Regional Outlook: Southeast Asia 2006-2007 9789812306630

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REGIONAL OUTLOOK

Southeast Asia 2006–2007

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the manyfaceted problems of stability and security, economic development, and political and social change. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publications, an established academic press, has issued more than 1,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publications works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

REGIONAL OUTLOOK Southeast Asia 2006–2007 Editorial Committee Chairperson K. Kesavapany Editors Russell H.K. Heng Rahul Sen Production Editor Tan Kim Keow

Southeast Asia 2006–2007

INSTITUTE OF SOUTHEAST ASIAN STUDIES

First published in Singapore in 2006 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://bookshop.iseas.edu.sg 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.

© 2006 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             sls91-209988 ISSN 0218-3056 ISBN 981-230-370-7 Typeset by International Typesetters Pte. Ltd. Printed in Singapore by Seng Lee Press Pte. Ltd.

contents

Preface K. Kesavapany

vii

Introduction Russell H.K. Heng and Rahul Sen

ix

POLITICAL OUTLOOK The Asian Security Environment

3

■ Terrorism in the Region: Changing Alliances, New Directions

8

■ The Threat of Maritime Terrorism and Piracy

12

■ The Inaugural East Asian Summit: The First Step in a Long Journey

16

The ASEAN-10

19

Brunei Darussalam

19

Cambodia

23

Indonesia

27

Laos

32

Malaysia

36

Myanmar

40

Philippines

45

Singapore

49

Thailand

53

Vietnam

57

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contents ECONOMIC OUTLOOK Regional Economic Trends

65

■ The Future for Asia’s Low-Cost Carriers

74

■ The End of Textile Quotas: Implications for ASEAN Economies

77

■ An Overview of Foreign Direct Investment Legal Rudiments in ASEAN

81

The ASEAN-10

85

Brunei Darussalam

85

Cambodia

88

Indonesia

94

Laos

99

Malaysia

105

Myanmar

111

Philippines

121

■ Competition Drives Growth: The Liberalized Telecommunications Sector in the Philippines

122

Singapore

129

Thailand

134

Vietnam

140

Selected Sources of Data

145

The Contributors

147

preface

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egional Outlook offers a succinct analysis of political and economic trends in Southeast Asian countries and their prospects for the forthcoming two years. Scholarly, yet written in an accessible style, it is designed for the busy executive, professional, diplomat, journalist, and interested observer. This annual publication, which the Institute launched in 1992, has built up a loyal following of readers in Singapore and beyond. Last year’s Regional Outlook warned that terrorism in the region would not recede any time soon. The attacks on Bali on 1 October 2005 underlined the continuing deadliness of this threat. Southern Thailand is another site of the destabilizing effects of terrorism. The terrorist attacks there not only eroded Thailand’s sense of domestic security but also affected bilateral relations between Thailand and Malaysia. Apart from terrorism, the member states of the Association of Southeast Asian Nations (ASEAN) have had to contend with various natural disasters. The Boxing Day tsunami of 2004 is etched deeply into regional memory. The looming possibility of the avian influenza turning into a pandemic is an issue that calls for the closest regional and global cooperation. On the bright side, an East Asian Summit spearheaded by ASEAN and scheduled for December 2005 is the first step towards an integrated Asian community. However, any realistic appraisal needs to acknowledge hurdles ahead. Just five years into the new millennium, Asia’s many challenges are clear. On the economic front, a moderate economic slowdown is expected in Southeast Asia over the next two years. The main risks that could affect the region’s economic outlook in 2006–2007 are high oil prices, China’s overheating economy, the possibility of an avian flu pandemic, and rising global imbalances because of the financing of the US cur-

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preface rent account deficits by excess savings in East Asia. Sustained high oil prices, in particular, are a major risk to regional economic growth. If oil prices continue to rise, inflationary pressure will persist, eroding business and consumer confidence in the region. In August and September 2005, hurricanes Katrina and Rita swept through the Gulf coast of the United States, disrupting global oil production and causing oil prices to shoot up sharply. Although the tsunami that hit the coastlines of many countries in South Asia and Southeast Asia in 2004 appears to have had limited macroeconomic impact on Southeast Asia, the nature of the devastation wrought may have serious repercussions on longer-term regional development. This is because the damage caused by the tsunami largely has been confined to the rural rather than the industrial areas of affected countries. While ASEAN continues to grapple with speeding up economic integration, it took an important step with the Vientiane Action Programme released at the 10th ASEAN Summit in November 2004. This step forward is to have an ASEAN Charter to strengthen the grouping and give it a legal standing. The Charter will lay the foundation of a more rule-based and legal institutional structure for ASEAN. The Charter could also provide the means to expedite regional economic integration, particularly through transforming the region into an ASEAN Economic Community by 2020. However, what shape the Charter takes finally and whether it facilitates regional economic integration remain to be seen. Regional Outlook 2006–2007 will walk you briskly through the problems faced by the region collectively and the particular problems facing its member states. The editors, Russell H.K. Heng and Rahul Sen, have brought in new writers to provide fresh perspectives on emerging regional trends and issues. For this, I wish to thank all the contributors and the two editors. K. Kesavapany Director Institute of Southeast Asian Studies 15 November 2005

Introduction

A

s is the long-standing pattern in the ASEAN region, politics in some of its member countries are rambunctious and unpredictable while in others, nobody is expecting any significant change. This picture emerges in the ten country reports on politics. In the Philippines, President Gloria Macapagal-Arroyo is fending off calls to impeach her. In Thailand, Prime Minister Thaksin Shinawatra, having won an impressive election victory in early 2005, is fast losing his hallmark lustre as an effective leader by the end of the year because of his failure to come to grips with the violent religious/ethnic problems in the country’s deep south. Indonesia’s President Susilo Bambang Yudhoyono, one year into his term, gets a mixed report card, which is perhaps what any Indonesian president can realistically expect given the complexities of the country’s problems. That is to say this President is not doing too badly. The new prime ministers of Malaysia and Singapore, two places where politics are rather more placid, are busy reinventing their respective country. Nobody expects the unexpected here. The even quieter sultanate of Brunei is actually experimenting with some rather bold political initiatives. These are exciting times for the country; however, very few seem to be curious about the Bruneians. Among the new ASEAN members, Vietnam is having its Communist Party Congress in 2006 and so is Laos. But the opacity of their politics perhaps hides no more than intra-elite squabbles over how to share power and the perks that come with power. Despite pundits pointing to reformists versus conservatives rifts, the leaders of these countries probably enjoy a stronger consensus than given credit for. That consensus is for the country and themselves to get rich quick.



introduction Given this mindset, development-friendly policies and politics are safely guaranteed for quite a while in these places. Cambodia continues to muddle through and the military regime in Myanmar remains in its political bunker while sorting out how to retain power, give some space to the opposition, and get round international pressure. Southeast Asia continues to face intra-regional problems that have no solutions in sight. The most dramatic of these would be that of terrorism. Terrorism struck a second blow at Bali on 1 October 2005. In South Thailand, terrorism committed in the name of Islam is going to get worse before it gets better. So far, all terrorist attacks in the region are land-based but shipping in the Straits of Malacca so vital to global trade can also be a tempting target. This issue of Regional Outlook has two thematic articles on the challenge of terrorism on land and at sea. At year-end in 2005, ASEAN leaders will meet the leaders of some dialogue partners in a historic East Asia Summit. Expanding regional cooperation beyond ASEAN is a necessity given the way global political and economic powers are being reconfigured. But integrating the very different member states of ASEAN into a more effective community has never been easy, let alone forging a bigger Asian community. A thematic article in the Political Outlook section takes a hard look at how far an East Asian Summit can go. External macroeconomic shocks such as rising oil prices, China’s overheating economy, the possibility of a bird flu pandemic and rising global imbalances due to the financing of US current account deficits through excess savings in East Asia continue to remain major risk factors for the ASEAN economies. Continued high oil prices, in particular, have clearly dampened economic growth in the region, except for the oil-rich sultanate of Brunei. Oil dependent countries such as Singapore, Thailand and the Philippines have been particularly vulnerable. Indonesia was also badly affected as its huge fuel subsidies were causing severe downward pressure on the rupiah. Nevertheless, the country’s currency has begun to stabilize with significant hikes in domestic gasoline and diesel prices imposed by the Indonesian government.

introduction

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If oil prices continue to rise, inflationary pressures are likely to continue to persist, eroding business and consumer confidence in the region. The disruption in global oil production caused by hurricanes Katrina and Rita in the Gulf coast of the United States during August and September 2005 has already spiked oil prices to a new high. Furthermore, although the Asian tsunami that swamped the coastlines of many countries in South Asia and Southeast Asia on 26 December 2004 appears to have had limited macroeconomic impact on Southeast Asia, the nature of the devastation may have serious repercussions on longer-term regional development, since the damage caused by the tsunami has largely been confined to the rural rather than the industrial areas of affected countries. Meanwhile, there is also good news trickling in. Southeast Asia saw a significant rise in inflows of foreign direct investment (FDI) — from US$17.4 billion in 2003 to US$25.7 billion in 2004. The main beneficiaries of the higher inflows were Singapore, Malaysia, Indonesia, Myanmar, Vietnam, Cambodia, and the Philippines. After several years of disinvestments, Indonesia’s business environment appears to have finally turned around — Southeast Asia’s largest and most populous country received US$1 billion worth of FDI in 2004. The thematic articles in the Economic Outlook section take a hard look at the implications for textiles trade in ASEAN after the abolition of the Multi-Fibre Agreement and the impact of low-cost air carriers on the airline industry in Southeast Asia. The somewhat lesser known success story of liberalization in ASEAN involving the telecom sector in the Philippines is also highlighted in this year’s issue. Russell H.K. Heng Rahul Sen Editors 15 November 2005

the asian security environment

political OUTLOOK



THE ASIAN SECURITY ENVIRONMENT By Mely Caballero-Anthony

More of the Same As Asia grapples with a growing list of new security threats, old issues continue to affect the broad security environment in Southeast Asia. The threats of terrorism were raised a few notches higher with the suicide bombings in Bali on 1 October 2005. The Bali attacks — which came a few days before the third anniversary of the Bali 2002 bombings — were a grim reminder of the potent threat of terrorist activities, despite tightened security measures instituted by governments and strengthened regional and international cooperation to combat terrorism. What is significant, however, with the 2005 terrorist attacks are the emergence of new disparate groups, some of which are reportedly factions of Jemaah Islamiyah (JI) who, while adopting similar tactics of suicide bombings, act independently of the Jemaah Islamiyah (JI). Terrorist targets also appeared to have shifted away from western-linked establishments to local ones (see the article “Terrorism in the Region: Changing Alliances, New Directions” on page 8). The mutations of other terrorist networks have put a new face to the festering problem of terrorism in the region, and highlights the extent to which little is still known about the chimerical nature and extent of terrorist networks operating here. The problems have also been compounded by the elusive peace in the troubled regions of southern Philippines and southern Thailand. Against the spectre of spawning networks, it becomes all the more crucial for states in the region to intensify cooperation not only in combating terrorism but also in helping to seek peaceful settlements to sectarian and ethnic conflicts that continue to beleaguer some states in Southeast Asia.



political Outlook In East Asia, beyond the persistent threats of terrorism, the concerns about North Korean nuclear proliferation got a much-needed respite after the successful conclusion of the six-party talks in Beijing in September 2005. The September talks ended a three-year stand-off and a hardening of positions taken by both the United States and North Korea on the issue of denuclearizing the Korean peninsula. The stalemate began in January 2003 when Pyongyang announced its withdrawal from the Treaty on the Non-Profileration of Nuclear Weapons (NPT). The announcement drew a sharp rebuke from the Bush administration that insisted on the dismantling of North Korea’s nuclear capabilities before any talks could proceed. The breakthrough finally came when China, acting as the intermediary, facilitated the participation of North Korea in the multilateral framework of the six-party talks that started in April 2003. The talk brought together the United States, China, Japan, Russia, and the two Koreas. With the growing threats of Weapons of Mass Destruction (WMD) confronting the region, Pyongyang’s agreement finally to abandon all nuclear weapons and programmes, rejoin the NPT, and return to the International Atomic Energy Agency (IAEA) safeguards are indeed salient developments in resolving the impasse in the Korean peninsula. This is also a boost to the promotion of the NPT regime. Beyond these positive developments, however, lies the more difficult challenge ahead of crafting the details on how the process should proceed and their implementation, including allowing back the UN inspectors to North Korea’s nuclear sites. At the reconvened talks in Beijing in November 2005, it is crucial to seize the momentum in order to avoid a sliding back from principles that took so long to get agreement on. The looming threats of proliferation of WMD and its possible linkages with terrorism are further reasons why the talks must push the process forward. The prospect for resolving many of the security challenges in East Asia hinges on the state of relations between major powers and there are more reasons for worry than relief. The pattern of periodic tensions between China and Japan, for instance, had raised new concerns about the state of this bilateral relationship given the escalation of

the asian security environment anti-Japanese sentiments as seen in the number of anti-Japanese demonstrations that occurred in several Chinese cities in early April 2005. The unprecedented attacks against Japanese diplomatic missions and Japanese shops and restaurants elicited both consternation and alarm in Japan. Although the Japan-China Summit held on the sidelines of the 24 April 2005 Asian-African Summit held in Bandung saw Indonesia helping to patch up bilateral frictions, several issues remain unresolved. Top of these include the annual visits of Japanese Prime Minister Junichiru Koizumi to the Yasukuni Shrine, a site where war heroes and convicted war criminals are commemorated. Koizumi’s visits, coupled with the controversy over the writing of Japanese and Chinese history books are perceived by China — and South Korea — as evidence of Japan’s insensitivity and inability to come to terms with its troubled history. These historical issues as well as the unresolved disputes over territories and gas fields continue to fuel the simmering tensions between Japan and China and could potentially cause instability in region. Similarly, the periodic tensions between Korea and Japan highlight the significance of maintaining a healthy state in the triangular relations among the United States, China, and Japan. The pivotal role of the United States in navigating the tricky ebbs and flows of China-Japan and Japan-Korea relations remains a crucial element in shaping the strategic environment in the region. Nonetheless, the role of ASEAN states in facilitating dialogue and warming of relations among East Asian states cannot be ignored. The success of ASEAN’s initiative in forming multilateral fora such as the ASEAN+3 and the East Asian Summit are indicative of the role that smaller states can play in improving multilateral cooperation in the region.

Emerging Security Challenges Multilateralism matters even more in the face of emerging challenges. Although many “old” conflicts continue to affect peace and security, nothing could have prepared the region for the horrendous devastation wrought by the earthquakes and tsunami along the Indian Ocean rim in 2004. Against the mass destruction of property and livelihood, over a quarter of a million lives were lost in Southeast and South Asia, with





political Outlook the Indonesian province of Aceh bearing about two-thirds of the total. The unprecedented scale and reach of the tsunami disaster had been described as the world’s “first truly global catastrophe”. The tsunami was followed by similar patterns of natural disasters which occurred in many parts in Asia — the latest being the massive earthquake in Pakistan in October 2005 and the ravages brought about by hurricanes and flash floods in India and China. The spate of natural disasters that had hit the region added to the list of emerging threats to human security. They were a rude awakening to how non-traditional threats could drastically alter the security conditions in the region. Among others, natural disasters had generated complex emergencies — displaced population, health threats, increased incidence of transnational crime — that required urgent and coordinated responses from a broad range of state and non-state actors. Unfortunately, many states in Asia were least prepared to cope with such emergencies, as vividly illustrated in the tsunami disaster where if it were not for the humanitarian assistance provided by Western countries and international aid agencies, the consequences would have been far more devastating. These events have underscored the need for the region to focus attention on disaster preparedness, prevention, and management. The importance of preparedness and management could not be understated in the light of another human disaster waiting to happen. Since the outbreak of infectious diseases like the Severe Acute Respiratory Syndrome (SARS) in early 2003 and the H5N1 virus (bird flu), the World Health Organization (WHO) has been warning the international community of the impending pandemic that can be caused by a form of human influenza. According to WHO’s Klaus Stohr, Head of Global Influenza Programme, when (and not if) this “big flu” pandemic breaks out, about 2 million in Asia and 7 million globally are expected to die from a new virulent virus such as H5N1, and another 1.5 billion will seek medical attention. And, while a vaccine can be developed, it may be a case of “too little, too late for many victims”. The threat has become more pronounced with the release of the research findings that the 1918 influenza virus that killed as many as 50 million worldwide exhibits the same strain as the H5N1 virus.

the asian security environment The human tragedies caused by these non-traditional threats — 2004 Asian tsunami, hurricanes Katrina in the United States and Talim and Damrey in China, earthquakes in Pakistan, SARS — are indicative of the new list of issues that are bound to dominate the security agenda in the region and place new demands on the capacities of states to respond to these challenges. Given that many states in the region have security and intelligence establishments that are inherently conservative when it comes to threat perception, it is imperative that channels of communications be started between administrative bodies that often do not interact with one another — including defence, public health, agriculture, and environment — to coordinate sharing of information and craft multi-dimensional responses. This also compels multilateral cooperation to be stepped up in order to adopt new operational mandates in addressing new threats that extend beyond traditional areas of hard security.





political Outlook

TERRORISM IN THE REGION: CHANGING ALLIANCES, NEW DIRECTIONS By Sidney Jones

I

ndonesia and the Philippines remain the main bases of terrorist activity in the region, but jihadist groups are fragmenting, regrouping, and mutating, making the task of mapping them ever more difficult. The violence in Southern Thailand remains a major source of concern, but there has been no significant evidence to suggest that local insurgents were seeking or receiving outside help. In Indonesia, the second Bali bombing on 1 October 2005 put Jemaah Islamiyah (JI), the region’s best known jihadist organization, once again in the spotlight, but the bombing obscured the extent to which JI had changed in the three years since the first attack on the resort island. Then, it had four regional divisions, covering Malaysia-Singapore; the Philippines, Sulawesi, East Kalimantan, and Sabah; the rest of Indonesia; and Australia. Three years and several hundred arrests later, it had lost its administrative structure outside Indonesia, and while individual JI operatives continue to be active, particularly in the Philippines, there is little indication that they are operating under the direction or control of JI leaders in Indonesia. At the time of Bali I, as the 12 October 2002 bombing is now known, there was already unhappiness within parts of the JI leadership at the bombing campaign that had begun in 2000 largely under the direction of Hambali, then head of the Malaysia-Singapore division known as Mantiqi I. At the time, he was explicitly aiming to follow the February 1998 fatwa of Osama bin Laden, urging war against the United States and its allies in retaliation for their attacks on Muslims around the world. Many within JI saw the al-Qaeda line as inappropriate for Indonesia. But as long as the bombings were justified as retaliation for the deaths of Muslims in Ambon and Poso in communal conflicts that erupted in 1999 and 2000, the opposition stayed muted. But with Bali I and the arrests that followed, and even more so after the Marriott and Australian embassy bombings of 2003 and 2004, respectively, unhappiness with the bombers intensified. They were seen as unstrategic, pursuing a campaign that was disruptive to the organization, in violation of institutional guidelines, and a misapplication of the concept of jihad. Particularly after Hambali was arrested in August 2003, two of his former associates in Malaysia, Noordin Mohammed Top and Azhari Husin, took the lead in planning and executing bomb attacks against Western targets. In the Marriott bombing, Noordin was the strategist and Azhari the technician, and

the asian security environment

while they clearly consulted with at least one other JI leader, Abu Dujana, before and after the blast, there appears to have been no other input from the JI structure. The embassy bombing again seems to have been a Noordin-led operation from the outset. It involved two JI leaders, one from Mantiqi I, one from East Java, in supporting roles, but there is no indication that it had the imprimatur of JI as an organization, and most of operational work was carried out by members of a non-JI group based in West Java called Ring Banten.1 By 2005 a variety of jihadist groups were operating in Indonesia, several of them with links to the Philippines. They included JI; fighters supported by the charity KOMPAK (Komite Aksi Penanggulangan Akibat Krisis, Action Committee for Crisis Response), who continued to raise funds and acquire arms for jihad in Indonesia, particularly in the conflict areas of Ambon and Poso but also in Jakarta; Ring Banten; at least one other Darul Islam splinter group; Laskar Jundullah, based in Makassar, which reportedly had ongoing activities in Poso, Central Sulawesi; and several local groups in Poso. In May 2005, two attacks took place that got little attention internationally because no foreigners were killed; they nevertheless offered an insight into the fluidity of organizational boundaries among Indonesian mujahidin. On 16 May, a group of eight men attacked a remote paramilitary police post in Ceram, an island near Ambon, Maluku. Five policemen and their cook were killed by a shot to the head; another policeman managed to kill one of the attackers, who turned out to be a Darul Islam member from Riau. More interesting was the composition of the other seven, who among them represented KOMPAK; a KOMPAK-funded group in Poso; and a few local thugs, one of them with Darul Islam connections. It turned out that apart from his involvement in the shootings, the KOMPAK member, from West Java, had purchased weapons in Mindanao that had found their way back to JI members on Java. Just over a week later, on 28 May, two bombs composed of TNT and nails went off in a crowded Saturday morning market in the predominantly Christian town of Tentena, Poso, killing 22 people. The bombs were designed to  This group, like JI itself, is an offshoot of the old Darul Islam insurgency that fought from 1948 to 1962 for an Indonesian Islamic state (Negara Islam Indonesia or NII). Through Imam Samudra, one of the Bali bombers and himself from Banten, Ring Banten worked with JI on the first Bali bombs in 2002 and its members trained alongside JI in Poso, Central Sulawesi, in 2001–2002.

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TERRORISM IN THE REGION (continued)

cause lethal injuries to ordinary civilians, but again because no foreigners died, the attacks attracted little lasting notice. The problem in Indonesia is that there is no clear line that one can draw in terms of targets, and increasingly, personal networks among mujahidin are taking the place of strict organizational affiliation. The same mujahidin coalitions that target Indonesians one day proved themselves able to regroup and target foreigners the next. Indonesians can no longer be complacent that terrorism is mostly aimed at foreigners. It is not just that many of these attacks have not gone according to plan and ended up killing mostly innocent bystanders. For some mujahidin members, Indonesian officials working together with foreigners in the war on terror are part of the US-led conspiracy to destroy Islam and therefore legitimate targets for attack. Likewise, foreigners cannot ignore the attacks aimed at Indonesians such as Ceram and Tentena, because the perpetrators saw these as part and parcel of the broader global jihad. By mid-year, word began to circulate of a new group led by Noordin and Azhari called thoifah muqatilah, Arabic for combat unit. It was said to be a JI suicide brigade although it clearly would not have had the endorsement of many within JI, and it was not clear when or on whose initiative it was set up. But when the second Bali bombing took place on 1 October, it seemed at least plausible that the three suicide bombers were linked to this new group. If in Indonesia, personal networks were increasingly taking the place of organizational affiliations as the operating principle for building teams of operatives for specific missions, the same seemed to be true in the Philippines. Between 1994 and early 2003, it was clear that the most important regional alliance was between the Moro Islamic Liberation Front (MILF) and JI, based on bonds forged in training camps along the Pakistan-Afghanistan border in the late 1980s and early 1990s. By 2004–2005, the peace process between the MILF and the government of the Philippines had pushed the most wanted JI members more and more into the arms of the Abu Sayyaf Group.2 The near-simultaneous attacks across Manila, Davao, and General Santos City in the Philippines on 14 February — the so-called Valentine’s Day attack — seemed to reflect JI’s capacity both for technical expertise in bomb-making and coordination skills. 2

The Abu Sayyaf Group (ASG) split off from the first big Mindanao-based insurgency, the Moro National Liberation Front or MNLF in 1991. Under its founder, Abdurajak Janjalani, it had active cooperation with al-Qaeda. After Janjalani died in 1998 the ASG seemed to degenerate into a kidnapping-for-ransom gang until Abdurajak’s brother, Khaddafy Janjalani, consolidated control. ASG began working together with JI more systematically in 2001, and has developed a particularly close relationship with its bombing faction since 2003.

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But in the Philippines, as in Indonesia, the alliances were fluid and constantly evolving. The four senior JI figures in Mindanao — Bali bombers Dul Matin and Umar Patek; a Malaysian, Zulkifli bin Hir alias Marwan; and an Indonesian named Asep alias Darwin who had been involved in the bombing of a Jakarta mall in 2001 — were actively recruiting new trainees from Indonesia in 2005 but were believed to be working as much with KOMPAK and Darul Islam as JI. JI members said they had gone off on their own to the extent that they were no longer considered JI, but it was they who had some access to money and arms that could be channelled to Indonesia. By the end of 2005, it was possible to think of members of Indonesian and Philippine organizations as having fused into a small operating unit that had no real national distinctions or boundaries. Southern Thailand remained apart from regional jihadist alliance building. There was no question that members of JI had a web of contacts in Thailand going back to the early years of training on the Pakistani-Afghan border and later, to study in Karachi in the late 1990s. But as of late 2005, there was no indication that these networks were being mobilized to draw Indonesians into the violence in Southern Thailand. The anger among Muslim Malays at the cultural arrogance and abusive practices of Thai security forces fuelled separatist violence, but it was overwhelmingly ethno-nationalist rather than global jihadist in nature. In all countries of the region, local factors were far more important than international ones in recruiting new members. Southeast Asians were not being tapped for the insurgency in Iraq, and if US killings of Iraqi civilians was food for nightly news broadcasts, it did not seem to be significantly increasing the pool from which Indonesian jihadists were drawn. Instead, the war in Iraq was simply a new argument being used to motivate jihadists who were already active, and who had been advocating violence before US troops began moving on Baghdad. The danger for the future was not so much that Southeast Asians would leave in droves for Iraq — it was that anger in the Middle East and South Asia over the war would lead to increased funding for jihadist activities around the world, including in Southeast Asia. As 2005 draws to a close, no government in the region could be complacent. The leading organizations were weakened, especially JI. But other bonds, based on shared experience in schools, businesses, military training or combat, seem to be taking the place of institutional hierarchies in terms of how terrorist teams are put together. The web of violent jihadist organizations has become more complex than ever.

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THE THREAT OF MARITIME TERRORISM AND PIRACY By Graham Gerard Ong

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egional efforts at countering maritime piracy along the Straits of Malacca have occurred at a breathtaking pace. The littoral states of Indonesia, Malaysia, and Singapore whose maritime boundaries overlap each other along this 960-kilometre waterway, launched their latest offensive in the form of a joint maritime air-patrol called the “Eyes in the Sky” (EiS) initiative, on 13 September 2005, three months after it was first proposed. The EiS also came, just over a year after the three countries established round-the-clock coordinated naval patrols along the Straits. These are concrete indications that the littoral states are committed to forging a maritime security regime that will fight piracy and other non-traditional maritime threats in the Straits with ASEAN members in the driver’s seat. To be sure, the littoral states and other ASEAN members have established certain bilateral patrol arrangements between themselves already in reaction to the almost unabated rise in piracy attacks since the 1990s. The rise of piracy over the last two decades has naturally followed the growth of maritime trade in the wake of post–Cold War economic globalization. While the 9/11 terrorist attacks in the United States led to tighter aviation, land-related, and maritime security in the United States, two other sets of developments related to the threat of maritime terrorism — attacks on vessels or fixed platforms at sea or in port — helped to bring about a more coherent regional agenda to address issues of security on the high seas.

Maritime Terrorism First, al-Qaeda's devastating assaults in Yemen on the USS Cole in October 2000 and again on the French oil tanker Limburg in October 2002, exposed the vulnerability of the global maritime realm. Second, similar threats were discovered in Southeast Asia. The masterminds of the USS Cole actually planned another attack on a US ship visiting a Malaysian port that same year. In 2001 the Malaysian Special Branch disrupted a plan by the Kumpulan Mujahidin Malaysia to ambush a visiting US vessel. In early 2002, Singapore intelligence also disrupted an al-Qaeda plot to attack a US ship docked in the country. Senior al-Qaeda operative, Omar al-Faruq, who is now in US custody, also told officials during his interrogation of plans to attack an American naval ship in Surabaya, Indonesia’s second largest port. In 2002 the Abu Sayyaf Group based in the Philippines claimed responsibility for an explosion of a large ferry in the country

the asian security environment

in which around one hundred of its citizens were killed. The coordinated boat attack by Iraqi insurgents on an oil terminal off the southern city of Basra, killing two US sailors and wounding several others in April 2004, has had the effect of sustaining this concern. The global and regional economic costs of a maritime terrorist or pirate attack in the Straits, leading to a blockage of maritime traffic, are unmistakable. The Straits of Malacca links the Indian and Pacific Oceans and is the shortest route between three of the world’s most populous countries — India, China, and Indonesia. The narrowest point of this shipping lane is only 1.6 kilometres in width. This creates a natural bottleneck with the potential for collision or grounding of a large vessel and the possible closure of the Straits. The waterway carries an annual commercial traffic of more than 50,000 ships, making it the world’s busiest waterway. The Straits also gives passage to more than a third of global trade and two-thirds of the world’s liquefied natural gas (LNG) trade. ASEAN’s subsequent declarations on counter-terrorism and on tackling transnational crime incorporated the need to deal with piracy because pirates, like terrorists, threaten maritime and national security in a similar manner. Hence, it is also hard to tell them apart. Both kinds of perpetrators use small and fast motor boats, and both are ruthless in terms of the violence they employ. In terms of the operational demands for fighting such threats, Singapore adopts the philosophy that during pursuit, “we do not know whether it’s pirates or terrorists who occupy the ship so we have to treat them all alike”. Three to four years on, judging from the fact that no such attack has occurred since the foiled attempts mentioned earlier, the efforts at securing vital sea-lanes and major ports along the Straits may have generated a deterrence dividend against maritime terrorism. It is likely that current state of preparedness has fazed the terrorists by removing the advantages of shock and surprise necessary for any attack. However, there are also other reasons why the threat of maritime terrorism never quite got off the ground. One of them is that owing to their experience, terrorist organizations prefer tried and tested land-based action to maritime operations. The records show only approximately 40 maritime terrorist incidents carried out by various groups and organizations since the first recorded attack in 1961. From 1981 to just prior to the 9/11 attacks alone, there were about 9,000 international terrorist attacks (excluding intra-Palestinian violence), or about 460 attacks a year.

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political Outlook

ThE threat of maritime teRRORISM and piracy (continued)

Notwithstanding the ability of both al-Qaeda and the regional organization Jemaah Islamiyah (JI) to morph and splinter into smaller groups that are still capable of carrying out significant bombing operations, the fight against global and regional terrorism has led to the general attrition in their expertise and resources to a point where the more elaborate attacks of a maritime nature may be out of their operational reach. In addition, al-Qaeda’s chief of naval operations, Abdulrahim Mohammed Abda al-Nasheri (also known as the “Prince of the Sea”), who is suspected to have masterminded the USS Cole attack, is in American custody. Piracy In contrast to maritime terrorism, piracy does not appear to be stalled. Piracy continues to dramatize the vulnerability of the Straits. Indeed, according to the annual piracy reports from the International Maritime Bureau (IMB), the number of pirate attacks, on a global scale, has been on the rise over the last 15 years. In 1991 the number of worldwide pirate attacks stood at 107. At the end of 2004, there were 325 reported attacks or an increase of 200 per cent. To be sure, there has seen a slight decline over the course of the last two years. The total number of worldwide reported attacks dropped by 27 per cent from 445 incidents in 2003 to 325 incidents in 2004. But it is early days yet to say if the decline of the last two years will be a sustained one. Annually, Southeast Asia continues to experience a quarter of the world’s pirate attacks in the last five years. The majority of attacks occurred in the Malacca Straits and the waters of Indonesia. Sadly, there is no tangible evidence to suggest that the implementation of the coordinated naval patrols since the third quarter of 2004 has done much to reduce the rate of piracy attacks in these waters. Where the Malacca Straits is concerned, IMB data shows that the third and fourth quarter figures for 2004 and quarterly figures for the first half of 2005 do not differ very much from each other. In fact, figures of the second quarter of 2005 show a slight rise for Indonesia and the region as a whole. In the final analysis, despite the rise of piracy in the Straits, the concern that this threat can disrupt maritime shipping through an inter-ship collision caused by a hijacked vessel must be placed in perspective. In 2004 there was

the asian security environment

2004

Regional total Malacca Straits Indonesian waters

2005

3rd Quarter

4th Quarter

1st Quarter

2nd Quarter

23  3 17

23  5 16

22 (25)   3 (2)  14 (16)

26 (35)   2 (6)  23 (26)

Note: The figures within parentheses are tabulated from summary statistics of the IMB 2005 reports for the first and second quarters and show some deviation in the tabulation of reported cases in the detailed narrative of attacks found at the end of these reports.

a total of 37 attacks in the Straits. Given that a total of 50,000 ships transit the Straits, the probability of an attack is 0.07 per cent. Even if we double the figures to take account of the 40 to 60 per cent of attacks, which the IMB says goes unreported, the probability of being hit by pirates is 0.1 per cent. However, these low statistical probabilities should not detract from the trauma experienced by a vessel’s crew and its shipping company when pirates brutalized crew members and kidnapped them for ransom. It is reported that about US$1 million in ransom was paid out by shipowners in the region in 2004, with an average negotiated ransom ranging from US$50,000 to US$100,000. In that year, 40 sailors were kidnapped in about 20 incidents. Four seafarers were killed because of botched negotiations. By the end of June 2005, there have already been five ransom-driven kidnappings in the Straits. In July 2005, it was announced that the Joint War Committee (JWC) of Lloyd’s Market Association had declared the Strait a war-risk area, along with 20 other locales worldwide in jeopardy of conflict, strikes, terrorism, and other related dangers. The momentum of regional cooperation in maritime security must be sustained. That would require ASEAN members to continue making a concerted effort in combating piracy and potential maritime terrorism. However, in the case of countering piracy, Malaysian Deputy Prime Minister Datuk Seri Najib is correct in pointing out that stronger enforcement, regional cooperation, and a better use of technology are best directed towards the effort in detaining pirates at source rather than on the high seas.

