) and the neighbouring ASEAN countries will constrain Brunei’s economic growth further. Concerns related to social discontent and diversification of its oil-dependent economy may pose serious challenges to the future of the “Shellfare state” in the long-term.

Indonesia

I

n 2001, Indonesia grew by roughly 3.8 per cent, and is forecast to grow by 4 per cent in 2002. Unlike its regional peers, Indonesia has registered fairly steady economic performance amid a global economic slowdown. However, the worsening of Indonesia’s external environment and volatile domestic politics have limited the economy’s performance on the upside. A weaker global outlook, and persistently high domestic risks, will serve to constrain the moderate growth in private spending and low-base effects.

Recent Progress Progress in the first half of 2001 was mixed. Despite a weaker external environment, various institutional weaknesses and domestic political instability, the Indonesian economy posted a respectable growth rate in the first half of 2001, despite the synchronized sinking of the global economy providing less external impetus. The 11 September terrorist attacks on the United States, which takes some 18 per cent of Indonesia’s exports, has added another element of uncertainty to the already weak U.S. consumer confidence. In its initial stage, the economic slowdown in the United States, led by a sharp decline in electronics demand did not affect Indonesia, given the country’s small exposure to electronics. However, as the downturn in the U.S. economy became broader in scope, Indonesia also experienced weaker export growth. In addition, Japan’s economy, which absorbs about 20 per cent of Indonesia’s exports, is still languishing. Europe, which takes another 15 per cent of Indonesia’s exports, also remains sluggish. Meanwhile, inter-Asian trade — which was initially expected to cushion Indonesia from a global slowdown — has been unable to take up the slack, because it is closely correlated with the global electronics cycle.

54 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

Nonetheless, the Indonesian economy grew by 3.4 per cent in the first half of 2001, led by private consumption, underpinned by fixed capital formation, and supported by government consumption. Low base effects have also added to the growth. On the domestic front, political volatility has injected huge uncertainties into the economy. On several occasions, politicians and government officials had shown signs of “reform reluctance” or “reform fatigue”, which has manifested itself in policy drift, thereby weighing down on the financial markets. However, market sentiment did turn broadly positive in the third quarter of 2001, following a smooth leadership transition in late July. Fiscal and monetary policies have not been supportive of growth. On the fiscal front, the 2001 budget deficit will fall short of the projected level (3.7 per cent of GDP), because a revenue shortfall has been accompanied by a cutback in fiscal spending, on the back of a weaker rupiah in the first half of 2001. On the revenue side, non-oil tax revenues in the first half of 2001 exceeded their target. Oil and gas revenues, on the other hand, fell as a result of softening oil prices and output decline, largely because of security disruptions in the fields. By end-June 2001, the Indonesian Bank Restructuring Agency (IBRA) had only managed to meet 30 per cent of its targeted revenue for 2001. Privatization proceeds are projected at Rp6.5 trillion in 2001. However, privatization plans have stalled, and no revenue has been generated recently. On the spending side, the government raised domestic energy prices in mid-2001, and scaled back development spending in an effort to keep within the budget deficit target. The allocations for rice subsidies, public health, and education were increased to help mitigate the impact of higher fuel prices on low-income households. Interest payments on government debt have also risen, due to higher interest rates. Nonetheless, the Indonesian economy performed relatively well in 2001. Fuelled by stronger domestic demand, the manufacturing sector grew by about 6 per cent in the first half of 2001, against 4.8 per cent in the second half of 2000. The recovery of the manufacturing sector was reflected in a sustained higher level of capacity utilization, which in turn was supported by imports that grew by 27 per cent in the first half of 2001. Commercial sectors (trade, hotel, and restaurants), another major component of Indonesia’s GDP, continued to expand in the second quarter of 2001 by more than 5 per cent. So did the transportation and communication sectors. However, more recent data show signs of a slowing of production momentum ahead, with the industrial production index, and merchandise exports both indicating a slowing. On the monetary front, policy has remained tight. In mid-August 2001, one-month SBI was 17.6 per cent, compared with 14.5 per cent at end-December 2000. Monetary policy has been tight for several reasons. First, Bank Indonesia (the central bank) was required to absorb liquidity in excess of the level dictated by the International Monetary Fund’s (IMF’s) performance indicator. With a calmer political situation after the leadership succession, and inflation that appeared to peak in August 2001, Bank Indonesia has some leeway to change its policy bias. However, a persistent weakness in the banking system and volatility in the regional financial markets have, so far, made Bank Indonesia reluctant to adjust its policy stance.

55 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK Current Risks For several reasons, the balance of risks to Indonesia’s growth still tips on the downside. Political problems form an inherently complicated backdrop to events, and have weighed heavily on economic policies. IBRA remains weak, and has not been very effective. Asset quality in the banking system remains low. Fiscal sustainability is another source of concern, while mounting external debt poses significant risks to Indonesia’s recovery. In the political sphere, a key issue is striking a new balance between economic resources and political power in the post-Sœharto era. The battle between the foot-draggers and the reformers covers nearly all ground. On the legal front, for example, there are battles over the new labour law, amendments to the central bank law, human rights, controversy over Bank Indonesia’s liquidity support, and the effort to bring to justice past corruption cases complicate the legal picture further. A weak legal system, and the legal uncertainties it creates, has provided no floor to business risks. The separation of the police force and the military has impacted on security arrangements, thereby raising the investment risk. Regional autonomy and fiscal decentralization, as well as the reorganization of the public sector have made the relationship between the central and local governments more tense. These issues have injected regulatory uncertainties, and increased business transaction costs. Continued political strife has sustained distorted local prices, and made it difficult to move away from corruption and cronyism. Political tension has also affected the banking restructuring process. IBRA’s pace of bank restructuring has been slow, and increasingly seen more as a liability than an asset to Indonesia’s recovery. IBRA’s asset recovery rate is only about 10 per cent, or less. Factors that serve as impediments to IBRA’s performance are resistance from powerful debtors, political influence, an ineffective bankruptcy system, and a lack of interested buyers. To make matters worse, the way restructuring is being conducted provides mixed incentives for economic recovery. Some banks have been heavily penalized, while others have been bailed out. In the first half of 2001, IBRA only managed to book Rp11.2 trillion in cash revenue — less than 40 per cent of its revenue target for 2001. The low quality of Indonesia’s bank assets is clearly reflected in non-performing loans (NPLs) that remained at 18.5 per cent in April 2001. There has been no real improvement on the December 2000 figure of 18.8 per cent, despite the continuation of the credit restructuring process, write-offs, and disbursement of fresh loans. This is a reflection of both the slow movement on the corporate restructuring front, and the weak economy. Concerns over fiscal sustainability have weighed heavily on Indonesia’s creditworthiness. The over-stretched budget has made it difficult for the government to shoulder the burden of growth. On paper, there are several conditions upon which the ability of the budget to finance recovery can be sustained. First, a sustained pick-up in GDP growth over the next four years — of an average of 5 per cent per annum, and within a stable macro environment — is needed. Were this to occur, economic growth could absorb the cost of restructuring. Secondly, interest rates of less than 12 per cent must prevail. This would reduce the interest rate cost of domestic debt. To achieve this, a low-inflation, stable rupiah environment is essential. Finally, effective fiscal consolidation, which includes revenue expansion and spending prioritization, is necessary. The current tax revenue over GDP ratio of around

56 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

11.5 per cent is very low in comparison with other major ASEAN countries (with more than 15 per cent). An inefficient tax administration is seen as largely responsible for the low ratio. Those conditions, however, require political stability and a strong government. Unless carefully managed, mounting external debt may well bring Indonesia to another crisis. This time, however, the trigger would not be a currency depreciation, but rather a mismatch in commercial banks’ balance sheets. A new crisis of confidence over the financial system could provoke domestic capital flight, which in turn could put the balance of payments under heavy pressure, triggering another currency meltdown. A reversal in the ongoing balance sheet adjustments of companies (that could increase loan defaults) may occur. This, in combination with a weak currency, may push more companies into insolvency, leading to a collapse in aggregate output.

Future Outlook Indonesia probably grew by about 3.8 per cent in 2001, against the government’s earlier estimate of 3–3.5 per cent. In 2002, the economy is forecast to grow by 4 per cent, on the assumption that the economy will maintain its current growth momentum. With a U.S. economic recovery in 2002, moderate domestic demand growth, and low base effects, there should be some upside in Indonesia’s growth. Early in September 2001, the new government announced its 2002 budget proposal. With a spending size of Rp 332.5 trillion, the budget assumes a deficit of 2.5 per cent of GDP, lower than the 2001 target of 3.7 per cent of GDP. Whilst the 2002 budget will help lubricate the economy, it is not expected to play a major role. Monetary policy is likely to be somewhat accommodative. Slower exports will cap Indonesia’s growth potential and distort its liquidity profile. The risks to this 2002 forecast are twofold: first, the ability of President Megawati to form coherent economic policies, and deliver on promises to remove impediments to growth; secondly, on the external front, the U.S. response to the 11 September 2001 attack, and the weakening of the Japanese economy could have a significant impact on the regional economic outlook, which in turn would impact on Indonesia. Bank loans being channelled through totalled Rp306 trillion in June 2001, compared with Rp265 trillion in January. Meanwhile, Sertifikat Bank Indonesia (SBI) holdings — which is a safe investment alternative — by banks declined to Rp77.7 trillion in June 2001, from Rp87 trillion in January 2001. There are indications that banks will continue to function as financial intermediaries. Investments will continue to contribute to growth. Given that growth in private spending will be moderate, gross fixed capital formation will continue to rise. The investment rate went up to 25 per cent in the second quarter of 2001, based on continued growth in bank credits and private consumption. Inflation in 2001 was about 11 per cent. This was at the upper limit of a new inflation target of 9–11 per cent, agreed in the latest Letter of Intent between the Government of Indonesia and the IMF, signed in August 2001. In 2002, some factors are likely to put pressure on prices. Huge external debt repayment obligations will put pressure on the rupiah and inflation. There will also be further tariff rebalancing in the offing. However, the absence of an improvement in economic momentum should put the lid on inflation. The average inflation

57 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

Indonesia: Selected Economic Indicators, 1996–2003F Indonesia

1996

1997

GDP growth (% change) Industry Services Agriculture

7.8 10.7 6.8 3.1

4.7 5.2 5.6 1.0

49,814.9 42,928.5 6,886.4

53,443 44,680 8,764

48,848 27,337 21,511

48,665 24,275 24,391

8.0

6.2

58.5

20.5

3.7

11.2

9.3

9.5

Gross external debt (% of GDP) Foreign exchange reserves (US$ billion)

48.6 25.5

63.6 21.4

150.6 23.6

96.0 24.4

97.0 29.4

92.0 28.5

85.0 27.6

80.4 28.0

One month SBI-rate (%) M2 growth (% y-y)

12.8 28.2

20.0 25.8

38.4 62.1

11.9 21.7

14.5 7.4

17.0 9.6

15.5 12.2

14.5 12.5

Exchange rate (average)

2,347.0

2,952

9,875

7,808

8,534

9,760

9,000

9,000

Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation (%, year-average)

1998 (13.1) (14.0) (16.5) (1.3)

1999 0.8 1.9 (1.0) 2.7

2000

2001E

2002F

2003F

4.8 5.5 5.2 1.7

3.8 5.0 4.8 1.2

4.0 5.2 4.6 1.5

5.0 5.4 6.5 2.0

61,866 58,820 68,043 78,746 33,572 38,262 49,336 63,625 28,294 20,558 18,707 15,121

E = Estimated F = Forecast SOURCES: Asian Development Bank and authors’ estimates.

for 2002 is forecast at 9 per cent, which is consistent with a rupiah target of Rp9,000 per U.S. dollar. The current account surplus is expected to narrow, because of weaker exports, while external demand will be neutral to 2002 growth. Merchandise exports (in dollar terms) contracted by 5 per cnet year on year in the first half of 2001, compared with a growth of 20 per cent year on year in the second half of 2000, owing to a decline in non-oil exports and stagnating oil and gas exports. This brings the average monthly value of exports to some 10 per cent lower in the first half of 2001 than in 2000. Non-oil exports declined as demand from the United States and Asia, both absorbing more than half of Indonesian exports in the past, softened because of the economic slowdown. Oil and gas exports, which had risen close to 50 per cent in 2000, recorded no increase in the first half of 2001. For 2001, total exports will probably grow by about 4–5 per cent, compared with 27 per cent in 2000. Assuming moderate growth in domestic demand, imports are expected to slow only a little in 2002. Falling exports and weaker imports will compress the 2002 trade surplus to around US$17 billion, from about US$20 billion in 2001. With inflows of official capital, foreign exchange reserves will probably remain stable in 2001 and 2002. As at end-September 2001, foreign exchange reserves stood at some US$28 billion, equivalent to nine months cover. The rupiah will continue to fluctuate. Having stayed at around Rp11,000 to the US$ during the

58 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

first half of 2001, the rupiah rebounded to circa Rp8,600, following a smooth political transition. This is well below the average exchange rate of Rp9,600, underpinning the revised budget. However, the rupiah traded above Rp9,000 in the aftermath of the terrorist attacks on the United States. With improved domestic sentiment, the market looks set to see it settle at around Rp9,000–Rp9,800 per U.S. dollar, following the signing of the agreement with the IMF in August 2001, and the prospect of a successful third round of negotiations at the Paris Club, which will postpone the maturity of several more billion dollars of government debt.