15

The Inaugural East Asian Summit: The First Step in a Long Journey By Valérie Engammare and Jean-Pierre Lehmann

A

t the time of going to press, the East Asian Summit was scheduled to be held on 14 December 2005 in Kuala Lumpur. It proposed to bring together the ten ASEAN (Association of Southeast Asian Nations) countries, China, Japan, and South Korea (the countries in the ASEAN+3 grouping), as well as other potential partners such as India, Australia, and New Zealand. If these participants at the Kuala Lumpur Summit form a regional community, demographically and economically, this East Asian bloc would comprise some 3 billion people — half the world’s population — and counting for an ever-increasing share of global gross domestic product (GDP), reaching approximately 35 per cent in terms of purchasing power parity by the end of this decade. Clearly, these developments will have a considerable impact on the rest of the world. The mere fact that such a Summit is possible shows how much the landscape has evolved in Asia since Malaysia’s then Prime Minister Mahathir Mohamad proposed an East Asian Economic Caucus (EAEC) 15 years ago. At the regional level, the financial crisis made it urgent for countries to cooperate. In so far as leadership is concerned, economic recession and structural issues weakened Japan’s role in the region, leaving room for China, with its fantastic economic growth and size, to take up the position. Internationally, the big developing nations in the World Trade Organization such as Brazil, India, and China have shown leadership and grown in importance. East Asian countries have gained experience in negotiating bilateral and regional deals. This has given them reason to become more self-confident. It also underlines the necessity to join forces, forge alliances, and identify and articulate demands. Given these developments, current attempts to strengthen regional ties are considered to be legitimate and timely. What Drives Integration? The first push factor for East Asian regional integration is a pre-existing and relatively strong market-led integration. Companies do produce at the regional scale. According to the World Bank, intra-regional trade in East Asia1 represented 26.5 per cent of the region’s GDP in 2002, which is more than it is for any developing region. Whereas China does attract huge amounts of foreign direct investment (FDI), its production processes are now fragmented and some parts of a production process are no longer most cheaply or efficiently done in China. For smaller economies that have an advantage over China in these niches, there are opportunities to attract investment and produce in tandem rather than in competition with the Chinese juggernaut. Since the dynamics for regional integration are already in motion, albeit in an uninstitutionalized manner, what could the Kuala Lumpur meeting contribute by institutionalizing the process? For a start, purely market-led integration can only go so far, beyond which it becomes necessary for a collective political will to tackle issues such as tariff and 1

 In World Bank statistics, East Asia refers to East Asia and the Pacific region, that is, the ten ASEAN countries, China, Mongolia, Japan, Korea, and the Pacific Islands.

non-tariff barriers or energy supply. A concerted effort to push integration would help East Asian economies to export to China and India’s huge domestic markets and generate a momentum for region-wide economic growth. Such a dynamic economic region would attract even more FDI. For some countries, the demands imposed by membership in regional institutions and programmes could help to force the pace of their own domestic economic and administrative reforms, for example, with respect to the rule of law. The creation of regional institutions could also bring more stability and avoid destabilization in the case of frictions among the countries, as has recently been the case between China and Japan over territory and especially offshore oil fields. A natural way to promote integration would be for the intended East Asian community to build on the cluster of bilateral relationships within the region, be it free trade areas or economic partnerships. ASEAN is at the core of this cluster of existing relationships. This raises the question of who will be in the driver’s seat to take the intended East Asian community where it should be heading. Political Will and Trust The ASEAN countries may have entered this East Asian community-building process as a group, but the Association itself has not been a model of efficient and smooth integration. Add to that a host of nations widely disparate in socio-economic and political conditions, and the challenges of integration seem daunting. East Asia, and even more so when one includes India and Australia, is by far the world’s most heterogeneous region from every perspective. Economically, as noted, it ranges from the extremely wealthy (Japan, Hong Kong, South Korea, Taiwan, Singapore) to the dirt-poor (Laos, Cambodia, Myanmar, North Korea, Mongolia), with many in between. For example, the GDP per capita for Japan is approximately US$29,000 while that for Laos is US$1,900. It is also very diverse culturally. Some countries have a Confucianist tradition (China, Korea, Japan, and Vietnam), some practise Theravada Buddhism (Thailand, Laos, Cambodia and Myanmar), and some are predominantly Islam (Indonesia and Malaysia) or Christian (Philippines, Australia, and New Zealand). In the case of India, its vast population is mainly Hindu but there is a very strong Muslim community of over 100 million. Several of these countries have large minorities of one or other races or religions. Politically, the range is equally large: from democracies (Japan, Korea, Taiwan, Philippines, Thailand, and Indonesia) to various degrees of autocratic states. No continent has such a diversity. Hence, it is a monumental challenge to bring about cohesion in the region. The region is further confounded by a leadership problem. Most regions have a recognized dominant player: Germany in Western Europe, Russia in Eastern Europe, the United States in North America, Brazil in South America, South Africa in sub-Saharan Africa, and so forth. In Asia, the biggest economy (in nominal terms) is Japan, with China rapidly catching up and already having surpassed Japan in terms of purchasing power. Japan, however, has yet to shake off its World War II image as an aggressor nation in the region, and a deep level of distrust exists between itself and China and Korea. China

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political Outlook The inaugural east asian summit (continued)

is huge but its communist system does not invite confidence in its leadership. None of the ASEAN states can claim leadership, and India is, for now, too much of an outsider. ASEAN has no collective leadership capability; and leadership by consensus is not likely to work. What this regional gathering is likely to witness is the evolution of the China-Japan leadership struggle, with the former likely to win in the end. External forces have clearly played a fairly important role in pushing the countries to meet in Kuala Lumpur this December. The European Union has been both a “model” of regional integration and a threat at the global economic level through its protectionism. The underlying impetus to an East Asian economic community has always partly been to find a counterpart to “Fortress Europe” and possibly to “Stockade America”. As for the United States, it is always opposed to any Asian regional integration of which it is not a part or has an influential role. Washington did everything it could, with some initial success, to undermine Mahathir’s proposed EAEC. In respect of an East Asian community, the United States has been less inclined to be involved, partly due to its overstretched capacity as a result of its involvement in Iraq. Hence, what may yet prove to be the group’s biggest challenge is the issue of political integration that will surpass economic integration in all its complexities. It remains to be seen whether in the short to medium term, East Asia will develop political institutions to which countries would be ready to transfer some parts of sovereignty. Disparities in terms of size, political regime, development, as well as the principle of non-interference — which underpins ASEAN cooperation — are likely to make political integration difficult. Given this reality, the driving force of integration is more likely to be economic — for example, the promotion of an expanding network of free trade agreements — than political. Concerning the latter, integration will remain limited to non-controversial issues, such as the fight against terrorism. Still, the East Asian Summit in Kuala Lumpur will provide an impetus for an ambitious project. Beyond this inaugural meeting, strong political will is needed among the key players who are forging this East Asian community. Political will requires both vision and trust among community members. Cooperation will lead to nowhere if countries that engage in it do not trust each other. The clearest conclusion that can be drawn from the East Asian Summit at this moment is that it is a first step of a very long journey. A direction has been identified but nobody is clear about what exactly this will lead to and the nature of the outcome.

THE ASeAN-10 Hamzah Sulaiman • Verghese Mathews • Yang Razali Kassim • Vatthana Pholsena • Ooi Kee Beng • Robert H. Taylor • Rodolfo Severino • Gillian Koh • Thitinan Pongsudhirak • Thaveeporn Vasavakul

Brunei Darussalam In May 2005 the Sultan of Brunei announced a long-awaited cabinet reshuffle, which incorporated a number of innovations. The first innovation is the institution of two new cabinet positions: senior minister and minister for energy in the Prime Minister’s Office. Crown Prince Al Mutadee Billah was given the senior minister position, which marked his formal induction into the cabinet structure. This can be looked at as training the heir to the throne for the job of governing within a monarchical framework. It would also help to ensure a smooth and effective succession in the near future. The additional appointments of the Crown Prince as a General in the Royal Armed Force and Deputy Inspector General of Police, as well as his frequent visits, as senior minister, to various ministries further highlighted the preparation for political succession. The sudden marriage of the Sultan to a young Malaysian, which has dented his popularity especially among Bruneian women, also fuelled speculations about the Crown Prince ascending the throne sooner rather than later. Another innovation in the cabinet structure is the introduction of the position of second minister in the ministries taking charge of finance and foreign affairs. The Sultan and his brother, Prince Mohammed, hold the ministerial position in both ministries respectively. Having second

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political Outlook

Brunei Darussalam Land area:

5,765 sq. km.

Population:

332,884

Capital:

Bandar Seri Begawan

Type of government:

Monarchy

Head of State and Prime Minister:

Sultan Haji Hassanal Bolkiah Muizzaddin Waddaulah

Currency used:

Brunei dollar (on par with the Singapore dollar)

US$ exchange rate on 1 December 2005:

US$1 = B$1.69

ministers to help with these portfolios will alleviate the workload of the Sultan, who is also Prime Minister, and of Prince Mohamed, who is also Head of the Brunei aristocracy. The Ministry of Foreign Affairs has also been enlarged to become the Ministry of Foreign Affairs and Trade by absorbing the Division of International Relations and Trade (previously under the Ministry of Industries and Primary Resources). The Division had been looking after ASEAN trade and economic cooperation, multinational economic organizations, and international economic issues. The appointments of Minister for Energy in the Prime Minister’s Office and second ministers in the two ministries will also have an impact on the workings of the State Legislative Council (SLC), a key institution that the Sultan reconvened in September 2004 after a 20-year suspension. Cabinet members being ex-officio members of the council have to attend its meetings. The Minister for Energy in the Prime Minister’s Office and the two Second Ministers can now take the place of the Sultan, the Crown Prince Al Mutadee Billah, and Prince Mohamed at these deliberations, which will help to remove the restraint of protocol and self-censorship that royal presence tended to bring into the council meetings. As precedence, the Sultan and Prince Mohammed

the asean-10 did not attend the question-and-answer session of the SLC last year though they were present at the opening and closing sessions. Their portfolios, however, were represented by their permanent secretaries who were assigned as appointed members of the SLC. The third innovation is the Sultan’s introduction of a five-year term for members of the Cabinet. This bodes well for governance as a whole because it would require ministers to formulate and execute policies that can then be assessed within their term of service and make them more accountable for any shortcomings. Four ministers — in charge of the portfolios of Home Affairs, Education, Communication and Culture, Youth and Sport — were replaced in this much-needed cabinet reshuffle. All these former ministers had been in the Cabinet for more than a decade and, except for the Minister for Communication, are older than 70. The newly appointed cabinet ministers were formerly deputy ministers or government permanent secretaries. The interesting development in this cabinet reshuffle was the introduction of new talent at the deputy minister level. Besides the usual recruitment from the pool of permanent secretaries and directors in the ministries, two new deputy ministers actually came from the private sector. This change, hopefully, will bring new ideas into government. It indicates the government’s willingness to bring talented people into its structure no matter where they come from. It also allows the private sector to contribute to government. The practice marks the beginning of a revolving-door mechanism between the public and private sectors in Brunei. In September 2005, the Sultan dissolved the SLC and announced plans to expand it from 21 to 30 appointed members for the 2005/2006 session. The enlarged membership comprises 14 ex-officio members (PM and all ministers), three titled members, nine distinguished members, and four members from the four districts of Brunei. As the electoral system is waiting to be finalized, members of the SLC are yet to be elected. The amended constitution provides for 15 elected SLC members, with seven from Brunei Muara district, three from Tutong district, three from Belait district, and two from Temburong

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political Outlook district. In July 2005 the Sultan laid down the foundation for a new B$62 million SLC building that is expected to be completed by March 2007. This is one more indicator that the Sultan is gradually putting together a limited representative and participatory political framework for Bruneians. In anticipation of the SLC elections provided for in the amended constitution, a new political party — Parti Pembangunan Negara (PPN) — was formed in September 2005. One of its founders was a former member of the banned Partai Rakyat Brunei (PRB). A majority of the PNN members are businessmen or retired government officers. The other two existing political parties are Parti Kesedaran Rakyat (PAKAR) and Parti Perpaduan Kebangsaan Brunei (PPKB). The fact that a new political party is allowed to emerge indicates that the government is gradually but cautiously conceding space to party politics in Brunei. However, this space is subject to the new Societies Order that has been enacted in January 2005. This new Society Order is much more comprehensive and stricter than the previous Society Act. The new statute serves as a legal safeguard against irresponsible party politics. Various government bureaucracies are actively formulating strategic plans to deliver effective, efficient, and responsive government in the future. One such effort includes the stepping up of e-government, which is expected to have a huge impact on governance in Brunei. The main concern here is to avoid the high failure rate seen in other countries where e-government initiatives were not handled prudently. That the government is fully committed is evidenced by its allocation of B$1 billion for the project. Acting on feedback that bureaucratic red tape has been a big obstacle for economic activities, efforts are also being made to streamline government procedures especially those dealing with businesses. Non-traditional security concerns have taken over the national security agenda in 2005. The threat of a bird flu epidemic and the rise of dengue fatalities around the region have alerted the relevant authorities to remain vigilant and ready for such threats. This, however, does not mean that the security agencies in Brunei are not attentive to the challenge of religious militancy or terrorism that affects the region.

the asean-10 On international affairs, relations with the sultanate’s nearest neighbours, Malaysia and Singapore, remain cordial and close. Brunei and Malaysia continue to work on their thorny border and maritime issues peacefully and in the spirit of close neighbourliness. Resolutions in these matters are not expected to take place in the near future but talks between senior officials from both countries are expected to continue till mutual agreements are reached. Brunei, in the near future (perhaps after five years), will be expecting a political leadership change. The current cabinet has a five-year term and this could be seen as a transitional cabinet before Crown Prince Al Mutadee Billah takes over the helm. Limited participatory politics will slowly but inevitably arrive in Brunei provided that the SLC grows in strength and experience, and contributes to national development. This is coupled with an official determination to provide good governance as well as take into account regional and global political developments. Administrative changes will be cautious and will push the government bureaucracy into being more responsive and accountable to the public.

Cambodia The year 2006 will primarily see the coalition government’s efforts at boosting its reform programmes to ensure deliverables and the various political parties reorganizing and finetuning their respective party machinery for the next general election. Although the election is not due until 2008, January 2006 will mark the mid-point between the last election in July 2003 and the next. Following the last election, a year was wasted in inter-party infighting, selfish political manoeuvrings, and protracted horse-trading before a coalition government was finally formed in the middle of 2004. Despite such disappointing politicking, Cambodia has done fairly well for a revolution-weary country starting from scratch 15 years ago, moving as it has from command economy to market economy, from instability to relative peace, and from authoritarianism to a fledgling democracy. However, a sad commentary of the Cambodian experience

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political Outlook

cambodia Land area:

181,040 sq. km.

Population:

13.4 million (2003 estimate)

Capital:

Phnom Penh

Type of government:

Parliamentary democracy with constitutional monarchy

Head of States:

King Norodom Sihamoni

Prime Minister:

Hui Sen

Next election:

2007 (local elections) 2008 (National Assembly)

Currency used:

Riel

US$ exchange rate on 1 December 2005:

US$1 = 4,290 riel

is that much more could have been achieved had Cambodian politicians been able to rise above their incessant squabbling and their intra-party insecurities. The year 2005 was marginally better than the previous one with the coalition government addressing a backlog of accumulated issues and problems. There has also been a gradually maturing trend in inter- and intra-party political engagement but the level of bitterness remains high among the political players. Despite some high-tension brinkmanship in the last two years, public safety and security were generally not threatened. All the three major political parties experienced internal disquiet in 2005 and are in various stages of adjustment and re-consolidation to be ready for the 2008 election. Prime Minister Hun Sen’s Cambodian Peoples Party (CPP) remains the dominant political force and despite an unprecedented spillover into the public domain of its internal disagreements in 2004, wiser counsel has prevailed and the party has, as is characteristic of it, closed ranks. The CPP can be expected to remain

the asean-10 the dominant political player for some time to come and spearhead changes unless there is a serious internal split. Within the party, Hun Sen’s position is much stronger and his control of the levers of power in government much greater. Although he has detractors among the CPP leadership, he is determined to lead his party into the next election and no challengers are presently in sight. FUNCINPEC (National United Front for an Independent, Peaceful, Neutral, and Cooperative Cambodia), the royalist party headed by Prince Norodom Ranariddh, which has progressively weakened over the years, received a hard knocking at the July 2003 polls. Observers are questioning the viability of a party that is badly factionalized for too long. Joining the CPP in a coalition government has provided FUNCINPEC with a much-needed lifeline. To FUNCINPEC’s further advantage, sometime in 2005 a much higher level of cooperation and comfort has been worked out between Hun Sen and Ranariddh that augurs better for their coalition government in the coming year. However, this improved working relationship has yet to percolate through the rank and file. The still-weak FUNCINPEC will need to quickly consolidate and revitalize its party structure and its electoral machinery in the provinces. Meanwhile, fortunes have been mixed for the opposition Sam Rainsy Party (SRP), which did well in the 2003 election and was seen as a party on the rise. Sam Rainsy was able to reach out to the young and the marginalized, by successfully projecting himself as a reformer. He was adept at using the language of democracy. The party has, however, been unable to live up to the expectations it had raised among the electorate. Moreover, some of the political positions Rainsy has adopted at times and his party’s boycotting of Parliament for six months in 2005 have not been helpful. On the positive side, there has been an infusion of new blood into the party. The SRP can be expected to close ranks quickly, work at its sagging image and be more active in and out of Parliament. It is still a party to watch. The protracted politicking and infighting has cost Cambodia much of the reservoir of goodwill it had in 1991 following the Paris Peace Agreement. Donor frustration with the slow progress of the government’s reform process comes at a time when other international

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political Outlook causes are competing for limited international aid. While the aid is unlikely to cease in the immediate future, it will become increasingly conditional on actual progress in reforms. Donors expect to see some meaningful forward movement especially in the areas of judicial and administrative reforms and the inculcation of good governance. A recent World Bank report noted that poor countries such as Cambodia and Laos were reforming far more slowly than the developing nations in Eastern Europe. The CPP-FUNCINPEC coalition government is aware of the need to accelerate reforms and provide deliverables or risk losing votes to the opposition. This will be an uphill task as Cambodia faces varied and complex challenges in 2006, in particular, the increasing unemployment rate among restless youth, a poor business competitive rating, higher oil prices, intense competition from China and India, international terrorism and inclement weather, among others. Undeniably, the biggest challenge for Cambodia in 2006 is to further strengthen its institutions and to ensure that good governance is firmly rooted in the country. This calls, in particular, for a determined, comprehensive, and sustained attempt at addressing the endemic corruption, which is deeply entrenched and highly debilitating. No doubt, it will take a long time for tangible results to emerge in the fight against corruption and cronyism but incremental small steps can be expected in the coming year. A start has been made with a recent government-initiated two-day “public consultation workshop” in Phnom Penh where the provisions of the draft anti-corruption law were debated by local and international experts. The government has little excuse now in not tabling the Anti-Corruption Bill, which has been on the back burner for far too long. The draft law is back to the drawing board before being tabled in the National Assembly. Another challenge ahead, and one that demands priority attention, is the urgent need to increase the country’s revenue flows by improving the systems of collecting custom duties and taxes. To its credit, the government has succeeded in increasing domestic revenue by 66 per cent from 1,329 billion riel in 1999 to 2,216 billion riel in 2004. It is expected that this positive trend will prevail though tax evasion remains a major problem.

the asean-10 A development that is expected to attract much international attention in 2006 is the proposed tribunal to try some of the Khmer Rouge leaders who were “most responsible” for the mass genocide in the country between 1975 and 1979. Following protracted on-off negotiations, an accord was reached in mid-2005 between the Cambodian government and the United Nations for the setting up of Extraordinary Chambers within the Cambodian judicial system; one that would see the participation of Cambodian and international judges and prosecutors. In foreign affairs, the government is expected to continue its pragmatic policy of maintaining friendly ties with all countries, especially the donor nations and its main trading partners. A noticeable trend has been Cambodia’s increasingly close relations with China, which has been a generous donor and an attractive economic partner. The Cambodians are particularly appreciative that China does not publicly criticize the Cambodian reform process or other internal developments as Western donors are wont to do. The relationship with China can be expected to develop further. There is no doubt that the coalition government has the support and the confidence of the majority of the Cambodian people and it would be a fair assumption that the government is aware that unlike in previous years, if the people’s livelihood does not improve, they will make known their displeasure in the 2008 election.

Indonesia On 1 October 2005, Indonesians received a rude triple shocker when three suspected suicide bombers blew themselves up in different locations in Bali, killing at least 22 people, mostly Indonesians, along with a number of foreign tourists. The bomb attacks, which have come to be known as Bali II, were a numbing replay of the Bali blast three years ago that killed at least 202 people, mostly foreign tourists. Bali II came on a day when Indonesians were already feeling worked up over a massive 126 per cent average rise in fuel prices. The fuel price hike was a result of the government cutting fuel subsidies to save the national budget from crashing under the weight of skyrocketing world oil prices. October was also the month that President Susilo Bambang

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political Outlook

indonesia Land area:

1,919,443 sq. km.

Population:

215 million (2003 estimate)

Capital:

Jakarta

Type of government:

Presidential; based on amended 1945 Constitution

Head of State:

President Susilo Bambang Yudhoyono

Next election:

2009

Currency used:

Rupiah

US$ exchange rate on 1 December 2005:

US$1 = 10,040 rupiah

Yudhoyono was to celebrate his first year in power. What do all these portend for Indonesia’s sixth president? Yudhoyono, or SBY as he is known, rode to power on 20 October 2004 with an impressive mandate of no less than 60 per cent of the vote in the first direct presidential elections since the fall of Soeharto in 1998. A popular figure, his teaming up with Jusuf Kalla, also known as JK, as his vice-president projected an image of an appealing twoman partnership. But it did not take too long before questions were raised about Yudhoyono’s seeming invincibility. By the end of 2005, there were rumblings that Kalla may pose a challenge to the President come the next presidential elections in 2009. When he captured the chairmanship of Golkar a month after Yudhoyono became President, Kalla went on to alter an existing balance of power in Indonesia’s Parliament, the Dewan Perwakilan Rakyat (DPR), whereby a Golkar coalition with PDI-P (Partai Demokrasi Indonesia–Perjuangan) could easily block SBY’s policies. Kalla took Golkar out of the coalition and transformed the party from an opponent to a key ally for the SBY-JK government. While this has made it easier for Yudhoyono to govern, it also gives his Vice-President added political clout and the opportunity to be a potential threat to the Presi-

the asean-10 dent’s position, at least in the eyes of people close to SBY. Although Kalla’s move to head Golkar had the blessings of SBY, the stage was set for speculations of political jostling and internal tensions spilling over into economic policy-making, an area dominated by Kalla’s men. The upshot had been persistent talk of a cabinet reshuffle in the first year of SBY’s presidency. A reshuffle would, of course, whittle down the influence of Kalla in the cabinet and over the economy. If there had been a tug-of-war between the Yudhoyono and Kalla camps over economic policy, the Vice-President seemed to have been having his way so far. After much dithering over how much fuel subsidies to cut due to concerns about the political backlash, Yudhoyono was finally forced to settle for the Kalla solution, which led to the steep rise in fuel prices. What remains to be seen now is how the next round would be played out in a cabinet reshuffle that was the subject of much speculation. Yudhoyono finally confirmed it when he disclosed in early December the appointment of former finance minister Budiono as the new Coordinating Minister for the Economy, replacing Aburizal Bakrie. But he softened the impact of his rare assertiveness by retaining Bakrie as Coordinating Minister for Welfare, perhaps as a compromise with his Vice-President. Earlier, there had been a mysterious report by the official news agency Antara — later denied — quoting the Vice-President as saying that he would run for the presidency in 2009. True or not, the report of a challenge for the presidency did not come as a surprise. It had intensified the speculations about the competitive dynamics of power within the SBY-JK partnership. On balance, Yudhoyono’s track record as president so far has been a mixed one. While he has his supporters among those who see him as the country’s Satrio Piningit or saviour of sorts, a year in office has also sapped his popularity. He had come to power with a promise to boost economic growth, bring in investments, and reduce poverty. Life may have gotten better for many Indonesians since he took over, but this improvement is seen as marginal. His sliding popularity is most pronounced in the eyes of the elite. A major factor is the President’s much talked-about indecisiveness. On the other hand, Yudhoyono’s fuel price hikes, surprisingly, had not led to massive rioting similar to the 1998 scenario when fuel price increases precipitated the fall of Soeharto.

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political Outlook In the face of such divided opinions, the Indonesian leader remained quietly confident that he could pull the country through. In a meeting in Jakarta with Asian and European editors, he listed, in uncharacteristic Javanese fashion, a string of pluses: •

• •

•

His leadership marked a new phase in the political transformation of post-Soeharto Indonesia. Democracy was growing and this was reflected in the free and fair legislative elections of 2004, the firstever direct presidential elections, and a series of regional direct elections that followed. He has launched a strong anti-corruption drive, leading a crackdown on several serving as well as former figures of authority. Despite teething problems, his government also demonstrated a certain sturdiness when confronted with one of the harshest human tragedies — the 26 December 2004 earthquake/tsunami disaster in Aceh that killed more than 200,000 people. The Aceh tragedy created the conditions for reconciliation between the Indonesian government and the Acehnese separatists, an opportunity Yudhoyono had seized. The result is an important peace accord in Aceh — one of the most intractable secessionist problems faced by Indonesia. The resolution of the Aceh conflict could end the myth that Indonesia was on the brink of being balkanized, with Aceh following in the footsteps of East Timor to break away.

Soon after the tsunami, Yudhoyono was confronted with his fifth challenge — an unexpected territorial dispute with Malaysia over the potentially oil-rich waters in Ambalat in the Sulawesi Sea. It was the worst bilateral tiff between the two close neighbours and led to loose talk of war. But Ambalat was cleverly used to deflect Indonesians’ attention from the government’s first fuel price hike, which came at around the same time in March 2005. To be fair, one year is too short a time to judge how the SBY government has performed. Indonesia is a complex country but the SBY-JK leadership combination is one of the best that has emerged through popular will. Security and the economy will continue to

the asean-10 be the government’s biggest headaches. On the security front, the government must act fast to rein in the problem of terrorism before it gets out of control. There is reason for optimism. The 9 November raid in Batu near Malang, East Java, just a few days after the end of Ramadan, and the subsequent killing of Azahari Hussin, the Malaysian bombmaker widely believed to be behind the string of bomb attacks in Indonesia over the last three years, underscore the government’s growing capacity in counter-terrorism. This should come as good news for the region, which feels it has a stake in a secure and stable Indonesia. The economy shows some promise but the SBY administration’s achievements in this area have been sketchy. In his September 2005 visit to the United States where he made a pitch to investors, Yudhoyono said the economy expanded by 5.1 per cent, the highest rate since the 1997/98 financial crisis. But he conceded that the growth was not good enough to create jobs for the millions of jobseekers entering the labour market each year. Although investments have been coming in, the flow has not been as strong as the government would like to see. According to the Asian Development Bank, the economy would grow by 5.7 per cent for 2005 and by 5.9 per cent in 2006, down slightly from the original forecast of 6 per cent. In other words, the economy would still be the thing to watch. Indeed, Yudhoyono’s biggest challenge in the coming year is how to steer away from being defeated by a possible economic crisis, which could easily turn into a political one and in turn exacerbate the security problem. The bad news is that Indonesia has become a net oil importer. A lot of investments will be needed to turn that around and recapture its status as an oil exporter. Should oil prices continue to create havoc, Yudhoyono will need the entire cabinet, and the people, behind him to prevent a repeat of the 1998 scenario. The Indonesian political environment is a volatile one. Curiously, talk of a possible impeachment is already circulating even though under new rules this will be difficult, though not impossible, to achieve. The clear message is that the immediate years ahead may not be plain sailing even for a president as immensely popular as SBY.

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political Outlook

Laos Laos is a single-party socialist state in which political power is monopolized by the Lao People’s Revolutionary Party (LPRP), the only legal political organization in the country. The party’s quinquennial congress is the most important event on the country’s political calendar. The 8th Party Congress will be taking place early next year and there are signs that the party is looking for change. A number of older officials on the Central Committee (the next most influential party organ after the Politburo) have been replaced by younger candidates over the past few months, while some officials (especially provincial governors) have been moved out of office because of their poor performance. These political moves suggest that the leadership is striving for more efficient governance, which may see a younger, better-educated, and more reform-minded selection of cadres made it into the Central Committee. It will not be a complete generational change, however. The old guard will retain some power by remaining in command of the Politburo (the seat of power). Some of its members, especially the older ones, may

laos Land area:

236,800 sq. km.

Population:

6 million (approx.)

Capital:

Vientiane

Type of government:

Socialist republic

Head of State (President):

General Khamtay Siphandone

Party Secretary:

General Khamtay Siphandone

Prime Minister:

Bounyang Vorachit

Next election:

Early 2007 (for the National Assembly) Early 2006 (for the LPRP Congress)

Currency used:

Kip

US$ exchange rate on 1 December 2005:

US$1 = 10,880 kip

the asean-10 be asked to step down and (relatively) younger members will move up the ranks; however, it is believed that Khamtay Siphandone will keep the position of Party Secretary for five more years. The adoption of the counter-corruption law by the National Assembly in 2005 is an indication of the government’s willingness to improve the management of the country’s institutions and their credibility in the eyes of the international community. Corruption, hardly a new phenomenon in Laos, has reached worrying proportions in the past decade, and fuels growing resentment amongst the population by confining economic benefits and other opportunities to an elite and its clients. Although the creation of a socialist republic in December 1975 was meant to rid the country of the ancient regime, many attributes of the former society have survived. The political culture in Laos depends to a great extent on personal and family relationships and patronage. New families with access to the highest levels of power have emerged, while older clans have resurfaced, and clients of lower status search them out as patrons. Under the former regime, powerful clans were constituted by aristocratic families; today, powerful figures (usually LPRP members) fulfil the same role. Laos’ landlocked geography places it at a disadvantage. Since the mid-1990s, the government, with some crucial external support, has been determined to overcome this geographical barrier (as far as global and regional trade and economic competitiveness are concerned). The Greater Mekong Subregion (GMS) programme plays an essential role in the process of moving towards the realization of this objective. Launched in 1992, this initiative involves the participation of six countries — Cambodia, China (Yunnan Province), Laos, Myanmar, Thailand, and Vietnam — as well as the strategic support of the Asian Development Bank. The GMS transport programme primarily consists of the building and development of three intra-regional “Economic Corridors”, namely, the North-South, the East-West, and the Southern corridors. The first two of these super-highways will cross Laos and terrestrially link up the country with the rest of the sub-region (covering southwestern China and northern Thailand, and stretching from central Vietnam to western Myanmar). The completion of these “corridors”

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political Outlook (scheduled for 2007 and 2008 for the East-West and North-South routes, respectively) will undoubtedly change the economic landscape of the region, putting Laos at the crossroads. However, it would be premature to predict the full impact — both beneficial and detrimental — that the new infrastructure (and trade liberalization) will have on the country’s economy and people. Ironically, it is this territorial contiguity with neighbouring states that explains the growing volume of various types of flow, mainly unwanted, across Laos’ borders. Since the early 1990s, the number of illegal labour migrants from Laos to Thailand has been increasing tremendously. Thailand’s economy is in need of (cheap) labour, while, like Myanmar and Cambodia, Laos offers few job opportunities other than subsistence farming to young people. Thailand and Laos have been collaborating for a few years now in an attempt to regulate the flow of illegal Lao migrants to Thailand. The Thai government has recently launched a policy to record all migrant workers and thus to eliminate illegal labour. Laos has been the first country to cooperate with the Thai authorities by starting to verify the citizenship of the migrants who claim to be Lao nationals in Thailand. The permeability of their frontiers has also contributed to an increase of drug trafficking. The illicit products (particularly methamphetamines or yaa baa) are believed to transit through northern Laos from the northern border areas of Myanmar, destined for the Thai market. GMS governments are thus facing a highly challenging, if not paradoxical, task of trying to bring about a border-less economic space but also retain the imperative of border control. Another kind of unsolicited flow has constituted a source of tension between the Lao and Thai authorities in 2005. In May, 6,588 Hmong were reported to have settled in Phetchabun province in northern Thailand and want to stay there or be relocated to the United States. But both the Thai and American authorities are unwilling to accept while the Lao government refuses to recognize these Hmong as Lao citizens. About a third of these Hmong refugees had journeyed from northern Laos and claimed to be former CIA soldiers or their relatives. Some Hmong have clashed with the Lao army over many years for reasons

the asean-10 that are linked with both the government’s development projects (particularly its policies of relocation and reduction of opium cultivation) and a lingering past (part of the Hmong population was entangled in a proxy alliance with the United States and fought during the Vietnam War against the Lao communists). A Hmong and Lao-American lobby has been opposing the Lao regime for years (thousands of Hmong fled the country after the end of the war; many of them took refuge in the United States). The issue of the Hmong in Laos, a sore remnant of the Cold War, has never been therefore a purely domestic matter; and because of its international dimension, it is unlikely to wane in the next few years. The construction of the highly contested Nam Theun 2 (NT2) dam is likewise better understood within a broader context. The 1,070-MW hydroelectric project is located on the Nam Theun River in Nakai district, Khammouane province, in the centre of the country. More than 90 per cent of its electricity production will be exported to Thailand. The estimated total project costs have reached a colossal US$1.2 billion — more than half of the country’s GDP. In March 2005, after several years of consultations, the World Bank finally granted financial and political risk guarantees in support of the project. Protests (mainly outside the country) against the project have not stopped, however, and continue to stress the social and environmental costs of such construction to the local population, while the project’s proponents point out the economic benefits and development opportunities for a country in dire need of hard currency. The Lao government and its international partners have insisted on presenting the gigantic dam as the best, if not the sole, remedy to alleviate the country’s poverty. Chinese aid and investment in Laos has dramatically increased over the past few years. The 1997 regional financial crisis sent a brutal signal to the Lao leadership regarding their over-dependence on the Thai economy, then badly shaken by the financial turmoil. The repercussions were severe for the Lao economy, and the government found itself suddenly in need of other economic partners. This re-orientation of their international economic strategy favoured China, which welcomed this rapprochement. Sino-Lao relations went through a tense

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political Outlook phase when Vientiane took sides with Vietnam in the Sino-Vietnamese dispute that erupted in 1979 and lasted more than a decade. In July 2005, China agreed to grant tax-free status to 91 export commodities from Laos (adding to an existing list of 221 items), in addition to a grant of 80 million Chinese yuan (nearly US$10 million). Vientiane may regard Beijing less as a potential rival economic partner to Bangkok than as a bulwark against economic instability in the region. Having learnt from the 1997 lesson, Laos no longer wants to rely too heavily on one single economic partner. The Lao leadership is also very careful to maintain a balance in their relationship — between China, on the one hand, and Vietnam, on the other, both of which are trying to expand their influence in the country. Vietnam opened a consulate in Luang Prabang province in September.

Malaysia On 31 October 2005, Datuk Seri Abdullah Badawi had been Prime Minister of Malaysia for exactly two years. A year earlier, at an event marking his first year in office, the premier optimistically stated that he expected to reap greater success during his second year. His first year had been spent sowing “high-yielding seeds”, he said, and these were expected to mature in the second year. Much hope for effective change and rectification of policies has been placed on Abdullah Badawi. There is his push for a more moderate Islam through his concept of Islam Hadhari, which occurs alongside his attempts to tackle the high-profile issues of graft and poverty. The 9th Malaysia Plan (2006–10) emerging under his watch will configure Malaysian politics for the immediate future, accompanied by the New National Agenda (NNA), which will express the latest inter-ethnic compromises between the major parties in the ruling coalition. At the point of going to print, a cabinet reshuffle is expected at any time. Abdullah Badawi’s Islam Hadhari has a list of ten principles, all but one of which have no religious connotation. This concept attempts to shift Islam’s focus from its sanctioning function to its civilizational potential. It presents Islam as a generator of civilization and culture,

the asean-10

malaysia Land area:

330,434 sq. km.

Population:

24 million (2004 estimate)

Capital:

Kuala Lumpur

Type of government:

Federated parliamentary democracy with constitutional monarch

Head of State:

Yang Di-Pertuan Agong Tuanku Syed Sirajuddin Syed Putra Jamalulail

Prime Minister:

Datuk Seri Abdullah Ahmad Badawi

Next election:

By March 2009

Currency used:

Ringgit (RM)

US$ exchange rate on 1 December 2005:

US$1 = RM3.78

and not merely a source of religious inspiration. This has helped to counteract extremist tendencies domestically and has provided a conceptual platform for “moderate Islam”. Very importantly, Islam Hadhari suggests that UMNO’s materialism and nationalism do not contradict Islam. Today, with the atmosphere strongly charged with concerns about emerging economic superpowers such as India and China, the religious aspect of Malaysian nation-building has been overshadowed by worries about the national economy and the rectitude of its political and bureaucratic elite. Economic development in Malaysia, as a rule, is irretrievably intertwined with the issue of inter-ethnic relations. At the Umno General Assembly in July 2005, the Youth wing chose to call for the reinstatement of the New Economic Policy (NEP), an affirmative action programme that sought to reduce the developmental gap between the Malay community and other ethnic groups. In name, the NEP ended in 1990 but in reality has continued to exist. This lack of certainty about how long affirmative action would

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political Outlook be retained worries non-Malay communities. Even among the Malays, questions about the efficacy of affirmative action programmes have been raised. Some even question its conceptual base. For example, former Finance Minister Tun Daim Zainuddin recently stated that “the natural second phase to social and economic transformation of the Malays is only through education, not equity participation. You take care of education and they will have enough to participate in the capital market”. The focus on the pitfalls of ethnic-based affirmative action has aroused fears among Malays that “the Malay agenda” would be abandoned. That was probably a reason why UMNO Youth decided to raise the thorny issue again. One way out of this minefield presently on offer is to subsume the Malay agenda under the umbrella of the forthcoming NNA. The details are far from clear but ultimately the NNA will have to translate the technical details of the 9th Malaysia Plan into broad operating principles that can appeal to Malaysians across all the ethnic divides. Publicity over dubious practices and other failings related to affirmative action programmes has led to demands that attention be given to the need for monitoring systems and to the sustainability of achievements. Future affirmative action programmes are also expected to pay more attention to an overall reduction of poverty regardless of race. While poverty rates have dropped greatly over the last decades, recent figures show that there is entrenched poverty in certain predominantly Malay states. Low-skilled Indians are also among those suffering badly from the lack of government aid and from changes in the economy. Both the World Bank and the Asian Development Bank consider inequality of income in Malaysia to be relatively high. At the same Umno General Assembly, Abdullah Badawi as party president, tellingly avoided inter-ethnic issues, but instead talked about the many global challenges that the country was facing. These translate readily into economic terms and signal the priorities that will preoccupy the regime in the immediate future. With regard to the fight against “the culture of corruption”, hopes have been raised by the release on 16 May 2005 of the 500-page Report

the asean-10 of the Royal Commission to Enhance the Operation and Management of the Royal Malaysia Police. While it lists 125 recommendations for reforming the police force, much scepticism has been heard over how many of them will be carried through. The suspension and subsequent resignation of Federal Territories Minister Tan Sri Mohd Isa Abdul Samad for vote-buying, along with the criticisms aimed at the Minister of International Trade and Industry, Rafidah Aziz, over alleged improprieties in the issuance of Approved Permits (APs) for car imports, fuelled speculations that Abdullah Badawi would be making changes to the cabinet that he inherited from his predecessor. Political observers believe that he will use the reshuffle as an opportunity to regroup his supporters. Party elections for the Indian-supported Malaysian Indian Congress (MIC), a key component of the ruling coalition, are scheduled for May–June 2006. Long-serving Works Minister Samy Veloo is expected to retire soon. That would finally allow a new generation of leaders to come to the fore. In the field of foreign relations, the chairmanship of ASEAN was recently passed to Malaysia. The 11th Asean Summit in Kuala Lumpur from 12 to 14 December 2005 also witnessed the inaugural East Asian Summit when all Asean members discussed future Asian regionalism together with representatives from China, Japan, Korea, India, Australia, and New Zealand. (See the article “The Inaugural East Asian Summit: The First Step in a Long Journey” on page 16. This provided Abdullah Badawi with a higher international profile. Abdullah Badawi’s first two years in office has seen some major changes in the country’s relations with its neighbours. Relations with Singapore saw a marked improvement after the all-time low experienced under his predecessor Mahathir Mohamed. Abdullah Badawi’s trip to Australia in April was the first in 21 years by a Malaysian prime minister, and the general consensus is that it helped paved the way for serious dialogue between the two countries. Australia’s commitment to sign the Treaty of Amity and Cooperation in order to get invited to the East Asian Summit held in the Malaysian capital is a positive development that is credited to that trip.

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political Outlook There have also been hiccups in the country’s relations with some of its key neighbours. Malaysia-Indonesia ties were sorely tested by three events in 2005: a dispute over territory in the Sulawesi Sea off North Borneo in February, the expulsion of Indonesian workers in March, and the haze from Indonesian forest fires in August. Resolving the maritime dispute will take a while. The departure of Indonesian workers has led to a severe labour shortage and the country has since been recruiting labourers from elsewhere. While Jakarta apologized for the forest fires, it also retorted that many of the forest-burning culprits — at least eight of them — were Malaysian companies. The Malaysian side continued demanding more effective action. A longterm solution to the recurrent haze problem needs to be sought at the regional level. Currently, relations with Thailand leave much to be desired. Terrorism in southern Thailand associated with a Muslim-led insurgency had created tension between the two countries. The Thais have charged that some of the terrorists operated from the safety of Malaysia, but this has been denied by the Malaysian government. Leaders on both sides have had angry exchanges of words. This thorny diplomatic issue is likely to grow more complex with the insurgency in Thailand showing no sign of abating.

Myanmar As Myanmar commences the eighteenth year of military rule following the collapse of the old one-party socialist regime in 1988, baring the unforeseen, the prospects for sudden change in the political condition of the country remain remote. The major civilian political group following the aborted 1990 elections, the National League for Democracy (NLD), faces atrophy as its septuagenarian leadership become increasingly incapacitated and it continues to refuse to cooperate with the military. Its iconic General Secretary, Daw Aung San Suu Kyi, will remain incommunicado under house arrest in her Yangon villa at least until the army has put in place a new constitutional order. The party is now thus virtually ignored except by some exiled factions

the asean-10

myanmar Land area:

678,675 sq. km.

Population:

54 million (2005 estimate)

Capital:

Yangon

Type of Government:

Military

Head of State:

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

Prime Minister:

General Soe Win

Next election:

Currently suspended

Currency used:

Kyat

US$ exchange rate on 1 December 2005:

US$1 = 1,180 kyat (parallel market rate) US$1 = 6.72 kyat (official rate)

and Western embassies required to appease human rights lobbies back home. Consequently, there is no organized opposition to the military government in urban areas. The prospect of other aspects of civil society developing the strength to stand up to the regime under current economic and social conditions remains equally remote as most people are concerned with the daily struggle to survive in an economy that is not creating new jobs and other opportunities for growth. As is also the case in many rural areas, coping with the necessities of existence is a full-time occupation. Similarly, the former ethnic insurgent groups, now in their second decade of armed truce with the military and increasingly enmeshed in business and local administrative affairs, are unlikely to wish to resort to arms. Even if they were to do so, the longest sustained period of peace in Myanmar’s post-independence history has provided the army with the infrastructure and equipment to penetrate the country’s remote areas in order to contain and suppress any potential outbreak

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political Outlook of armed conflict. Moreover, neighbouring states that had previously facilitated the armed insurgencies, if not providing them with arms and ammunition, are now far more interested in trade and development than in creating strategic buffer zones as they were in the past. The ability of the vocal, though badly divided, Myanmar exile community in Thailand and a number of Western countries to influence the situation within the country grows more remote every day. Their previous optimism, shared with the NLD, that their cause would inevitably succeed because of the backing they receive from Western governments and influential men of wealth has now deteriorated as they have come to realize that even if pledges of solidarity with “the pro-democracy campaign” may be long-lasting, they are of little real consequence within the country. Indeed, they have now become dependent on their financiers for their future livelihoods and this has forced many either to leave the movement or to compromise their principles so greatly as to undermine whatever political credibility they may once have possessed. Their occasional political stunts within the country only serve to strengthen and prolong the military’s grip on power. The overall result of this situation is that the ruling State Peace and Development Council (SPDC) is in a position to determine the pace and nature of any significant political change. The constitutional convention which re-convened in May 2004 will continue to meet intermittently until the army is ready to move to the second step of its seven-step road map to constitutional government and power-sharing with civilian institutions. By then the Union Solidarity and Development Association (USDA), the regime’s mass and class organization which operates in every township, will be in a position to be the chief beneficiary of any eventual electoral process. Thus the army is not only protecting its own future institutional autonomy from civilian oversight or control, but also guaranteeing that its perception of the national interest should prevail. When eventually a referendum on the constitution now being drafted is held, victory for the army’s definition of political order will be assured. There is hardly any internal political pressure on the regime to accelerate its announced intention to create a “disciplined” multi-party

the asean-10 constitutional democracy; neither is there any significant international pressure available to force the pace unless China and India simultaneously deny the regime the trade and aid support that they have provided in the past. That is an extraordinarily remote possibility, given India’s hunger for Myanmar’s natural gas reserves and China’s growing dominance in Myanmar markets. The potential for pressure from Myanmar’s fellow members of the Association of Southeast Asian Nations (ASEAN) has now been subdued by the SPDC’s decision in July 2005 to abandon its turn as chair of the organization’s standing committee in 2006. By cleverly obliging the ASEAN call, the regime not only avoided the close scrutiny that would have taken place at Myanmar-chaired ASEAN meetings in its capital but it is also free to dictate when it is ready to take the leadership of the Association. Western pressure is also now totally ineffectual on the regime. Myanmar has absorbed the consequences of increasingly stringent Western sanctions imposed by the United States and the European Union member states for nearly two decades. Repeated condemnation of a regime which has the support, even if grudgingly, of its powerful neighbours, makes little difference now. As Western nations gets further preoccupied by the situation in the Middle East and their own domestic economic and political woes, the prospect of them spending additional resources to undermine the SPDC grows ever more remote. While fora such as the International Labour Organization (ILO) will continued to be used by powerful influences in political circles in Washington and Brussels in alliance with a handful of exiled Myanmars, the big prize of taking Myanmar to the United Nations Security Council will remain elusive because it is likely to be vetoed by either China or Russia or by both. There would appear to be only two possible means by which the SPDC might be forced either to increase the pace of political reform or to step down from power in a dramatic and unexpected manner. One would be a collapse of the economy as had occurred in 1987–88. The other would arise from internal divisions within the army’s own officer corps. Neither seems likely, though any possibility should not be ruled out. With regard to the economy, the government has seen the folly of

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political Outlook its socialist predecessors and their autarkic policies. While having to rely on the country’s internal resources for survival and development, they have ensured that the import tap has never been completely turned off so that shoppers continue to get the basic necessities and a few of the luxuries of life. Given the years of privation that the average Myanmar has experienced since World War II, today’s markets seem well stocked in comparison, although the poorest of the population remain in desperate conditions. Despite its resort to printing money to finance its activities, the government tries to control the effects of rapid price inflation by artificially depressing basic food prices. While this is harming rural producers, it ensures that the urban population has access to cheap food. As regards the possibility of radical change resulting from splits within the armed forces, the purge of the previously powerful Prime Minister and head of Military Intelligence, General Khin Nyunt, in October 2004 shows that the top of the hierarchy knows how to protect its position. While that move doubtless caused unrest amongst lowerranking officers, it also demonstrated the dangers to career and family of stepping out of line. As the post–Khin Nyunt inertia in government ministries and agencies very clearly demonstrates, ministers and officials who cross the undeclared line of unacceptable behaviour are fearful of taking initiatives for they know there is no one to protect them if they were to fall from favour. This sense of insecurity among the lower-ranking officers strengthens the grip of those at the top. Even if there were to be a coup initiated by some young Turks who feel they can lead the country better than the ageing Senior General Than Shwe and his increasingly powerful, if not dominating, deputy, General Maung Aye, little would change. An army career creates patterns of thought and action that are not easily abandoned. Myanmar will remain much as it is for the foreseeable future. As if to underscore the prognosis given above, the announcement in November 2005 of the imminent change of Myanmar’s capital city from Yangon to near Pyinmana, 400 kilometres to the north, demonstrated the insularity of the army regime. Confident of its command at home, and scornful of its foreign critics, whatever the speculations

the asean-10 about the alleged underlying historical, strategic, or astrological reasons for the move, it sent a clear message to the world that the SPDC will not be moved except on its own terms. Returning the capital from the colonial coastal city to the heartland of the dry zone commanding access to the country’s main cultural and economic roots is seen by the generals as merely the further completion of the process of creating a unified nation, which has been their goal since taking power.

Philippines On 25 July 2005, President Gloria Macapagal-Arroyo gave a predictably upbeat address before the Philippine Congress on the state of the nation. She recited a litany of accomplishments: 6 per cent economic growth in 2004, four million new jobs in the past four years, 69 million beneficiaries of health insurance, the “drug menace” cut in half, kidnappings “a thing of the past”, the insurgency in the South having “abated”, the passage of “the biggest fiscal package in our history” that would produce “the biggest revenue increase in a generation”, the stability of the peso, 30,000 new classrooms in the past four years, “computer access to more than 3,000 high schools”, and so on.

philippines Land area:

300,000 sq. km.

Population:

76,504,877 (2002 official statistic)

Capital:

Manila

Type of government:

Presidential democracy

Head of State:

President Gloria Macapagal-Arroyo

Next election:

May 2010

Currency used:

Peso

US$ exchange rate on 1 December 2005:

US$1 = 54.15 pesos

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political Outlook Ironically, however, at around the time of the President’s state-ofthe-nation address, the most common question about the Philippines was this: Will the Arroyo presidency survive? Just a few weeks before her speech, Arroyo had undergone the most trying time of her five-year-old presidency. Her husband and son had been accused of taking bribes from gambling operators. She had been caught on tape talking on the telephone to an election commissioner while the counting of ballots in the 2004 elections was still going on. She later apologized to the nation for this “lapse in judgement”. International rating agencies had downgraded the country’s credit ratings. Ten cabinet members had resigned in protest. Public demonstrations demanded her resignation. A motion for impeachment had been filed, albeit without success, in the House of Representatives. All this commotion has fuelled a perception of continuing political instability. It evokes memories of two out of the four presidential changes in the past 20 years taking place by extra-constitutional means. The current turmoil recalls the military mutinies that have plagued the Aquino and Arroyo administrations. Several major indicators underline the dysfunctional system. One is the loss of the Philippines’ lead over regional countries in economic and educational development. For example, as Peter Wallace, a long-time consultant in the Philippines, pointed out, in 1938 the Philippines had the highest per capita income in Southeast Asia. In 1952, the Philippines had twice the per capita income of Thailand. Today, Thailand has twice the per capita income of the Philippines. Some people blame the malaise on too much democracy. Others blame the “partisan politics”, as did Arroyo. On the contrary, the problem may be that there is too little democracy and no real partisan politics. In the Philippines, political parties do not present alternative visions and programmes for the voters to choose from, as in a working democracy. Political candidates indicate their party affiliations nominally at election time. Electoral contests for the House of Representatives are more about rivalries between provincial clans and their vassals. No common policies or visions link these oligarchies together at the national level. Most voters support candidates solely in the hope of getting jobs in the

the asean-10 bureaucracy, or a road by their homes, or a bridge to their market, or for some other personal consideration that has nothing to do with national policy or party platform. For the Senate, candidates sell themselves as individuals and most people would vote on the basis of “name recall”, because the names of the candidates, who are elected by the whole country, have to be written manually on the ballot. A small number of seats — 24 out of 236 — in the House of Representatives have been set aside to represent sectoral interests such as “labour, peasant, fisherfolk, urban poor, indigenous cultural communities, elderly, handicapped, women, youth, veterans, overseas workers, and professionals” but these representatives, not linked together by a common platform, have not been able to improve governance in any substantive way. Under these conditions, congressional members have no political stake in the progress of the country. Because they are identified with no programme of government, their political survival does not depend on the success of official policies. To be sure, there are members of Congress who care for the progress of the country, but they are not organized into identifiable groups from which the electorate can choose. Thus, in the present system the only politician who has a political stake in the progress of the country is the president. It is he or she who gets the blame for poverty, corruption, and lack of progress. This is why most Philippine presidents have lost in their re-election bids. The only incumbents who have won election to a new term are Marcos, in 1969, and Gloria Macapagal-Arroyo, in 2004. The 1987 Constitution did not permit two other presidents — Corazon Aquino and Fidel Ramos — from contesting election after a full six-year term. Because it is the president who is held accountable for the country’s development, he or she tries to put together and sell a coherent programme of government. However, operating under a system of separation of powers and checks and balances, Arroyo, like any other president, must win the support of individual members of Congress for much of her programme. Since there is no party affiliation and therefore no party discipline to count on, the president will have to win their support with all kinds of concessions and inducements — not

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political Outlook to their parties, as in a democracy, but to each member individually. Since there will never be enough goodies to go around, any president’s programme would not get very far, except in the rare instances of the president and the congressional hierarchy working together. Arroyo recognizes the failings of the country’s political system and has proposed that it be changed to one that is parliamentary and federal. However, this is unlikely to make much difference if congressional representatives continue to be products of feudal rivalries rather than belonging to parties offering real policy options to voters. The coming debate on constitutional change would be an opportunity for Arroyo to lead the way towards a change in the substance and not just the form of governance. However, her ability to do so is hobbled by the erosion in the credibility of her leadership, a leadership weakened by the accusations and challenges it has to face. The natural tendency would be to sit tight, take no risks, and throw concessions to her baying enemies. On the other hand, she could give primacy to her place in history over the demands of relatives, friends, and entrenched interests, go over their heads and lead the people in bringing about the fundamental changes that they require in the political and social system. This means judicious, pragmatic, resolute, and fearless land reform. It also means the overhaul of the systems of public education, public health, and public housing. Not least, it means bringing about the conditions for the emergence of real political parties offering genuine electoral choices. Conscious of her legacy in history, as her father President Diosdado Macapagal was, Arroyo just might do it. Under the present constitution, she has less than five years to do so. In the mean time, because of the weakened leadership and the debilitated economy, the government has not achieved any kind of breakthrough in dealing with the twin communist and radical-Muslim insurgencies. In foreign affairs, the Philippines has been reduced to pleading for breathing space in the wave of regional economic liberalization within ASEAN or between ASEAN and outside partners. The exercise of strong leadership by the President might not only place

the asean-10 the country on solid democratic foundations and lead to an economic revival; it just might regain for the Philippines the international influence, or at least prestige, that it had in the past.

Singapore The year 2005 was Lee Hsien Loong’s first as Prime Minister and it had two notable features: one, his government’s determination to face difficult socio-economic challenges head-on, and the other, increased levels of political activism that resulted in a deepening process of engagement between state and society in some respects, and a restatement of the limits to that in others. First, on the critical issue of socio-economic development, government statistics released in mid-2005 suggested that between 1998 and 2003, income growth had slowed to a crawl and income gaps had widened. The average monthly household income increased by 1.1 per cent per year, with 0.4 per cent of it eroded by inflation. The average income

singapore Land area:

660 sq. km.

Population:

4.1 million (3.3 million residents and 0.8 million non-residents; June 2001 estimate)

Capital:

Singapore

Type of government:

Parliamentary democracy

Head of State:

President S.R. Nathan

Prime Minister:

Lee Hsien Loong

Next election:

By 2007

Currency used:

Singapore dollar

US$ exchange rate on 1 December 2005:

US$1 = S$1.69

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political Outlook per capita which presents a clearer picture of the situation given the increased number of retirees and falling household sizes, indicated that incomes had grown by 2.7 per cent per year. For the poorest 20 per cent of the population, average income per capita fell by 1.6 per cent, while the richest 20 per cent of the population achieved 3.5 per cent growth in per capita income. Seven years of recession and economic restructuring have produced a constituency of older workers from both the managerial corps, and the less-skilled who have been retrenched. They face structural unemployment and downward pressure on wages. This is a constituency that any governing party would ignore at its own peril especially in a country used to the notion of growth with equity. Lee’s government responded with clear policy directions and allocated substantial resources to assure the public that poverty and unemployment would be dealt with systematically, aggressively, and convincingly. Some of the measures to tackle these problems include job redesign, retraining, assistance in seeking re-employment, and support for the elderly and children of the needy. As Singapore keeps pace with the trends of the global economy to stay in the top league of competitive nations, the government will have to invest increasingly in social policies that temper the harshest edges of laissez-faire economics. This will help to maintain the perception that everyone can benefit from economic growth to some extent and that meritocracy works. As this publication goes to print, there is talk of impending elections in Singapore. The results of this election — Lee’s first as Prime Minister — would provide a gauge of whether these policies have gone far enough to address such bread-and-butter issues. Besides the economy, talk about elections has been dominated by a preoccupation with how much the new Prime Minister has lived up to his promise to deliver a more open and inclusive Singapore. The open political climate that Lee has encouraged has resulted in a surge in state-initiated public consultation and more spontaneous expressions from citizens about the sort of Singapore they want. The government invited discussion on a proposal to reverse a ban on casino gaming and introduce integrated resorts. Leaders of many religious groups made formal representations against it. Forum pages

the asean-10 of local newspapers were filled with letters arguing for and against it from the economic, social, religious, and moral standpoints. An online petition against it gained 40,000 endorsements. Even cabinet ministers revealed publicly there was division among them. When the decision was announced in Parliament in April, it was extraordinary that cabinet ministers were allowed to state their position of conscience before going on to explain their final agreement to the proposal. In spite of all this and the year-and-a-half long public debate, there was still scepticism that these were merely window-dressing for a decision taken in principle earlier by the government. The Elected Presidency (EP) polls were due at the end of August 2005 but the incumbent S.R. Nathan was returned unopposed on Nomination Day. While there were three other persons who applied for pre-qualification (known as the certificate of eligibility) to contest for the office, the Presidental Elections Committee in charge only approved Nathan. In the days before the applications closed, one of the applicants, Andrew Kuan was publicly invited by the Prime Minister to account for his job record in the interest of transparency in the wake of mounting public interest in him as a serious potential candidate. Following that, his most recent employers, both with various degrees of linkage to the government, held press conferences where they questioned his ability and character. Public commentary in newspapers and online suggested there were some quarters that felt Kuan’s profile and prospects had been sabotaged by the government, and that Lee’s People’s Action Party (PAP) had yet again shown little respect for the need for competitive politics as integral to developing a robust democracy in Singapore. Analysts highlighted ways in which the EP system itself was flawed in terms of its democratic qualities. In September a controversy on the Internet precipitated another round of criticism against the government for curbing freedom of speech, while others recognized the need for limits to maintain social harmony. The government charged three young bloggers under the Sedition Act for posting disparaging remarks against the Malay/Muslim community. Outside of the Internet, other incidences of civil protest also emerged. Four members and supporters of the political opposition demonstrated

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political Outlook outside the premises of a statutory board and were investigated by the authorities. Another person mounted eight cut-outs of white elephants outside a newly completed mass rapid transit train station to register the unhappiness of residents with its delayed opening, a delay which to their minds, rendered the empty station a “white elephant”. A filmmaker, Martyn See, made a biopic on opposition leader Chee Soon Juan and faces police investigation for violating the country’s Films Act. All these have triggered off an official wariness that some people may be overstepping the limits of what the government is prepared to allow even as it promises a liberalizing agenda. The Minister of Home Affairs has warned that wilful law-breaking “regardless of whether you think it is a silly law or not … does violence to the rule of law”, even if no harm results from the action. All things considered, Lee has generated a sense of a changing Singapore. Nobody expects him to lose any election but many will use the results as an assessment of the extent to which the early translation of his vision of Singapore has struck a chord with citizens. Another thing that will be of interest in the election will be the identities of those leaving and joining the PAP slate. More importantly, many will be wondering who among the new recruits and the current cabinet ministers will emerge as Lee’s key deputies and his designated successor. Lee’s tenure as Prime Minister has also coincided with changes in leadership in Singapore’s two immediate neighbours, Malaysia and Indonesia. This has led to fresh impetus to and a warming of ties among them. The Singapore government and people’s gestures of assistance and goodwill after the Asian tsunami in December 2004 have helped to strengthen bonds with Indonesia. Lee conducted a state visit in June to India where an important trade and investment agreement was signed, and another well-received state visit to China in October. These are integral to Singapore’s strategy of expanding her diplomatic and economic space in a rising Asia. A key landmark for diplomacy in the year was Singapore’s inauguration and convening of the AsiaMiddle East Dialogue, a Track 2 meeting aimed at creating greater understanding, and social and economic interaction between the two regions — hopefully, a lasting form of friendly engagement of Muslim states and their people in a post-9/11 world.

the asean-10

Thailand The year 2005 was a roller-coaster ride for the political fortunes of Prime Minister Thaksin Shinawatra. When the year began, Thaksin was busy managing the huge rescue and relief operation needed for the tsunami that hit the tourist resort of Phuket and Phang-nga on 26 December 2004. The disaster management gave him opportunities to demonstrate leadership at a time when it was most needed. This helped him to rehabilitate his image of a dynamic political leader — a reputation that had taken a bad beating after his administration mishandled the Tak Bai incident that preceded the tsunami by two months. On 25 October 2004, a boisterous but peaceful protest at the Tak Bai district police station in the southern Narathiwat province demanded the release of six local Muslim men accused of firearms theft. The crowd swelled from two hundred to more than two thousand. In trying to disperse the protesters, the authorities caused the death of 87 Muslims. The Tak Bai disaster could not come at a worse time for Thaksin. Two months before that, his ruling Thai Rak Thai (TRT)

thailand Land area:

514,000 sq. km.