REFORMING THE LAWS AND LEGAL INSTITUTIONS OF INDONESIA By Rajenthran Arumugam

S

ince the onset of the Asian financial crisis, the legal system in Indonesia has been in the spotlight, and controversy has been raised over its efficacy. Generally, the legal system in Indonesia has been alleged by some as being inefficient and corrupt. Among the forty-nine countries surveyed in the World Competitiveness Yearbook for 2001, on the “Administration of Justice” and “Legal Framework” Indonesia was ranked 49 and 48, respectively. Furthermore, the Jakarta Post reported in late September 2001 that the judicial courts top the list of public complaints in Indonesia. At the time of writing, some aspects of the legal system in Indonesia have been reformed, or are in the process of being reformed — partly tied to IMF (International Monetary Fund) and other multilateral agencies’ loan programmes. Upon assuming office, President Megawati Sukarnoputri was prompt in reiterating that legal reforms in Indonesia should proceed swiftly and diligently. Undoubtedly, reforming the legal system is one of the greatest challenges facing Indonesia today. The ultimate aim is to put in place an efficient and dynamic legal system that supports and underpins the country’s economic goals. Dilemmas Broadly, the Indonesian legal system is pluralistic. Substantial aspects of the civil and commercial codes, and many other colonial laws, in Indonesia have yet to be amended or repealed to keep pace with

modern business dynamics. Hence, the inherited Dutch law remains largely outdated and obscure. Indeed, it would not be wholly incorrect to say that the fundamental components of commercial law — including contract law, security law, and agency law — in Indonesia do not seem to support modern and international business transactions. Clearly, the Parliament needs to commit itself to a vigorous programme of modernizing these laws, which is in need of fresh impetus. Similarly, the judiciary needs to be actively engaged in identifying outdated laws, and either amend or repeal them. Generally, the primary laws enacted in the Parliament tend to be concise, and the implementing details are supported by secondary legislation. It is not uncommon to find a plethora of secondary legislation addressing a particular primary law. At present, there are many regulations, directives, and decrees where the scope and extent of their applicability and validity are not entirely clear, and are riddled with inconsistencies and contradictions. For instance, several jurists are of the view that the implementing regulations in regard to the autonomy and fiscal laws, adopted in 2001, are both confusing and contradictory. Conversely, the absence of relevant implementing regulations has rendered several primary laws futile. Such a precarious situation requires attention. Needless to say, substantive laws should clearly enshrine the elements of certainty and predictability of legal principles.

59 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

REFORMING THE LAWS AND LEGAL INSTITUTIONS OF INDONESIA (continued)

Modernizing the Laws The reformasi era supposedly underpins transparency and accountability. To this end, the government has revised or enacted several laws in the field of commercial law, including the banking law, central bank law, bankruptcy law, arbitration, and alternative dispute resolution law, anti-monopoly law, and intellectual property rights law. In particular, the new legal framework introduced for the intellectual property regime is noteworthy, having been structured to conform to the Trade-Related Aspects of Intellectual Property Rights Agreement. Undoubtedly, the rapid legislative changes made in the commercial sector should support foreign investor confidence. That said, to actualize and benefit from the new laws, it is vital that all implementing regulations are adopted promptly. Most importantly, enforcement of the laws must be carried out swiftly and decisively. Several existing laws, such as the land law, mining law, and forestry law, among others, are perceived by foreign investors as weak. Foreign entities, such as PT Newport Minahasa Raya, PT Kelian Equatorial Mining, and PT Exxon Mobil constantly endured land rights disputes in 2001. It is necessary to modify these laws, particularly in line with the ongoing autonomy policy. Enhancing the Judiciary Some legal observers have depicted the judiciary in Indonesia as corrupt, incompetent, and politicized. The controversial Manulife case purportedly revealed many weaknesses of the legal system, including political intervention and the lack of transparency. Reuters reported in early August 2001: “Indonesia’s graft-ridden legal system has been a key impediment to foreign investment, which plunged amid the Asian economic crisis of the late 1990s”. This is not surprising in a country where anecdotal evidence suggests that corruption has permeated to all levels of society. In a bid to stem corruption, collusion and nepotism, new governance laws were promulgated in 1999. Thus far,

60 © 2002 Institute of Southeast Asian Studies, Singapore

however, criminal prosecutions brought under such laws have been minimal, if not insignificant. Some analysts have attributed this to the lack of “judicial will” to implement and enforce the laws. To this end, they argue that the judiciary itself must be “cleaned” before anything else. What has been done to enhance the integrity and efficiency of the judiciary? In an effort to shore up the independence of the judiciary, the law now empowers the Supreme Court to carry out the various administrative and regulatory functions, which were previously undertaken by the Ministry of Justice. Efforts have also been made to appoint or replace judges, solely based on the criteria of meritocracy. A Joint Anti-Corruption Team was initiated to investigate complaints of misconduct against judges. However, in March 2001, the Supreme Court annulled its existence, to the dismay of many observers. It remains to be seen if such an anti-corruption commission, with wide-ranging powers to scrutinize the judiciary, will be constituted. It can be argued that such a body should be in place. In reforming the judiciary, it would be advisable to adopt a holistic approach, with an integrated and longterm strategy. In this regard, it is essential to re-think, and if necessary reformulate, the legal education system, the training of the legal profession, professional conduct principles, and legal fees. Conclusion Indonesia is presently undergoing a paradigm shift in numerous spheres of its society. The dawn of the twenty-first century poses myriad challenges for Indonesia, and its counterparts in Southeast Asia. Thus far, the legal system seems to have contributed a nominal role in the economic development of Indonesia. However, “rule of law” and “law-based behaviour” are now the name of the game, and there are indications that Indonesia is earnest in wishing to adopt this path. To be successful in the globalized world, the law should be harnessed for all aspects of economic development.

THE ASEAN-6

T

he global economic slowdown, that was aggravated by the terrorist attacks on the United States in September 2001, will have an adverse impact on the Malaysian economy. Malaysia will narrowly escape a recession in 2001, with its economy growing by only 0.5 per cent. It was the buoyant global demand for electronics which enabled the country to register a strong economic growth of 8.3 per cent in 2000. Electronic and electrical products contribute about 60 per cent of Malaysia’s exports. As a response to the imminent global economic downturn, the Malaysian Government announced a RM4.3 billion fiscal stimulus package in late September 2001, with the aim of generating domestic economic activities with the maximum possible spin-off effects. Of that total amount, about RM2 billion will be spent on rural and development projects, education, training of retrenched workers, and social welfare activities. This latest stimulus package is on top of the RM3 billion package that was announced in March 2001. Since only a small portion of the March package was utilized in 2001, the full impact of both fiscal stimulus packages will only be realized in 2002. However, they probably will give a boost of 1 to 1.5 per cent to gross domestic product (GDP) in 2002. The Malaysian Government will run a higher budget deficit than earlier projected, estimated to be in the range of 5.5 to 6.0 per cent of GDP in 2001. This will have been the fourth consecutive year that the government has registered a fiscal deficit. However, there are limitations to what fiscal stimuli can do to jump-start the domestic economy, and the main concern will be rising government debt (37 per cent of GDP at end-2000). For the first time in two years, Malaysia’s central bank, Bank Negara Malaysia (BNM) slashed interest rates to enhance domestic economic activity and consumer spending. On 20 September 2001, the three-month BNM intervention rate was reduced by 50 basis points to 5 per cent. Accordingly, the ceiling for the base lending rate of commercial banks and finance companies will also be reduced to 6.42 per cent (from 6.83 per cent), and 7.46 per cent (from 7.98 per cent) respectively. Monetary policy for 2002 and 2003 is expected to remain easy, and inflation will be relatively subdued. From January to May 2001, there was a decline in foreign reserves at the rate of US$800 million per month, which resulted in speculation that the ringgit peg to the US$ was not sustainable. Since June 2001, however, concerns of a devaluation have subsided, as the country’s foreign reserves have stabilized at slightly more than four months of retained imports. The government’s resolve to maintain the fixed exchange rate of RM3.80 to US$1 will be put to the test in 2002, because of various external factors, such as a severe depreciation in regional currencies (if global economic slowdown is prolonged), a weaker Japanese yen, and a firmer U.S. dollar. However, the costs of a re-peg are just as high, given the high import content of Malaysian manufactures, and the resulting loss of credibility in maintaining the peg may deter foreign investment. In the Eighth Malaysian Plan (8MP) 2001–2005 that was released in April 2001, the country targets an annual average GDP growth rate of 7.5 per cent over the next five years. One of the main objectives of the 8MP is to shift the economy from input-driven growth to productivity-driven growth, and targets total factor productivity (TFP) growth to contribute 37.2 per cent of GDP growth. This would translate to a target TFP growth rate of 2.8 per cent, which is more than twice the growth achieved in the Seventh Malaysian Plan (7MP)

Malaysia

61 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

1996–2000. Economic growth emanating from private investment will grow at an average of 19 per cent a year (contracted by 11.6 per cent during the 7MP period). In the light of the present economic environment and electronics downturn, it seems highly unlikely that these optimistic growth targets can be achieved over the next two years. Malaysia’s financial restructuring has been one of the most advanced in Southeast Asia. Danamodal (the government agency responsible for recapitalizing the banking sector) and Danaharta (the asset management company responsible for acquiring nonperforming loans [NPLs] from the banking system) both completed their main tasks in 2000. Danaharta, which has acquired 44 per cent of NPLs from the banking system, is currently at the asset management and disposal phase. Danaharta has successfully restructured RM35.8 billion of loans (74 per cent of loans under its portfolio) with expected recoveries of RM23.8 billion, which translates into a 66 per cent recovery rate of resolved assets. Meanwhile, the balance will be resolved by end-2001. However, the pace of asset disposal will likely slow down significantly as Danaharta deals with more difficult cases. Malaysia has also made significant progress in bank consolidation. By end-2000, 50 out of 54 domestic financial institutions had been merged. Upon completion of the ongoing bank

Gross Domestic Product by Industry of Origin Average Annual Growth Rate (%) Sector Agriculture, forestry, livestock & fishing Mining & quarrying Manufacturing Construction Electricity, gas & water Transport, storage & communication Wholesale & retail trade, hotels & restaurants Finance, insurance, real estate & business services Government services Other services (–) Inputed bank service charges (+) Import duties GDP at purchasers’ value

Target 7MP

Achieved 7MP

1.9

1.2

3.0

1.7 3.9 –1.8 7.9 3.9

0.4 9.1 –1.1 3.8 6.2

3.3 8.9 6.5 7.5 9.1

5.2

4.2

7.7

7.9

7.3

8.5

3.7 5.1 11.5 –5.8

4.5 4.1 9.9 –6.5

3.0 9.0 6.5 4.0

3.0

4.7

7.5

7 MP = Seventh Malaysian Plan, 1996–2000; 8 MP = Eighth Malaysian Plan, 2001–2005. SOURCE: Eighth Malaysian Plan, 2001–2005.

62 © 2002 Institute of Southeast Asian Studies, Singapore

Target 8MP

THE ASEAN-6

Contribution of Factors of Production, 1996–2005

GDP Labour Capital TFP

7MP: % of Contribution

7MP: % of Total

8MP: % of Contribution

8MP: % of Total

4.7 1.2 2.3 1.2

100.0 25.0 50.2 24.8

7.5 1.6 3.1 2.8

100.0 21.5 41.3 37.2

7MP = Seventh Malaysian Plan, 1996–2000; 8MP= Eighth Malaysian Plan, 2001–2005 SOURCE: Eighth Malaysian Plan, 2001–2005.

mergers, there will eventually be ten anchor banking groups, each of which will have minimum shareholders’ funds of RM2 billion and an asset base of at least RM25 billion. However, the more difficult aspects of the merger process, such as the integration of operations and the rationalization of human resources, will take longer to complete. Although Malaysia’s efforts in consolidating its domestic banking sector are commendable, there still seems to be too many banks for a relatively small economy like Malaysia’s. Rising NPLs and thinner profit margins will also adversely impact smaller banks. Hence, a second round of bank mergers is possible over the next two years. The pace of corporate restructuring has lagged behind financial restructuring in Malaysia. Nevertheless, the Malaysian Government appears to be now serious in resolving the corporate debt overhang, which had been a heavy burden on the domestic banking system. In September 2001, the government successfully acquired (via a special purpose vehicle) United Engineers (Malaysia) Bhd, as a means to control Renong Group, which is Malaysia’s largest debtor. In August 2001, a new chairman was appointed to the Corporate Debt Restructuring Committee (CDRC), Datuk Azman Yahya (the former head of Danaharta), and new measures were unveiled to speed up the corporate debt restructuring process. These new measures include: • •

•

•

A one-year time-frame to resolve the outstanding corporate debt of RM30 billion. To accelerate the debt restructuring process, financially distressed companies will be given three months to sign debt restructuring agreements, if 75 per cent of their debtors give approval (previously a 100 per cent agreement was required). For new cases, assistance will only be considered by CDRC for financially troubled companies with minimum aggregate borrowings of RM100 million (previously RM50 million). The borrower must have exposure to at least five creditor banks (previously two creditor banks).