Population:

62.8 million (2002 estimate)

Capital:

Bangkok

Type of government:

Parliamentary democracy with constitutional monarch

Head of State:

King Bhumibol Adulyadej

Prime Minister:

Dr Thaksin Shinawatra

Next election:

Upper House (due in April 2006) Lower House (due in February 2009)

Currency used:

Baht

US$ exchange rate on 1 December 2005:

US$1 = 41.24 baht

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political Outlook party lost the Bangkok governor race to the opposition Democrat Party. In his handling of the tsunami relief effort, it was clear that Thaksin benefited from his CEO top-down management style. He was hands-on within hours, inspecting worst-hit Phang-nga province and appearing to be in overall charge of rescue and recovery operations. His centralization of the state machinery also allowed him to command bureaucrats effectively. His government’s control of the media, especially state-run television, duly extolled his leadership while marginalizing leaders of other political parties. As the general elections were just weeks away, Thaksin’s effective handling of the tsunami gave the TRT a big campaign boost and won the party a second term in office by a huge margin. Yet just several months after the impressive re-election victory, Thaksin found himself embattled on several fronts. His hold on power is much less secure than his party’s control of 75 per cent of the Lower House seats in Parliament would suggest. His political slippage is attributable to several factors. First, the Muslim insurgency in the south continues to erode his aura of invincibility. Over the past 20 months, a succession of strategies has failed to quell the violence and the death toll has risen to more than 1,000. What is worse for the Prime Minister is the internationalizing of the insurgency when a group of 131 Thai Muslims of Malay ethnicity fled into neighbouring Malaysia’s Kelantan state in early September 2005. The fleeing Muslims have become a refugee problem, attracting the attention of the United Nations High Commissioner for Refugees (UNHCR), and souring bilateral relations between Thailand and Malaysia. Shortly thereafter, Thaksin’s remarks at the UN targeted at the UNHCR and the Malaysian government nudged the incident further into the international arena when his government had been trying very hard to keep it within the domestic realm. Just days after Thaksin’s remarks at the United Nations, another incident at Tanyonglimo village in Narathiwat province marked a further escalation in the violence. Two Thai marines were taken hostage by villagers who were outraged by the gangland-style shooting that killed two and injured four Muslims. The marines were subsequently

the asean-10 stabbed to death by unidentified assailants among the villagers. Thaksin condemned the deaths of the marines but failed to redress the grievances of local villagers. He has made fresh promises to put an end to the insurgency, even urging voters to give him the boot should he fail to restore peace and order in his second term. However, the southern insurgency showed no sign of dissipation. The slaying of a monk and two attendants at a Buddhist temple in mid-October infuriated Thaksin, who promised to go on the “offensive” against the insurgents. Around the same time, his administration renewed for another three months the emergency decree for administering the southernmost provinces, effectively designating the area as a war zone. As the year 2005 drew to a close, the situation in the deep South appeared set to get worse before it gets better. The second major problem confronting Thaksin is the economic slowdown, which has fundamentally undermined the Prime Minister’s self-styled ”Thaksinomics”, a dual-track development approach that relied on domestic demand and exports. The premise of Thaksin’s rule from the outset was a restoration of high economic growth. But economic conditions have hardened, partly due to high oil prices. In the face of growing price pressures, interest rates are on the rise. Yet Thaksinomics, which emphasizes the grassroots sector, was predicated on ample liquidity, easy credit, and low interest rates. The public perception is that the government seems to be losing momentum and running out of ideas to boost growth. The government has conservatively revised GDP growth for 2005 downwards to 4 per cent — far short of the double-digit pledged when Thaksin first entered office. Third, the opposition Democrat Party is alleging that there is growing corruption within Thaksin’s government. In a June 2005 censure debate, the TRT’s No. 2 man, then Transport Minister Suriya Juengrungruangkit, failed to adequately answer the opposition’s questions about a corruption scandal involving the procurement of scanners for Bangkok’s new airport. Yet Thaksin stood by Suriya and merely transferred him from the transport to the industry portfolio, as well as made him deputy Prime Minister. This was despite overwhelming public sentiments against Suriya.

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political Outlook Fourth, the Thaksin government is reneging on its campaign promises for the first time. In the February election, the TRT’s most salient campaign plank was a massive and comprehensive infrastructure development plan, including seven subway lines in the Bangkok metropolitan area. But financial squeeze since then has resulted in the suspension of two of them, with proposals for a rapid bus system as a substitute. The resulting public outcry in the capital prompted the government to turn the green light back on. Whatever the eventual outcome of the mega-infrastructure projects, the public no longer sees Thaksin as the man who could be counted on to deliver the goods, as he did in his first term. Finally, the government has been embroiled in three political crises that have highlighted the role of the King as the check-and-balance force in the face of Thaksin’s monopoly of political space. One case concerned the country’s auditor-general, whose tenure was cut short by a vague Constitution Court ruling and a Senate’s dubious replacement. As the King did not endorse the Senate-appointed replacement, the crisis has consumed the Senate and has reflected poorly on the Thaksin government. Although the government is technically not responsible for what takes place in the Senate, many considered the institution to be partial to the Thaksin government. Another case was the government’s military promotions list, which had to undergo a significant revision before it gained royal approval. Such royal signatures normally were a matter of routine in the past. But under Thaksin’s virtual authoritarian rule, many believe the royal signature should not be treated as a rubber stamp. The third crisis gathered momentum towards the end of the year when media tycoon Sondhi Limthongkul intensified his personal crusade to topple Thaksin on charges of corruption, cronyism, and disloyalty to the King. Sondhi’s movement evidently resonated with Bangkok’s middle classes, who felt their dissent had been suppressed. Yet in and of itself, the movement was unlikely to erode Thaksin’s overwhelming political legitimacy and fresh electoral mandate in the near term. Thus Thailand enters 2006 with a Prime Minister who has lost much of his political mantle as the leader who would solve the coun-

the asean-10 try’s myriad problems. Thaksin began 2005 with a spectacular win in the country’s election but in the space of a year, he is no longer the knight on a white horse in Thai politics. The mystique surrounding him for much of his first term has been deflated. He is merely just another elected leader bent on political survival at all cost. His harsh management of the southern insurgency could backfire, with violence spreading to economically sensitive locations such as Bangkok or Phuket. Rising interest rates and unfavourable global oil prices may further constrain economic growth to undermine Thaksin’s economic policy platform. As it regains momentum, the Opposition is likely to take Thaksin to task in Parliament, eagerly assisted by the Bangkok-based intelligentsia and civil society and fuelled by growing government corruption scandals. Royal prerogatives will also keep Thaksin’s runaway power in check. Soon after Thaksin’s re-election victory in February 2005, many viewed his prospective third term as a foregone conclusion. Some now think that he would be fortunate just to complete a second term.

Vietnam The year 2005 is the end of a cycle of three key multi-sectoral five-year plans that began in 2001, including the socio-economic development plan, the poverty alleviation plan, and the implementation of the Public Administration Reform Master Program (PAR-MP), all for the period from 2001 to 2005. The first two concentrate on and concretize the sectoral strategies to promote growth and poverty alleviation, the twin pillars of Vietnam’s development policy. The last is aimed at building a public administration system capable of promoting the national economy, maintaining social equity, preserving the nation’s cultural essence, and preparing Vietnam to join the international economic community. Equally important is that part of 2005 is spent on preparing for the 10th Congress of the Vietnamese Communist Party (VCP), with emphasis going to leadership change and the formulation of new policy directions. The year 2005 ends with the National Assembly’s promulgation of crucial legislations, the Law on Anti-Corruption and

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political Outlook

vietnam Land area:

330,000 sq. km.

Population:

82.1 million (2004 estimate)

Capital:

Hanoi

Type of government:

Socialist republic; a one-party centralized state that increasingly decentralizes administration and devolves decision-making power to the provinces

Party Secretary:

Nong Duc Manh

Head of State:

President Tran Duc Luong

Prime Minister:

Phan Van Khai

Chairman, National Assembly:

Nguyen Van An

Next election:

By second quarter 2006 (Communist Party) By mid-2007 (National Assembly)

Currency used:

Dong

US$ exchange rate on 1 December 2005:

US$1 = 15,910 dong

the Law on Petitions and Denunciation, both of which are potential driving forces for Vietnam’s future reform efforts. The implementation of the socio-economic development and poverty alleviation plans has resulted in some positive achievements. Vietnam’s growth rate is high compared with the rest of the region, averaging some 7 per cent. Exports and foreign investment have increased sharply. The poverty rate has been reduced to 8.8 per cent by mid-2004. In the area of public administration reform, the government has moved forward on building the necessary legal frameworks, simplifying administrative procedures based on the one-stop shop principle, consolidating administrative decentralization, training and retraining civil servants, granting limited financial decentralization in the form of block grants

the asean-10 and autonomy in income-generating public services, and modernizing government operations. In 2005 the new public administration reform discourse centres around participatory planning, administrative decentralization, one-stop shop, output-based budgeting, job descriptions, competence-based training, and performance management. Yet Vietnam watchers and certain figures within Vietnamese policymaking circles also express concerns that given the resources invested, Vietnam’s progress has been too slow. They argue that Vietnam’s growth should be 11 instead of 7 per cent and that the poverty alleviation should have been more sustainable. In the case of the latter, if the new poverty criteria is applied in 2006 (that is, under 260,000 Vietnamese dong per month for those living in urban areas and under 200,000 dong a month for those living in rural areas), the percentage of poor households will rise substantially, to an estimate of between 22 and 26 per cent. In the area of public administration reform, institution-building within the PAR framework has encountered a number of obstacles, ranging from a poor implementation strategy and the lack of a monitoring and evaluation system to conflicting perceptions about the sources of political authority and still limited popular participation. The discourse on PAR has been linked with the question of how the public administration system can directly contribute to both economic growth and poverty alleviation. The question raised, then, is whether the leadership and the public administration system have implemented growth and poverty reduction strategies effectively and efficiently. There is as yet no clear answer to this question. In 2005 an attempt to reform the public administration and to promote socio-economic development is reflected in the government’s and the National Assembly’s move to draft the Law on Anti-Corruption to replace the Ordinance on Anti-Corruption of 1998. The draft Law on Anti-Corruption, when passed by the end of 2005, is a comprehensive legal framework that attempts to address the increasingly complicated problems of corruption. The Law expands the list of corrupt practices, from the seven listed in the Penal Code to eleven. The purpose is to cover both new corrupt practices that have emerged, and those that could potentially emerge. It highlights corruption prevention within

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political Outlook key corruption-prone public sectors, including public procurement and capital construction, public finance and state budget, the use of publicly raised funds, management of state-owned enterprises and their equitization, land management, and personnel management. Finally, the Law directly addresses what are considered the cultural causes of corruption, that is, family ties and gift-giving. The preventive measures adopted prohibits family members of public officials (that is, spouses, children, parents, and relatives) from contributing capital to, doing business with, or serving in human resources and finance positions for, the enterprises under their management. These regulations apply to leaders of state-owned enterprises, army and police officers, and even deputies of the National Assembly and People’s Councils. The Law also devotes one article to the protocol of gift-giving and receiving by public employees. Whether the Law on Anti-Corruption is a spearhead for further reform remains to be seen. A successful implementation of the Law in Vietnam will depend on at least the following four factors. The first is the promulgation of additional government regulations required, including decrees on publicity and transparency, asset declaration by cadres and civil servants, a public code of conduct, public denunciation of cadres and officials, and involving the participation of the media, social organizations, and the populace in fighting corruption. The second is the prioritization of different elements of strategies, or a combination of strategies, at different stages of implementation, especially the balance between prevention, which involves long-term reform programmes, and punishment, which reflects the commitment of the leadership. The third is coordination between the Law and party regulations on personnel management, disciplinary action, and anti-corruption strategies. The fourth is institutional capacity-building within various sectors of government agencies. In 2005, Vietnam also plans its revision of the 1998 Law on Petition and Denunciation. This more or less is to respond to the requirements imposed by the Vietnam-US Bilateral Trade Agreement and to prepare Vietnam for joining the World Trade Organization. The Law has liberalized the process of petitions and denunciation in several areas,

the asean-10 including the increase of the role of the court in handling petition cases and strengthening the role of lawyers in the process. Petitioning procedures will be simplified. The ultimate objective is to set up in the near future a separate administrative tribunal to deal with administrative petitions. The promulgation of these two legal frameworks will improve governance. In 2005, voices of concern began to surface and debates on what constitutes “good governance” are likely to become more heated. In order to push the reform process to the next stage, the Vietnamese Communist Party will need more than its traditional system for allocating leadership positions and the division of powers among various sectoral interests. The above problems are endemic to the Vietnamese political system and they will take time to sort out. Meanwhile, the focus of politics in Vietnam is the Party Congress looming in 2006. As in any run-up to this major party event, the talk is about who will stay and who will go among the political elites and what these changes point to. The VCP organizes its local congresses in October and November of 2005 to select candidates to attend the National Party Congress. These local congresses also discuss leadership change at different levels. However, more heated debates on the leadership change tend to come up after the National Assembly session that ends in November. It is also a common practice that a “scandal” will be exposed as a final measure to screen potential top candidates. From the structural point of view, however, there are two key questions to be considered. The first is whether there will be a charismatic and competent leader emerging who can lead the reform process. Vietnam’s reform programme, known popularly as doi moi, unlike that in former socialist countries, has not been led by one strong leader; it has instead been driven by both old and new sectoral political interests that comprised the reform and competed as the process unfolds. The second question is whether the discussion about “red” versus “expert” will conclude in favour of the latter, with more authority being granted to professional technocrats and intellectuals. These questions govern the discussion of the choice of potential candidates for the top VCP leadership positions.

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political Outlook The future of General Secretary Nong Duc Manh will depend on how well he meets the criteria that emerge from the discussion of the two questions raised. The General Secretary has been, during his first term, careful in balancing various competing interests. This choice of strategy might have been fostered by his previous experience as Chairman of the National Assembly. Although this cautious approach has helped to maintain stability within the leadership, it is not the most appropriate strategy to push Vietnam’s needed reforms forward. Nong Duc Manh’s chance for a second term will depend on whether he manages, during the limited time available, to convince the reformists that his second term will make a difference. The new corps of leadership that eventually emerges will serve as a signal on the extent to which the VCP is committed to the implementation of its various domestic reform programmes and the potential pace of the reform, both of which are crucial to Vietnam’s integration into the international system.

regional economic trends

economic OUTLOOK

63

regional economic trends By Denis Hew

S

outheast Asia will grow slower in 2005 — at 5 per cent compared with 6.3 per cent observed in the previous year (ADB 2005). The slowdown in the major industrial countries has been a drag on the global economy and high oil prices will continue to be a matter of concern over the coming year. Global economic growth will decelerate to 4.3 per cent in 2005 compared with a historical high of 5.1 per cent in 2004 (IMF 2005) (Figure 1). World trade volume (goods and services) growth will soften from 10.3 to 7 per cent over the same period. It is evident that high oil prices and the downturn in the information technology (IT) sector have clearly taken their toll on industrial production and world trade in 2005. Most countries in Southeast Asia will register lower growth rates in gross domestic product (GDP) in 2005 (Figures 2 and 3). The IT slump has affected the export performance of Singapore, Malaysia, the Philippines, and Thailand. On the supply side, bad weather conditions during the year have badly affected agricultural output in the Philippines and Thailand. Continued high oil prices have clearly dampened economic growth in the region. Oil-dependent countries such as Singapore, Thailand, and the Philippines were particularly vulnerable. Indonesia also fared badly as its huge fuel subsidies were causing a severe downward pressure on the rupiah. Nevertheless, the country’s currency has begun to stabilize, with significant hikes in domestic gasoline and diesel prices imposed by the Indonesian government.

Figure 1: Real GDP Growth in the World, USA, China, and Southeast Asia, 2000–2006F

10.0 9.0

Percentage change

8.0 7.0 6.0 5.0 4.0 3.0 2.0 World USA

1.0 0.0

2000

2001

2002

2003

China Southeast Asia

2004

2005E

2006F

Sources: International Monetary Fund, Asian Development Bank.

Figure 2: Real GDP Growth in the ASEAN-5 Countries, 2000–2007F

10.0

Percentage change

8.0 6.0 4.0 2.0 0.0 –2.0

2000

2001

2002

2003

2004

2005E

Indonesia Singapore Malaysia

–4.0

Source: ISEAS, Regional Outlook.

2006F

2007F

Thailand Philippines

regional economic trends Inflows of foreign direct investment (FDI) to China rose from US$53.5 billion in 2003 to US$60.6 billion in 2004, making it the world’s third largest destination for FDI after the United States and the United Kingdom (UNCTAD 2005). Meanwhile, Southeast Asia saw a significant rise in FDI inflows, from US$17.4 billion in 2003 to US$25.7 billion in 2004 (Figure 4). The main beneficiaries of the higher inflows were Singapore, Malaysia, Indonesia, Myanmar, Vietnam, Cambodia, and the Philippines. After several years of disinvestments, Indonesia’s business environment appears to have finally turned around — Southeast Asia’s largest and most populous country received US$1 billion worth of FDI in 2004. Inflation has been on the rise in Southeast Asia for a number of reasons. One reason is higher fuel prices as countries, namely, Malaysia, Indonesia, and Thailand cut fuel subsidies and raise gasoline and diesel prices. Food prices have also gone up in several Southeast Asian countries due to poor crop harvest. Therefore, monetary policy is likely to tighten in these countries to keep inflation in check. With regard to fiscal policy, Southeast Asian countries such as Indonesia, Malaysia, and the Philippines will consolidate their fiscal position in 2005 as they plan to narrow their fiscal deficits by reducing government expenditure. Rising fiscal costs from fuel subsidies have also been scaled back in some countries as high oil prices persist. Looking ahead, a moderate economic slowdown is expected in Southeast Asia over the next two years. The main risks that could affect the region’s economic outlook in 2006–2007 are as follows: •

High Oil Prices Sustained high oil prices continue to be a major risk to the regional economic growth. If oil prices continue to rise, inflationary pressure will persist, eroding business and consumer confidence in the region. In August and September 2005, hurricanes Katrina and Rita swept through the Gulf coast of the United States, disrupting oil production and causing oil prices to spike. (Crude oil prices breached the US$70 per barrel level in late August 2005.) Nonetheless, the subsequent release of strategic oil reserves by the United States and other members of the International Energy Agency (IEA) to

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Figure 3: Real GDP Growth in Cambodia, Laos, Myanmar, and Vietnam, 2000–2007F

8.0

Percentage change

7.0

6.0

5.0

4.0 Cambodia Laos

3.0

2.0

2000

2001

Myanmar Vietnam

2002

2003

2004

2005E

2006F

2007F

Source: ISEAS, Regional Outlook.

Figure 4: FDI Inflows to China and Southeast Asia, 1998–2004 70.0 60.0

Southeast Asia China

US$ billion

50.0 40.0 30.0 20.0 10.0 0.0

1998

1999

2000

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Source: United Nations Conference on Trade and Development.

2004

regional economic trends substitute for output loss should keep a lid on escalating oil prices. According to the World Bank, crude oil prices are not expected to fall rapidly over the next two years as supply conditions remain tight (World Bank 2005). •

China’s Overheating Economy China’s booming economy over the past few years had been an engine of growth for the region. China’s economy grew by 9.5 per cent in 2003 and 2004 (IMF 2005). In July 2005, China permitted greater exchange rate flexibility in its currency by moving from a fixed exchange rate system to a managed float. However, China’s economy is showing worrying signs of overheating. There are concerns that an investment bubble and industrial over-capacity could lead to a hard economic landing in the near future.

•

Bird Flu Pandemic The H5NI virus — better known as the bird flu — could potentially become a global pandemic. The bird flu, which started to spread throughout Asia two years ago, has now reached Europe with reported bird infections in Turkey, Russia, and Romania. In Southeast Asia, the bird flu has killed more than 60 people (mostly in Vietnam). Although human-to-human transmission is rare at this moment, the greatest concern is that the H5N1 virus could one day mutate into a more lethal and infectious new strain. If a global flu pandemic erupts, the loss of human lives would be devastating. (The Spanish flu pandemic in 1918, for example, killed about 50 million people worldwide.) Moreover, the flu pandemic would severely depress economic activity and labour productivity, disrupting world trade and global supply chains.

•

Rising Global Imbalances The United States’ rising current account deficits (now standing at over US$700 billion or over 6 per cent of GDP), which are financed by surpluses in Japan, China, and oil-exporting countries investing in US dollar assets create global imbalances that are not

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economic Outlook only unsustainable but could destabilize the global economy. These imbalances may continue for some time due to a “global savings glut” where super-abundant savings abroad enables the United States to borrow cheaply to cover its external deficit (Bernanke 2005). However, should a sharp decline in the demand for US dollar assets ever occur it could lead to a sharp decline in the dollar, causing upward pressure on interest rates and triggering an economic recession in the United States — with negative implications for the global economy (EIU 2005).

The Impact of the Asian Tsunami The Asian tsunami that swamped the coastlines of many countries in South Asia and Southeast Asia on 26 December 2004 was one of the worst catastrophes in recent decades. The tsunami disaster appears to have had limited macroeconomic impact on Southeast Asia, but the nature of the devastation wrought may have serious repercussions on longer-term regional development. The tsunami has destroyed local economies and communities and at least 2 million people are now living in poverty due to this natural disaster (ADB 2005). So far, the damage caused by the tsunami has largely been confined to the rural rather than the industrial areas of the affected countries. Malaysia’s industries were marginally affected by the Asian tsunami that hit the northwestern coast of the peninsula. For example, Malaysia’s electronics hub in Penang remained intact as industries there were located in the southeastern part of the island. Indonesia’s province of Aceh — which suffered the worst damage in Southeast Asia — only accounts for 2 per cent of the country’s GDP. Moreover the oil and gas industry in Aceh — which accounts for half of the province’s GDP — was not damaged by the tsunami. Although Thailand’s main industries are concentrated in the central region, away from the coast line, its tourism industry has taken a hit as the damage was mainly concentrated on well-known beach resorts in six southern Thai provinces (these provinces account for 1.3 per cent of Thailand’s GDP). The economic costs pale in comparison with the huge loss of human lives — estimated to be nearly 300,000 and about one-and-a-half million

regional economic trends people have been displaced. Hence, while the macroeconomic impact may be minimal, the loss in terms of human lives is incalculable. Also, the impacts on the local economy in Aceh and other affected areas in the region have clearly been devastating. The Asian Development Bank (ADB) estimates that 600,000 to 800,000 jobs were lost in Aceh because of the tsunami. The tsunami disaster triggered a tremendous international response with financial and humanitarian assistance coming in from all over the world. To date, US$5 billion of international aid has been pledged while the ADB has set up a US$600 million tsunami emergency fund to support reconstruction and rehabilitation in tsunami-affected countries. It is estimated that a total of US10 billion would be needed over the next five years for relief aid, reconstruction, and rebuilding costs. Within the region, ASEAN leaders held a special summit in Jakarta on 6 January 2005 to consider the impact and regional response to the earthquake off the west coast of Sumatra and the deadly tsunami that was unleashed by the earthquake. The joint declaration of the summit emphasized the need to address different elements of this natural disaster. These elements were: emergency relief, rehabilitation and reconstruction, and prevention and mitigation. 1 On 26 July 2005, ASEAN concluded an Agreement on Disaster Management and Emergency Response, which provides a comprehensive framework for implementing disaster reduction activities in the region.2

Recent Developments in ASEAN ASEAN’s six-year strategic action plan, the Vientiane Action Programme 2004–10 (VAP), calls for the need to have an ASEAN Charter to strengthen the grouping and give it a legal personality. The Charter will lay the foundation for a more rule-based and legalistic institutional structure for ASEAN. At the 11th ASEAN Summit in Kuala Lumpur, a ten-member Eminent Persons Group (EPG) was appointed to examine and provide recommendations on the ASEAN Charter.3 A High-Level Task Force will also be established to draft the Charter after taking into account the recommendations of the EPG. The EPG is expected

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economic Outlook to submit its report in a year’s time, that is, at the next ASEAN Summit in the Philippines. The Charter could provide the means to expedite regional economic integration, particularly in transforming the region into an ASEAN Economic Community (AEC) by 2020. (There was also some discussion during the ASEAN Summit on bringing forward the AEC by five years to 2015.) Although most of the essential economic elements have been identified for the Charter (see the ASEAN Concord II and the VAP), the main problem lies in its effective implementation and compliance by member countries. It is therefore crucial that the Charter should be designed to ensure that economic commitments are legally binding and that non-compliance will result in punitive measures such as trade sanctions. One hopes that the Charter can provide the existing ASEAN dispute settlement mechanism with some much needed “bite” (Hew 2005). The inaugural East Asia Summit (EAS) was held in Kuala Lumpur on 14 December 2005. It brought together the ASEAN+3 countries (that is, the ten-member countries of ASEAN plus China, Japan, and South Korea), India, Australia, and New Zealand. There were some concerns that enlarging the participation beyond ASEAN+3 may give rise to conflicting interests. But market forces have bound the economies of all participating countries together, creating greater impetus to cooperate in trade, investment, and finance. For example, one observes a relatively high degree of trade integration in this region. Intra-regional trade as a share of East Asia’s trade has risen from 35 per cent in 1980 to 54 per cent in 2003. This means that by 2003 about half of East Asia’s trade was with itself, a trend comparable with the 64 per cent in the European Union, a far more formalized economic grouping.4 Hence it is not surprising that economic issues ranked highly in the Summit’s agenda. During the summit, the 16 leaders of the EAS agreed to promote financial stability, economic integration and growth, eradicate poverty, and narrow the development gap in the region.5 It also appears that ASEAN will be in the driver’s seat of the EAS. It was agreed among the leaders that future East Asia Summits will be held back-to-back with the ASEAN Summits. However, one

regional economic trends wonders whether ASEAN will be able to call the shots in the longer term given the participation of larger and more influential member countries (namely, China, Japan, India, and Australia) in the EAS. In this context, it may very well depend on whether ASEAN is able to successfully integrate its economies in the near future.

NOTES 1. ADB Briefing Paper on the ASEAN Leaders’ Special Summit, “Earthquake and Tsunami Disaster”, 6 January 2005 (www.adb.org/Documents/Papers/Tsunami/ asean-earthquake-tsunami.pdf). 2. ASEAN Agreement on Disaster Management and Emergency Response, Vientiane, 26 July 2005 (www.aseansec.org/17587.htm). 3. Kuala Lumpur Declaration on the Establishment of the ASEAN Charter, Kuala Lumpur, 12 December 2005 (www.aseansec.org/18031.htm). 4. D. Hew and R. Sen, “Why Economics Will Top Agenda”, Straits Times, 30 November 2005. 5. Kuala Lumpur Declaration on the East Asian Summit, Kuala Lumpur, 14 December 2005 (www.aseansec.org/18098.htm).

referenceS Asian Development Bank (ADB). Asian Development Outlook 2005 Update. September 2005a. ———. Asia Economic Monitor 2005. September August 2005b. Bernanke, B. “The Global Savings Glut and the US Current Account Deficit”. Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia, 10 March 2005. Declaration of the ASEAN Concord II. 7 October 2004. www.aseansec.org/15159. htm. Hew, D. “Towards an ASEAN Charter: Regional Economic Integration”. In Framing the ASEAN Charter: An ISEAS Perspective, compiled by Rodolfo C. Severino. Singapore: Institute of Southeast Asian Studies, December 2005. International Monetary Fund (IMF). World Economic Outlook: Building Institutions. September 2005. United Nations Conference on Trade and Development (UNCTAD). World Investment Report 2005: Transnational Corporations and the Internationalization of R&D. New York and Geneva: United Nations, 2005. World Bank. Global Economic Prospects 2006: Economic Implications of Remittances and Migration. Washington, DC: International Bank for Reconstruction and Development and World Bank, November 2005.

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The future for asia’s low-cost carriers By Chang Chiou Yi

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espite the significant market share enjoyed by low-cost carriers in the United States, Australia, and Europe, low-cost carriers only began taking off in Asia, particularly in ASEAN countries, in recent times. They mainly operate on the basis of “no frills”, with quick aircraft turnaround at each destination, use of lower-cost secondary airports, direct Internet ticket sales, and doing away with in-flight catering. Singapore, for one, saw the creation of three Singapore-based budget carriers in the year 2004 alone, with the starting of Valueair in May, Tiger Airways in September, and Jetstar in December. Within a few months of startup, however, Valueair and Jetstar merged into a new company under the name of Orange Star. Indeed, the economic implications are aplenty. First of all, the recent proliferation of budget airliners points to a growing demand for intra-Asian travels. In part, this is due to the growing affluence, purchasing power, and business opportunities within the Asian community. A case in point would be the budding economic opportunities within China that saw the numbers of passengers flying between China and other Asian destinations rising 67.9 per cent between 2003 and 2004. According to the International Herald Tribune, this figure far exceeds the 8.5 per cent and 6.2 per cent growth in the Asia-Pacific region and the average world growth, respectively. India with its domestic market of 1 billion is similarly seeing an emergence of aviation startups with orders of 490 aircrafts scheduled for delivery the coming decade, according to the Sydney-based Center for Asia Pacific Aviation. At the same time, given the previously low exposure of the Asian market to no-frills air travel, it is expected that travel demand would in turn be further stimulated with the provision of such low-cost air travel services. One would expect to see stronger demand growing, in particular from leisure travellers and small and medium enterprises (SMEs) who previously found it costly to fly on full-service airlines such as Singapore Airlines (SIA). It is of note that given the different target markets and small passenger load as well as the focus on shorter-haul routes, low-cost carriers are thus unlikely to pose a serious competitive threat to existing airlines that cater mainly to long-haul routes and a different set of clientele. Merrill Lynch investment bank, for instance, estimated that only 7 per cent of SIA’s total revenue comes from such short-haul trips and leisure travels.

regional economic trends

Provisions of secondary airports, low barriers to entry, transparency, and adequate support facilities are also influential supply side factors and a key determinant in the decision to base several low-cost carriers in Singapore. The decision of the Civil Aviation Authority of Singapore (CAAS) to build a low-cost terminal with a capacity to handle 2.7 million passengers a year by 2007 points to the interest in keeping Singapore competitive as the regional hub for air travel. Costs would be kept low in this instance due to the absence of aerobridges. Not to be left behind, Malaysia is also building a low-cost terminal at the Kuala Lumpur international airport. These secondary airports in turn impact on the domestic economy via jobs creation and a boost to the construction industry. Holding a long-term outlook on the vast potential in servicing the travel needs of a massive Asian market, the moves are well timed. On the other hand, the merger of the above-mentioned low-cost carriers points to the difficulties fledgling low-cost carriers in Asia face. Escalating fuel prices, higher pilot wages driven up by the influx of low-cost carriers, as well as the rapid growth in aviation activities in India and other supply-side disruptions including air lease rates are just some of the factors that squeeze profit margins and contribute towards a shake-up in the industry. As a case in point, Valueair, which did not have the financial backing of established airline companies such as Quantas and Singapore Airlines (SIA), which were the majority stakeholders of Jetstar and Tiger Airways, respectively, saw losses of S$4.1 million in its first half year of operation. To stop the bleeding it resorted to a merger with Jetstar. Rising fuel costs in particular have contributed an estimated 20 to 30 per cent to the increase of Valueair’s operating costs and accounted for 43 per cent of Malaysia’s budget airline AirAsia’s operating cost in 2004. With prices hitting a high of US$84.26 on 2 September, even established airlines such as SIA had increased fuel surcharges five times. Given the uncertainty in oil supply and the burgeoning world energy requirements, escalating fuel premium would continue to pose a serious problem for many budget airlines whose sustain­ability are based on their ability to provide frequent short-distance flight service at markedly discounted fares. On the other hand, oil futures contract thus far appear a useful counteract and provide insurance against further oil price surges.

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the future for asia’s low-cost carriers (continued)

Another key factor to consider when one looks at the prospects for low-cost carriers in Asia would be the lack of a cohesive “open skies” agreement among Asian countries, unlike in Europe and the United States. Although some breakthroughs have been seen in Tiger Airways’ success as the first low-cost carrier to obtain rights to fly into Hanoi and Ho Chi Minh City, obstacles, justified or otherwise, still persist. To illustrate, Indonesia’s plans to impose new regulations limiting landing rights for foreign low-cost carriers in a bid to protect the national Garuda airlines led to a tit-for-tat retaliation by CAAS, which then refused landing rights to Awair, an Indonesia subsidiary of Malaysia-based AirAsia. It is thus uncertain if the expectations of the “open skies” policy across all ASEAN capitals by 2008 and within ASEAN by 2011 would materialize. Facing tentatively rising government protectionism and growing air traffic that are in turn exacerbated by inadequate provision of support facilities in most ASEAN countries, this would remain a serious issue of concern. Notable as well, given the stringent regulations seen in China and India thus far in terms of fare competition, fuel and aircraft purchases restrictions, expectations by ASEAN-based low-cost carriers in capitalizing on the potentially lucrative Chinese and Indian markets should be considered only as part of a longer-term strategy. However, given that Malaysia’s AirAsia had recently announced expansion plans with an exercise option of 40 Airbus A320s in addition to a firm order for 60 Airbuses as well as Singapore’s Tiger Airways plans to double its capacity to three million by 2006, it is apparent that the budget carrier business does hold significant rewards and potential. To conclude, there is great potential in the low-cost carrier industry in Asia given the burgeoning travel demands and greater intra-Asian networks especially if supported by the provision of relevant facilities and more “open” skies agreements. Spin-off strategies with low-cost carriers supported by established airline companies appear thus far to hold the greatest financial muscle and ability to sustain operations. Therefore although competition would emerge with benefits for travellers and the economy alike, one would expect that more often than not, a first mover advantage gives the carrier an edge. Nevertheless looking forward, with expected deregulation and more open access to the massive Asian travel market in the medium to long term, the stars will be shining for low-cost carriers that survive the inevitable shake-ups meanwhile from the competition pressures flanking the wait.

regional economic trends

The end of textile quotas: implications for asean economies By Ng Boon Yian

B

efore the phasing out of the Multi-Fibre Agreement (MFA) in January 2005, there were widespread concerns that smaller textile and clothing producers, including those in some Southeast Asian countries, would not be able to withstand the onslaught of competition from China and India. This is especially so since textiles and clothing are a principal export item for countries such as Cambodia, Laos, the Philippines, and Indonesia. For instance, in the Philippines the textile and clothing industry is the second largest export earner and employs 400,000 people. In Cambodia, textiles and clothing account for 87 per cent of exports and employ about 200,000 workers. With its hordes of low-cost labour, the competitive advantage of China has certainly caused some impact on the textile and clothing industries in ASEAN. Contrary to popular fears, however, the regional industries did not immediately tank when vast Chinese exports flooded major markets in the West. According to the US Department of Commerce, ASEAN’s total exports of textile and apparel to the United States, its biggest market, fell by just 4.05 per cent in the first six months of 2005. Meanwhile, China’s cheap exports, not surprisingly, expanded by 45.81 per cent year-on-year. However, it is clear that ASEAN’s textile industries, rather than its clothing production, are the ones bearing the brunt of competitive forces from low-cost powerhouses such as China and India. In fact, while ASEAN’s textile exports to the United States has fallen 19.8 per cent, its clothing exports has actually risen by 5.7 per cent in the first six months of the year. The only exceptions were Singapore and the Philippines, which saw a fall in clothing exports of 22.5 per cent and 2.7 per cent, respectively. While Singapore has clearly lost its comparative advantage in garments production as it moves up the economic value chain, the reason for the Philippines’ poor performance is likely to be due to its ill-preparedness in dealing with the quota phase-out. For instance, its poor logistics, slow turnaround time, inefficient supply chain, declining productivity, high transaction costs, and reliance on the US market through the quota system are some of the factors strangling the Philippine clothing industry. Overall, however, the garment industry in ASEAN remains relatively resilient. Even though China, with a market share of 21.2 per cent, is now the biggest exporter of clothing to the United States, ASEAN, with its share of 16.7 per cent, is not far behind. Of course, these indicators should be taken tentatively as it is too early to posit a long-term trend from these early figures. The apparel buyers

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the end of textile quotas (continued)

are also not likely to shift their buying patterns too quickly so as to avoid supply chain disruptions. This is especially so given the recent tussles that China has had with both the European Union (EU) and the United States over the limits on its textile and clothing exports. A poorly implemented agreement between the EU and China to limit exports had led to piles of Chinese sweaters, pyjamas, and brassieres being stuck at European ports in August 2005, thus disrupting retail sales in Europe. After tortuous talks, the United States and China finally signed an agreement restricting Chinese clothing and textile exports to the United States in the next three years, taking effect from 1 January 2006. As long as these uncertainties continue to cloud the picture, it is unlikely that buyers will put their eggs in one basket and simply source from China, no matter how cheap it is. This is especially so since China can still be prevented from fully flexing its textile muscles, thanks to safeguard quotas, which the World Trade Organization (WTO) member countries can, until 2013, impose to restrict Chinese imports. As buyers seek to hedge their bets, ASEAN will likely continue to be a significant player in the market. Despite this silver lining, the textile and clothing industries in some ASEAN economies have been undergoing adjustment pains — even before the official expiry of the MFA in 2005. These have been manifested in terms of factory closings, job losses, or even the lowering of labour standards. Take the Philippines, for instance. As early as 2001 and 2002, the local garment and textile industry had already been badly hit by a US$198 million export loss when several specific items such as baby clothing and luggage products were liberalized. As a result of quota phase-out, many small and medium-sized enterprises have also been forced to shut down. In 2003, around 90 textile or apparel establishments resorted to closure or retrenchment, which left 9,443 workers jobless. In Indonesia, some 300,000 jobs were lost in the textile-weaving sector in 2004, thanks to the flood of cheap imported textiles from China — legal as well as illegal — which is displacing a large number of local jobs. Besides job losses and export declines, growing global competition has also led to other social costs such as a decline in labour standards in the textile and clothing industry. For instance, more employers in Cambodia have allegedly been trying to justify lower pay and longer working hours by waving the “compete with China or perish” card, according to a report by the International Confederation of Free Trade Unions. The same phenomenon has also been reportedly happening in the Philippines where, according to a trade union survey, almost 37 per cent of the garment companies located mostly in export-processing zones remunerate their workers below the minimum wage.

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The picture is not all gloomy, however. Vietnam, for instance, has held its own quite well. Both its exports of textiles and garments to the United States rose by 8 per cent and 4.1 per cent, respectively, in the first six months of 2005. This is a continuation of the growth that took off since the United States granted normal trading relations (NTR) status to Vietnam in December 2001. Its productive labour and improved infrastructure has led to a positive outlook for the industry, which has since brought Vietnam more investments from big names such as Mast Industries, one of the world’s largest contract manufacturers, importers, and distributors of apparel, including brand names such as Abercrombie and Fitch. However, Vietnam and Laos are still not WTO members, and hence, they are not automatically entitled to quota elimination. Still, Vietnam is expected to join the trading organization in 2006, which means that the country should be able to export quota-free to the US market by then. Meanwhile, all is not lost for countries such as Laos. The European Union and Canada had unilaterally dropped quotas for non-WTO members; this allows countries such as Laos to export there on a quota-free basis. Indeed, the European Union is the largest market for Laos, which remains highly dependent on trade in textiles and clothing. Hence, while the overall picture for the region is not one of a total disaster, the challenge from China, particularly as the lower prices cut into profits, is palpable. However, this does not mean that it is impossible for ASEAN to maintain its competitive edge. To do so, there are several strategies that ASEAN countries can pursue. For one, since it is difficult for ASEAN countries to compete with China on costs, they should move up the value chain and focus on producing more value-added products such as fashion clothing for which quality, design, a short lead time, and flexibility are just as (if not more) important as low production costs. Indeed, time-to-market is an increasingly important element in the fashion clothing industry, especially for high-fashion items such as women’s and designer clothing. Hence, it is important that ASEAN countries seek to fine-tune its competitive edge by enhancing vertical integration. After all, one of the major advantages that China enjoys is a high level of vertical integration. Garment assembly time has been estimated to be as much as 30 per cent less in many Chinese firms, according to an ASEAN study. In that respect, up-and-coming exporters such as Vietnam should aim to establish backward linkages by seeking investment in fabric dyeing, weaving, and spinning. This will yield important benefits as garment manufacturers who buy fabric locally can enjoy benefits such as a

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the end of textile quotas (continued)

shorter lead time for purchasing fabric, lower costs associated with shipping and export/import clearance for imported fabric. It is also critical that the infrastructure be improved and transaction costs such as transport costs, customs clearance, and corruption lowered as part of the overall efforts to shorten the time-to-market for the exports. At the regional level, ASEAN should hasten its efforts to enhance regional integration of the textiles and clothing industry — one of the 11 priority areas for such an objective — by, for instance, eliminating all tariffs on the products. ASEAN countries should also fight low-cost competitors by differentiating their products in terms of design and quality by investing in research and development in these areas. This is likely to work, as seen in Indonesia, where according to a April 2005 report by the US embassy in Jakarta, the mid- to high-end textile manufacturers in Indonesia still remain competitive for reasons of quality and labour standards compliance, other than price. Other governments have also taken active steps to move up the value chain. Thailand, for instance, has sought a niche for itself by beefing up its design capabilities and strengthening its fashion industry with the launch of the “Bangkok Fashion City” project in February 2004, which aims to turn Bangkok into a world fashion centre by 2012. Greater product differentiation will also help facilitate greater intra-industry trade between China and ASEAN, taking some sting out of the competition from China. Given that Western consumers are increasingly sensitive to environmental and labour issues, compliance with labour standards may turn out to be an important factor for ASEAN textile and garment producers to retain their competitive advantage and keep sewing up orders from socially conscious companies. Take Cambodia, for instance. According to a World Bank survey of international buyers in 2004, more than 60 per cent of the companies that bought apparel from Cambodia said compliance with labour standards was of equal or greater importance than price, quality, and speed of delivery. Companies like Gap and Marks & Spencer are still continuing to source supplies from Cambodia for the same reason. Therefore, while the challenge to ASEAN countries’ textile and clothing industries appears to be serious at this point, it is not insurmountable if correct and creative measures are taken, and quickly too.

an overview of foreign direct investment legal rudiments in asean By Rajenthran Arumugam

T

oday, ASEAN is at the crossroads as it takes concrete steps to integrate economically, both internally and externally. This is evident from the recent promulgation of the Vientiane Action Programme (2004) and the Declaration of Bali Concord II (2003), which envisions an ASEAN economic community, security community, and social-cultural community. These are discerned as mutually reinforcing to create “Shared prosperity and destiny in an integrated, peaceful, caring ASEAN community”. Ultimately, the ASEAN Vision 2020 hopes to bring forth a peaceful, stable, and developed ASEAN. However, the ASEAN 100 Leadership Forum held in Singapore in 2005 noted inherent flaws in the grouping; this, notwithstanding, determinedly endorsed a strong political will and peoples participation to see through the progression of the grouping. Certainly, the economic prowess of China, and increasingly, of India, has given fresh impetus to ASEAN. More instructively, to its credit, ASEAN (unlike other regional groupings) has adopted an inclusive stance in engaging other countries, both socio-economically and politically. Indeed, with a view to evolving the grouping into a legal juridical entity, the regional leaders are now seriously studying the prospect of an ASEAN Charter. Regional Dynamics of Foreign Direct Investment Suffice it to say, there is a clear appreciation among ASEAN countries that foreign direct investment (FDI) in the last two decades has brought about much needed development in the form of capital, technology, know-how, and creation of employment, among others. To date, the greatest beneficiaries of FDI in the group are: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Increasingly, Cambodia, Laos, Myanmar, and Vietnam (the CLMV countries) are enticing FDIs via responsive legal instruments. The importance attached to FDI in the region has culminated in the promulgation of two crucial investment framework agreements (discussed below). Furthermore, several ASEAN countries have unilaterally adopted foreign investment laws, and over the years entered into a slew of bilateral investment treaties. Statistically, intra-ASEAN investment has been modest relative to extra-ASEAN investment hailing from the European Union, Japan, and the United Sates. It is important to note that it has never been the intent of the ASEAN countries to form an exclusive investment regime within the grouping. The aim has always been to put in place an ideal regional investment platform that reaches out to regional as well as global foreign investments. To this end, ASEAN leaders tend to draw a close linkage between trade and investment. Not surprisingly, despite the modest intra-ASEAN trade inflow, the Framework Agreement on Enhancing ASEAN Cooperation (1992), applying the Common Effective Preferential Scheme and liberal rules of origin, facilitates a free trade area in the region. In terms of investment, it is believed that this would make available a cost-effective supply chain network and viable markets, regionally. FDI Legal Framework within ASEAN The rationale for investment law is to signal certainty and predictability to the investment climate, which invariably would induce investor confidence. As mentioned earlier, most ASEAN countries at varying degrees have implemented their investment law and policy.

an overview of FDI legal rudiments in asean (continued)

The focus tends to be on post-establishment rights as opposed to pre-establishment rights. Understandably, the socio-economic development norms and needs of ASEAN countries differ, and consequently the application of strict National Treatment Principle can possibly engender market failures, especially for the CLMV countries. Henceforth, save Singapore and to some extent Malaysia, several ASEAN countries’ economic sectors are either closed or restricted to FDI. That said, given the vagaries of globalization there is a stronger momentum in recent years to liberalize more economic sectors. Business surveys constantly criticize the administrative bodies of several ASEAN countries for arbitrary decision-making, corruption, and collusion, which can be worsened by the existence of weak property rights and judiciary. In all fairness, countries such as Indonesia, Malaysia, and Thailand have indeed taken steps to redress bureaucratic inefficiency, but more constructive measures are needed. More importantly, judiciary reforms are urgently wanting in most ASEAN countries. Needless to say, to sustain investor confidence it is imperative that the judiciary is able to implement and enforce property rights in a fair, cost-effective, and timely manner. This should be supplemented by an effective informal disputes-settlement mechanism (arbitration, conciliation, and mediation). At the regional level, ASEAN is governed by two investment-related agreements: the Agreement for the Promotion and Protection of Investments 1987, as amended in 1996 (the 1987 ASEAN Agreement) and the Framework Agreement for the ASEAN Investment Agreement 1998 as amended in 2001 (the 1998 Framework Agreement). The former addresses the protection aspects or post-establishment rights of FDI, and correspondingly, the latter enshrines the pre-establishment rights that include facilitation, promotion, and liberalization of FDI. Under the 1998 Framework Agreement it is envisaged that national treatment be accorded to and all industries opened for investments to ASEAN investors by 2010 and to all investors by 2020, subject to the exceptions provided for under the Agreement. On the face of it, the Agreement aims to promote ASEAN as a collective investment area wherein investment laws and policies are to be implemented in a transparent and accountable manner. At the same time, it also provides ample safeguard measures to counter unforeseen economic conditions. The Agreement, particularly, includes the following sectors and services incidental to such sectors: manufacturing, agriculture, fishery, forestry, and mining and quarrying. Paradoxically, apart from manufacturing, several ASEAN countries, to a greater or lesser degree, restrict foreign investments in the other mentioned sectors. Hence, in the mid to long term there would be greater pressure on these countries to liberalize these sectors. It should be noted that neither the 1998 Framework Agreement nor the 1987 ASEAN Agreement requires an ASEAN investment to be wholly Asian in flavour. Hence, invariably minority-owned foreign multinational corporations can avail the protection of both agreements. Still, to invoke the 1987 ASEAN Agreement, the relevant ASEAN country’s investment authority must duly approve the investment. Apparently, this requirement is strictly adhered to. Thus far, the only arbitration based on both the agreements: Yaung Chi Oo Tading Pte Ltd versus Government of the Union of Myanmar (42 ILM 540, 2003), stipulates so. This aside, the 1987 ASEAN Investment Agreement provides protection against discriminatory expropriations,

facilitates free repatriation of capital and earnings and, caters for investor and state disputes resolution. Also, the ASEAN Industrial Cooperation Scheme (1996) complements both the mentioned agreements. By all accounts, the existing ASEAN investment framework promotes open-regionalism, and the challenge for ASEAN countries is to implement and enforce both the agreements decisively and consistently. This may bestow the region with a comparative advantage over China, India, and other emerging economies. Multilateral Investment Regulatory Commitments With the exception of Vietnam and Laos, all other countries in ASEAN are members of the World Trade Organization (WTO). In relation to investment these countries are specifically legally bound by the Agreement on Trade Related Investment Measures (TRIMS), General Agreement on Trade in Services (GATS), and Trade-Related Aspects of Intellectual Property Rights (TRIPS). The TRIMS categorically prohibits deviation from national treatment and imposition of quantitative restrictions. In general, all WTO-ASEAN countries have removed all kinds of erstwhile performance requirements ranging from local content usage to export requirements, although residual aspects may still be lingering. With regard to GATS, positive steps have been taken to liberalize trade in services under the commercial presence mode, particularly in the retail sector, real estate sector, and professional services, amongst others. Unquestionably, today, most ASEAN countries have revamped their Intellectual Property Rights (IPRs) regimes along TRIPS; nonetheless, institutional incapacity and failure continue to stifle the proper implementation and enforcement of the IPRs laws. Several ASEAN countries are also members of the Asia Pacific Economic Cooperation, which advocates the non-binding investment principles that are similar to universal investment norms. Bilateral Investment Treaties There is a perception that Bilateral Investment Treaties (BITs) attract FDI by serving as a commitment tool. However, this notion has yet to be empirically proven. In fact, many developing countries that have entered into BITs with developed countries have not experienced a corresponding surge in FDI. Yet, the number of BITs has significantly increased in the last decade — practically all ASEAN countries are parties to several BITs. Perhaps this is due to the unspoken “domino effect”. It is disturbing, however, to note that in recent years more legal actions have been brought against developing countries, especially by Western multinational corporations, under the BIT. The developing countries include ASEAN countries such as Indonesia, Malaysia, and the Philippines. There is a need to treat BITs with caution. First, they may limit the feasible policy choices available to particularly developing countries’ policymakers. Second, its cost implications can be severe. Third, institutional and regulatory reforms must be undertaken to operationalize the BIT, otherwise inconsistencies will prevail. Fourth, BITs do not necessarily level the economic playing field, especially when there are unequal bargaining powers.

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an overview of fDI legal rudiments in asean (continued)

ASEAN and Dialogue Partners As alluded to earlier, ASEAN embraces inclusiveness and accordingly its members have maintained diplomatic relationship with several dialogue partners, which continue to increase year by year. Pointedly, ASEAN has taken strident steps to engage its East and South Asian dialogue partners in the aftermath of the Asian crisis in 1997. In this connection, the ASEAN+3 (China, Japan, and Korea) was initiated with a view to maintaining financial stability in the region. However, in recent years this has been overshadowed by the ASEAN+1 initiative. Not surprisingly, hitherto ASEAN has signed separate Comprehensive Economic Cooperation Agreements, setting out the negotiation modalities with Australia–New Zealand (CER), China, India, Japan, and Korea. The scope and coverage of these agreements vary. Would these developments lead to a formidable Asian Economic Community? This remains to be seen. The novelty about these agreements: they tend to be all-encompassing, addressing subjects ranging from trade, investment, and services to security and various functional cooperation. Several analysts reckon that the motivation for such partnerships, apart from economic reasoning, is fundamentally geostrategic. The investment chapters call for both pre- and post-establishment obligations and rights. The CLMV countries are accorded with special and differential treatment, and by and large it is hoped that a free trade area would materialize between ASEAN and the respective dialogue parties by 2010 for ASEAN-6, and 2015 for CLMV countries. Undoubtedly, for ASEAN it would be an immense challenge to negotiate as an entity and more importantly, to realize the agreements provisions, in a timely manner. This process may to some extent help to harmonize the ASEAN countries’ investment law and policy. Several economists have expressed concerns of trade diversion potentially arising from the contemplated free trade agreements, and also increase in transaction costs resulting from the complexity of the various rules of origin, tantamounting to a “spaghetti-bowl” effect. It should be noted that all the above said agreements have pledged to be WTO-plus. However, the devil is in the details of the final agreements and their implementation. Concluding Remarks The advent of globalization and the onset of the Asian crisis have propelled ASEAN to be forward-looking, and the ultimate goal now is the realization of ASEAN Vision 2020. The competition for FDI has spurred since the early 1990s with former USSR countries, Central Asia, together with China and India taking on vigorous market reforms. Inevitably, ASEAN countries that were enjoying high inflows of FDI in the 1980s and early 1990s have lost their glitter since the late 1990s. In the wake of present economically challenging times, as well as fresh security and social concerns such as threat of terrorist attacks and fear of widespread avian flu, ASEAN should collectively stand resolute. Suffice it to say, economic progression can only be sustained in the region if security concerns are jointly addressed and social cohesion closely maintained. To alleviate poverty and human sufferings, proper public governance is highly crucial. ASEAN, particularly the CLMV countries, need to speed up their democratization process to bring about credible economic growth. Ultimately, there must be a strong political will to carry out credible institutional reforms, and more importantly, to empower the people. It is only then that the benefits of FDI can be fully realized.

THE ASeAN-10 M. Shahidul Islam • Mya Than • Aris Ananta • Nick J. Freeman • Lee Poh Onn • Aladdin D. Rillo • Manu Bhaskaran • Sakulrat Montreevat

Brunei Darussalam As one of the most oil-dependant economies of Southeast Asia, the sultanate of Brunei’s economic prospects hinge largely on the oil and gas sector. Crude oil and liquefied natural gas accounts for half of Brunei’s GDP, as well as 90 per cent of its exports and 88 per cent of government revenue. As crude oil prices continue to spiral upwards to about US$70 a barrel (as of September 2005) in the wake of a myriad of factors including stronger demands from China, continuous oil supply disruption in the Middle East and disruptions in global oil production due to the adverse impacts of hurricanes Katrina and Rita in the Gulf of Mexico in the United States, the sultanate exchequer is likely to get a boost. According to the Brunei Economic Bulletin (BEB), the non-oil sector expanded by 6.0 per cent in the first quarter (Q1) of 2005 compared with the same period last year owing to the strong performance in forestry, construction, wholesale and retail, restaurant and hotels, and transport and communication sectors. The wholesale and retail trade, construction, and transport and communication sectors are likely to maintain steady growth in 2006. Brunei recorded a steadily improving budgetary position in 2005 due to the skyrocketing oil prices. In Q1 2005, the economy witnessed a budget surplus of B$99.11 million (US$58.68 million). The state of government finance is expected to remain in surplus in 2006, benefiting

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economic Outlook from the high global oil prices. The Brunei government expects this surplus to be instrumental in accelerating the implementation of country’s 8th National Development Plan. The BEB reported that Brunei recorded a trade surplus of B$1,860.5 million (US$1,101.60 million) during Q1 2005 owing to the persistent oil price hike and a plunge in import demand. However, a stronger consumer demand and construction growth may push the import demand in 2006 substantially. In Q1 2005, Japan remained the dominant export market of Brunei, followed by ASEAN, Korea, Australia, United States, India, and China. The consumer price index (CPI) for the Q1 2005 rose marginally, by 0.6 per cent. compared with the previous quarter. A low inflation rate is expected to prevail in 2006 owing to a more stable outlook for commodity prices, relatively low inflation in country’s major trading partners, and the maintenance of the 1:1 link between the Brunei dollar and the Singapore dollar. According to the BEB, the banking and finance sector recorded a contraction of 5.7 per cent in Q1 2005 compared with Q1 2004. The insurance sector registered an estimated growth of 3.9 per cent in Q1 2005 compared with the same period a year earlier. However, the financial sector is expected to observe a robust growth in 2006. To develop Brunei as an Islamic banking hub, the banking sector has undergone some restructuring measures including the merger between the Islamic Bank of Brunei (IBB) and Islamic Development Bank of Brunei (IDBB). Financial market analysts believe that this merger will enhance cost efficiency by eliminating duplications and will allow the Bank to explore niche areas such as investment banking and fund management. The enterprise of the first Brunei Darussalam Sukuk Al-Ijarah or Islamic bond between Brunei LNG Sdn. Bhd., IDBB, and IDBB, Sukuk Inc. might be instrumental in realizing the ambition of developing Brunei’s own Islamic capital market. The Al-Ijarah Agreement between BLNG, IDBB, and IDBB Sukuk Inc. is based on B$100 million (US$59.2154 million) and has a six-year lifespan with profit payment on a semi-annual basis. Moreover, to strengthen the financial sector,

the asean-10 the Insurance Act, Banking Act, Financial Companies Act, and Pawn Broking Act are being amended to align local practices with global standards. To reap the benefits of regional trading advantages, Brunei signed on a pluri-lateral free trade agreement named the Trans-Pacific Strategic Economic Partnership (SEP) in 2005, which will eliminate all trade tariffs among New Zealand, Chile, Singapore, and Brunei by 2015. Together, the four nations have a combined GDP of some US$400 billion and it is expected that the recently concluded FTA will expand bilateral trade significantly among the members, currently worth over US$2.5 billion. Significantly, the partners to this agreement, including Brunei are all Asia-Pacific Economic Cooperation (APEC) member countries, and have left the agreement open for accession for newer members on the same terms and conditions. In this manner, the agreement could be touted as one that is generating momentum towards a future APEC-wide FTA that also involves Brunei. The Brunei government is seeking to diversify its economy away from oil and gas as the primary source of revenue by promoting private sector development in its non-oil sector. The country’s ruler, Sultan Hassanal Bolkiah, in a speech marking his 59th birthday last June announced a series of financial and other reforms. The Brunei government also plans to build a deep-water port and develop the Sungai Liang Industrial Park. As part of the diversification programme, the sultanate is negotiating with some potential investors to set up an ammonia and methanol petrochemical plant. Brunei is expanding its external trade and investment wing, especially with Asian economic giant China to reap the benefits of the momentum of Beijing’s economic growth. Brunei currently has a total of 562 investment projects in China, with their contractual sum reaching B$2.14501 billion (US$1.27 billion) and actual investment valued at B$405.359 million (US$240 million). Besides soaring oil prices, favourable fiscal, as well as external balances, economic diversification measures, financial reform, and China-led strong growth prospects in Asia offer a positive outlook for the Brunei economy. According to the Economist Intelligence Unit’s

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economic Outlook estimation, the sultanate of Brunei is expected to grow at an average rate of 3 per cent in 2006. However, it needs to diversify its economy to sustain its long-term economic growth. REFERENCES Asia Regional Information Center. Asia Economic Monitor. http://aric.adb. org/index.asp. Bilaterals.org. http://www.bilaterals.org/article.php3?id_article=2321. Borneo Bulletin. http://www.brunei-online.com/bb/. Brunei Economic Bulletin, vol. 4, no. 1 (2005). Economist Intelligence Unit, EIU Country Report — Brunei (June 2005).

Cambodia Although Cambodia’s economy grew by a moderate 5 per cent in 2004, the growth rate is lower than the average of 6.8 per cent during the period 1999–2003. It is expected to slow down further to 4.5 per cent in 2005. Compared with the official estimate, the ADB’s and EIU’s estimates of GDP growth rates were 2.3 per cent and 3.5 per cent, respectively, for the same period. The economic growth rates attained in 2004 and 2005 were attributable to the growth in the industry and services sectors in 2004 and 2005 although the growth in the industrial sector in 2005 registered a negative rate of 2 per cent compared with about 17 per cent in 2004. The growth rate in the services sector increased to 7.3 per cent from 2.1 per cent during the same period (ADB 2005). Cambodia’s industrial sector growth was driven by a 25.0 per cent increase in the textile, apparel, and footware sub-sector as stronger world trade and a higher quota allocation by the United States lifted garment exports (ADO 2005) by 25 per cent from US$2.5 billion in 2004 compared with US$2.0 billion in 2003. Its export earnings from the garment sector in December 2004 was US$200 million and in January and February 2005, revenues rose by 13.4 and 21 per cent year-on-year, respectively. It is expected that exports will continue to remain at the same level of US$2.5 billion in 2005.

1,374 1,600 –226 –2.3 0.3 586.3 142.1 20.4 3,916

Exports (US$ billion) (EIU) Imports (US$ billion) (EIU) Trade balance (US$ million) Current account balance (% of GDP) (ADB)

Inflation CPI average (% change) (ADB) Foreign exchange reserves (US$ million) (EIU) Foreign direct investment (actual US$ million) M2 money supply growth (% change) (ADB) Exchange rate (average) (ADB)

2.0 2.6 –0.6 –10.1 3.3 815.5 77.0 15.3 3,980

775.6 139.1 31.1 3,921

4.5 6.6 2.1 9.6

5.0 5.1 5.1

2003

1.8 2.6 –0.8 –8.9 4.4

4.0 17.7 4.3 –3.2

5.2 5.5 5.5

2002

943.1 115.0 30.1 4,019

2.5 3.2 –0.7 –9.8 4.2

5.0 16.9 7.3 –2.4

4.3 6.0 4.8

2004

n.a. n.a. 17.0 n.a.

2.5 3.3 –0.8 –11.7 4.3

4.5 –2.0c 5.0c 3.2c

1.9 2.3 3.5

2005E

n.a. n.a. 22.0 n.a.

2.8 3.7 –0.9 –11.3 3.9

4.5 2.9 5.5 3.5

7.0b 4.1 4.0

2006E

n.a. n.a. 25.0 n.a.

n.a. n.a. n.a. –10.5 3.8

5.0 4.0 6.0 3.7

n.a. 4.7 n.a.

2007E

Note: Data given for 2005E–2007E are estimated figures. n.a. = Not available. a Cambodia Development Research Institute, 2003. b Government of Cambodia. c Country Presentation for Cambodia, Third United Nations Conference on the Least Developed Countries, 2001. Sources: Cambodian Development Research Institute, 2003; Asian Development Bank (ADB), Asian Development Outlook 2003; ADB, Key Indicators 2003; Economist Intelligence Unit, EIU Country Report — Cambodia, August 2003 and August 2004.