In the coming decade, globalization and intense competition from an emerging China will pose serious challenges for the Malaysian economy. Although the Malaysian

63 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

economy has grown rapidly over the past three decades, Malaysia is now at the crossroads in economic development. In the Third Outline Perspective Plan (2001–2010), a master plan would be introduced to facilitate Malaysia’s transformation from a production-based economy into a knowledge-based one. However, a chronic shortage of skilled labour (which is a critical factor in developing a knowledge-based economy) in Malaysia, and global competition for knowledge workers, will mean that such a transformation is going to be a long hard struggle. The lack of world-class Malaysian universities, low output of science graduates, and negligible domestic research and development (R&D) are serious stumbling blocks. For example, the current university entry quotas could lead to a continued “brain drain” of young Malaysian talents to more developed knowledge-based economies. The Malaysian economic outlook over the next two years will largely depend on the global electronics cycle. Although the current situation undoubtedly looks gloomy, the economy is expected to gradually recover in 2002. Efforts by the United States and its allies to counter the rise in terrorism will result in higher defence and telecommunications expenditure, which will in turn boost demand for microchips. Consequently, Malaysia’s exports of electronic and electrical products are expected to pick up towards the second half of 2002. However, over the longer-term, Malaysia will need to look for new sources of economic growth to remain competitive.

Malaysia: Selected Economic Indicators, 1997–2003F 1997

1998

1999

2000

2001E

2002F

2003F

7.3 10.1 9.9 0.7

–7.4 –13.4 –0.4 –2.8

6.1 13.5 4.8 0.4

8.3 21.0 4.8 0.6

0.5 –1.5 2.3 2.0

2.5 3.5 3.0 1.5

4.8 6.7 4.5 1.6

57,293 54,589 2,704

74,123 55,909 18,214

83,933 61,161 22,772

98,208 77,169 21,039

94,476 76,397 18,079

98,728 81,745 16,982

114,524 96,459 18,065

2.7

5.3

2.8

1.5

1.6

2.0

2.5

Gross external debt (% of GDP) Foreign-exchange reserves (US$ billion)

47.1 20.9

61.8 25.7

58.3 30.6

49.4 29.6

49.0 29.0

49.2 34.0

52.8 39.0

Three-month interest rate (% per annum) M2 growth (% change)

7.8 22.7

9.4 1.5

4.1 13.7

3.2 5.2

3.2 2.8

3.2 6.1

3.5 7.8

Exchange rate (year end) (Ringgit/US$1)

3.89

3.80

3.80

3.80

3.80

3.80

3.80

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation/CPI (average) (% change)

SOURCES: Bank Negara Malaysia; Economist Intelligence Unit (EIU); author.

64 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

MALAYSIA’S EPF SCHEME By Lee Hock Guan

M

alaysia’s state-controlled Employees Provident Fund (EPF) scheme, established in 1952, is arguably one of the most creative and successful national pension plans in the developing world. It is a mandatory defined contributions system, where all employers — excluding own-account workers and domestic households — are required by law to enrol their employees, and make joint contributions with their employees on a monthly basis towards their workers’ retirement fund. Overall, the enforcement of the scheme has been quite effective, such that a majority of the working population are members of the scheme. In 2000, the number of contributors totalled 9.75 million, or 66.7 per cent of the total working population. The EPF’s joint contribution rate is regarded by some as being on the high side; currently, the rate stands at 21 per cent of an employee’s salary (of which the employer’s share is 12 per cent). In effect, the EPF accounts for a sizeable portion of the country’s national savings. From 1975 to 1990, the total accumulated contributions grew from RM4.2 billion to RM46.2 billion, and by 2000 the accumulated contributions had reached RM167.5 billion (approximately US$44 billion). In line with the high growth rate for total accumulated contributions, the EPF’s total investments have also grown dramatically, from RM4.2 billion in 1975 to RM185.1 billion in 2000. As a ratio of Malaysia’s gross domestic product (GDP), the EPF’s total investments currently stand at about 50 per cent. The EPF guarantees a minimum 2.5 per cent annual dividend. In practice, however, since 1960 it has managed to give much higher returns. From 1980 until the early 1990s, the EPF paid annual rates of between 8.0 per cent and 8.5 per cent. One consequence of achieving such high annual returns was that contributors came to expect similar high returns later. Consequently, since the 1997–98 financial crisis, when the return rates fell below 7 per cent — touching 6 per cent in 2000 — the EPF came under severe criticism from some quarters. The underlying rationale for the EPF scheme is the creation of a savings arrangement to help provide contributors with old age security after retirement. Ideally, the main issue facing policy-makers should be

how best to invest the savings, so as to generate healthy dividend returns for EPF contributors. Although the EPF has continued to achieve healthy returns, it has nevertheless been criticized for failing to match rates of return in the open market, especially prior to the 1997 crisis. In addition, given that Malaysians are living longer, there is rising concern that, in spite of the high contributions, lower income workers may retire with insufficient assets held in the EPF to adequately support themselves in later life. Indeed, while the real dividend returns is currently around 4 per cent, the EPF might find it hard to maintain this rate in the future. Partly in response to such criticisms, and partly because of the decline in the issuance of government securities (as a result of privatizations), good revenue growth and surplus budgets, policy-makers in Malaysia have made a few reforms to the EPF scheme. One of the reforms allows individual contributors to take out a certain amount from their account, to be managed by pre-selected external investment companies. The argument supporting this move is that professionally managed funds will yield higher returns than government-controlled funds — the latter being viewed as inefficient and thus generating lower yields. However, the evidence supporting this claim is not entirely convincing, especially in 1997 and 1998, when the open market yields were lower than the EPF return rates. In general, taking into account the additional administrative costs, the yields from the privately managed investments must outperform the EPF returns rate by at least 2.5 per cent to 3 per cent to make it worthwhile. Most importantly, it should be borne in mind that the financial risks involved in this scheme are entirely the responsibility of individual contributors. Up to 1990, most of the EPF investments — 92.5 per cent in 1980 and nearly 80 per cent in 1990 — were funnelled into government securities which were low-risk, and gave relatively high return rates. In recent years, however, the EPF has diversified its investment portfolio, such that government securities accounted for only 33.6 per cent in 1996 and 34.5 per cent in 2000, of its total investments. Conversely, its investments in other instruments have grown substantially; money market instruments accounted for 29.7 per cent in 1996 and 23.1 per cent in 2000; loans and debentures at 20.8 per cent and 20.5 per cent

65 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

MALAYSIA’S EPF SCHEME (continued)

respectively; and equities at 15.6 per cent and 21.2 per cent respectively. Although the dividend returns achieved from the EPF’s diversification of its investment portfolio have not improved thus far, it is generally acknowledged that this is the right thing to do. Nevertheless, in investing in financial instruments other than government securities, especially in loans and debentures and equities, the EPF has moved towards embracing a higher degree of investment risk. Recognizing the risk factor inherent in the open market, various strategies have been proposed. One of the strategies involves revamping the form and style of the EPF management. The EPF management has been criticized for being overly centralized and inefficient, and lacking in transparency and accountability. Another development that the EPF is currently considering is parcelling out funds to be managed by private fund companies, through an open bidding process. The lack of transparency and accountability regarding the EPF decision-making process has been frequently raised. A recent example involved accepting Time.Com shares as part settlement of its earlier loan to the parent company, Time Engineering. The subsequent initial public offering of Time.Com saw share prices decline substantially, losing about a quarter of their value after listing. Somewhat surprisingly, even the representatives of the Malaysian Trades Union

Congress, who sit on the EPF management committee, were apparently uninformed of this decision. Finally, until 1990, contributors benefited from the EPF’s financial support of national economic development, by investing almost entirely in government securities, which provided secure respectable returns rates. Since the early 1990s, however, the EPF has also invested heavily in privatized projects, such as the various independent power plants, the North-South Highway, the Kuala Lumpur Airport, the Light Rail Transit System, the Bakun Dam, and several other projects. In the aftermath of the 1997–98 financial crisis, when banks were still reluctant to lend, the EPF loaned RM31 billion to 71 Malaysian companies between 1997 and 1999. The key doubt here is whether the EPF is receiving adequate returns for its investments, or are the projects and companies concerned being subsidized or bailed out? On the whole, the EPF’s strategy to diversify its financial portfolio is probably the optimum method to invest, and thus contributors will have to accept the inevitable correlation that exists between increased risks and returns. However, since the 1990s, the EPF’s investments in various privatized projects — and since the financial crisis, in the stock market and providing loans or bonds to a number of Malaysian companies — have raised some concern about the Fund’s investment allocation procedures.

Selected Indicators for Malaysia’s Employees Provident Fund (EPF), 1975 to 2000

Year

No. of Contributors (million)

Total Accumulated Contributions (RM million)

Total Investments (RM million)

Dividend Rate (%)

1975 1980 1990 1995 2000

2.89 3.76 5.94 7.76 9.75

4,108 9,129 46,179 97,540 167,485

4,212 9,261 45,642 96,600 185,140

6.6 8.0 8.0 7.5 6.0

Real Dividend Rate (%) 2.1 1.3 4.9 4.1 4.4

Asset Class Allocation, 1996–2000

Year

Malaysian Govt. Securities (RM million)

1996 1998 2000

38,754 45,670 61,766

(%)

Money Market Instruments (RM million)

33.6 31.6 34.5

34,170 34,249 36,674

SOURCES: www.bnm.gov.my; www.kwsp.gov.my

66 © 2002 Institute of Southeast Asian Studies, Singapore

(%)

Loans & Debentures (RM million)

Equities (%)

(RM million)

(%)

29.7 23.7 23.1

23,991 38,435 37,966

20.8 26.6 20.5

17,930 25,738 41,438

15.6 17.8 21.1

THE ASEAN-6

A

fter the change of leadership in early 2001, political uncertainty in the Philippines has receded, and the economy is exhibiting adequate resiliency. Owing to a fiscal deficit and eased monetary policies, the stimulation of domestic demand underpins the country’s growth. This will help offset weakening export growth, as a result of reduced global demand for electronic products. With a massive fiscal and monetary stimulus by the United States in the immediate wake of the terror attacks in September 2001, export growth in the Philippines will resume in the second half of 2002, though at a slow pace. On the production side, strong performance from the agricultural sector has contributed to the economy. Agricultural sector growth has been supported by new jobs created in the sector since 2001, which employs roughly a third of the country’s total work-force. However, the unemployment rate is at a high level, of about 13 per cent in 2001. Strengthening of the agricultural and service sectors is expected to buoy the targeted growth of 2.3 per cent for 2002. According to the Agriculture and Fisheries Modernization Act (AFMA), a budget of P18.8 billion has been allocated to the agricultural sector in 2002. At least P5 billion in agriculturerelated credit will be funded by government financial institutions. As a result, one million jobs will be generated, in order to boost agricultural growth in 2002. A weakening growth of the economy is attributed to a slowdown in the industrial sector, owing to the weakening of domestic and external demand in 2001, which will carry over into early 2002. The government has maintained a budget deficit reduction programme, with substantial reforms to the tax system and increased privatization revenue from the sale of the power utility. A modest increase in the 2002 budget expenditure of 11.6 per cent is intended to address the basic needs of the people, whilst investing in long-term economic growth. With a strong push for the improvement of tax administration, revenue collections in 2002 are forecast to be 11.8 per cent higher than in 2001, or equivalent to 15.8 per cent of gross domestic product (GDP). It is envisaged that the national government budget will be in balance by 2006. Borrowing from domestic and foreign creditors is planned to finance the budget deficits until then. A sharp increase in public debt is a source for concern, as it is currently running at about 70 per cent of GDP, compared with about 90 per cent in Indonesia, and about 50 per cent in Thailand. On the monetary front, the Monetary Board announced that it would keep interest rates unchanged, as the foreign exchange market seemed to stabilize and the inflation trend appeared clearer. Inflation in 2002 is expected to moderate within the 6–7 per cent target range, reflecting a stable peso and low capacity utilization. More accommodative monetary policy is likely to be adopted if there are signs of falling inflation and further stabilization of the peso. Interest rate cuts will therefore be required to stimulate private investment in the second half of 2002. Credits to the private sector have started to pick up. Whilst banks have gradually shed their reluctance to lend, domestic demand growth is not strong enough to take up spare capacity and encourage new investment. Meanwhile, credit expansion in the public sector has slowed down, owing partly to the improvement in the government’s fiscal position. The reform of the country’s banking sector seems to be on a track. Several banks have publicly endorsed the formation of a state-organized asset management company (AMC), as a result of the rise in non-performing loan (NPL) ratios in bank balance sheets. Meanwhile, a proposal to set up a private AMC is being considered. Higher bank capitalization and loanloss provisioning would improve financial sector stability in the country.

Philippines

67 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

Philippines: Selected Economic Indicators, 1997–2003F 1997

1998

1999

2000

2001E

2002F

2003F

5.2 6.1 5.4 3.1

–0.6 –2.1 3.5 –6.4

3.4 0.9 4.0 6.5

4.0 3.9 4.4 3.3

2.1 0.8 2.9 2.7

2.3 1.8 2.6 2.6

2.8 2.6 3.1 2.5

25,228 35,933 –10,705

29,496 29,660 –164

35,033 30,726 4,307

38,078 31,387 6,691

30,932 27,773 3,159

32,463 29,322 3,141

35,832 33,039 2,793

5.7

9.7

6.7

4.3

6.7

5.8

5.3

Gross external debt (% of GDP) Foreign exchange reserves (US$ billion)

55.5 7.3

73.0 9.2

67.9 13.8

68.9 14.9

70.5 14.5

69.1 14.6

67.6 14.5

91-day treasury-bill rate (% per annum) M2 growth (% change)

12.9 20.5

15.0 8.0

10.0 19.3

9.9 4.8

9.7 5.1

9.4 5.0

9.9 7.6

Exchange rate (year end) (Peso/US$)

37.2

39.1

40.6

49.9

52.0

52.6

52.3

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation/CPI (average) (% change)

SOURCES: CEIC Data; Economist Intelligence Unit (EIU); author.

The country’s external position is vulnerable. This is due to a continued decline in electronic shipments, which comprise 60 per cent of total exports. The terrorist attacks on the United States have adversely affected the Philippine economy through the channels of trade and investment. With about half of Philippine exports going to the United States and Japan, the country’s economy is particularly vulnerable to downturns in these two countries. Meanwhile, increasing oil import dependence makes the Philippine economy very sensitive to the fluctuation of oil prices. In addition, a series of high-profile tourist kidnappings, and ongoing clashes between the military and various guerrilla groups, have contributed to a continued decline in tourism revenues for the Philippines. With regard to incomes from abroad, the terrorist attacks on the United States have put a large number of overseas Filipino workers’ jobs at risk, and raise the possibility of a decline in remittances from overseas Filipino workers. However, the current-account surplus in 2002 is expected to remain at about the same level as in 2001. Capital inflows will be weak in the first half of 2002, because of the uncertainty of the global economic and political situation. Although gross international reserves, in terms of imports and short-term external debt, are forecast to be comfortable, the peso will remain volatile in 2002, and then steady in 2003 in tandem with the country’s economic growth trajectory. In August 2001, the Bangko Sentral ng Pillipinas (BSP) signed an agreement for a US$3 billion bilateral swap arrangement (BSA) with the Bank of Japan (BOJ). The BSA is designed to provide short-term financial assistance, in the form of swaps, for balance of payments or short-term liquidity support. The Philippine Economic Plan consists of steps to institute economic reforms, and to create an environment favourable to foreign investment. In addition, the country has entered

68 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

into a post-programme monitoring arrangement with the International Monetary Fund (IMF), commencing in April 2001. This arrangement involves regular assessments of the country’s macroeconomic and financial programmes and policies, as well as the implementation of key structural reform measures within a medium-term framework. On the industry level, the government is taking steps to support Philippine aviation as well as insurance industries in the aftermath of the terror attacks on the United States in September 2001. These steps include the formulation of a plan, within applicable laws and in consultation with the local airline industry, to keep the airliners in the air. The Philippines currently lags behind most other East Asian countries in terms of infrastructure development. Any further reduction in spending for this purpose could have dire economic consequences in the medium term. Meanwhile, various impediments to market entry in Philippine industry continue to undermine the pro-competitive effects of import competition. Although the Congress passed the Electric Power Industry Reform Act in early June 2001, details of its implementation have still to be finalized. The government should speed up privatization programmes in order to reduce the sizeable liabilities of the government. The forecast on the country’s growth is on the downside, because of uncertainties in world economic and political outlook, as well as the effectiveness of domestic policy implementation.

T

he year 2001 did not go well for the Singapore economy, which contracted by roughly 3 per cent, after growing by almost 10 per cent in 2000. The main reason for this economic contraction was a global drop in demand — particularly from the United States — for Singapore exports, most notably in information technology-related and electronic products. In the short-term, there is little that Singapore can do to revive external demand for its export items, beyond waiting for an upturn in the U.S. and global economy. In the medium and long term, however, Singapore is expected to continue its policy of diversifying its economic base and corporate landscape, in a bid to lessen its exposure to global downturns in specific business sectors and export markets, such as the “tech” sector cycle (which peaked in 2000 and should bottom in 2002). The economic downturn currently facing Singapore — reportedly the worst since independence in 1965 — has a closer resemblance to the 1985 recession than the more recent 1997–98 regional crisis, with global weakness as the principal contributory factor. External trade is a substantial element of the Singapore economy, with exports accounting for 85 per cent of Singapore’s gross domestic product (GDP) in 2000. Therefore, the extent to which the country’s economic fortunes can be revived by measures intended to invigorate the small domestic economy is somewhat limited, as will be the multiplier effects of “pump-priming” projects. Nonetheless, the government enacted two off-budget economic stimulus packages in 2001 in a bid to temporarily support the Singapore economy, and more importantly, assist individuals and local companies caught in the sharp economic downdraft. The first — fairly modest — stimulus package was announced in July 2001, and was valued at S$2.2 billion (approximately US$1.2 billion), or 1.4 per cent of GDP. The second package — unveiled in October 2001 — was valued at S$11.3 billion (approximately US$6.3 billion), or about 7 per cent of GDP. This second package included S$3.5 billion in infrastructure spending; a range of income and property tax rebates and relief measures (worth US$2.5 billion); rebates for

Singapore

69 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

utilities, education, and hospital costs; expansion of various social safety net programmes (including skills training); further assistance for small and medium enterprises (SMEs); and a S$2.7 billion “Singapore Share Scheme” for all citizens. (The last, distributed in November 2001, resembles a redeemable savings bond, with a guaranteed coupon of 3 per cent.) The unemployment rate, which has hovered around 2–3 per cent in recent years, is expected to rise to around 4 per cent in 2002, as a direct result of the economic slowdown in general, and layoffs at various “tech”-related companies and financial institutions in particular. As during the 1997–98 Asian financial crisis, Singapore’s policy-makers are not expected to allow immediate economic difficulties to divert the country from its long-term economic development strategy. Various structural reforms and policy initiatives to keep the economy robust, and Singapore relevant in the global business environment, will undoubtedly continue. These include the partial divestment or corporatization of some government-linked businesses and statutory boards, including Changi Airport, the Port of Singapore Authority, and the Public Utilities Board. However, poor equity market conditions may result in delays for some of these initiatives, where investor appetite is deemed insufficient. There have also been some notable advances in Singapore’s financial industry, with a long-awaited consolidation of the local banking sector now under way. As a consequence of merger and acquisition (M&A) deals enacted in 2001, the number of local banks has contracted from five to three, and an additional banking merger in the future should not be completely ruled out. This is just part of a five-year reform process within Singapore’s financial sector, which has included instructions by the government to local banks to divest their non-core (that is, non-banking) assets and unwind any cross-shareholdings. The presence of foreign banks is also being gradually increased. In addition, Singapore’s integrated equities and futures market (SGX) is positioning itself to form strategic alliances with stock markets overseas. There is no question that Singapore’s policy-makers will continue to pursue strategies intended to best position the city-state for its long-term economic development. However, there may be some question as to what precisely those strategies should entail, in what has become a much more challenging global economic environment since mid-2001. As Senior Minister Lee Kuan Yew noted in late 2001, there is a need for Singapore’s policy-makers to “retest every policy assumption and test its validity” in the current environment. In December 2001, an Economic Review Committee was formed by the government to study how Singapore might go about transforming its economy. The city-state has a good track record of adopting pragmatic and flexible policies, aimed at maintaining, and occasionally redefining, Singapore’s areas of comparative advantage and its niche positions in the ”international food chain”. Advancing from an entrepôt to a regional hub for multinational enterprises (whilst maintaining its entrepôt capabilities), moving up the value-added and technology ladder, diversifying its manufacturing base and creating a world-class financial centre, have all been part of this evolutionary process during the past three decades or so. In other words, Singapore has been able to reinvent itself in the past, and should continue to do so in the future. The government has recently signalled that it will assist local companies caught in the current economic recession. It remains to be seen how policy-makers will balance such short-term initiatives with their long-term desire to encourage a more entrepreneurial and less risk-averse approach towards business among local firms and individuals, which is deemed necessary to be successful in various spheres of high value-added activity. The burgeoning of more private

70 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

domestic firms might also be expected to partially reduce the high profile of foreign multinational enterprises and government-linked companies in Singapore’s corporate landscape. Singapore is likely to continue to expand its corporate profile overseas, through investments in both new projects and the acquisition of existing companies. In 2001, for example, Singapore Telecommunications acquired Cable & Wireless Optus of Australia for US$9 billion, and DBS Bank acquired Dao Heng Bank in Hong Kong. Whilst corporate Singapore has sometimes faced resistance in East Asia towards its overseas investment activity, this is unlikely to thwart Singapore’s general thrust to develop the external wing of its corporate community. Like many international firms, Singapore corporates are likely to explore the large China market quite closely, following the latter’s entry into the World Trade Organization (WTO) in late 2001. Although Singapore firms have had a relatively mixed experience in China, they — like most major companies around the world — will not wish to be bystanders in the anticipated burgeoning and opening up of the potentially massive China market. Singapore firms are also likely to continue acquiring business assets in the Southeast Asian region, when and where there are attractive (and feasible) opportunities. However, overseas investments by Singapore firms are unlikely to be confined to just East Asia. Morgan Stanley estimates that the external wing of Singapore’s economy will increase from about US$200 billion at present to US$500– 550 billion by 2010, or three times nominal GDP. Returning to the near-term, Singapore’s economic growth is anticipated to be about 3–4 per cent in 2002, although much depends on developments both within and beyond Southeast Asia, and on both the economic and political fronts. The surrounding region seems likely to remain the main liability for the Singapore economy in the few years ahead, notably with

Singapore: Selected Economic Indicators, 1997–2003F 1997

1998

1999

2000

2001E

2002F

2003F

8.5 4.5 16.1 6.4 8.8 18.6

0.1 –0.6 2.9 –4.1 6.0 –8.3

5.9 13.6 –8.8 7.1 7.5 0.5

9.9 15.2 –4.6 15.2 9.0 4.1

–3.0 — — — — —

3.0 — — — — —

5.5 — — — — —

125.8 124.6 17.9

110.8 96.0 20.4

115.6 104.4 21.8

138.9 127.5 21.8

130.1 113.8 23.4

133.4 121.3 20.7

2.0

–1.5

0.8

2.1

0.7

1.7

2.0

Official reserves (US$ billion) Official reserves (as months of goods exports)

71.3 6.9

74.9 9.4

76.8 8.8

80.1 7.5

81.5 8.6

84.0 8.3

85.0 —

Prime lending rate (% per annum) M2 growth (% change)

7.0 10.3

5.9 30.2

5.8 8.5

5.8 -2.0

5.7 –1.0

5.7 6.0

6.5 7.0

Exchange rate (average) (S$1/US$1)

1.49

1.67

1.70

1.72

1.78

1.79

1.76

GDP growth (% change) Manufacturing Construction Trade Transport and communications Financial services Exports of goods (US$ billion) Imports of goods (US$ billion) Current account balance (US$bn) Inflation/CPI at year-end (% change)

— — —

SOURCES: IMF; J. P. Morgan; ING Barings; author’s estimates.

71 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

regard to general political risk perceptions of the region, lacklustre economic growth trajectories in some regional economies, and continued foot-dragging on much needed structural reforms in a number of Southeast Asian countries. Although a relatively diversified player in the international business arena, Singapore is not wholly divorced from the surrounding region, and a paucity of promising economic and corporate news emanating from neighbouring countries will weigh on the city-state, at least to some extent. As both a regional hub for multinational enterprises operating in Southeast Asia and a regional financial centre, Singapore would wish to see a much more alluring corporate landscape across the Southeast Asian region, thereby prompting major firms and banks to continue to significantly develop and expand their presence in the city-state. However, Singapore’s aspirations in this regard will remain constrained as long as overseas perceptions of the Southeast Asian region as a whole remain ambivalent. Direction of Singapore’s Total Exports, 1996–2000 100%

Rest of the world

% of total exports

90% 80%

Western Europe

70% North America

60% 50%

Northeast Asia

40% 30%

Malaysia

20% Southeast Asia (exc.Malaysia)

10% 0%

1996

1997

1998

1999

2000

SOURCES: IMF and CEIC Data.

Breakdown of Singapore’s Domestic Electronics Export Markets, 1996 to 2000

100%

Others

% of total domestic electronics exports

90% 80%

Japan

70% 60%

European Union

50% 40%

Malaysia

30% 20%

United States

10% 0% 1996

1997

1998

1999

SOURCE: IMF.