5.5 12.9 4.2 2.2

5.4 5.7 6.3

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

GDP growth (% change) — CDRIa — ADB — EIU

2001

Cambodia: Selected Economic Indicators, 2001–2007E

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economic Outlook Furthermore, Cambodia’s participation in the World Trade Organization (WTO) in 2003 removed another uncertainty facing the garment sector in so far as Cambodia was not subjected to restrictive quotas following the winding up of the Multi-Fibre Arrangement in December 2004. In spite of this, garment manufacturers continued to be largely hampered by poor infrastructure and rampant corruption, which made it difficult for them to compete with more efficient garment exporters such as China. Although the garment industry contributes about four-fifths of Cambodia’s total official exports of 1.5 billion a year, weaknesses in this sector is expected to cause total export revenue to decline in 2005. However, merchandise trade performance is bright for Cambodia’s key commodity exports, which will remain buoyant in 2005/2006 in line with global prices and fairly positive prospects for global economic growth (EIU May 2005). In addition, Cambodia now enjoys quota-free and duty-free access to the EU market for all export items except arms, which will also facilitate its external sector growth. The top export items from Cambodia continue to be garments and textiles, seafood, and rubber. Imports also grew from US$2.6 billion in 2003 to US$3.2 billion in 2004 and to US$3.3 billion in 2005. As a result, the trade gap is likely to be widened further. However, import growth will be limited by the reduction in imported inputs for the garment manufacturing sector. The top import items in 2004/2005 were vehicles and transportation equipment, textile fibres, and machinery and equipment. The growth in the services sector is likely to be driven by tourismrelated sectors. Tourist arrivals into Cambodia increased from 701,014 in 2003 to 1.1 million in 2004. According to the Ministry of Tourism, foreign tourists increased by 53 per cent on a year-on-year basis in the first quarter of 2005 to 400,000, according to the Ministry of Tourism. It is expected that the number of tourists would increase to about 1.3 million in 2005. The tourism-related industry, which significantly grew by 30 per cent, contributed to the services sector growth, which lifted the economy in 2004. This surge in tourism was caused by the rebound in tourist arrivals from the decline experienced in 2003 due to the SARS outbreak, political uncertainties after the July general elections,

the asean-10 fear of regional terrorism, and anti-Thai riots in Phnom Penh. Official sources indicated that total tourist earnings were US$578 million in 2004, up by 67 per cent from 2003. The government has targeted to attract 1.5 million tourists in 2006, rising to 2.2 million in 2008, and to 3.1 million in 2010. Unlike in 2003, foreign direct investment (FDI) inflows were fairly strong in value — US$141 million in 2004 compared with US$65 million in 2003. The top three foreign investors were China, Malaysia, and Taiwan (Council for Development of Cambodia). It is interesting that Vietnamese firms are investing heavily in Cambodia despite occasional political hiccups between the two. The FDI volume in 2005 is expected to grow higher since Malaysian and Singaporean manufacturers’ associations organized a trade and investment mission to Cambodia in May 2005. This is because Cambodia has become the second least-developed member of WTO after Nepal in 2004 and this move can be seen as crucial for the survival of the country’s main growth engine — the garment industry that contributes four-fifths of Cambodia’s total official exports. Moreover, Prime Minister Hun Sen promised that the country would introduce new reform measures by reducing company registration costs from US$615 to US$177, slashing the time needed for completing formalities from 30 days to ten days, and the state investment body would take no more than 28 days to approve an investment after receiving application (Bangkok Post, 21 August 2004). In addition, the annual development assistance from donor countries, which amounts to about 50 per cent of the country’s budget, is ongoing and is expected to facilitate the economic performance. In February 2005 the government of Cambodia signed a Memorandum of Understanding with Vietnam for the upgrading of a 70-km stretch of road in Ratanakiri province, which runs to the border to provide a low-interest loan of US$24 million for the project, under which the road will be widened and resurfaced (EIU May 2005). Also, at the same time, France’s Societe de I’Aeroport, which operates the airports in Phnom Penh and Siem Reap, signed an agreement with the government to expand the facilities at both airports. The International

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economic Outlook Finance Corporation, the private sector lending arm of the World Bank and the Societe de Promotion et de Participation pour la Co-operation Economique, which is a subsidiary of the State Department Agency of France are providing the financial backing for the project. It is estimated the cost of the work will be 15.6 million euros (US$21.4 million). Meanwhile, inflation (in terms of consumer price index) slowed down to 5.6 per cent towards the end of 2004 in December from 6.7 per cent in August and September (EIU May 2005). However, on a year-to-year basis, inflation in 2004 increased to 3.8 per cent from 1.2 per cent in 2003 although the growth of money supply in 2004 virtually doubled to 30.1 per cent from 15.3 per cent in 2003 (ADB 2005). This is because the rise in money supply was, in fact, a rise in net foreign assets of the banking sector, which will not have a significant impact on inflation. Inflation (CPI) in 2005 would increase slightly to 4.3 per cent, which is higher compared with that in 2004 because the global rice prices are forecast to rise sharply. There is also a possibility that bird flu outbreaks could push up the prices of meat in the country, further spiralling inflation. The foreign exchange rate has been stable throughout the year at 4,016.25 riel per US dollar although it increased from 3,973.33 in 2003. It is forecast that there would be a 2.6 per cent increase in the exchange rate of about 4,120 riel in 2005. As far as foreign exchange reserves is concerned, it increased to US$943.1 million in 2004 from US$815.5 million in 2003. According to the EIU (May 2005), the foreign exchange reserves stood fairly strong at US$950.8 million as of February 2005. The good news for the Cambodian government is that the budget of 2004 recorded a current surplus of 362.3 million riel (US$90 million). During the first 11 months of 2004, the country’s revenues, compared with the previous year, strengthened by 15 per cent, mainly due to a 25 per cent rise in tax collection. On the other hand, as in the case of 2003, the economic performance of Cambodia in 2004 was dragged down by the political upheaval in the country, along with red tape, rampant corruption, and weak rule of law — in addition to economic woes.

the asean-10 The agriculture sector, which accounts for nearly 40 per cent of real GDP, continued to suffer from poor rice harvest due to widespread drought in late 2004 and early 2005. The production of rice fell in 2004 to 4.17 million tons, down from 4.88 million tons in 2003. It created rice shortages in several provinces in Cambodia. According to official source, there were 700,000 people in 14 provinces that will need outside assistance in food aid until the next harvest in 2005. The World Food programme (WFP) has been distributing rice to droughtaffected areas in Cambodia since November 2004, at the government’s request. This means there would be a shortage of rice until the end of 2005. However, it is learnt from government sources that despite the drought, there exists rice surplus in several provinces that were spared from the drought. This surplus was exported to the largest rice-exporting countries such as Vietnam and Thailand due to different harvest cycles. How is Cambodia’s economy expected to perform over 2005/2006 and in 2006/2007? The end of the year 2004 marked the ending of the Multi-Fibre Arrangement (MFA), which is expected to cause a sharp decline in economic growth in recent years. With the failure of achieving Cambodia’s Millennium Development Goals (MDG) along with the ending of the MFA, the prospects of the country’s economy look grim in the near-term as well as medium-term perspective. Most Cambodia Watchers agree that the economic outlook for 2005 is not rosy and there would be a decline in economic growth between 2 and 4 per cent, partly due to the end of the WTO’s global system of garments and textiles quota in 2005 and partly due to drought, stagnant external trade, and rampant corruption which has paralysed private businesses and is hampering economic growth in Cambodia. According to ADB, the government’s attempts to reduce the budget deficit of 6.3 per cent in 2005 by raising revenue were not possible due to difficulties in raising revenues in an environment of slower economic growth. In addition, based on the level of per capita income, Cambodia, along with Laos, is expected to grow much slower relative to the rest of Southeast Asia.

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economic Outlook It is expected that external trade will only recover in 2006/2007 but trade balance could widen to around US$1 million. Inflation is expected to increase slightly in 2005 and gradually decline in 2006/2007, whereas money supply is forecast to show a reverse trend. The current account balance is expected to increase from US$9.8 million in 2004 to US$11.7 million in 2005 but it would decrease slowly to US$11.3 million in 2006 and US$10.5 million in 2007. It is also good for the economy that the depreciation of the local currency, the riel, is unlikely during the period 2005–2007 although this would have limited impact on competitiveness due to dollarization, especially when more than 90 per cent of deposits are foreign currency, predominantly US dollars in Cambodia. The prospect of an increase in FDI in Cambodia is likely due to China’s and Vietnam’s interests in investing there and an improved environment for private sector development and, along with it, continued inflows of official loans and grants would lead to an overall surplus on the balance of payments in the medium term. Although public external debt is expected to be sustainable over the forecast period, the net present value of it would still represent around 230 per cent. If the new administration’s single planning document, the National Development Strategic Plan (NSDB) is properly worked out by the government and development partners and implemented efficiently, the grim picture of the economic outlook for the forecast period could be changed for the better. REFERENCES Asian Development Bank (ADB). Asian Development Outlook 2005 — Cambodia. 2005. Economist Intelligence Unit. EIU Country Report — Cambodia (May 2005).

Indonesia Indonesia suffered from the worst natural disaster by way of the tsunami generated in the Indian Ocean on the 26 December 2004 that also affected other Asian countries. It caused much suffering and shock to Indonesians, especially those in Aceh and its surroundings. The

the asean-10 social and human capital lost has been tremendous. The government has been reacting relatively quickly, along with much support from international communities. The Indonesian President has seen the Aceh reconstruction programme as a window to a new Indonesia. The impact on the overall economy was not significant. Yet, the large inflow of money to Aceh and its surroundings in the post-disaster period may have stimulated the Indonesian economy in general. Indeed, the Indonesian economy kept growing, though the growth declined in the second semester of 2005, from 2.7 per cent in the first quarter to 1.0 per cent in the second quarter. The overall yearon-year growth rate in the first quarter of 2005 was 5.86 per cent, still higher than growth rates in the preceding years. In a broader sense of development, Indonesia also made an important progress, with the human development index rising from 65.8 in 2003 to 68.7 in 2004. The year 2005 also shows the continuation of the shift of the engine of growth that started in 2004 from consumption, towards investment and export. Investment grew by 13.2 per cent year-on-year in the second quarter of 2005, similar to that in the second quarter of 2004. Unlike in 2004 when imports had the highest rate of growth followed by exports, investments had the highest rate of growth in the first quarter of 2005, followed by imports and exports, respectively. Private consumption growth declined to 3.5 per cent year-on-year in the second quarter of 2005, from 5.1 per cent in the second quarter of 2004. Government consumption continued to decline in absolute terms, with a larger rate of decline: –5.6 per cent year-on-year in the second quarter of 2005, which was larger than the –2.7 per cent in the preceding year. The contribution of investment to the overall GDP increased to 21.5 per cent in the second quarter of 2005, though personal consumption still accounted for almost two-thirds of the total GDP. Furthermore, the increasing contribution of exports and imports indicates the rising importance of international trade, with exports always exceeding imports. In absolute terms, export and import in the second quarter of 2005 were smaller than those in the first quarter, but still larger that those in the second quarter of 2004.

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economic Outlook Transport and communication continued to be the sector with the highest growth rate, followed by trade, hotels, and restaurants. In the first quarter of 2005, the year-on-year growth rate in transport and communication was 13.12 per cent in the first quarter and 13.91 per cent in the second quarter. The second highest growth was in the trade, hotel, and restaurant sectors, at 9.96 per cent in the first quarter and 9.48 per cent in the second quarter. The three national elections in 2004 and a series of elections of regional heads in 2005 may have contributed to the growth in these two sectors. The remaining regional elections in 2006 may continue to be an important economic stimulus. Statistics on business climate was also encouraging. The business tendency index continued to improve. It was 106.31 in the second quarter of 2005, indicating that business conditions in the second quarter were better than in the first quarter, which implies that the business community was optimistic about the prevailing business environment in Indonesia. However, the consumer confidence index rose little, from 96.7 in the first quarter of 2005 to 98.1 in the second quarter, implying that consumer confidence remained almost constant, and still lower than in the preceding year, partly because of the rising inflation in 2005. The year-on-year inflation rate in August 2005 was 8.3 per cent, indicating that the yearly inflation rate continued to be below 10.0 per cent, though it was higher than in the preceding two years. The inflation rate was relatively low compared with the history of an inflationary Indonesian economy, though much larger than the rates in Indonesia’s neighbouring countries. To curb the weakening rupiah and rising inflation, the Bank of Indonesia has raised benchmark interest rate several times in 2005, including an increase to 10.0 per cent on 6 September 2005. However, there is concern that an rise in the interest rate may also slow down the investment rate, which had started to increase in 2004 and therefore may hit the economy further. This has been a delicate choice faced by the Bank of Indonesia — choosing between reducing inflation and strengthening the rupiah on the one hand and raising investment on the other hand — a classic dilemma in macroeconomic analysis.

the asean-10 Nevertheless, the rising fuel subsidy has been the most difficult politico-economic issue to deal with in 2005, as it has always been for almost all governments in Indonesia during the reformasi. The much lower domestic price than the international price has resulted in inefficiency in the use of fuel as well as corruption and smuggling of fuel to foreign countries. Without a reduction in the subsidy, the subsidy would have doubled from 69 trillion rupiah in 2004 to 138.6 trillion rupiah in 2005 with the rising oil prices on the international market. The expected doubling of the subsidy is due to the weaker rupiah as well as the rising oil prices. The rising world prices of oil had prompted the Indonesian government to sell a much larger amount of rupiah and this, along with the bandwagon effect of the bank customers, had further weakened the rupiah, which in turn had required a yet larger fuel subsidy. The rupiah had exceeded the “psychological” threshold of Rp 10,000 — per US dollar. It sank to Rp 10,510 by the end of August 2005, a 7.1 per cent depreciation from July 2005 and a 13.0 per cent depreciation on a year-on-year basis. Most economists have been aware of the danger of a looming fuel subsidy, even before Indonesia became a net oil importer in March 2004. They argue that the present levels of electricity and fuel subsidy are too large and need to be reduced, although it would lead to painful adjustments for society at large. This is particularly so as elimination of the subsidy will strengthen the government’s effort to eliminate or drastically reduce corruption and smuggling of oil. On the other hand, populist elites have always stated that cutting the subsidy will make things even worse for the poor. Furthermore, some politicians have taken the populist argument and used the issue as an important tool to attack the government. It is always ambiguous, however, how these politicians can solve the problem of the looming fuel subsidy. The difference in stance from previous governments is that the current government is sufficiently confident on the political side. The government had raised the price of fuel by 29 per cent in March 2005. It was followed by demonstration and protest, and yet, this time, the government managed to minimize the political impact.

97

10,400i

3.8a 56,320.9b 30,962.1b 25,358.8 12.55e 133.1g 13.42h 8,940i

4.3a 57,158.8b 31,288.9b 25,929.9 10.03e 131.3g 11.38h

2002

8,465l

5.0a 61,058.8b 32,550.7b 28,508.1 5.06e 135.4g 6.33h

2003

9,290i

5.1a 71,584.6b 46,524.5b 25,060.1 6.40e 136.1g 5.88h

2004

9,470i (May)

6.0 81,557.27c 56,862.86c 24,694.4 12.0f 134.4 j 10.0h

2005E

8,000

6.5 95,000 70,000 25,000 7.0 133.0 5.00

2006F

8,000

7.5 115,000 85,000 30,000 6.0 132.0 5.00

2007F

Note: Data given for 2005E are estimates; data for 2006F and 2007F are forecast figures. a Calculated from Indikator Ekonomi, Badan Pusat Statistik, April 2005, table 9.2, based on 2000 constant price. b Indikator Ekonomi, Badan Pusat Statistik, April 2005, table 6.2. c Estimated by the author, assuming the average of the first seven months of 2005, based on the data from Badan Pusat Statistik, press release, 1 September 2005. d Export minus import. e Indikator Ekonomi, Badan Pusat Statistik, April 2005, table 1.3. Prior to 2004 the index was based on 1996 price. Since 2004 it was counted on 2002 price. f The rate was 8.33 per cent from August 2004 to August 2005 (Badan Pusat Statistik, press release, 1 September 2005). Because of the large cut in fuel subsidy since 1 October 2005, inflation rate during 2005 is predicted to be about 12 per cent in the year 2005. g Statistik Ekonomi Moneter Indonesia (Weekly), 13 May 2005. h Statistik Ekonomi Moneter Indonesia (Weekly), 13 May 2005. The rate for May 2005 was 6.06 per cent. With the large cut of the fuel subsidy, the rate is predicted to reach an average of 10.0 per cent in 2005. i Statistik Ekonomi Keuangan Indonesia (Bank Indonesia), April 2005, table VI.18; November 2003, table VI.16. j March 2005, from CEIC Database.

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

GDP growth (% change) Exports of goods (US$ million) Imports of goods (US$ million) Trade balanced (US$ million) Inflation/CPI average (% change) Total debt (US$ million) Three-month average interest rate (% per annum; in July)

2001

Indonesia: Selected Economic Indicators, 2001–2007F

98 economic Outlook

the asean-10 The seriousness of the commitment of the government to further reduce the subsidy has been backed up by Parliament in early September 2005. On 1 October 2005, just four days before the start of the Ramadan (fasting month), the government announced that the price of fuel was raised by an average of 90 per cent, much larger than the highest expected increase of 60 per cent. Politically, it is a very brave decision. To help the people to swallow this “bitter pill”, the government has created a “temporary relief medication”, particularly to soften the critics from the populist elites. The government created a compensation package for the poor, to disburse 4.7 trillion rupiah for an estimated 15.5 million poor households earning less than 175,000 rupiah a month. Beginning on 1 October until the end of December 2005, each of the poor households will receive 100,000 rupiah a month. Economics seems to have won over politics, with relatively smaller protests on the rise of the fuel price. The second Bali bombing on the evening of 1 October may have evaded the people’s attention away from the price increase or it may have worsened the feeling of economic and political insecurity of the people. Yet, so far the impact of the second Bali bombing on the Indonesian economy may not be great and it will only be temporary. Overall, at the time this article is written (end of October 2005), the economy looks set to achieve an almost 6 per cent growth rate in 2005. If the elimination of subsidy proves to be successful, without major political costs, the economy is very likely to improve — perhaps hitting close to a 7 per cent growth rate in 2006. Early observation shows that there is no significant political upheaval and that the Indonesians can again adjust to the shock well, as they have done in the past, in spite of the spiralling cost of living.

Laos The Lao People’s Democratic Republic (Lao PDR) is a less-developed country, with approximately a third of its population living below the food poverty line (of US$1 per day). The average annual per capita income is around US$350 on a GNI (gross national income) basis, or

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economic Outlook US$1,700 on a PPP (purchasing power parity) basis. International donor activity currently accounts for around 7 per cent of Laos’ GDP, almost 40 per cent of its total public expenditure, and over 60 per cent of the country’s capital budget. When measured on a per capita basis, Laos receives ones of the highest levels of donor assistance in the whole of Asia. With a total population of less than 6 million and an average density of just 25 people per square kilometre, the country is sparsely populated. Only 21 per cent of Lao citizens reside in urban areas, and 18 per cent live in Vientiane province alone. Average life expectancy is no more than 56 years, compared with 69 years in neighbouring Thailand and Vietnam. Almost 45 per cent of the population is aged 15 or less. The adult literacy rate is around 50 per cent, and only about 30 per cent of its citizens have attained some elementary or secondary education. Of a total labour force of just 2.3 million, only 10 per cent are salaried, and the bulk of the rest are farmers. Since the late 1980s, the country has been undergoing a gradual process of economic transition, away from the central planning methods adopted after the overthrow of the Royal Lao government in late 1975, and towards a more market-oriented economy. This transition process, dubbed the “New Economic Mechanism” (NEM) by some observers, broadly parallels — but is certainly not a carbon copy of — the doi moi economic reform and business liberalization process under way in neighbouring Vietnam. Also, this transition process in Laos has been a very gradual one, and has been prone to occasional diversions and distractions. Factors behind the slow pace of economic reform in Laos are multiple and complex, but include: a cautious approach taken by policymakers, particularly towards economic reform measures that might potentially cause unwelcome socio-political consequences; resistance from those with vested interests that anticipate losing current privileges as a result of economic reforms; and a general lack of urgency displayed by the government in economic policy matters. It could be argued that, given the socio-economic profile of Laos, the need for reforms to maintain an adequate pace of economic growth and development is deemed less urgent than in transitional neighbours like China and Vietnam.

the asean-10 The Lao government has recently been seeking to eradicate opium cultivation, primarily conducted in remote upland areas of the country, and particularly in Phongsali and Houaphanh provinces. According to the UN Office on Drugs and Crime, Laos had been the third largest opium producer in the world during the 1990s, after Afghanistan and neighbouring Myanmar. Total opium production in 2003 was estimated to be 120 metric tons, mostly produced by small-scale subsistence farmers, for use in medicine and as a cash crop. In 2001, Vientiane boldly pledged to wipe out all opium production by the end of 2005, and subsequently received US$80 million in grants from foreign donors to assist in this campaign. Recent media reports suggest that there has indeed been a commendable 73 per cent decline in poppy production since 2000. However, there has been some concern expressed about the means used, including the forced relocation of some hill tribes. It will also have removed the primary source of income for some former opium farmers, with some critics noting that the government’s campaign has not placed sufficient emphasis on creating new sources of income for such people. One benefit of the campaign to eradicate opium production has been improved relations with the United States. Since signing a second bilateral trade accord with the United States in September 2003 (the first having been signed in 1997, but was not ratified), Vientiane had been seeking to establish normal trading relations (NTR) status (previously known as “most favoured nation” status) with Washington, but came up against resistance from lobby groups opposed to Vientiane’s alleged disregard for human rights and religious freedoms, as well as its seemingly relaxed attitude towards opium production, at least before 2001. However, in late 2004, President Bush formally granted Laos NTR status. This “normalization” of trade will permit Laos to have a markedly lower tariff rate for goods exported to the United States, down from an average of 45 per cent to around 2.5 per cent. Under NTR, US tariffs on Lao imports will drop: from 40 to 7 per cent for cotton garments; from 60 per cent to zero for handicrafts; from 42 per cent to zero for wooden furniture; from 90 per cent to less than 1 per cent

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economic Outlook for Lao silk textiles; and from 10 per cent to zero for coffee and tea. Having attained this agreement with the United States, Laos’ attention is slowly turning to gaining entry into the WTO, although this is not an immediate prospect. In the business realm, 2005 saw a number of important developments, particularly in the power and mining sectors, which are likely to have a marked impact on Laos’ macroeconomic well-being in the years ahead. For some time now, Laos has aspired to exploit its considerable hydropower potential to become the “battery of Asia”. But a number of factors have cumulatively served to constrain the development of power plants, and only two projects had become operational by 2003. The largest proposed power project has been the 1,088-megawatt Nam Theun 2 project, located 250 kilometres east of Vientiane. On the drawing board since the early 1990s, the construction of Nam Theun 2 was initially scheduled for 1996, with commissioning slated for 2000. However, extended delays were encountered in putting together a financing package, and most notably in attaining partial risk coverage from the World Bank. On its part, the World Bank was concerned about the potential environmental, social, and other costs stemming from the 450 square kilometre reservoir that it will create, necessitating the relocation of 16 villages. In early 2005, however, having devised a programme that would address these concerns, the World Bank gave the green light to proceed. This will be the single largest investment project ever undertaken in Laos, at a cost of around US$1.2 billion. After five years of construction, power generation should commence in 2010, with the majority of the electricity produced destined for Thailand. In 2003, Vientiane and Bangkok signed a power-purchasing agreement, whereby Thailand is committed to 95 per cent of Nam Theun 2’s electricity, at an agreed price, for 25 years. This single project should generate more than US$200 million in foreign exchange revenue for Laos each year. Indeed, the IMF estimates that as a direct result of Nam Theun 2 alone, Laos’ exports in 2010 (the year the power plant enters production) will grow by 27 per cent and real GDP will rise by 11 per cent. In the mining sector, further progress has recently been made at a

the asean-10 large gold and copper mine located near the southern town of Sepon, east of Savannakhet. The mining is being conducted under a 36-year exploration and production agreement between the Lao government and Oxiana Resources of Australia. The mine is believed to contain 1 million tons of high-grade copper and more than 3.5 million ounces of gold, all of which can be extracted using open-pit mining techniques. Gold production commenced in 2003 and copper extraction began in 2005. In 2004, Oxiana Resources signed an exploration agreement with AngloGold Ashanti, the world’s second largest gold-mining company, to explore for other gold reserves in the whole of Laos. These developments have sparked interest in Laos by the international mining community, and could mark the beginning of production projects that will help increase Laos’ current account from exports, as well as bolster budget revenues from royalty payments. In 2005 a Lao Business Forum was established to serve as a conduit for two-way communication between the government and the corporate sector on pertinent issues. In addition, a Small and Mediumsized Enterprise Development and Promotion Office (SMEPDO) was established at the Ministry of Industry and Handicrafts. Both initiatives should help improve the enabling environment for local businesses in Laos, which currently face a number of hurdles that constrain their development. For example, Laos ranks poorly against other countries in the number of days it currently takes to incorporate a new company (around 200 days). This issue and others will hopefully be addressed in a new and more robust Business Law, to be implemented in 2006, replacing the earlier (and now inadequate) 2004 law on business activity. Laos’ budget revenue shortfall has long been a source of concern for international development agencies such as the IMF. Much of the blame for inadequate revenue collection is attributed to: poor administrative capacity by various pertinent state agencies; a generous array of fiscal incentives offered in a bid to stimulate investment activity; and the ongoing process of decentralization at the provincial level, which is fragmenting the collection of taxes at the national level. Some provinces, particularly in the south, are reported to have pursued decentralization

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economic Outlook

Laos: Selected Economic Indicators, 2001–2007F

2001

2002

2003

2004

2005E

2006F

2007F

GDP growth (% change)

5.8

5.9

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

10.1

10.1

5.9 11.5

6.5 11.4

7.0 11.9

6.5 11.5

5.8 9.8

5.7

5.7

7.5

7.3

7.3

7.0

6.0

3.8

4.0

2.2

3.5

4.1

3.0

3.0

Exports (US$ million)

320

324

373

455

600

550

562.0

511

470

500

600

710

751

800.0

Trade balance (US$ million)

Imports (US$ million)

–191

–146

–127

–145

–110

–201

–238

Current account balance (% of GDP)

–4.6

–2.3

–0.3

–0.5

–1.8

–13.3

–13.5

7.8

10.7

15.8

10.6

7.0

5.0

5.0

M2 money supply growth (% change)

20.1

27.0

19.2

21.3

18.0

20.0

20.0

Fiscal balance (% of GDP)

–7.6

–8.3

–7.8

–4.8

–5.3

–3.9

–3.8

1,205

1,284

1,390

1,961

—

—

—

Debt service ratio (% of exports)

7.8

8.9

6.8

9.4

16.3

14.6

13.6

Foreign exchange reserves (US$ million)

133

196

216

225

240

260

280

Inflation/CPI average (% change)

Total debt outstanding (US$ million)

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

8,955 10,056 10,652 10,380 10,400 10,600 10,800

Sources: Asian Development Bank; author’s estimates.

the asean-10 with considerable vigour, notably in such areas as customs duties. Although one could argue that a degree of economic and administrative decentralization is appropriate, given Laos’ poor communications and transport infrastructure, considerable doubt surrounds the capacity of some provincial authorities to sensibly manage and balance local public finances. It should also be noted that a previous attempt at decentralization in the late 1980s ended in abject failure. The IMF has also expressed some concern over Laos’ external debt, which it estimates to be around US$1.2 billion, equivalent to: around 60 per cent of the country’s GDP, more than double its annual export earnings, or more than five times the yearly government revenues. This places Laos in a high-risk category. However, the IMF also believes that Laos’ current debt service obligations are manageable, as long as economic reform momentum is maintained. Although Laos is technically eligible for debt relief under the HIPC (heavily indebted poor countries) Initiative, it has thus far chosen not to avail itself of this programme.

Malaysia Malaysia’s growth prospects look stable for the forecast period of 2006 and 2007. The real GDP growth rate is likely to hover around 5.2 per cent in 2006 and 5.3 per cent in 2007. Real GDP grew by 7.5 per cent in 2004, and is estimated at 5.0 per cent for 2005. Growth in 2006 and 2007 looks set to continue above the 5 per cent mark, influenced by several internal and external factors. Overall, the positives outweigh the negatives to ensure that outlook during the next two years remains at least fair to favourable, although the prospects for fast-paced growth will remain elusive for the time being. Growth will hover above the 5 per cent mark in 2006 and 2007 because of the proposed measures carried out under the 9th Malaysian Plan (2006–2010), and the expected pickup in the global electronics sector. The 9th Malaysian Plan aims to structurally reform the economy by strengthening Malaysia’s “Information and Communications and Technology” sector through conducive investment and development

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economic Outlook policies, supporting small and medium-sized enterprises (SMEs) through the setting up of a new SME Bank, developing and enhancing the agricultural sector through new fiscal measures, and promoting human capital development through education and training initiatives. In addition, the Malaysian Stock Exchange (Bursa Malaysia) has simplified its settlement system, paving the way for foreign funds to enter more easily into the market. Foreign investors will soon be allowed to have one settlement account for all its clients. Previously, each broker had to open an individual sub-account for each of its clients. Prime Minister Abdullah Badawi’s promotion of the agricultural sector to serve as the third pillar of growth after manufacturing and services should bode well for Malaysia over the forecast period. A reliance on three instead of two sectors should serve as a good buffer for fluctuations in the former two. Also, higher commodity prices currently prevailing are in Malaysia’s favour. Palm oil prices are expected to increase with rubber prices remaining firm during the forecast period. Increased incentives have also been offered by the government to boost investment in agriculture and food production and the state is keen to promote the development of the biotechnology sector given Malaysia’s rich sources of biodiversity especially in the states of Sabah and Sarawak. On the domestic front, the rise in oil prices has put some strain on the economy in 2005, and this is likely to continue in 2006 and 2007. With three oil price hikes in 2005 and a cutback in subsidies, the Malaysian government has promised in September 2005 that it would not be lowering oil subsidies for the rest of 2005. Also, the government has stated that due to dwindling reserves Malaysia may no longer be able to depend on crude oil exports as a source of revenue by the end of the decade. Malaysia has reserves lasting for the next 19 years but surging domestic demand may use up this supply sooner than anticipated. The government has announced in September 2005 that it will not be aggressively balancing its budget especially at the expense of a severe contraction of its economy. In addition to the RM10 billion allocated for development schemes in 2004, the government has

the asean-10 allocated an additional RM2.4 billion (US$0.63 billion) for construction projects in April 2005. The emphasis on improving English-language skills, and fiscal spending and incentives on education and training will also ensure that Malaysians are equipped to face the challenges of globalization and trade liberalization. The 2005 budget continues on its focus of boosting the return on investments in government-linked corporations (GLCs) by stimulating reforms. An open tender system in likely to be the norm under the Badawi government, rather than the often secretive tender process in the Mahathir administration. Several mega projects under the Mahathir administration had been cancelled, although the rather financially “worrisome” Bakun Dam project in Sarawak is still proceeding (with an expected delay of another 18 months). Previously expected to be completed in mid-2007, the project has now been pushed to early 2009 with costs exeeding RM2.5 billion. In terms of GLCs, the government’s initiative to reform entities including Telekom Malaysia (one of Malaysia’s major telecommunications player), Proton (Malaysia’s national car-maker), and Tenaga Nasional (Malaysia’s power company) bodes well for economic development. Falling trade barriers in the years to come will open up these GLCs to intense competition and they cannot afford to be hindered by inefficient practices. Such entities now have to abide by the guidelines set by the government as well as ensure that positive investment returns are generated. However, the hot issue of approved permits (APs) to import foreign cars continued in September with members of Parliament questioning Datuk Seri Rafidah’s deputy Ahmad Husni Hanadziah about alleged abuses in the issuance of such permits. The AP saga began in July when it was revealed that the Ministry of International Trade and Industry (MITI), headed by Datuk Seri Rafidah, had handed out a disproportionate number of APs to three Malay individuals. It was also alleged that many former officers in MITI had received APs. From the list released from the Prime Minister’s Office, it was revealed that two former senior officials from MITI received 28,000 and 67,158 permits in 2005 alone. In comparison, UMV Corp, a local assembler and

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economic Outlook distributor of Toyota only received 107 permits in the same year. With the end of the Mitsubishi’s partnership in 2005, Proton has been actively seeking a foreign partner. Proton’s market share had been shrinking from 66 per cent in 1999 to 48 per cent in 2003, to 44 per cent in 2004, and to about 40 per cent in the first half of 2005. The new car policy proposed under the national budget in 2005 would likely make the Proton-Volkswagen partnership viable with the competitive landscape and favourable fiscal incentives to invest in Malaysia. It is widely expected that a stronger relationship between Volkswagen and Proton is in the offing towards the end of 2005. This new synergy looks promising for the troubled national car-maker, given Volkswagen’s experience and knowledge in the increasingly competitive car industry. Volkswagen is the fifth largest player in Malaysia’s car market. On the external front, free trade agreements (FTAs) have continued to be prominent in Malaysia’s quest for improving its competitiveness, developing wider export market opportunities, and pursuing market pragmatism and consolidation in a globally competitive and aggressive environment. Whether such goals can be achieved remains to be seen as internal domestic market policies must work in tandem with the pursuit of trade liberalization. While Malaysia has stressed its stance on supporting the multilateral trading process via the WTO, there has been a flurry of preferential and bilateral FTAs involving several countries in the recent years. The countries currently in Malaysia’s FTA radar include: •

•

• •

Japan — the Japan-Malaysia Economic Partnership Agreement (JMEPA), which commenced in 2003. An agreement, in principle, was reached on the major elements in May 2005, and the JMEPA was signed in December 2005. the United States — the Malaysia-US Trade and Investment Framework Agreement, which commenced in May 2004, lays the groundwork for an eventual bilateral FTA; Australia — the Malaysia-Australia FTA, which started in April 2004 and is scheduled to be completed by mid-2006; New Zealand — the Malaysia–New Zealand FTA, which was initiated in March 2005 and is scheduled to be completed by end-2005;

the asean-10 • • •

India — the Comprehensive Economic Cooperation Agreement, which had its genesis in December 2004; Korea — the Malaysia-Korea FTA commencing after the ASEAN wide–Korea FTA in 2005; Pakistan — the Malaysia-Pakistan FTA, which commenced in April 2005.