72 © 2002 Institute of Southeast Asian Studies, Singapore

2000

THE ASEAN-6

SINGAPORE AND THE NEW REGIONALISM By Ramkishen Rajan

T

he East Asian financial crisis of 1997–98 and its lingering effects appear to have slowed the pace, if not the commitment, of some ASEAN countries towards trade liberalization, and to have depleted the organization’s collective economic strength. Meanwhile, the Asia-Pacific Economic Co-operation (APEC) forum has become large and unwieldy, and appears ill-equipped to handle substantive trade and investment liberalization issues effectively. Consequently, Singapore policy-makers have underscored the need to explore alternative (that is, third and fourth track) liberalization paths. Free trade agreements (FTAs) have, therefore, become an integral part of Singapore’s trade policy. Motivation FTAs appear to be increasingly regarded by policymakers around the world as effective and expeditious instruments for achieving trade liberalization among “like-minded” trading partners. The formation of bilateral FTAs among such partners is also seen as a way to overcome the so-called “convoy problem”, whereby the pace and depth of trade integration is held back by the “least willing member”. FTAs are viewed as a means of maintaining forward momentum towards trade and investment liberalization, failing which there might be a lapse into protectionism. To the extent that contracting parties to an FTA agree to move beyond their respective WTO (World Trade Organization) commitments, there may be a demonstration effect that motivates future rounds of broader multilateral negotiations, under the auspices of the WTO. Since trade agreements nowadays go well beyond trade in goods, to encompass an increasing number of areas and issues, FTAs could also act as a “testing ground or pilot project for exploring complex trade issues”, and to establish some sort of precedent or benchmark for trade negotiations involving a larger

number of countries, including one at the multilateral level. Being among the first few countries to establish a number of FTAs, Singapore has ensured that it is not discriminated ex-post in the event that its “competitors” form FTAs with third countries. A further first-mover advantage in forming FTAs with a large number of different countries takes the shape of a “hub” of overlapping arrangements. Producers in the hub have cost advantages vis-à-vis producers in the “spokes”, being able to obtain more of their intermediate goods at lower prices. Furthermore, since exports originating from Singapore are given preferential access to a number of other markets (with which Singapore has trade pacts), this may encourage the trans-shipment of goods through Singapore ports, hence fortifying its dominant role as an entrepôt. Of course, it is for this very reason that FTAs have special provisions or rules of origin (ROOs), that are meant to prevent goods from being re-exported from a lower tariff country to a higher tariff one. However, this in turn may lead to a shift of export platforms from other regional developing economies to Singapore in order to enjoy duty-free market access. Singapore has already established a bilateral FTA with New Zealand, and is in the process of negotiating others with Japan and the United States, while trade pacts with Australia, Chile, the European Free Trade Area, and Mexico are also being seriously considered. Singapore’s Trade Pacts with Japan and the United States While the United States has signed a series of bilateral FTAs with Canada, Israel, Mexico, and Jordan, most recently, the announcement of the Singapore–U.S. FTA has been considered especially significant, as it will be the first one that the United States intends to

73 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

SINGAPORE AND THE NEW REGIONALISM (continued)

sign with an Asian economy. It has also been suggested that Singapore’s bilateral trade pacts with the United States and New Zealand, together with anticipated ones with Australia and Chile, may lead to a “Pacific-5” FTA, which itself could be a precursor to an APEC-wide FTA. The announcement of a Singapore–Japan FTA is also of significance, as Japan and Hong Kong have been the only two economies that have hitherto not participated in any FTAs. Rightly or wrongly, the Singapore–Japan FTA has been viewed as a precursor to the formation of an East Asia-wide FTA between countries in Southeast Asia plus Japan, Korea and China (ASEAN Plus Three, or APT). Entering into broad-ranging trade pacts with the two economic superpowers is not only seen as a means of gaining greater market access (with Japan in particular), but also as a way of avoiding the imposition of possible protectionist measures in the future (with regard to the United States in particular) and managing future trade tensions, including establishing orderly dispute settlement mechanisms. Singapore’s total merchandise trade with the United States and Japan, in the period 1980-99, constituted one-third of Singapore’s total merchandise trade. Conversely, trade with Singapore constituted a mere 2 per cent of the United States’ global trade in 1999, and 3 per cent in the case of Japan. Nevertheless, despite the city-state’s microscopic physical size, it was the United States’ tenth largest export market, and the twelfth largest source of imports in 1998. Singapore was the sixth largest export market for Japanese goods and Japan’s thirteenth largest import source in 1999. Significant linkages also exist in trade in services, as well as foreign direct investment.

1

Drawbacks Since Singapore has one of the most liberal trade and investment regimes in the world, with near zero tariff rates on most goods (and limited non-tariff barriers) the scope for trade diversion from Singapore’s vantage point is quite small.1 Proponents of Singapore’s push towards FTAs note that the proposed bilateral trade pacts with the United States and Japan are formalizations of the de facto extensive and deep linkages that already exist. While this may be true, it would certainly be a leap of faith to conclude that there are no ill-effects whatsoever. Thus, what are some potential concerns of Singapore’s recent drive to form FTAs? The proliferation of a number of overlapping FTAs raises many technical problems with respect to the implementation of ROOs. Even with a single FTA, a concern is that ROOs with a particular country, for example, the United States, may be sufficiently prohibitive as to induce Singapore exporters to source their inputs from the United States rather than from some other country in Asia (such as Korea). In other words, the United States exports its external tariffs to Singapore. This appears to have been the case with NAFTA (North America Free Trade Agreement), where the United States negotiated a ROO on Mexican assemblers of automobiles. ROOs can also give rise to significant costs, because of the need for administrative surveillance and implementation. In practice, ROOs are particularly complex — almost two hundred pages long in the case of NAFTA, and eighty pages of small print in the case of the EU’s agreement with Poland — as they have to take into account tariffs on imported intermediate goods used in the products produced within the FTA. The book-keeping and related costs rise sharply as production gets more integrated internationally.

Ninety-nine per cent of Singapore’s imports are not dutiable. Tariffs are only imposed on alcoholic beverage imports while excise duties are imposed on tobacco products, automobiles and gasoline.

74 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

Apart from the issue of ROOs, a large number of FTAs may leave investors confused as to which rules, obligations, and incentives correspond with which partner. Worse still, there is the possibility that membership in multiple trade pacts may create “obligations made in one that contradict those made by others”. Bergsten highlights this point in the context of APEC’s goals of region-wide trade liberalization. As he notes of the blueprint on the proposed Singapore– Japan FTA: … it states that Japan is unwilling to liberalize agricultural trade, even in a deal with Singapore where there is no agricultural trade. In other words, they do not accept the principle. They can argue, as this blueprint does, that it is perfectly compatible with the WTO. The WTO says you must substantially cover all trade. If there is no agricultural trade, you do not have to include it to meet the WTO test. But the APEC test, which was hammered out after much debate in both Bogor and Osaka, states that trade liberalization must be comprehensive — no sectors can be excluded. APEC was consciously being WTO+ and the Japan-Singapore agreement, if that study result becomes the actual outcome, would violate its precepts … Japan and Singapore should be asked how their new agreement is compatible with APEC.2

Time and efforts spent on negotiating and implementing a series of bilateral and trilateral FTAs may divert scarce resources from the multilateral rounds. Potentially more important is the fact that, by being involved in a number of FTAs, Singapore must accept at least partial responsibility for diverting the attention of trade partners away from multilateral negotiations. Singapore appears to be willing and able to negotiate FTAs fairly quickly. However, this rapid pace apparently hinges on Singapore’s readiness to accept a number of conditions in the context of the bilateral

pacts set forth by the larger partners, such as labour and environmental standards, in the case of the FTA with the United States, or the exclusion of agriculture in the case of the FTA proposals with Japan. While acceptance of these conditions may not be problematic in the case of Singapore, given its high environmental standards and negligible agricultural sector, if they are eventually included in the agreements, Singapore may be doing a disservice to developing economies’ interests in multilateral negotiations at large. More narrowly, such supplemental agreements may not be readily acceptable to other ASEAN members. Accordingly, Singapore-based FTAs may not be an appropriate model for future agreements by other Asian nations. Furthermore, by unilaterally agreeing to such terms and conditions (such as linking trade with labour standards), Singapore might preclude ASEAN from taking a common and credible stand on these and other issues. An oft-noted question is whether bilateralism and regionalism are “stepping stones” or “stumbling blocks” to multilateral liberalization. Insofar as a key component of Singapore’s growth strategy has been its outward orientation, particularly its openness to trade and investment flows, and the city-state has been a leading advocate of global trade liberalization, it is fairly clear that Singapore’s drive towards regionalism is not an instrument of covert protectionism. That said, there is the important question of how Singapore’s decision to embark on a separate series of trade initiatives to bolster its trading, investment, and strategic position, without the consent of ASEAN, is perceived by other Southeast Asian economies, and what it means for initiatives towards the implementation of an ASEAN Free Trade Area.

2

F. Bergsten, “Back to the Future: APEC Looks at Subregional Trade Agreements to Achieve Free Trade Goals”, Speech given at the Pacific Basin Economic Council luncheon, Washington, DC, 31 October 2000.

75 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK Thailand

P

rivate consumption has become the main factor contributing to Thai gross domestic product (GDP) growth. Its indicators have portrayed a stable trend, with rising income from crop sales, as well as a downward trend for both average monthly wages and high unemployment levels. Meanwhile, exports are weakening, together with the global downturn, and as a result, net export earnings are on a declining trend. Private investment in machinery and equipment has slowed down because of a decline in manufacturing production. The role of public expenditure has been heightened, after diminishing in the first half of 2001, as the government administration underwent political changes. Acceleration in public expenditure is expected to stimulate the country’s growth in 2002. In the agricultural sector, output and prices show an expansion, attributed to higher yields of rice, price incentives to tap more rubber, and rising livestock prices. Meanwhile, a declining trend for both the manufacturing production index (MPI) and the capacity utilization rate reflect weak external and domestic demand. The services sector remains buoyant compared with other sectors. Tourism has expanded slightly, as a result of niche marketing strategies and a tourism promotion campaign held abroad. In addition, local tourists have turned towards domestic travel, as a result of the hesitation over air travel to potential areas of terrorist attack, including the United States, the European Union, the Middle East, and South Asia. This has resulted in rising earnings for hotels and other services related to tourism. The telecommunications sector also continues to grow. The number of subscribers for basic telephones and mobile phones is rising, mainly due to price discounts on telephone sets and service charges. Signs of sluggish growth have been apparent since the second half of 2000, even though the government has maintained an expansionary fiscal policy to support the recovery process since 1998. To counter the weakening economic activity, a 50-billion-baht fiscal stimulus has been added to the fiscal year 2001/2002 budget. The stimulus measure aims at propping up domestic demand, restructuring non-performing loans (NPLs), and promoting small and medium-sized enterprises (SMEs). This is in addition to other populist measures (including a village development fund, a farmer debt moratorium, and a public healthcare scheme) currently being implemented by the government. The 2001/2002 fiscal programme also involves a postponement of a previously anticipated value-added-tax (VAT) hike. As planned, the VAT will be increased by one per cent each year, starting from October 2002 until it reaches 10 per cent in 2004. To promote SMEs, a package of corporate income tax cuts and investment incentives will become effective in January 2002. It is estimated that the package would cover 85 per cent of total corporate taxpayers. On the privatization front, eighteen enterprises are to be privatized by 2003, through minority retail share offerings on the Stock Exchange of Thailand (SET). The heroic budget expansion has led to public concern about mounting public debt, which reached 50–55 per cent of GDP in 2001. According to the new five-year plan (2002–2006), deficit spending is expected to continue until 2005. Meanwhile, public debt is set to stay below 60 per cent of GDP throughout the 2002–2006 period. On monetary policies, the Bank of Thailand (BOT) raised the fourteen-day repurchase rate from 1.5 to 2.5 per cent in June 2001, in order to curb baht depreciation. However, it did

76 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6

State-Enterprise Privatization Programme, 2001–2003 2001

Internet Thailand, Thai Airways International PCL, The Petroleum Authority of Thailand, Krung Thai Bank PCL, Bangkok Metropolitan Bank PCL, Siam City Bank PCL

2002

Telephone Organization of Thailand, The Communication Authority of Thailand, Thailand Tobacco Monopoly, Airport Authority of Thailand, The Government Housing Bank, Port Authority of Thailand, The Government Savings Bank

2003

The Electricity Generating Authority of Thailand, The Metropolitan Electricity Authority, The Provincial Electricity Authority, The Metropolitan Waterworks Authority, The Provincial Waterworks Authority

SOURCE: Ministry of Finance, Thailand.

not have any significant influence on either deposit or lending rates. Thereafter, the BOT announced that it would maintain low interest rates in order to support the economic recovery. Commercial bank deposits have been expanding continuously. Meanwhile, bank lending is expected to remain sluggish, reflecting a weak banking system and excess production capacity. On inflation, a lack of demand pressure and excess capacity, together with a relatively stable baht, should keep inflation within a target range of 2–2.5 per cent for 2002. Reported NPLs have declined substantially, as a result of write-offs and transfers to asset management companies (AMCs). Meanwhile, new and re-entry NPLs have offset the reduction in NPLs from debt restructuring, and with a weakening economy, the trend of rising new and re-entry NPLs will persist. Slow progress in corporate restructuring is the main source of risk to the Thai banking system. In June 2001, the government rapidly established a centralized AMC, Thai Asset Management Corporation (TAMC). The TAMC aims at acquiring about half of the banking system’s NPLs by the end of 2001, including 1.1 trillion baht of the state-owned banks’ NPLs, and 250 billion baht of private banks’ NPLs. Only large, multi-creditor loans are to be purchased from private banks. The bad asset appraisals are estimated according to the BOT’s market values, instead of the Land Department’s values, which are about 20 per cent lower than market values. The monetary authorities anticipate an NPL level of 9–10 per cent of total loans by the end of 2001. The International Monetary Fund (IMF) believes that the success of TAMC will depend on a number of factors, including consistent application of the value maximization principle, as well as transparency, and even-handedness of its operations. Legal and judicial reforms have been identified to help accelerate corporate restructuring. To enhance the availability of bank credit, a legal framework for secured lending and credit enforcement are recommended. To support the capital market, several government measures involve the removal of tax obstacles in debt transactions, securitization, and investment in retirement funds. Moreover,

77 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

the Securities Exchange Commission is leading an initiative to enhance the effectiveness and efficiency of the existing clearing and settlement platform for the secondary bond market. Meanwhile, new plans for the Stock Exchange of Thailand (SET) are being developed. Shortand long-term strategic positioning, as part of the SET’s master plan, is aimed at developing the Thai bourse. The short-term strategy would support government measures to stimulate the domestic economy. The long-term strategy would be a step towards boosting the local equity market’s competitiveness, in order to attract more foreign investors in overseas markets. In line with the global downturn, exports have become the biggest drag on the Thai economy. The prolonged economic slowdown in the United States and the U.S. counterattack on terrorists have triggered worries of a negative second-round impact for the Thai economy, after the 1997–98 crisis. Moreover, Japan focuses on the same industrial investments in both Thailand and China, including vehicles, electrical and electronic products, chemical products, metal products, and machines. An expansion of Japan’s investment in China, after the latter becomes a member of the World Trade Organization (WTO) may prompt a decline in Japan’s investment in Thailand. Meanwhile, weak equity investment and the government’s decision to reduce external borrowing will also put pressure on the capital account. As a result, the balance of payments will weaken. Nevertheless, the baht will remain stable, because of the BOT’s inclination towards exchange rate stability.