On an ASEAN-wide perspective, Malaysia, together with other ASEAN countries, is pursuing initiatives with Australia and New Zealand, China, India, Japan, and Korea. And in December 2005, Malaysia will be holding the strategically important East Asian Summit embracing countries in ASEAN+3, as well as India, Australia, and New Zealand, which will be participating for the first time. Malaysia gave the world a pleasant surprise by following China’s decision to relax its foreign exchange controls on 21 July 2005 when it switched to a managed float exchange rate system. The Malaysian currency is expected to gradually appreciate against the US dollar in the coming years. It has also been widely speculated that the Malaysian authorities will be allowing the ringgit to appreciate because of the surging inflation caused by oil price hikes and high private and public consumption. Consumer price inflation is expected to increase from 1.5 per cent in 2004 to 2.8 per cent in 2005. During the forecast period, inflation is expected to average around the 2 per cent mark. The public sector is unexpectedly going to be a cause of inflation due to cuts in oil subsidies and also the introduction of the goods and services tax in 2007. In the short term, exporters will be bearing the brunt of this policy measure as ringgit-denominated exports will become more expensive because of appreciation. Both exporters and importers will also be exposed to exchange rate volatility after being under the fixed peg for seven years. However, in the longer term, businesses will adjust to the new environment. With uncertainties associated with the removal of the currency peg finally resolved, business people are more willing to make longer-term investment plans. Singapore-Malaysia business ties continued to be strong in 2005 and is expected to continue in the years to come. In September 2005,

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Malaysia: Selected Economic Indicators, 2001–2007F

2001

2002

2003

2004

2005E

2006F

2007F

0.3

4.1

5.3

7.5

5.0

5.2

5.3

— Industry sector   growth (real,   % change)

–3.8

4.1

7.2

7.8

4.8

4.1

4.4

— Services sector   growth (real,   % change)

6.2

6.4

4.3

7.8

5.4

6.5

6.0

— Agriculture sector   growth (% change)

–0.6

2.6

5.7

3.0

3.0

3.2

3.2

Goods: exports f.o.b. (US$ billion)

88.0

93.4

105.0

126.6

146.6

165.2

183.5

Goods: imports f.o.b. (US$ million)

–69.6

–75.2

–79.3

–99.3 –118.7

139.7

158.2

18.4

18.1

25.7

27.5

27.9

25.3

25.5

Inflation/CPI average (% change)

1.4

1.8

1.1

1.5

2.8

2.4

1.9

Gross external debt (% of GDP)

50.7

51.2

49.0

52.3

51.4

52.2

55.1

Total external debt (US$ billion)

44.6

48.6

50.5

52.3

51.4

52.2

55.1

0.3

1.3

0.8

1.3

1.1

1.3

1.6

2.4

3.7

9.6

19.3

9.9

9.0

11.1

3.8

3.8

3.8

3.8

3.78

3.75

3.72

GDP growth (real, % change)

Trade balance (US$ million)

Net FDI inflows (US$ billion) M2 money supply growth (% change) Exchange rate at year-end (ringgit/US$)

Note: Data given for 2005E are estimates; data for 2006F and 2007F are forecast figures. Sources: Economist Intelligence Unit; Asian Development Bank; Bank Negara Malaysia, Ministry of Finance; author’s estimates.

health-care giant, Parkway Holding in Singapore, paid about S$139 million for a 31 per cent stake in Pantai Holdings, Malaysia’s largest private health-care provider. Telekom Malaysia and Khazanah Nasional bought a 12.1 per cent stake in Singapore’s telecommunication giant,

the asean-10 M1, in August 2005. In June 2005, Singapore signed a treaty with Malaysia to buy more than S$3 billion of natural gas over the next 18 years. Under the deal, Keppel and Petronas will build a 5-kilometre line that will connect Malaysia’s gas system from Johore to Singapore’s gas transmission system. In February 2005, Singapore’s investment company, Temasek Holdings, and its Malaysian partner purchased a controlling 15.4 per cent interest in MPlant, which wholly owns Alliance Bank. Malaysia and China are also developing stronger ties with the visit of Deputy Prime Minister Najib Tun Razak to Beijing in September 2005. New tie-ups are expected in the energy and infrastructure sectors with both countries also working on a joint defence agreement. The Malaysian economy will be facing many new challenges in the years to come, especially with the rise of China. Given the flurry of developments on the global front, positive government measures such as the promotion of clear corporate governance measures, positive investment and financial incentives, and trade alliances and liberalization measures will ensure that the forecast period looks reasonably favourable for the country.

Myanmar According to the government-owned newspaper, New Light of Myanmar, quoted by Kyodo News (17 April 2005), the country’s no. 3 leader General Thura Shwe Mann announced that the country’s economy expanded by 12.6 per cent in 2004/2005 against the target of 11.3 per cent and per capita income stood at 165,725 kyat (about US$27,621 at the official rate and US$182 at the market rate) in the same fiscal year.1 This implies that if official figures are to be believed, Myanmar’s economic performance in 2004/2005 surpassed that of the fast-growing economies of China and Vietnam, which grew at 9.2 per cent and 7.6 per cent per annum, respectively, during the same period. However, according to the Economist Intelligence Unit (EIU), “proxy indicators GDP growth in Myanmar have remained sluggish, and the junta’s estimates of robust growth are unrealistic” (Country Report,

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economic Outlook August 2005). This finding is also echoed by the Asian Development Bank (ADB), which also observes that the rapid growth rate is not corroborated by the performance of inputs such as power and fertilizer. Thus, the actual GDP growth rate is likely to be much lower than official estimates. The economy underperformed because of macroeconomic imbalances and structural problems that included a wide fiscal deficit due to losses by state-owned enterprises (SOEs) and a dual exchange rate system (Asian Development Outlook, 2005 — Myanmar). The country’s average economic growth rate for eight years between 1997/98 and 2004/2005 was 10.7 per cent. Those who are well versed in mathematics and economics know that if the eight-year average growth rate is 8 per cent, the size of the GDP will double, which in turn will raise the standard of living significantly — provided that the data is reliable. China is a good example of such a happy outcome. For Myanmar, however, there is no strong evidence of significant improvements in the social and economic arenas. According to official sources, the double-digit growth rate of 12.6 per cent is attributable to growth in the agriculture sector, which witnessed a decline from 11.7 to 9.6 per cent in 2004/2005. EIU data shows negative growth in the agricultural sector (–3.5 per cent) since rice production fell from 23.1 million tons in 2003 to 22.0 million tons in 2004. This was probably influenced by floods and the ban on the export of rice by the private sector from 1 January 2004 to July in the same year, triggering a decline in rice prices. This adversely affected farmers’ incentive to grow rice and also the export of rice since it hurt farmer’s incomes as well as the national income. This is also expected to affect rice production in 2005/2006 as farmers would have lost confidence in the agricultural sector. However, a noted Myanmar academic said the country’s economists are hardly in a position to know exactly what drives Myanmar’s GDP growth to double-digit levels as from 1998 the government had stopped releasing the Review of the Financial, Economic and Social Conditions for sale to the general public. The growth rate (official) of the industrial sector for 2004/2005 looks very impressive, with 21.1 per cent compared with 20.5 per cent in 2003/2004. This might have contributed to the overall economic growth

the asean-10 if the official data is to be believed, although many — including the EIU report — consider the industry output to be sluggish as well. In particular, the garments industry was affected by US sanctions in 2003 in the areas of production, employment, and export. In addition, there were still blackouts due to power and water shortage in cities. These affected not only the industries but also the urban households. Although the government imported US$250 million worth of fuels from Malaysia, the demand for fuels continued to outgrow the supply, all of which had an adverse impact on the performance of the industrial sector in Myanmar. With regard to the inflation situation, the consumer price index is estimated to have increased to 20 per cent in 2004/2005 compared with last year’s 25 per cent due to a decline in food prices caused by the six-month ban on rice exports. Inflation started to grow again from July 2004 when the export ban was lifted selectively. To make matters worse, at the time of writing, the government has imposed a shocking ninefold increase in state-subsidized petrol prices, raising panic among the public with fears of rampant inflation (Nation, October 2005). It could be said that the country has had a negative inflation rate as the central bank interest rate, deposit rate (six-month), and lending rate remained unchanged at 10 per cent, 9.5 per cent, and 15 per cent, respectively. The reason for the estimated double-digit inflation in 2004/2005 might have been the government’s high borrowing of money from the central bank (that is, by printing more money) in order to fund the budget deficits which averaged around 4 per cent of GDP during the last five years. In 2004, according to IMF figures, government borrowing from the central bank was about 15 times higher than in 1994 while the consumer price index was ten times higher during the same period (The Economist, 23 July 2005). The year-on-year percentage change in money supply (broad money, M2) increased from 11.0 per cent in the first quarter of 2004 to 33.3 per cent in the first quarter of 2005. Meanwhile, according to Associated Press (30 September 2005), Myanmar’s currency, the kyat, fell to an all-time low of 1,330 to the US dollar on the black market (or market rate) on 30 September

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economic Outlook 2005, driving up prices of commodities, including imported goods, which in turn raised the prices of local goods such as diesel fuel, medicine, and food. The value of the kyat has been gradually falling this year — from 880 kyat to the US dollar in January, to 950 kyat in May, and to 1,170 kyat in August. The fall in local currency this year could perhaps be attributed to the deteriorating consumer and business confidence in the wake of recent bombings in the major cities of Yangon and Mandalay, in addition to the acceleration in inflation (EIU, August 2005). The previous low in the exchange rate was 1,330 kyat to the dollar in September 2002 while the official exchange rate remained at 6 kyat to the dollar. In fact, in Myanmar there are at least four exchange rates: official rate, parallel rate (market rate), tariff valuation rate (import duty rate), and foreign exchange certificate rate. This has perhaps led the Heritage Foundation, an American think tank, to rank the Myanmar economy as being the most distorted in the world, except for North Korea. Similarly, the Asian Development Bank (Asian Development Outlook 2005) mentions that dual exchange rates and the large gap between the parallel and official exchange rates have distorted official statistics. Another factor that has a negative impact on economic performance is the people’s loss of confidence in the banking system — perhaps due to the bank run in 2003, and the banning of two private banks, namely, May Flower Bank and Asia Wealth bank in 2004, for irregularities. There were more than 10,000 lawsuits by customers against the Mayflower Bank and Asia Wealth Bank for turning down customers’ requests to withdraw their deposits. There was the takeover of the privately owned Myanmar Universal Bank by a state-owned Myanmar Economic Bank in August 2004 without any explanation by the government for the takeover. A possible reason is the anti–money laundering measures or the bank’s connection with the ethnic opposition group. Myanmar introduced a Control of Money Laundering Law in 2002. The Paris-based Financial Action Task Force, a world financial watchdog, placed Myanmar, along with Nigeria and Nauru, on the black list of countries that failed to cooperate in fighting money laundering. In September 2005, the Australian government offered financial assistance

the asean-10 to the Myanmar government to facilitate the establishment of anti–money laundering measures. On the brighter side, as far as external trade in 2004/2005 was concerned, total foreign trade expanded by 9 per cent compared with that of 2003/2004, according to official sources (Associated Press, 23 May 2005). Total revenues from exports increased from US$2.4 billion from 2003/2004 to US$2.9 billion in 2004/2005. This is attributable to an increase in oil and gas exports (mainly to Thailand from Yetagun gas field via a pipeline), agricultural products, timber, and marine products despite the significant fall in rice exports resulting from the export ban on rice and sanctions from the west. Teak exports earned US$300 million in 2004/2005 compared with US$250 million in the previous year. However, garment exports declined in value from US$327 million in 2003/2004 to US$216 million in 2004/2005. In fact, Myanmar’s exports of garments to the United States declined by about 50 per cent over the past three years due to the US ban on imports from Myanmar. Rice exports declined drastically by 63 per cent in 2004 to 113,900 metric tons from 403,700 metric tons in 2003 after the State Peace and Development Council (SPDC) banned rice exports from January to July 2004, to ensure that there was sufficient rice for the general population and to keep the domestic price of rice affordable. Border trade is increasing, especially with Thailand and China although sometimes the border points are closed for a considerable period without prior notice (especially at the Thai-Myanmar border).2 This has affected the border trade, leading to a rise in input prices. It is important to note that the United States and the European Union have renewed their sanctions against Myanmar’s military government this year. In the case of imports, the total value of imports declined to US$2.0 billion in 2004/2005 from US$2.2 billion in 2003/2004, mainly due to a shortage of foreign exchange and to reduce the current account balance. The current account deficit was US$228.2 million in 2004/2005 compared with US$49.7 million in 2003/2004 although foreign exchange reserves increased from US$550.2 million to US$672.1 million during the same period. The leading export items in 2004/2005 were (as in the previous year)

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economic Outlook natural gas exports (which have become the leading item), fol­lowed by timber, beans and pulses, garments, and marine products. During the same period, the leading import items were machinery and transport equipment, refined mineral oils, synthetics and woven fabrics, base metals and manufactures, electrical machinery, and plastics. Another positive aspect of the economy for 2004/2005 was the increase in foreign direct investment of 34 per cent against last fiscal year — it increased from US$95.32 million in 2003/2004 to US$128.09 million in 2004/2005, mainly due to investments from South Korea, China, and Thailand of US$112.25 million as part of their seven oil and gas contracts despite the sanctions imposed by the West. The remaining investments went to the manufacturing sector, mining sector, transport sector, and hotel and tourism sector. However, sanctions imposed by the United States and human rights organizations are likely to continue to impede the potential inflow of foreign direct investment (FDI) (see the table on the next page). In an ABAC (Assumption Business Administration Colleage) poll conducted in Bangkok, it was revealed that of the 428 Bangkok-based foreign investors polled, 50.4 per cent had kept abreast of human rights developments in the military state (Nation, 22 March 2005). Altogether, 56 foreign firms from 14 countries have already pulled out of Myanmar in recent years, mostly since 1997 because of the poor business climate and erratic policy environment and sanctions imposed by the West. The total central government tax revenue including income tax, lottery and stamp duty, profit tax, and customs taxes rose by 63.4 per cent on a year-on-year basis at the official exchange rate. (As of June 2004, customs taxes increased significantly since the government imposed a flat rate tax of 25 per cent on a range of imported items, replacing a previous raft of taxes at rates ranging from 2 to 20 per cent.) At the same time, the government raised the exchange rate for valuation of import duties from 100 kyat to 450 kyat to the US dollar. These measures created a surge in commodity prices. In the light of the above developments, Myanmar’s actual economic growth for 2004/2005 is estimated at between 4 and 5 per cent against the official estimate of 12.6 per cent “because of macroeconomic

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Sanctions Imposed on Myanmar

By the United States — Ban on all new investments by US firms in Myanmar — Ban on all imports from Myanmar — Ban on visa for senior officials of the SPDC — Selective Purchasing Law supported by five states and 17 cities By the European Union — Withdrawal of GSP benefits on industrial goods and agriculture products — Ban on the import of arms By Canada — Myanmar was excluded from Canada’s Least Developed Country Market Access Initiative. — Withdrawal of Myanmar’s GSP benefits By Australia — Selective Purchasing Law passed by Marvickville Council in Sydney Global sanctions — Consumer boycotts advocated by human rights organizations Sources: Economist Intelligence Unit, Country Report, Myanmar.

imbalances and structural problems that include a wide fiscal deficit due to loses by SOEs and a dual exchange rate system” (Asian Development Outlook 2005). The EIU is more pessimistic than the estimate of the Regional Outlook; it has estimated a negative growth rate of –2.7 per cent for the same time period. For 2005/2006 and 2006/2007, the EIU report estimates the GDP growth to improve to about 1.5 per cent and 2.2 per cent, respectively, in the coming two years. The reasons behind this optimism could be the following. First, in spite of the floods in most of the neighbouring countries, Myanmar was spared the natural disasters. FDI from China, India, Thailand, and Korea are rising mostly in the oil and gas sector and their firms are actively involved in exploration and production deals. Many potential natural gas deposits are found in the Bay of Bengal as well as onshore. This indicates the high potential of production and export of natural gas

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economic Outlook within the Bay of Bengal region, which would benefit members in the Bay of Bengal Initiative for Multi-sectoral and Technical Cooperation (BIMSTEC) grouping, of which Myanmar is an important member, and has an important stake in promoting energy security in the region. Currently, a quarter of Myanmar’s total export earnings is derived from gas exports. Foreign reserves grew from US$672 million in 2004 to US$786.0 million in March 2005. Second, in 2005/2006 and 2006/2007, exports are expected to grow at the rate of 10 per cent and 15 per cent, respectively, mainly due to the expansion in production of natural gas, agricultural products, marine products, and timber. Imports may also increase by 5 per cent for both years due to an increase in export earnings and increased costs of importing fuels. Moreover, government revenues are expected to be fivefold higher due to the government’s raising of taxes of electricity, water, fuels, transport, newspapers, among others. A 34 per cent rise in FDI in 2004/2005 also gives impetus to the energy sector mainly due to investments from China, India, Thailand, and South Korea. Third, the tourism sector is also improving. According to the latest official data, tourist arrivals in January–July 2004 reached 175,123 — an increase of 5.6 per cent on a year-on-year basis. Although sanctions from the West remain intact, the high presence of China and India would buffer the impacts of sanctions by injecting more investment in the oil and gas sector and increased trade with Myanmar. Concomitantly, Myanmar’s active participation in sub-regional cooperation arrangements such as BIMSTEC and the Ayeyarwady–Chao Phraya–Mekong Economic Cooperation Strategy (ACMECS) is expected to expand regional economic cooperation within ASEAN and with South Asia through tariff reduction, enlarged market size, improved infrastructure, and more investments. The above notwithstanding, there are several areas of concerns that need to be addressed in order to improve upon the current growth performance. First, farmers have lost confidence in the government’s sudden changes in policies using drastic measures to force the cultivation

6.7 710

Exchange rate — Official (kyat/US$) (average) — Market (kyat/US$) (average) 6.6 900

58.1 6.6 470 86.9 34.6

3,063 2,300 763

4.5 35.4 14.8 6

12 5.3 10 5.5

2002/ 2003

6.1 950

24.9 7.3 550 91.2 25.5

2,357 2,240 117

4.2 20.5 14.5 –3.5c

13.8 –2 10.1 5.1

2003/ 2004

6.5 1,000

20.0a 7.5 672 128.1 22.2

2,900 2,000 900

4 21.1 13.8 9.6

12.6 –2.7 n.a. 4.3

2004/ 2005

6.7 1,300

25.0c 7.2a 774d n.a. 33.3c

2,500a 2,200a 300

4 14.7b 9.0b 2.0a

11.3b 1.5 n.a. 3.7

2005/ 2006F

6.7 1,350

30.0a 7.7a n.a. n.a. n.a.

2,600a 2,300a 300

3 14.7b 9.0b 1.2a

11.3b 2.2 n.a. n.a.

2006/ 2007F

Note: Data from International Monetary Fund, Asian Development Bank, and Economic Intelligence Unit are for calendar year ending December. Data given for 2005/2006F and 2006/2007F are forecast figures. n.a. = Not available. a  Economist Intelligence Unit, EIU Country Report — Myanmar, August 2004 and May 2004. b  Government’s Third Five-Year Plan. c  First quarter of the year. d  March 2005. Sources: Ministry of National Planning and Economic Development; Central Statistical Organization (CSO), Yangon.

34.5 5.7 401 19.1 43.9

Inflation CPI average (% change) (CSO) External debt (US$ billion)a Foreign exchange reserves (US$ million)a Foreign direct investment (US$ million) M2 money supply growth (% change) (average)a

2,544 2,735 –191

5 21.8 15.7 12.3

Regional Outlook — Industry sector growth (% change) — Services sector growth (% change) — Agriculture sector growth (% change)

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

11.3 5.3 11.3 10.5

2001/ 2002

GDP growth (% change) — Official — Economist Intelligence Unit — Asian Development Bank — International Monetary Fund



Myanmar: Selected Economic Indicators, 2001–2007F

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economic Outlook of rice in several townships. There is a lack of incentive for farmers to grow more rice because of the temporary ban of rice exports and decline in paddy price in early 2005. This has to be corrected if the agriculture sector is to see growth. Second, in the industry sector, shortages in electricity, water, and imported inputs continue to hinder the production and export of key commodities. At the time of preparing this report, the inflation rate was around 50 per cent due to an increase in the government’s taxes, transport costs, fuel costs, unrealistic exchange rate, and political uncertainties. The negative interest rate will exceed growth in incomes. By the end of September, the exchange rate had already risen to 1,400 kyat to the US dollar — about 220 times that of the official rate. The banking sector and the financial sector continue to be weak and customers’ confidence in the banks is at a low level. Finally, the monetization of fiscal deficit continues and this is likely to lead to higher inflation. Trade sanctions, lack of foreign aid, and a marginal increase in FDI along with the stalled reform measures will hinder not only any prospects of high growth, but will also trim the government’s spending on the social sector such as education and health, and social welfare relative to the GDP. According to a UN study done in 1997, the spending on defence as a percentage of combined education and health expenditure was 222 per cent. Furthermore, this trend seems set to continue. To make matters worse, red tape and corruption are still very much a part of the picture. In the light of the above concerns, the economic outlook for Myanmar in terms of GDP growth for the next two years is estimated at between 3 and 4 per cent. Structural reforms along with political stability will continue to hold the key for Myanmar’s economic future. NOTES 1. Deficiencies in data, in terms of reliability, comparability, completeness, and timeliness, make an objective assessment of the economy difficult and affect the ability of the authorities to formulate policies. For example, dual exchange rates and the large gap between the parallel and official exchange rates distort official statistics (Asian Development Bank, Asian Development Outlook 2005 — Myanmar).

the asean-10 2. For example, the border points between Myanmar and Thailand were closed for five months following border skirmishes in May 2002. Chiang Rai, situated at one of the Thai border points, lost an estimated 30 million baht every day during the five months that the border remained closed.

Philippines Three factors will be crucial in determining the economic outlook for 2006: fiscal reforms, high oil prices, and political uncertainty. As in last year, investors will be looking for further evidence of sustained and credible fiscal reforms, particularly the implementation of the eight tax measures the government had promised to deliver in 2005. Although progress was achieved in pushing for new tax measures last year (for example, an increase in alcohol and tobacco excises and a rise in duties on oil and petroleum imports), much remains to be done. Frontloading the fiscal adjustments is still a real challenge, particularly the fundamental reforms of the tax structure and tax administration. If the authorities are able to properly implement these measures and deliver results, there is a good chance that growth prospects will improve and reduce the high level of public debt that has led to overcrowding of investments over the last few years. But should the reform momentum falter, the Philippine economy will be in for a difficult time. Part of the fiscal problems, it seems, is the political economy aspect of implementing reforms in the Philippines. While the authorities have been making commendable efforts since 2004 to discipline fiscal policy, getting the political support in Congress presents a major obstacle. Given the continuous political bickering in the government, pushing the fiscal adjustments in all fronts is a challenge for policymakers. Obviously, this will put at risk the hope for a sustained economic take-off. In fact, in its assessment of the country in the last quarter last year, the International Monetary Fund (IMF) singled out political uncertainty as the biggest threat to the Philippine economy, which can further undermine economic growth in 2006. The economy also remains vulnerable to exogenous factors, notably rising oil prices and measured increases in global interest rates. Although

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economic Outlook

COMPETITION DRIVES GROWTH: THE LIBERALIZED TELECOMMUNICATIONS SECTOR IN THE PHILIPPINES By Lorraine Carlos Salazar

I

n today’s “Information Age”, a country’s telecommunications infrastructure is one of the most critical components underlying its capacity to participate in the global economy. In particular, communication networks that link people together are essential in facilitating information exchange whether it is via the telephone, e-mail, or the Internet. Thus, in recognition of this, the United Nations General Assembly in 1997 adopted a resolution declaring access to communication as a basic human right. Yet, in most developing countries, access to basic telephony is not readily available. About a decade ago, the famous jest about applying for a telephone connection in the Philippines was that it was an ordeal that would surely test one’s patience. Years would pass before any progress occurred, and when the line finally came, the dial tone often lagged behind! All of this has changed. Today, Lee Kuan Yew’s quip that 99 per cent of the Philippines is waiting for a phone while the remaining 1 per cent for a dial tone,1 does not apply any more. Nowadays, it takes at most three working days for a telephone to be installed (with a dial tone). And if one buys a mobile phone, the connection is almost instantaneous. From a country with a teledensity of less than one telephone for every 100 persons from 1970 to 1990, a decade of liberalization of the industry has led to fixed line density of 8.0 and a mobile phone density of 40 in 2004. A June 2003 survey found that 94 per cent of mobile telephone subscribers use their phones for text messaging, of which 70 per cent send about ten messages per day and about 14 per cent send between 10 and 20 messages per day. This means that an estimated 200 million text messages are sent per day, which is more than the volume of text messages sent in the entire continent of Europe!2 This development earned the Philippines the moniker “Text Capital of the World”. Indeed, the remarkable growth in the Philippine telecommunications industry is proof that competition leads to the provision of better and innovative services at more affordable prices. In fact, there are now more fixed lines available than people willing to subscribe to them. More outstanding is the growth in the mobile market, which places the Philippines among countries with more mobile than fixed line subscribers. How did this change come about?

1 Shiela Coronel, “Monopoly”, in Pork and Other Perks (Manila: Philippine Center for Investigative Journalism, 1998), p. 136. 2 Philippine Daily Inquirer, 21 June 2003.

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The tremendous growth in the sector, with its huge multiplier effect on the economy, was the direct result of liberalization policies initiated in 1993 by then President Fidel Ramos. In his inaugural speech in June 1992, Ramos argued that it was time to “dismantle the oligarchy whose rent-seeking elite have dominated the economy not through possession of skill at entrepreneurship or superior intelligence but through monopoly or access to political power”.3 Telecommunications was one such industry — dominated by the Philippine Long Distance Telephone Company (PLDT), a virtual private monopoly owned by a politically influential family. While there were about 60 provincial telephone companies, a government telephone system, and two international submarine cable companies before liberalization, PLDT owned and controlled the infrastructure through which all calls passed. Through this, PLDT controlled over 95 per cent of the market. Because of its monopoly position, PLDT neglected customer service and failed to upgrade its system. The National Telecommunications Commission (NTC), the industry regulator, was unable to compel PLDT to provide more phones, improve its service, or protect the consuming public from the latter’s monopolistic abuses. In 1993, Ramos issued two executive orders that revolutionized the industry. The first, Executive Order 59, provided for mandatory interconnection among all telephone companies. It also empowered the NTC to set the terms of interconnection in case the parties could not agree. The second, Executive Order 109, laid down the “Universal Service Policy”, which divided the country into 11 service areas for nine new telecommunications companies to serve. Executive Order 109 allowed new companies to invest and establish their own international gateway facilities and mobile telephone systems as long as they installed a certain number of landlines throughout the nation. Cellular phone companies were required to expand the national infrastructure by installing 400,000 lines in three years, while international carriers were required to put up 300,000 lines in five years. Companies were given both profitable and unprofitable areas of operation in order to modernize the telephone system and to increase the national teledensity of the country. In the face of new competition, PLDT launched a massive expansion and upgrading programme and doubled its fixed lines in about five years. To secure these reforms, the Public

3 Fidel Ramos, “To Win the Future”, inaugural address as President of the Philippines, Manila, 30 June 1992, in Developing as a Democracy: Reform and Recovery in the Philippines 1992–1998, by Fidel V. Ramos (Hong Kong: Macmillan Publishers, 1998), p. 4.

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competition drives growth (continued)

Telecommunications Act (Republic Act 7925) was enacted in 1995, providing a legal framework for the liberalization of the industry. From being dominated by PLDT, the telecommunications sector became very competitive with 11 international gateway, seven mobile telephone, 14 inter-carrier, and 74 local exchange services providers. By December 2000, 6.9 million new telephone lines were installed through the Service Area Scheme (SAS), and provided fixed telephone coverage to 92.9 per cent of the country’s 1,609 town and cities. By another measure, the liberalization of telecommunications attracted over 600 billion pesos in foreign and local investments by 2000. Only four of the new players (Digitel, Globe, Bayantel, and Smart) were able to accomplish their land-line commitments, while five (Islacom, Philcom, Piltel, PT&T, and ETPI) failed to do so. Among the reasons cited for this failure was the onset of the 1997 financial crisis, which increased the cost of borrowing and dampened consumer demand for fixed lines. The other unforeseen development was the substitution of mobile phones for fixed line telephones, as competition among the mobile phone led to the provision of affordable services, innovative packages, and the introduction of prepaid services. The use of mobile phones, which at the start of the 1990s was only affordable to those with high incomes, became accessible to lower-income groups through the prepaid method. Also, intense competition among new entrants led to consolidation, from five to three mobile players: Smart, Globe, and Sun Cellular. The reform of the telecommunications industry evidently led to economic and social gains. Today, corporate and individual users have clearly benefited from the introduction of competition as services have become available and cost has gone down dramatically. In May 2005, the NTC issued its ruling on the use of Voice over Internet Protocol (VOIP). VOIP is a new technology using Internet protocol for voice applications instead of the expensive traditional switched telephone network. By categorizing the use of VOIP as an enhanced service that can be offered by value-added service providers and not merely by telecommunications companies, the NTC opened the voice market to more competition. In response, telecommunications companies starting in September 2005 lowered their international direct dial (IDD) rates by at least 75 per cent, from US$0.40 cents to as low as US$0.05 to US$0.10 cents. Clearly, market competition and new technologies are driving developments in the telecommunications sector, making it a growth engine for the country’s development. Telecommunications liberalization has led to the provision of necessary infrastructure for economic growth as well as spurred economic development through huge capital investments. In addition, telecommunications companies have become the most profitable listed and actively traded companies in the Philippine Stock Exchange. Finally, the liberalized telecommunications sector is providing connectivity to Overseas Filipino Workers, thus slightly mitigating the social costs of being away from their families.

the asean-10 oil prices are expected to soften this year, after breaching US$60 per barrel in early July 2005, they are expected to stay volatile due to supply-side concerns in several oil-exporting countries. The Asian Development Bank estimated that should oil prices stay at their current levels until the end of 2006, Philippine output growth will decline by 1.4 percentage points while the budget deficit will deteriorate by about 0.8 percentage points of GDP. Despite these concerns, real GDP growth in 2006 is expected at 5 per cent, from 4.8 per cent estimated in 2005. This will be triggered mainly by private consumption, which is seen to grow by 5.1 per cent on the back of a steady increase in rural incomes (due to the recovery in agriculture) and remittances inflows. However, the prospect of private consumption shifting to higher gear this year will be limited by high unemployment (11.8 per cent as of April 2005) and poverty in the country (with almost one-sixth of the population living on the benchmark of less than US$1 a day set by the World Bank). Government consumption will continue to be constrained by the need to bring down the budget deficit to 3 per cent of GDP from 3.2 per cent in 2005. As a result of tight controls over expenditures and in response to fiscal consolidation, government spending is seen to grow, albeit slowly, at 2 per cent. The modest trend is likely to be sustained in the coming years as the government implements its Rationalization and Re-engineering Program, including reductions in staff, abolition of agencies, and devolution of activities to local governments. However, private investment will remain a major sore point preventing the economy from growing above its potential. Although the growth in private investment has picked up in recent years, the average growth of (gross fixed) investment (4 per cent) in the Philippines in 1999–2003 was lower than in China (8 per cent), Malaysia (5 per cent), India (6 per cent), and Thailand (5 per cent). Declining competitiveness is obviously a problem, as evident in the World Economic Forum’s Growth Competitiveness Index for 2005, which puts the Philippines’ competitive ranking at 77th (out of 117 countries), behind the other five ASEAN countries (Singapore 6th, Malaysia 24th, Thailand 36th, and Indonesia 74th). Against the same comparator group, and even against Vietnam

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economic Outlook (a new ASEAN member country), the Philippines fares poorly in terms of quality of public institutions (corruption, regulatory, and contracts environment) and the macroeconomic environment (government waste and macroeconomic stability). Successful implementation of measures that will boost competitiveness and investor confidence is therefore critical, including reforms to simplify business procedures and introduce more flexible labour laws. On the production side, overall growth will be supported by agriculture and services. After a slow recovery last year from weatherrelated disturbances, agricultural output is seen to rebound by 4.6 per cent. This should offset the moderate growth in industrial output (4.7 per cent), as both manufacturing and construction sub-sectors are weighed by rising oil prices and high cost of financing. But the opening up of the mining industry to foreign investments should lead to greater activity in mining and quarrying, thus boosting industrial output. Meanwhile, services will remain buoyant, growing by 6.9 per cent, with strong performances by telecommunications, business process outsourcing, and tourism. Continued consolidation and decline in excess capacity in real estate, banking, food, and retailing should also lead to renewed growth for the winners in these sectors. Mostly as a result of high food prices due to high fuel prices, the inflation rate will still average 6.5 per cent from 7.7 per cent in 2005. Nonetheless, inflationary pressures will be well contained by prompt responses from the monetary authorities. It appears that the BSP (Central Bank) will stand ready to adjust policy rates should the second-round effects on wages, power rates, and transport fares turn more adverse than expected. The limited appreciation of the peso (expected to settle to 53 pesos to the US dollar by year-end), which reflects the overall weakening in the US dollar and further progress in the Philippine public finances, should also keep inflation worries at bay. Although global trade is seen to pick up (a projected growth of 7.4 per cent from 7 per cent in 2005 — IMF), the pace of expansion will remain modest, thus providing a small boost to exports this

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Philippines: Selected Economic Indicators, 2001–2007F

2001

2002

2003

2004

2005E

2006F

2007F

4.5 3.6

4.4 4.1

3.3 5.3

6.1 5.8

4.8 4.9

5.0 5.1

5.2 5.3

–5.3

2.4

–3.6

0.0

3.5

2.0

2.5

12.0

2.4

–7.8

4.2

–5.1

4.0

4.5

4.7 4.8 4.3

3.3 3.7 5.4

3.9 0.2 5.4

4.9 5.2 7.1

31.4 4.6 6.3

4.6 4.7 6.9

4.1 5.2 7.3

Exports (US$ million)

31,243

34,377

35,342

38,728

41,110

43,900

44,930

Imports (US$ million)

31,986

33,970

40,797

45,109

45,230

47,745

48,145

Trade balance (US$ million)

–743

407

–5,455

–6,381

–4,120

–3,845

–3,215

Inflation (CPI; average)

6.1

3.0

3.5

6.0

7.7

6.5

5.8

External debt (% GDP)

73.3

71.9

74.3

63.9

63.4

60.1

58.7

Reserves (US$ billion)

15.6

16.3

17.1

16.2

15.7

15.8

16.1

9.7

5.5

5.9

7.3

8.0

8.5

9.0

6.8

9.5

3.3

4.1

9.2

8.5

8.9

–4.0

–5.4

–4.7

–3.9

–3.2

–3.0

–2.3

51.40

53.10

55.57

56.45

53.50

53.0

54.0

GDP growth (%) — Private consumption — Government consumption — Gross fixed investment — Agriculture — Industry — Services

Interest rate (%; average)* M3 money supply growth (%) Fiscal balance (% GDP) Exchange rate at year-end (pesos/ US$1)

Note: Data given for 2005E are estimates; data for 2006F and 2007F are forecast figures. * 91-day T-bill rate. Source: Country websites; Economist Intelligence Unit; author’s estimates.