Thailand: Selected Economic Indicators, 1997–2003F 1997

1998

1999

2000

2001E

2002F

2003F

–1.4 –1.9 –1.3 –0.4

–10.8 –13.6 –10.0 –3.2

4.2 9.8 –0.1 2.7

4.4 5.1 4.1 2.7

1.7 0.2 3.2 1.8

1.8 0.5 3.0 2.0

2.2 1.1 3.2 1.8

56,725 61,349 –4,624

52,878 40,643 12,235

56,800 47,529 9,271

67,943 62,422 5,521

59,137 55,869 3,269

59,256 57,098 2,158

61,626 59,096 2,530

5.6

8.1

0.3

1.5

2.0

1.8

2.1

Gross external debt (% of GDP) Foreign exchange reserves (US$ billion)

72.6 30.0

93.8 29.5

78.9 34.8

65.9 32.7

65.0 32.0

55.7 31.7

50.9 32.2

BOT interbank rate (% per annum) M2 growth (% change)

12.5 16.4

12.5 9.5

4.0 2.1

4.0 3.7

4.0 6.0

4.0 7.1

4.0 7.5

Exchange rate (year end) (baht/US$)

47.3

36.7

37.5

43.3

45.0

45.0

45.0

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation/CPI (average) (% change)

SOURCES: Bank of Thailand; CEIC Data; Economist Intelligence Unit; author.

78 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6 INDOCHINA AND MYANMAR

Although the government’s pump-priming of the economy will help to support economic growth in 2002, it is unlikely to offset completely the slowdown in external demand. Given the short-term fiscal stimulus, more long-term measures to improve the country’s industrial competitiveness and reform the educational system will need to be accelerated. Low onedigit growth is forecast for 2002-2003, if the negative external economic environment does not improve.

INDOCHINA AND MYANMAR Mya Than • Nick J. Freeman

A

fter registering strong economic growth in the first half of the1990s, through the introduction of market-oriented reforms and international assistance, Cambodia’s economic performance subsequently slowed down, owing in part to the El Nino effect and political instability. However, it regained a modest growth rate towards the end of the 1990s, thanks to the resumption of political and macroeconomic stability in the country, despite flooding, and the regional economic crisis. The agricultural sector — including the livestock and forestry sub-sectors — grew at an average rate of 2 per cent over the 1991–2000 period. This slow growth in the agricultural sector could be attributed to flooding, and a reduction in the legal limit of timber that could be felled. Rice production, livestock production, and forest products contributed about 30 per cent, 13 per cent, and 4 per cent to Cambodia’s gross domestic product (GDP) respectively. On the other hand, there was strong performance in the industry sector, with an average annual growth of 6.9 per cent between 1991 and 2000. More importantly, the contribution of the industrial sector to GDP increased from 9.5 per cent in 1996 to 21.7 per cent in 2000. The industry sector grew particularly during the second half of the 1990s, with an average growth rate of 14.7 per cent, mainly because of a rapid expansion of the apparel industry, which is now the country’s major source of foreign exchange earnings. (Garment exports accounted for about 86 per cent of total exports in 2000.) According to a recent government report, although the garment industry performed well, it still faces many obstacles, such as: inadequate labour relations between the companies and unions; the quality of apparel sometimes not meeting the standard of foreign orders; and the relatively high cost of production, as a result of weak infrastructure and services. The services sector showed modest growth during the last decade. One contributory factor during the second half of the 1990s was the special trading rights granted under the most-favoured-nation (MFN) treatment and the Generalized Systems of Preferences (GSP), extended to Cambodia by many industrialized countries. The tourism industry also contributed to the growth of the services sector, despite the political instability seen prior to 1997.

Cambodia

79 © 2002 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

What are the prospects of economic growth for Cambodia in 2002 and 2003? The government of Cambodia has projected that average annual GDP growth between 2001 and 2005 will be 6.4 per cent, and average per capita GDP is forecast to grow from US$300 in 2000 to US$400 in 2005. Will the country achieve the targets set by the government? There are a number of favourable factors, such as a strong industrial sector, based on the rapid expansion of the garment industry; improved infrastructure (especially land communications with Thailand and Vietnam, as part of the Greater Mekong Sub-Region initiative); and a strong export sector registering double-digit growth. External assistance, in the form of official assistance and soft loans from international agencies, may play a role in economic growth for 2002 and 2003. More importantly, there exists relative political stability in the country. Since Cambodia is the most open economy among the new member countries of ASEAN, and the government is driving for capacity building and poverty reduction all over the country, there are good prospects for meeting the government’s economic targets. However, there are a number of issues that need to be addressed, notably in general economic management, and policy and development, in order to accelerate the development

Cambodia: Selected Economic Indicators, 1997–2003F 1997

1998

1999

2000

2001

2002

3.7 3.7 5.1 20.4 –3.7 5.8

1.8 1.8 5.0 8.6 –1.3 2.5

5.0 5.0 5.8 11.4 5.8 1.5

4.5 4.5 4.5 16 6,0 –1.8

6.4* 5.0 5.0 11.0** 3.0** 3.7**

6.4* 6.0 6.0 14.1** 3.5** 3.6**

Exports (US$ million) Imports (US$ million) Trade balance (US$ million)

862 1,092 –231

890 1,073 –173

980 1,212 –231

1,049 1,428 –380

850* 1,560* –710*

Inflation CPI (average) (% change)** Gross external debt ($ million)**

8.0 2,129

14.8 2,210

4.0 2,045

–0.8 2,033

5.0 —

5.0 —

— —

262

390

422

468

—

—

—

16.6 2,991

15.7 3,770

17.3 3,814

28.5 3,861

24.0 —

20.0 —

— —

GDP growth (% change) (Official) (ADB) (Regional Outlook) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change)

Foreign exchange gross official reserves (US$ million) M2 growth (% change)** Exchange rate (annual average)**

1,350* 1,740* –390*

2003 6.4* — 6.5 8.4* 9.0* 4.4* 1,350* 1,740* –390*

* Country presentation for Cambodia, May 2001. ** ADB estimates. F = Forecast SOURCES: Government of Cambodia, Country presentation for Cambodia to the Third United Nations Conference on the Least Developed Countries; Asian Development Bank; International Monetary Fund; and the Economist Intelligence Unit.

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THE ASEAN-6 INDOCHINA AND MYANMAR

process. According to the Asian Development Bank, the government needs to improve public expenditure management, and particularly budget planning and execution. Another issue is external assistance. To implement the government’s Sectoral and Special programme for 2000–2002, the country estimates that it needs US$1.574 billion in external assistance. However, so far only US$709 million has been committed, leaving a balance of about US$787 million to be raised. If the country is unable to raise the required amount of external assistance, there will be difficulties in meeting the growth targets for 2002 and 2003. Apart from red tape, corruption is another obstacle for economic development. According to one study by the Cambodian Development Research Institute, garment-factory operators paid US$700 million in “bureaucracy costs” in 2000. Given the small size of the country’s budget, the extent of this corruption is enormous — the highest in the Southeast Asian region. Corruption is clearly rampant in Cambodia, as salaries of civil servants are very low (a minister’s monthly salary is US$300 and a low-level civil servant may make just US$20), and this encourages civil servants to take bribes. Even Prime Minister Hun Sen admitted recently that corruption was hurting his nation’s development, and is taking a toll on Cambodia’s overall economic performance. Furthermore, Cambodia is prone to natural disasters, such as flooding of the mighty Mekong River. People are still recovering from the floods which made thousands homeless, and crops were destroyed. There is an urgent need to develop “a more comprehensive and sustainable” basic safety net. In conclusion, Cambodia’s GDP is expected to be moderately strong over the next few years, growing 5–6 per cent in 2002 and 2003. However, political uncertainties in the world and the surrounding region may disrupt the growth prospects of Cambodia’s economy in the short term.

L

aos is a less developed country (LDC), with approximately 40 per cent of its population living below the poverty line. The domestic economy is heavily dependent on external assistance from bilateral donors and multilateral agencies, as well as remittances of funds from Lao living overseas. Since the late 1980s, Laos has been undergoing a gradual process of economic transition, away from central planning and towards a more market-oriented economy. However, this transition process has been fairly slow, and has had only a limited impact in those parts of the country beyond the main towns. Whilst the lowland areas close to the Mekong River, and the larger towns located in this belt, have seen a relatively substantial rise in living standards during the last decade or so (albeit from a low base), the same gains have been less evident in the highland areas to the north. As the Vientiane government itself concedes, the macroeconomic situation in Laos is “fragile, with major policy challenges ahead”. The Asian Development Bank (ADB) notes that Laos is confronted with “severe budget and trade deficits” and that the “external debt burden and aid-dependency are increasing”. At the Seventh Party Congress held in March 2001, the leadership set itself some fairly ambitious — but potentially feasible — targets under the five-year development plan for 2001–2005. Vientiane is aiming for an average increase of 7–7.5 per cent in annual gross domestic product (GDP) growth, with the agricultural sector

Laos

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GDP Projections by the Lao Government, 2000–2010 Average Annual Growth Rate Agriculture and forestry Industry and handicrafts Services

4–5% 10–11% 8–9% Share of total GDP

Agriculture and forestry Industry and handicrafts Services

1990

1995

2000

2005

2010

60.7% 14.4% 24.1%

54.3% 18.8% 24.5%

51.3% 22.6% 26.1%

47.0% 26.0% 27.0%

36.6% 31.5% 31.9%

SOURCE: Government of the Lao PDR.

recording annual growth of 4–5 per cent, industry and handicrafts 10–11 per cent, and the service sector 8–9 per cent. Inflation should be kept within single digits, and the exchange rate should remain stable after the pummelling of the local currency in 1998–99. The budget deficit is to be kept below 5 per cent of GDP, and the current account deficit below 6 per cent of GDP. By 2005, the average per capita income is targeted to be US$500–550. In order to achieve these targets, the government anticipates that it will need foreign assistance equivalent to 17 per cent of its GDP — a further reflection of the extent to which the Lao economy has become dependent on external support. Forecasting GDP growth in Laos is a difficult exercise, given that 50 per cent of national income stems from agriculture, and the agricultural sector employs about 90 per cent of the labour force. Consequently, adverse weather conditions and other natural disasters can have a marked impact on agricultural output, and throw out economic forecasts accordingly. In late 2001, the ADB issued a new Country Strategy Programme for Laos, which aims to assist the Lao Government in halving poverty levels in Laos by 2005, and permit the country to leave behind its LDC status by 2020. Over the next five years, the ADB is to focus its attention on rural development and market linkages, human resource development, regional integration, private sector development, and sustainable environmental management, and concentrate its activities in the northern highlands, as well as Savannakhet province in the south. (The latter is also to be involved in an “East-West Economic Corridor” that the ADB wishes to develop, linking northeastern Thailand with the coast of central Vietnam.) In April 2001, after an extended hiatus, the International Monetary Fund (IMF) resumed lending to Laos, with a three-year US$40.2 million loan under its Poverty Reduction and Growth Facility (PRGF). The PRGF aims to support a country’s macroeconomic stability and

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reduce its poverty levels “through growth with equity”. This loan has a number of conditionalities attached to it, and future tranches of the loan will presumably be dependent on Laos making tangible progress in various areas. The IMF is expecting to see a number of positive developments in the country’s economic sphere, including reforms to the banking and enterprise sectors, promoting private sector firms, and improvements to public finances. (With regard to the latter, Laos is expected to introduce a new value-added tax in 2003.) The IMF wishes to see the country’s state-owned banks restructured and recapitalized, their lending practices overhauled, loans reclassified, independent audits conducted, and the cessation of so-called “policy lending” (that is, loans directed by the government, where the normal concerns for collateral are not given full consideration). It is estimated that non-performing loan levels at the country’s three large state-owned commercial banks are about 70 per cent of total loans, with an aggregate value equivalent to 3 per cent of Laos’ GDP. Vientiane has agreed with the IMF that losses incurred by the country’s twenty-four largest state firms are to be tackled through upward price adjustments, and efforts to “commercialize” the operations of these firms is to be revived. (In the early 1990s, the Lao Government was surprisingly successful in divesting itself of most small and

Laos: Selected Economic Indicators, 1997–2003F

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million)

1997

1998

1999

2000

2001E

2002F

2003F

6.9 8.1 7.5 7.0

4.0 9.2 5.5 3.1

7.3 7.9 6.9 8.2

5.7 7.5 6.2 5.1

6.0 7.5 6.1 5.3

6.5 7.2 6.1 6.0

7.0 7.5 6.2 6.5

336.8 301.5 552.8 554.4 –216.0 –252.9

335.9 437.0 –101.1

350.0 460.0 –110.0

375.0 500.0 –125.0

400.0 600.0 –200.0

312.7 648.0 –335.3

Inflation/CPI average (% change)

19.3

87.4

134.0

27.0

9.0

7.5

—

Gross external debt (% of GDP)* Debt service ratio (as % of goods and services imports) Foreign exchange reserves (US$ billion)

60.9 7.3 136

95.2 9.7 112

89.4 10.4 106

73.4 11.2 140

72.0 11.4 152

70.0 11.3 155

— — —

Interest rate (short-term loans) M2 growth (% change)

20–27 65.8

30–36 113.3

30–34 78.4

26–30 45.7

— 20.0

— 20.0

— —

Exchange rate at year-end (Kip/US$1)

2,135

4,274

7,600

8,140

7,650

7,500

7,500

* Figures exclude Laos’ quite considerable rouble-denominated debts. SOURCES: ADB; IMF; Economist Intelligence Unit (EIU); and author’s estimates.

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ECONOMIC OUTLOOK

medium-sized state firms, primarily through leasing, but has insisted that the remaining twenty-four large state firms are of strategic importance, and cannot be divested.) In tandem, private sector firms are to receive support for their development. Laos has until 2005 to meet its requirements under the ASEAN Free Trade Area (AFTA), and — like neighbouring Vietnam — also seeks to gain membership of the World Trade Organization (WTO). The IMF anticipates that real GDP growth in Laos will reach 7 per cent by 2003, comfortably ahead of the country’s population growth rate (about 2.5 per cent per annum). It is anticipated that official foreign exchange reserves are to be gradually increased, to a level where they are equivalent to at least three months of import cover. The flexible exchange rate is to be maintained, and exchange rate controls eased, with the margin between the bank and parallel exchange rate markets not exceeding 2 per cent. If successfully enacted, the combined impact of the new ADB and IMF strategies, together with other external assistance agencies, could prompt a resumption of meaningful economic reform and business liberalization efforts in Laos. The appointment in April 2001 of Bounnyang Vorachit as the new Prime Minister of Laos (see also the Laos section in the Political Outlook part of this volume) is also perceived by some observers as a possible prelude to renewed economic reform efforts. However, it remains to be seen whether current optimism on this front will be proved accurate. Whilst Laos’ economic problems are often perceived to be typically those of a transitional economy, gradually making its way from a centrally planned system to a more market-oriented one, this is only part of the picture. The leadership’s attempt to create a socialist economic system in the late 1970s was a relatively brief and rather half-hearted affair. Similarly, the subsequent attempts at economic reform have also reflected a degree of leadership ambivalence at times. Vientiane has become somewhat accustomed to receiving external assistance that permits Laos’ small economy to continue, if not thrive, and a general lack of urgency seems to permeate government economic policy-making and its implementation. Arguably, Laos’ most fundamental economic challenges are those of a less developed country, with a population of about 5.2 million people, spread sparsely over 236,000 square kilometres (of which 47 per cent is forested), linked by an inadequate transport system that spans the country’s very challenging terrain. As a result, transaction costs are high, domestic markets are difficult to develop, and subsistence agriculture remains the principal endeavour for many, operating in a non-monetized economy. Since the exodus of many urban Lao after the fall of the Royal Lao Government in 1975, Laos still faces a paucity of skilled and well-educated human capital. An additional challenge that confronts the Lao economy is the legacy of U.S. bombing over large parts of the country before 1975. Unexploded ordnance (UXO) is still evident in thirteen of Laos’ seventeen provinces, and currently contaminates up to half of the total land area. In addition to its continued toll on civilians, the presence of UXO constrains agricultural activity in large parts of the country, and inhibits food security for many Lao. Whilst ridding Laos of UXO will probably take several decades, Vientiane aims to rid the country of all opium production and swidden agricultural methods (sometimes referred to as “slash-and-burn”) by 2005.

84 © 2002 Institute of Southeast Asian Studies, Singapore

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Myanmar today is politically peaceful and stable, economically vibrant and dynamic. It is on the threshold of rapid economic growth. — General Than Shwe, Chairman of SPDC, 26 September 2001.

Myanmar

T

o forecast the future economic performance of Myanmar’s economy, it is necessary to look at both the recent past performance, and the present economic policy of the country. First, one should briefly look at Myanmar’s economic successes and failures since it began the transformation process from a command economy into a marketoriented system. The Myanmar Government, known as the State Peace and Development Council (SPDC), claimed that their first Short-Term Four-Year Plan (1992/93 to 1995/96) was more successful than expected. It achieved an average annual growth rate of 7.5 per cent, compared with the targeted rate of 5.1 per cent. This performance was possible because of three factors: the growth rate of the base year was very low; progressive economic reform measures had been implemented; and good weather boosted the agricultural sector, the dominant sector in Myanmar’s economy. After the successful first Four-Year Plan, the government introduced the Short-Term Five-Year Plan (1996/97 to 2000/2001). It is officially claimed that this plan was also successful, because it achieved an average annual growth rate of 8.4 per cent — much better than Myanmar’s regional neighbours. The government has provided several reasons for the historic growth of the economy, including strong growth in almost all the productive sectors, with the exception of forestry and construction sectors. The growth rates of the services and trade sectors were also higher than that of the original target rates, according to the official report. Total foreign trade increased 13.8 per cent between 1999 and 2000, with exports and imports growing by about 29 per cent and 7 per cent respectively. Rice exports alone grew from 63,700 tons in 1999 to 110,000 tons in 2000. During the period January — August 2001, Myanmar exported about 300,000 tons of rice. Based on these figures, the government claimed that within the past five years, the economy achieved an average annual growth rate of 8.4 per cent. There was a possible surge in the growth rate in 1999/2000, as a result of such factors as: the inclusion of informal production into the national accounting matrix; land reclamation; and fairly good weather, which boosted the paddy harvest. Moreover, there was a dramatic increase in garment exports to the United States and the European Union, even though economic sanctions were imposed on the country. However, several credible sources, such as the Asian Development Bank, the Economist Intelligence Unit (EIU), and even the government’s own Deputy Planning Minister Brigadier General Zaw Tun, have disputed the official GDP (gross domestic product) figures. (General Zaw Tun was subsequently dismissed for saying that the government figures were over-estimated.) In particular, GDP figures for 1999/2000 and 2000/2001 are disputable, as these figures surpassed double digits, at 10.9 and 13.2 per cent respectively. Many observers found it remarkable that even the GDP growth rates of China, which is supposed to be the strongest economy in the region at present, were markedly lower than that of Myanmar.

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The International Monetary Fund and EIU reports have a common opinion; the economy of Myanmar grew about 5–6 per cent in recent years — about half the official rate. They have several reasons to believe this. First, there has been some back-tracking in economic reforms, such as an export and import ban on many items, and the raising of export duties. There are also more restrictions in the foreign exchange regime, and the withdrawal of licences from selected money-changers. Meanwhile, the highly overvalued official exchange rate remains intact. Despite the very low official figure for inflation, prices of basic food items — such as cooking oil and meat, and other items such as fuel — have increased markedly, not in single-digit, but in triple-digit rates. There was also a widening of the trade deficit, which worsened the current account balance. Moreover, foreign direct investment (FDI) has declined drastically since 1996, mainly because of the capping of some reform measures, trade and investment sanctions from the West, and the regional economic crisis. At present, the main economic strategy is to bring in as much land as possible under cultivation, with the aim of achieving self sufficiency. However, to boost the economy as planned, Myanmar needs external assistance, because of a lack of foreign exchange, which is expected to flow in only when political stability is established. (During the last decade, the country received official development assistance [ODA] of about US$197.4 million, from South Korea, the Organization of Petroleum Exporting Countries [OPEC] and the United Nations Development Programme [UNDP].) One positive piece of news is that Japan is to provide US$28 million in aid for the renovation of the Baluchaung hydroelectric plant in Kayah state. What will be the economic outlook for Myanmar in the coming years? The government has introduced a very ambitious Ten-Year Plan (2001/2002 to 2010/2011), which is divided into two short-term Five-Year Plans. The objective is to double GDP growth in ten years, with an average annual growth rate of 7.2 per cent — the average annual growth rate achieved during the recent four years. Per capita GDP is projected to increase at an average annual growth rate of 5.1 per cent. Will it be possible to achieve this target? Self-sufficiency remains the main economic policy, employing the land reclamation drive. With enough rain in 2001, rice production is expected to grow to 13 million tons, which means that the country could export at least 1 million tons of rice. However, this depends on essential inputs, as there is a lack of capital to acquire the necessary quantities of seeds, fertilizers, and pesticides. The industrial sector, particularly mining and energy, will grow, but not as high as the official estimates. Output from the Yadana and Yetagun offshore gas fields will continue to increase, to meet demand from Thailand. In addition, a recent fivefold salary increase for one million civil servants should stir domestic demand. On the other hand, the construction sector will remain weak, and inflation will increase further, as prices of fuels and edible oil are currently rising at three-digit rates, and money supply (M2) is growing around 30 per cent annually. Low foreign reserves, equivalent to two months of imports, and continued widening of the trade and current account deficits will drag down the growth rates projected by the government, as a result of restrictions on foreign trade. Declining FDI and a deep depreciation of the local currency (the current market exchange rate is about 700 kyats to the U.S. dollar, whereas the official rate is just 6.5 kyat) might also affect the country’s economic performance in the short term. Furthermore,

86 © 2002 Institute of Southeast Asian Studies, Singapore

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Myanmar: Selected Economic Indicators, 1997–2003F 1997

1998

1999

2000

5.7 5.7 5.1 8.9 6.6 3.7

5.8 5.8 5.0 6.6 6.7 2.8

10.9 10.9 5.8 13.7 9.2 2.5

13.2 6.2 5.5 20.6 13.3 10.5

975 2,107 –1,132

1,065 2,451 –1,386

1,125 2,116 –991

Inflation CPI average (% change)**

33.9

49.1

Gross external debt (% of GDP)** Foreign exchange reserves (US$ million)**

1.08 250

Six month interest rate (% per annum)*** M2 growth (% change)**** Exchange rate at year end (Official) (Market)

GDP growth (% change) (Official) (EIU) (Regional Outlook) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million)

2001

2002

2003

7.2* 5.3 5.0 14.7* 9.0* 4.4*

7.2* 5.6 4.5 14.7* 9.0* 4.4*

7.2* — 5.0 14.7* 9.0* 4.4*

1,309 2,355 –1,046

1,400** 2,200** –800

1,600** 2,200** –600

— — —

11.4

4.3

13.0**

16.0**

—

1.14 315

1.15 266

1.05 280

— —

— —

— —

— 29.6

12.5 28.5

10.5 27.2

9.5 30.7

9.5 —

— —

— —

6.2 241

6.2 334

6.3 341

6.3 374

6.7 415

6.7 461

6.7 500

* Programme of Action for 2001-2010 ** EIU Country Report, August 2001. *** EIU, Deposit rate for second quarter **** IMF Report, January 2001. SOURCES: Ministry of National Planning and Economic Development, May 2001; Asian Development Outlook; IMF Country Report No. 01/18.

the development of the private sector is not particularly encouraging, as there is no level playing field between private firms and state-owned enterprises. At the same time, traderelated regulations are being implemented off and on, without any prior notice. In sum, GDP growth rates for 2002 and 2003 are forecast to be 4.5 per cent and 5 per cent respectively, in spite of the lack of new economic reform measures and current political uncertainties in the global, regional, and domestic spheres.

A

fter a slowdown in the economic reform process during the latter part of the 1990s, there were some indications that a revived reform and business liberalization programme was beginning to take shape in Vietnam during the latter part of 2000 and 2001. As a result, investor sentiment towards the country picked up markedly after the doldrums of the 1996–99 period. This change in sentiment was largely derived from a

Vietnam

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ECONOMIC OUTLOOK

handful of encouraging signs. First, a new Enterprise Law was introduced in early 2000, making it easier for private firms to commence and conduct business in an economy that has generally been dominated by state enterprises. Secondly, in July 2000, Vietnam finally took a leap of faith in opening its first and long-awaited stock exchange, located in the southern commercial hub of Ho Chi Minh City. Thirdly, an overdue trade deal with Washington, granting Vietnam normal trading relations status with the United States, was also agreed in the same month. Fourthly, there have also been some improvements in the legislation pertaining to foreign investment. Finally, in the weeks leading up to the Ninth Party Congress of April 2001, the International Monetary Fund (IMF) announced that it was resuming its lending programme to Vietnam after a five-year hiatus, providing an important psychological boost. The IMF loan, of US$368 million, released in tranches over three years, is being conducted under a poverty reduction and growth facility programme. Future tranches will be dependent on Vietnam making tangible progress on various economic reform fronts, including: increasing the level of competition and business liberalization, banking sector recapitalization, restructuring the four large state-owned banks and major state-owned firms, maintaining fiscal and credit discipline (including an end to so-called “policy loans”), and improvements to both the existing foreign exchange and trade regimes. The IMF anticipates that gross domestic product (GDP) growth in Vietnam will rise to 7 per cent by 2003, and that inflation will stay below 5 per cent. The current account deficit is to be kept at around 2–3 per cent of GDP, and foreign exchange reserves will rise to slightly more than nine weeks of import cover (currently around eight weeks, or US$3.6 billion). Vietnam’s budget deficit is to stay at about 3 per cent of GDP, by improving the performance of the four big state-owned banks, curbing losses in the state enterprise sector, improving fiscal spending efficiency, and improving tax revenue policies. The IMF also clearly wishes to see Vietnam’s “equitization” programme (the partial divestment of state-owned firms) accelerated, and the enforcement of better lending discipline in the banking sector. Monetary policy is to be tightened, and the “crawling peg” foreign exchange system is to be gradually relaxed. The unveiling of this new loan by the IMF has been regarded as a particularly good sign, as the previous loan programme was halted in mid-term, after the IMF became disappointed with Hanoi’s progress on the economic reform front. It seems that the IMF now senses that the general pace of economic reform in Vietnam has picked up since 1999, and that key structural reforms have gained some momentum since 2000. In particular, the IMF has noted improved access to credit for small- and medium-sized enterprises, and some foreign trading rights have been liberalized, as well as other positive developments noted earlier. At the Ninth Party Congress, the leadership set itself some fairly ambitious — but not impossible — economic targets for the 2001–2010 period, including a doubling of Vietnam’s GDP over the next ten years. (Vietnam’s GDP roughly doubled during the previous decade.) The agricultural sector is being asked to record average annual growth of 4–4.5 per cent, amounting to 16–17 per cent of GDP by 2010. The industrial sector is expected to grow by 10–15 per cent per year on average, and account for 40–41 per cent of GDP by 2010 (and employ about 23–24 per cent of the work-force). The service sector is expected to register 7–8 per cent annual growth, representing 42–43 per cent of total GDP by 2010 (and

88 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6 INDOCHINA AND MYANMAR

Vietnam’s GDP Growth, 1990–2000 and 2001–2010 Compared Average Annual Growth Rate 1990–2000 record Agriculture and forestry Industry (including construction) Services

2001–2010 target

4% 10% 7%

4–4.5% 10–15% 7–8%

SOURCES: “Strategy for Socio-Economic Development” , Report to the Ninth Party Congress; and Vietnam Development Report 2001.

Vietnam’s GDP Breakdown, 1991–2010 Proportion of Total GDP

Agriculture and forestry Industry (including construction) Services

1991

2000

2010

38.7% 22.7% 38.6%

24.3% 36.6% 39.1%

16–17% 40–41% 42–43%

SOURCE: “Strategy for Socio-Economic Development” , Report to the Ninth Party Congress.

26–27 per cent of the work-force). These are fairly bold targets to sustain over a ten-year period, and it remains to be seen if they can be achieved. Much will depend on the country’s success in further developing its overseas trade and foreign investment inflows, including meeting its commitments under the ASEAN Free Trade Area (AFTA), and getting the trade deal with the United States fully implemented. Under AFTA, Vietnam is committed to reduce tariffs on most imports to 20 per cent by 2003, and between 5 and zero per cent by 2006. However, increasing foreign investment inflows and export volumes will also depend on events beyond Vietnam’s control. The current global economic environment does not provide a conducive backdrop for foreign direct investment activity in relatively risky emerging markets, nor robust demand for Vietnam’s principal exports. For example, the country’s remarkable success in massively increasing its coffee crop (and coffee exports) is one of the main factors behind the marked global decline in coffee prices of recent years. At the time of writing, crude oil prices were also dropping in expectation of reduced demand. While recent developments appear to signal that Vietnam is keen to resume its economic reform and expansion plans, it is far from clear whether the international business community has the volition to play a supporting role at present. Although Vietnam is certainly not

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wholly dependent on foreign investment and external trade for its economic well-being, there is little doubt that its economic growth targets for the 2001–2010 period would be impossible to achieve through domestic resources alone. During much of the 1990s, foreign investment played a critical role in Vietnam’s economic advancement and industrialization, not only in terms of capital, but also in introducing new skills, technology, managerial expertise, access to foreign markets, and so on. Although foreign-invested companies currently employ less than 1 per cent of the total work-force in Vietnam (about 350,000 jobs), they cumulatively account for about 27 per cent of non-oil exports (and 48 per cent of total exports including crude oil), and 35 per cent of the country’s total industrial output. They represent almost 13 per cent of Vietnam’s GDP, and contribute 25 per cent of all tax revenues (about US$280 million). According to the United Nations Conference on Trade and Development (UNCTAD), for every US$1,000 of Vietnam’s GDP, FDI inflow pledges in 1999 amounted to slightly over US$56 — higher than Thailand (US$49), Malaysia (US$47), China (US$41), and the ASEAN average (less than US$21). Much of this investment activity has been based on “greenfield”

Vietnam: Selected Economic Indicators, 1997–2003F 1997

1998

1999

2000

2001E

2002F

2003F

8.2 12.6 7.1 4.3

4.4 7.3 3.0 2.8

4.7 7.6 2.1 5.2

6.1 9.7 4.4 3.6

6.4 9.6 4.9 4.2

6.0 9.0 5.3 4.3

6.5 9.1 5.9 4.5

Exports (US$ million) 8,900 Imports (US$ million) 11,270 Trade balance (US$ million) –2,370 Balance of payments on current account (% of GDP) –6.5

9,360 11,500 –2,140 –4.1

11,540 11,622 –82 4.4

14,308 15,200 –892 2.0

16,054 16,598 –544 –0.1

17,498 18,341 –843 –3.3

20,071 20,597 –526 –1.9

3.1

9.2

4.1

–1.7

–0.1

1.2

2.5

Gross external debt (% of GDP) Debt service (% of GDP) Foreign exchange reserves (US$ billion) Reserves in weeks of imports

74.8 5.4 1.9 8.0

75.6 6.4 1.8 7.0

71.6 7.3 2.7 9.1

39.6 6.2 3.0 9.1

41.4 8.8 3.6 10.8

— 7.6 — 10.8

— 6.4 — 11.5

Central government expenditure (% of GDP) Central government revenue (% of GDP)

24.8 20.8

22.5 20.2

21.2 19.8

22.0 20.4

22.0 20.0

— 20.0

— 19.7

M2 growth (% change)

26.1

25.6

39.3

39.0

22.8

—

—

13,344 19,922

14,157

14,900

15,600

16,000

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change)

Inflation/CPI average (% change)

Exchange rate at year-end (Dong/US$1)

11,706

SOURCES: IMF; ADB; World Bank; EIU; CSFB; and author’s estimates.

90 © 2002 Institute of Southeast Asian Studies, Singapore

THE ASEAN-6 INDOCHINA AND MYANMAR

projects, effectively generating new production capacity. However, global over-capacity in various sectors at present may constrain new foreign investor activity in Vietnam, as long as world economic growth remains anaemic. The enactment of the new Enterprise Law should help — but by no means fully create — a more level playing field between state and private companies in Vietnam, and may bode well for the domestic economy in the long term. The leadership continues to officially support the development of a multi-sector economy, comprising various ownership forms. However, Hanoi has made it clear that the “leading role” of the state enterprise sector is to remain. Indeed, the Ninth Party Congress envisaged an enhancement of the state sector, “governing key domains of the economy; state enterprises are to be renewed and developed”. The development of the fledgling stock market has not been a complete success since its opening in Ho Chi Minh City in mid-2000. More than a year later, just seven former stateowned enterprises were listed on the exchange, and the aggregate market capitalization remained around US$100 million. While interest among retail investors in buying shares has been surprisingly strong in Ho Chi Minh City, the managers of “equitized” firms have been somewhat reluctant to have their shares traded on the stock market, partly because of the disclosure requirements that come with a stock market listing. As yet, no local private firm or foreign-invested enterprise has been allowed to list its shares on the stock market, although this may only be a matter of time. Some foreign observers perceive the recent appointment of Nong Duc Manh (formerly the chairman of the National Assembly) as Secretary-General of the Vietnam Communist Party as a potentially good sign for economic reform. However, it must be remembered that decision-making within Hanoi’s senior leadership is derived through consensus, and thus, the impact of changes in specific personalities need not necessarily result in major policy shifts (or changes in pace). That said, the recent agreement signed with the United States on trade and investment, several “conditionalities” attached to the new IMF loan programme, and various existing commitments, such as the AFTA and the AIA (ASEAN Investment Area), all combine to create a fairly comprehensive economic reform and business liberalization agenda for Vietnam. In order to meet all these commitments, Vietnam will have to deliver various initiatives, and thus, to some extent at least, the country’s near-term economic reform “road map” has been identified. Hanoi’s longer term aim is for Vietnam to be an industrialized economy by 2020. Hanoi has also indicated its desire to gain admission to the World Trade Organization (WTO), which will probably be its principal aim in the external trading sphere now that the bilateral trade agreement with the United States has been ratified by both Washington and Hanoi. The long-term prognosis for the Vietnamese economy is still generally a good one, although the pace of growth depends in part on a broadly conducive global and regional environment, as well as willingness by the government to move ahead with various economic reform measures.

91 © 2002 Institute of Southeast Asian Studies, Singapore

SELECTED SOURCES OF DA TA Asian Development Bank, Asian Development Outlook Asian Wall Street Journal Asiaweek Bangkok Post (Thailand) Borneo Bulletin (Brunei) BruNet (Brunei) Cambodian Daily, Weekly Review (Cambodia) CEIC Data, DRI Database Business Times (Singapore) Economist Intelligence Unit, Country Reports The Edge (Malaysia) Far Eastern Economic Review International Monetary Fund, Staff Country Reports International Monetary Fund, World Economic Outlook Kompas (Indonesia) Lao Dong (Vietnam) Manila Times (Philippines) Nation (Thailand) New Light of Myanmar (Myanmar) New Straits Times (Malaysia) Philippine Daily Enquirer (Philippines) Phnom Penh Post (Cambodia) Selected Monthly Economic Indicators (Myanmar) Straits Times (Singapore) Sydney Morning Herald Tempo (Indonesia) The Economist Utusan Malaysia (Malaysia) Vientiane Times (Laos) Vietnam News

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This chapter is reproduced from Regional Outlook: Southeast Asia 2002–2003 , edited by Nick J. Fr eeman and Tin Maung Maung Than (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced, translated, 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 < http://www.iseas.edu.sg/pub.html >

THE CONTRIBUTORS Political Outlook 2002–2003 Emiliano P. Bolongaita, Jr., is Assistant Professor of Public Policy at the National University of Singapore. He contributed the country section on the Philippines. Derek da Cunha is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Singapore. Nick J. Freeman is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Laos. John Funston is a Visiting Fellow at the Australian National University. He contributed the country section on Thailand Russell Heng is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Vietnam. A.V.M. Horton is an analyst based in Britain. He contributed the country section on Brunei. K.S. Nathan is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Daljit Singh is a Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the overview section on geopolitical trends in the Asia-Pacific. Anthony L. Smith is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Indonesia, and the section on East Timor. Tin Maung Maung Than is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Cambodia and Myanmar.

Economic Outlook 2002–2003 Rajenthran Arumugam is a Fellow at the Institute of Southeast Asian Studies. He contributed the section on reforming the laws and legal institutions of Indonesia. Soedradjad Djiwandono is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He co-contributed the country section on Indonesia. Nick J. Freeman is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the introduction to the ASEAN-6 economies (including the sections on China and the U.S. economy), and the country sections on Laos, Singapore, and Vietnam. Denis Hew is a Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Brunei and Malaysia. Lee Hock Guan is a Fellow at the Institute of Southeast Asian Studies. He contributed the section on Malaysia’s EPF scheme. Sakulrat Montreevat is a Fellow at the Institute of Southeast Asian Studies. She contributed the country sections on the Philippines and Thailand. Mya Than is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Cambodia and Myanmar. Adrian Panggabean was a Southeast Asian Economist at Nomura Singapore. He co-contributed the country section on Indonesia. Ramkishen Rajan is a Visiting Research Fellow at the Institute of Southeast Asian Studies and a Lecturer at the School of Economics, University of Adelaide, Australia. He contributed the section on Singapore and the New Regionalism. This chapter is reproduced from Regional Outlook: Southeast Asia 2002–2003 , edited by Nick J. Freeman and T in Maung Maung Than (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced, translated, 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 < http://www.iseas.edu.sg/pub.html >

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