127

128

economic Outlook year. The performance of exports will also be limited by weak global demand for electronics, which accounts for more than 50 per cent of Philippine exports. According to the US-based Semiconductor Industry Association, global sales growth for electronics will remain at singledigit, rising to 9 per cent in 2006 from 6 per cent in 2005. Similarly, the Semi-conductor Association of the Philippines (SEPI) projects the long-term outlook to be less upbeat due to years of under-investment in the country’s electronics sector relative to the global industry. Thus, with weak electronics exports and rising costs of oil imports, trade deficit is projected to remain at US$3.8 billion. Despite this, the current account is expected to generate a surplus (2.3 per cent of GDP), supported by overseas remittances. This should also enable the country to post a small balance of payments surplus (US$900 million) amid slow inflows of FDI. However, as global liquidity is likely to remain tight, the Philippines will be in a precarious situation given its large stock of foreign debt (60.1 per cent of GDP) and small foreign reserves (expected at US$15.8 billion by year-end). Therefore, there is a need for the authorities to be decisive in implementing comprehensive economic reforms in order to avoid shifts in investor sentiment arising from the country’s large debt and financing requirements. How fast and thoroughly the government can pursue these reforms will determine the quality and level of growth — and going forward, addressing the policy challenges will be key. In the fiscal sector, durable consolidation must proceed with earnest efforts, first by ensuring the timely implementation of tax measures already identified. These measures must be complemented by reforms in the power sector (particularly by ensuring the successful privatization of National Power Corporation) to sustain the fiscal reform programme. Monetary policy is still expected to be managed at a measured pace, guided by its inflation objective and commitment to exchange rate flexibility. There is also a need for credible efforts to dispose of non-performing assets, improve banking supervision and regulation, and strengthen the financial sector. Finally, political stability matters if the hard-won gains of reforms are to be preserved.

the asean-10

Singapore Singapore enters 2006 in good shape. Internally, its fundamentals have improved while the external portents remain reasonably good. Although global lead indicators point to reasonably firm global demand for Singapore’s exports in the near future, there are some risks in the global economy as well as in its hinterland that Singapore will need to manage carefully. This makes the issue of Singapore’s resilience in the face of potential shocks a central one. External Demand Set to Support Growth Several reasons point to a sanguine outlook for external demand. First, the cyclical indicators are pointing to a rebound in external demand: •

•

Global lead indicators are rising. The OECD (Organization of Economic Cooperation and Development) lead indicators have been firming, suggesting that growth in developed economies’ demand for exports is likely to remain good. Technology demand also shows signs of improvement, with forecasts for semiconductor sales being raised. The inventory correction that caused the slowdown appears to have run its course. More importantly, there are some indications that the Asian region is now investing more heavily in computers in order to reap the productivity windfall that the United States enjoyed starting in the 1990s — this is positive for Singapore’s electronics sector.

However, what is also encouraging is that structural forces promoting growth have also become more positive, giving the Singapore economy a further boost: •

Japan’s structural weaknesses are being reduced, thereby strengthening growth prospects. Its banks and companies are enjoying their strongest balance sheets in a decade and a half. Recent price rises in central Tokyo indicate that the deflation in real estate prices is beginning to come to an end. The labour market is also showing the lowest unemployment and best applicant-to-vacancy ratio in a decade. With Japan likely to be more of an engine of growth for Asia, Singapore stands to benefit from intensifying

129

130

economic Outlook

•

•

trade and investment flows between Japan and developing Asia. Already, Singapore’s offshore banking services segment is showing the fastest growth since 1997, partly reflecting renewed activity by Japanese banks, which used to dominate this sector until the mid-1990s. Intra-regional trade in Asia is also picking up, reflecting (a) China’s emergence at the centre of production networks in Asia; and (b) Indonesia’s recovery from its crisis. As a premier air and sea transportation hub, as well as a key centre for trading and financial services, Singapore benefits disproportionately from booming intraregional trade. India’s accelerated economic growth is likely to be positive for Singapore, given the strong economic ties between the high-growth regions in south and west India and Singapore. Singapore’s role as a key transport hub for India also yields benefits, as does the fact that Singapore is a major investor in India. The two have recently signed the Comprehensive Economic Cooperation Agreement (CECA), which is expected to further strengthen economic and strategic ties between the two economies.

Domestic Engines of Growth Appear to Be Strengthening Growth For some time after the Asian crisis in 1997, observers had lamented the weakness of domestic demand in Singapore which made the economy dependent on external demand and, consequently, highly susceptible to the vagaries of the global economy. A number of factors are helping to reverse this excessive dependence on external demand. First, Singapore is now reaping the benefits of the restructuring of the economy spurred since the late 1990s by intensifying competition, the Asian crisis, and policy deregulation. As a result: •

New areas of growth are emerging, as manifested in the surge in new business formation — from an average rate of firm creation in 1995–2001 of 7,000 to a level of about 18,000 in 2004. These new businesses are found to be in a range of service activities such as information technology–related services, wealth management, and the creative industries.

the asean-10 •

The crunch in the labour market has thus eased. Employment creation has surged, bringing the unemployment rate down and boosting consumer demand. According to estimates of the Ministry of Manpower, 49,500 jobs were created in the first six months of 2005, double the growth seen in the first half of 2004. This was the highest number in four and a half years. The vacancy-tounemployed ratio rose from 41 per 100 job seekers in March to 46 in June, the highest ratio in nearly four years.

Second, the painful fallout from the fall in real estate prices from 1997 onwards is finally over. Property prices are edging up, boosting consumer confidence and encouraging a rise in private sector property development. Consequently, the long-drawn decline in the construction sector appears to be coming to an end. Employment in construction rose in the first two quarters of 2005, the first rise since 1997. The rate of decline in construction output is also diminishing — it is likely that construction will go back to being a positive contributor to growth once again in 2006. Construction will be boosted by a number of large projects in the coming years — the two massive integrated resorts that have just been approved, several other tourism-related projects such as new ones in Sentosa and Orchard Road, and some new transportation schemes. What Can Go Wrong? Global imbalances:  If the current account imbalances in the global economy precipitate painful currency and interest rate adjustments in large economies such as the United States and cause economic growth in the OECD to weaken, Singapore’s growth will be hurt given that it remains one of the most open economies in the world, with total trade to GDP exceeding 300 per cent. Oil prices:  A sharp rise in oil prices could still compromise Singapore’s economic prospects — if oil prices rise much more, to a level sufficient to weaken economic growth in the OECD economies, then global demand would weaken and Singapore would suffer. So far, however, Singapore appears to have weathered the damage from rising oil prices reasonably well. As global demand has held up well in

131

75,800 1.85

82,276 1.74

234,011 n.a. n.a.

–0.4 –0.3 0.0

125,044 116,338 8,706 21.4

3.2 7.8 3.1 0.1

2002

96,324 1.70

n.a. n.a. n.a.

0.5 8.1 0.0

144,127 127,892 16,235 29.2

1.4 2.7 1.3 0.1

2003

n.a. n.a. n.a.

0.3 8.0 0.5

201,983 181,834 20,149 24.0

4.8 7.2 4.0 n.a.

2005E

112,808 125,000.0 1.63 1.61

n.a. n.a. n.a.

1.7 6.2 0.0

179,540 163,814 15,726 26.1

8.4 13.9 7.5 0.1

2004

Sources: CEIC Database; Ministry of Finance of Singapore; Forecasts by Centennial Group.

Note: Data given for 2005E are estimates; data for 2006F and 2007F are forecast figures.

Foreign exchange reserves (US$ million) Exchange rate at year-end (S$1/US$1)

221,848 n.a. n.a.

1.0 5.9 0.0

Inflation/CPI average (% change) M2 money supply growth (% change) Fiscal balance (% of GDP)

Total debt outstanding (US$ million) Long-term debt (US$ million) Debt service ratio (% of exports)

121,685 115,917 5,768 18.8

–2.0 –11.6 2.4 0.1

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) Current account balance (% of GDP)

2001



Singapore: Selected Economic Indicators, 2001–2007F

135,000.0 1.55

n.a. n.a. n.a.

1.5 10.0 0.8

232,280 209,109 23,171 24.0

6.4 11.4 4.7 n.a.

2006F

140,000 1.52

n.a. n.a. n.a.

1.5 8 1

255,508 230,019 25,489 18.0

6.5 8.0 6.0 n.a.

2007F

132 economic Outlook

the asean-10 the face of rising oil prices, Singapore’s export growth has not been hit hard. But there have also been some domestic factors that have helped Singapore cope better: •

•

•

Higher oil prices have not raised retail prices of petrol and electricity as much as expected because of mitigating factors such as increased competition in petrol retailing and in the electricity market. Consequently, inflation has remained muted, with consumer prices rising only 0.7 per cent in the year to August 2005. Thus, consumer demand has not taken a substantial hit from higher oil prices. Singapore is also in some senses a beneficiary of rising oil prices. Its marine services sector ranks among the most competitive manufacturers of certain types of oil rigs and related ships — and is consequently benefiting strongly from the pick-up in oil exploration activity.

Risks in the regional hinterland:  Indonesia’s recovery from its 1997–98 crisis accelerated in 2004–2005, particularly after President Yudhoyuno’s victory in the 2004 elections boosted business and consumer confidence. The sharp depreciation of the rupiah in early September, however, showed that there remains an element of fragility in Indonesia’s recovery. Any currency crisis there could hurt Singapore’s trade, transportation, and finance sectors. How Resilient Is Singapore? Singapore’s resilience in the face of external shocks has improved as a result of the stronger domestic demand explained above. In addition: •

•

Singapore’s policy regime can help weather potential shocks. Singapore’s exchange rate policy has proven to be quite effective in filtering out some of the global turbulence that has affected Singapore in recent years. Fiscal policy has been extremely conservative, meaning that the government has the capacity to substantially increase government spending in the event of a crisis. Singapore is once again enjoying multiple engines of growth lending its economy the diversity needed for enhanced resilience.

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economic Outlook Key engines of growth now include higher-value electronics components, pharmaceuticals, offshore banking, China, India, the Southeast Asian hinterland and construction. This is a substantial improvement from a couple of years ago when Singapore relied heavily on electronics and when the hinterland was in crisis and India had not emerged so strongly. Consequently, even acknowledging the risks in its environment, Singapore is poised for several years of moderate to strong growth, as indicated by the forecasts in the table on page 132.

Thailand The Thai economy continues to expand, driven by government spending and exports. The government has turned to public investment as a new key engine of the country’s growth. Meanwhile, the Bank of Thailand maintains a tight monetary policy by raising its benchmark interest rate to curb inflation and keep the baht stable. In June 2005 the Cabinet approved the government’s investment plan for mega-projects with total budget of 1.7 trillion baht (US$42.5 billion) for use over the period 2005–2009. The budget was revised to 1.8 trillion baht (US$45 billion) in November 2005. Of this, 44 per cent of the total budget would be allocated to infrastructure projects, 24 per cent to social projects (hospitals and educational institutions), and the remaining 32 per cent for development purposes — irrigation and communication systems. According to the Finance Ministry, the government’s investment would raise the country’s growth by about 1 per cent a year over the investment period. Sources of funding for the mega-projects are the national budget (39 per cent), domestic and foreign borrowings (42 per cent), state enterprises (13 per cent), and other sources (6 per cent). In 2005 the infrastructure projects were delayed by rising current account deficit and inflation. The mega-projects are likely to raise import demand, which puts more pressure on the current account deficit and inflation.

the asean-10 The government targets a balanced budget in FY 2006 based on the assumption of 5.5 to 6.5 per cent growth. Total budget expenditure is set at 1.36 trillion baht (US$34 billion), which is 8.8 per cent higher than for FY 2005. Capital expenditure constituted nearly 26.3 per cent of the total budget expenditure. In FY 2005 Thailand recorded a budget surplus of 120 billion baht (US$3 billion) for the first time since the 1997 financial crisis. The government remains confident that the country’s outstanding public debt is below 50 per cent of its GDP. At the end of August 2005, the public debt was at 4.64 trillion baht (US$116 billion), accounting for 45.34 per cent of GDP. Nevertheless, off-budget spending has raised concerns about the size of the government’s contingent liabilities. The off-budget liabilities have been built up, stemming from a rapid growth in lending by state-owned banks. On the monetary front, the central bank’s concern has more to do with inflation and baht stability than with the country’s growth. In 2005 inflation picked up rapidly due to a diesel subsidy cut and rising production costs. Bank interest rates continued to rise but at less than the official rate, owing to ample liquidity in the banking sector. The inflation rate is expected to be between 2.5 and 3.5 per cent in 2006–2007, in line with continued high levels of oil prices and upward adjustments in consumer prices. The central bank expects its bench­mark 14-day repurchase rate to continue rising and outpace inflation by mid2006. High levels of oil prices are a key concern for the Thai economy in 2006–2007. A fundamental problem of the economy is its high oil consumption. Although Thailand’s oil dependency has been substantially reduced in recent years, its demand for oil is 8 per cent of GDP, with oil constituting 16 to 17 per cent of its total imports. The surging oil prices in 2005 have caused the current account to register a deficit and accelerated the pace of inflation. The impact of energy conservation and substitution measures appears to have been minimal. Strengthening export growth is a policy option to stabilize the

135

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economic Outlook country’s economic situation. Promoting export diversification and enhancing competitiveness could help reduce the country’s vulnerability to oil price shocks. It is in this context that Thailand has been very proactive in entering into preferential and bilateral free trade agreements (FTAs) and inking closer economic cooperation pacts with countries as well as regions across the world as part of its trade policy. Among the FTAs in force, a comprehensive Thailand-Japan FTA would be more significant than the country’s existing FTAs with Australia and New Zealand and preferential trade agreement (PTA) with China and India (which is currently restricted to tariff reduction on a few goods only). Japan is Thailand’s major trading and investment partner. The two countries started trade negotiations in February 2004 and reached a basic agreement in the agriculture and fisheries fields in April 2005. Under the agreement, Japan will eliminate tariffs on tropical fruit imported from Thailand, and reduce tariffs on Thai chicken meat. The FTA was concluded in August 2005. Although Thailand had withdrawn its demand that Japan liberalize imports of rice and sugar in order to get the deal going, differences concerning the provision of preferential market access for imports of cars, auto parts, and steel products by both countries, continue to persist. The Thailand-Japan FTA is expected to come into force in April 2006. The Thailand Development Research Institute (TDRI) forecasts that Thailand’s growth could increase by 1.7 per cent if the ThailandJapan FTA comes into full force. The Thai processed food industry could enjoy productivity growth of 12 per cent, while growth of other farm products could increase by 9 per cent. However, productivity of Thailand’s auto-parts sector is likely to drop by 15 per cent because of cheaper products from Japan. Concomitantly, Thailand is in the process of bilateral trade negotiations with the United States, Bahrain, Peru, and the European Free Trade Association (EFTA). The United States is Thailand’s largest export market. The two countries started FTA negotiation in June 2004, followed by the conclusion of a bilateral Trade and Investment Framework Agreement in October 2002. The central preoccupation of Thai trade policy now

the asean-10 is the Thailand-US FTA. A full range of products and services under the FTA have not been agreed upon. Both countries have agreed to put the broader principles of financial sector liberalization on hold in order to move the talks forward. Thailand insists that it wants to open up its financial sector step by step following the government’s Master Plan. FTA negotiations with Bahrain and Peru have been on hold since 2004. The main focus of the negotiations of Bahrain and Thailand has been on services. The delay in conclusion, however, is mainly due to complications between Bahrain and other members of the Gulf Cooperation Council, who are not comfortable with a separate Bahrain-Thailand FTA. As for a Peru-Thailand FTA, negotiations of tariffs have been on hold while negotiations in other areas have not got off the ground. The first round of trade talks with the EFTA, which comprises Switzerland, Norway, Lichtenstein, and Iceland, took place in October 2005. Thailand hopes to attract foreign investment in the services and manufacturing sectors from EFTA and to expand its market presence in the EFTA states. Thailand expects that an open trade policy can raise foreign capital and subsequently inject know-how into the economy. Nevertheless, there is concern over the crowding out of less competitive firms and industries. With the more open market, the country becomes more vulnerable to outside forces and competition. Thailand’s economic outlook in 2006–2007 hinges largely on oil price levels and the global economy. Private consumption growth is expected to slow down in pace, owing to upward adjustments of consumer prices, rising interest rates, accumulating household debt, and stricter measures on consumer credits. Household debt has been on a rise since 2002. The average debt per household rose from 82,485 baht (US$2,062) in 2002 to 104,571 baht (US$2,614) in 2004. If interest rates increase significantly, the household debt burden will become a major concern. To sustain private consumption, the government retains a 7 per cent value-added tax rate until the end of September 2007. In addition,

137

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economic Outlook the government initiates a personal loan-restructuring programme. According to the Finance Ministry, the government plans to buy half of outstanding individual debts, worth 7 billion baht (US$175 million), in the banking sector and ask banks to write off accumulated interests of 20 billion baht (US$500 million). Private investment is likely to remain weak mainly due to rising interest rates and production costs and concerns over political uncertainties, especially the ongoing unrest in the South which could widen and deteriorate. However, high levels of capacity utilization in certain manufacturing industries (chemical, petroleum, and paper industries) will speed up their investments. The Board of Investment Thailand launched a new policy to give tax privileges to promote the production of machinery automobiles and parts that use natural gas for vehicles (NGV). Firms that assemble cars using NGV will be given tariff exemptions on imported machinery. The tariff exemptions for energy-saving machinery will be extended until the end of 2009. Thailand’s goods exports are expected to grow moderately in 2006–2007, in line with an expected slowdown in the world economy. As a risk factor, the recurrent avian flu epidemic could adversely affect exports of poultry and tourism as well. Tourism revenue continues to recover due to intensive government promotions. Health-care tourism is growing strongly, owing to high standards and relatively low costs of treatment. Growth of services exports is forecast to outpace that of goods exports in 2006. The import demand for capital goods and raw materials remains strong, owing to government investment on mega-projects. A high demand for oil imports has contributed to the increase in total imports. The value of imports is expected to continue to outpace that of exports, and the trade balance would remain in deficit in 2006–2007. The current account is projected to remain in deficit in 2006 as a result of import expansion. Foreign direct investment would grow steadily as a result of bilateral trade pacts. According to Goldman Sachs Investment Bank, the reason Thailand continues to attract good

33.0

International reserves (US$ billion)

42.1

46.8

1.82

78,105 74,346 3,759

6.9 9.4 4.2 8.7

2003

49.8

36.2

2.75

94,941 93,706 1,235

6.1 8.3 6.2 –3.9

2004

4.2 44.48

2.6 43.00

4.9 41.53

5.4 40.27

Note: Data given for 2005E are estimates; data for 2006F and 2007F are forecast figures. Sources: Bank of Thailand; Economist Intelligence Unit; author’s estimates.

Exchange rate, average (baht/US$1)

M2 money supply growth (% change)

38.9

58.1

0.68

66,092 63,353 2,739

5.3 6.9 4.5 1.0

2002

7.00–7.50 6.50–7.00 5.50–5.75 5.75–6.25

65.0

Prime lending rate (% per annum)

1.57

Gross external debt (% of GDP)

63,070 60,576 2,494

2.2 1.7 2.3 3.2

2001

Headline Inflation (%)

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

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



Thailand: Selected Economic Indicators, 2001–2007F

40.26

6.0

6.00–6.50

49.0

31.3

4.35

108,707 120,412 –11,705

3.9 5.0 4.3 –3.4

2005E

49.6

26.0

2.50

153,930 157,860 –3,931

5.2 5.1 5.6 3.5

2007F

41.00

5.6

41.00

6.1

6.25–6.75 6.25–6.75

49.2

28.1

3.45

128,275 137,270 –8,995

4.0 4.3 4.6 –0.5

2006F

the asean-10 139

140

economic Outlook foreign investment is largely due to the government’s infrastructure projects and privatization efforts. The baht is expected to remain stable in 2006–2007, due mainly to rising domestic interest rates, declining external debt repayments, and a comfortable level of international reserves. After a sharp slowdown in 2005, the Thai economy is expected to grow moderately in 2006. The country is likely to chalk up a satisfactory growth rate of about 5.2 per cent in 2007 with continued public investment spending and continual growth in goods and services exports.

Vietnam The economy of Vietnam can be broadly characterized as that of a developing country undergoing gradual economic transition, away from a centrally planned to a largely market-oriented economy. The first seeds of this economic transition process began in 1979, and were concretized under the banner of doi moi (renovation) at the 6th Party Congress in 1986. Apart from a brief hiatus during the middle to late 1990s, the basic thrust of Vietnam’s economic reform and business liberalization process has been constant and consistent. In return, the country has been rewarded with commendably robust GDP growth, averaging around 6 per cent per annum over the last decade. Lacking its own domestic private sector before the mid-1990s, and burdened by an inefficient and unwieldy state-owned enterprise sector, Vietnam’s policymakers initially focused considerable attention on attracting foreign investment capital and expertise, and this has continued to be a key component of Vietnam’s economic and industrial development programme. Although Vietnam was not immune from the recent global downturn in foreign direct investment flows, 2005 saw a 60 per cent increase in new investment pledges, from both new market entrants and existing foreign investors wishing to scale up their operations. However, the global downturn in foreign investment flows experienced since 2001 has also served to underline the importance of

the asean-10 developing a robust domestic private sector. With the state enterprise sector being gradually “right-sized” and consolidated, it is the private sector that must absorb the one million or so young people that enter the labour force each year. Comfortably recording double-digit growth, the private sector does appear to be burgeoning in Vietnam, albeit from a low base point, with output increases that outpace both the state enterprise sector and even that of the foreign-invested sector. Indeed, the private sector is becoming an important engine of economic growth and foreign exchange earnings for Vietnam — in some business sectors at least. Part of the private sector’s success is attributed to the passing of an Enterprise Law in 2000, widely perceived as an important milestone in Vietnam’s economic reform process. In particular, this law has made it much easier and quicker for private firms to formally register their businesses and commence operations on a firm legal footing. As a direct result, the number of private companies formally registering has risen considerably, according to official figures. But these “headline figures” for new company registrations should be treated with some degree of caution. Most new registrants are small, often family, businesses, and Vietnam has still to develop a corporate community that includes a sufficient number of large, non-state firms with the scale and sophistication of operations that will allow them to compete effectively in the global market. This issue came to the fore in 2005, as Vietnam pursued vigorously its bid for WTO accession, and it became apparent that the country’s domestic market will have to be opened up quite considerably as a condition of entry into the organization. This in turn will pose new challenges to previously protected local businesses, both state-owned and private, particularly in the services sector. At the time of writing, it seems highly likely that Vietnam will gain entry to the WTO in 2006. Throughout 2004 and 2005, the country’s law-makers were hurriedly revising existing regulations and drafting new legislation intended to make Vietnam WTO-compliant. This has included a new Competition Law, a Unified Enterprise Law, and a Common Investment Law. The latter two documents are intended to create a broadly level playing field for all businesses, whether domestic

141

142

economic Outlook or foreign, and remove barriers that have delineated the way state agencies treat local and overseas investors. Potentially at least, these laws will be as epochal as the Enterprise Law was in 2000, in terms of markedly improving the business enabling environment in Vietnam, although much will depend on their effective implementation. To a marked extent, therefore, the pursuit of WTO entry is driving the economic reform agenda in Vietnam, in tandem with the US bilateral trade agreement (BTA) that Hanoi signed with Washington a few years back, and commitments made in connection with various development assistance programmes agreed with the international donor community. When Vietnam does accede to the WTO, its garment manufacturers will benefit from the Agreement on Textiles and Clothing (ATC), introduced in January 2005, which sees an end to all quota restrictions (but not tariffs) for textile and garments produced by WTO members. With immediate neighbours (and WTO members) such as China and Cambodia already beneficiaries of the ATC, Vietnam’s garment manufacturers are at a marked disadvantage while the country remains outside the organization. Not only is the garment industry an important source of employment; it also generated export revenues of over US$4 billion in 2004. Looking ahead, sustaining Vietnam’s economic growth will be dependent on a number of factors. These include ongoing efforts to transform the state enterprise sector into a leaner and more efficient engine of production, being able to compete with its private sector peers (both domestic and foreign), without the kinds of special protection and privileges it enjoyed in the past, and which WTO membership will no longer permit. State enterprise reform also entails more effective prohibition of the bad corporate governance practices that have undermined the performance of many state enterprises. In terms of all-important private sector development, there is an urgent need to overcome a number of factors that cumulatively serve to constrain non-state firms in Vietnam. These include accessing sufficient human resources, as many skilled people see the fledgling private sector as less attractive when compared with the security of working in the state sector, or the higher salaries commanded by foreign-invested companies. There is also a need for greater access to land, as private firms are

3,815 15,280

13,100 12,181 8.3

–3.8

3.9 17.6

16,706 18,001 –1,295 –2.8

6.4 8.9 6.0 3.0

2002

5,577 15,656

14,100 — 8.0

–4.6

3.2 21.0

20,176 24,776 –4,600 –6.9

7.1 9.6 6.8 3.1

2003

6,027 15,781

14,410 — 6.7

–3.8

7.7 28.0

26,660 31,600 –4,940 –5.7

7.5 10.2 7.4 2.8

2004

Note: Data given for 2005E are estimates; data for 2006F and 2007F are forecast figures. Sources: Asian Development Bank; author’s estimates.

3,540 14,725

Foreign exchange reserves (US$ million) Exchange rate at year-end (dong/US$1)

–3.0

Fiscal balance (% of GDP) 13,242 11,429 0.6

–0.4 25.5

Inflation/CPI average (% change) M2 money supply growth (% change)

Total debt outstanding (US$ million) Long-term debt (US$ million) Debt service (% of exports)

15,029 14,556 473 1.5

5.8 9.7 4.4 2.3

2001

Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Current account balance (% of GDP)

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



Vietnam: Selected Economic Indicators, 2001–2007F

— 15,900

— — 6.1

–4.9

5.7 28.0

30,660 36,348 –5,688 –5.6

7.6 10.1 7.6 2.6

2005E

— 16,000

— — 6.0

–5.0

5.2 27.0

38,000 44,582 –6,582 –5.8

7.6 9.9 7.6 2.7

2006F

— 16,200

5.7

—

–4.8

5.2 25.0

45,600 53,288 –7,688 –6.6

7.5 9.7 7.5 2.7

2007F

the asean-10 143

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economic Outlook unable to expand their operations for lack of physical space, further exacerbated by the extremely high cost of property in Vietnam. There is also a need for private sector firms to access the right kind of financing to fund their upgrading and expansion, other than through informal borrowing from friends, family, or customers. The local banking sector has grown considerably in recent years, and access to finance is improving slowly, but the range and quality of financial services and products remains sub-optimal, as does the lending behaviour and operational procedures of some banks. Indeed, the vigour of recent lending activity, underpinned by high land prices as the principal form of collateral pledged by borrowers, probably merits close monitoring in the years ahead. In summary, the economic reform and business liberalization process in Vietnam is expected to continue, as commitments made by the government to various donor agencies, regional associations, and international organizations have effectively created a reform road map for the country. With many of these commitments time-bound, the pace of economic reform is also expected to be fairly steady, if not always as rapid as some might desire. As Vietnam is discovering, the economic reform agenda can sometimes feel like an endurance test, posing new challenges with each passing year, and does not necessarily become easier to pursue over time. Indeed, as the “low-hanging fruit” of initial economic reforms are successfully tackled, it can become more challenging to reach those reforms that are less easily grasped. At the time of writing, Vietnam’s long-term sovereign rating from both Standard & Poor’s and Fitch was BB– with a stable outlook, and Ba3 from Moody’s with a stable outlook.

SELECTED SOURCES OF DATA Asian Development Outlook (Asian Development Bank) http://www.adb.org/Documents/Books/ADO/default.asp Wall Street Journal (Asia section) http://www.wsj.com/public/asia Bangkok Post (Thailand) http://www.bangkokpost.net Borneo Bulletin (Brunei) http://www.brunei-online.com/bb/ Business Times (Singapore) http://business-times.asia1.com.sg/ Business Day (Thailand) http://www.biz-day.com/ CEIC Database http://www.ceicdata.com Economist Intelligence Unit, Country Reports http://www.eiu.com/ Jakarta Post (Indonesia) http://www.thejakartapost.com Manila Bulletin (Philippines) http://www.mb.com.ph/ Nation (Thailand) http://www.nationmultimedia.com New Light of Myanmar (Myanmar) http://www.myanmardigest.com/eng_md/eindex.html New Straits Times (Malaysia) http://www.nst.com.my/ News Express (Brunei) Newsbreak Magazine (Philippines) http://partners.inq7.net/newsbreak/common/about.php

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selected sources of data Nhan Dan (Vietnam) http://www.nhandan.com.vn/ Philippine Daily Enquirer (Philippines) http://www.inq7.net/index_network.htm Philippine Star (Philippines) http://www.philstar.com/ Phnom Penh Post (Cambodia) http://www.phnompenhpost.com/ Star (Malaysia) http://thestar.com.my/ Straits Times (Singapore) http://straitstimes.asia1.com.sg/ Tempo (Indonesia) http://www.tempointeractive.com/ Thanh Nien (Vietnam) English on-line edition http://www.thanhniennews.com/ The Economist http://www.economist.com The Edge (Malaysia) http://www.theedgedaily.com Utusan Malaysia (Malaysia) http://www.utusan.com.my/ Vientiane Times (Laos) http://www.vientianetimes.com/ VietnamNet e-newspaper http://english.vietnamnet.vn/

The Contributors

Political Outlook Mely Caballero-Anthony is Assistant Professor at the Institute of Defence and Strategic Studies, Singapore. She contributed the overview section “The Asian Security Environment”. Valérie Engammare is an Associate Fellow at The Evian Group, Switzerland, She co-authored the section “The Inaugural East Asian Summit: The First Step in a Long Journey”. Hamzah Sulaiman is Head of the Institute for Policy Studies at Universiti Brunei Darussalam. He contributed the country section on Brunei. Sidney Jones is Southeast Asia Director of the International Crisis Group. She contributed the section “Terrorism in the Region: Changing Alliances, New Directions”. Gillian Koh is a Research Fellow at the Institute of Policy Studies, Singapore. She contributed the country section on Singapore. Jean-Pierre Lehmann is Professor of International Political Economy at IMD (International Institute for Management Development), Switzerland, and Founding Director of The Evian Group. He co-authored the section “The Inaugural East Asian Summit: The First Step in a Long Journey”. Verghese Mathews is a Visiting Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Cambodia. Graham Gerard Ong is an Associate Research Fellow with the Institute of Defence and Strategic Studies, Singapore. He contributed the section “The Threat of Maritime Terrorism and Piracy”. Vatthana Pholsena is an Assistant Professor at the National University of Singapore. She contributed the country section on Laos.

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the contributors Thitinan Pongsudhirak is an Assistant Professor with the Faculty of Political Science at Chulalongkorn University and an executive board member of its Institute of Security and International Studies. He contributed the country section on Thailand. Ooi Kee Beng is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Rodolfo Severino is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on the Philippines. Robert H. Taylor is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Myanmar. Thaveeporn Vasavakul is a Visiting Researcher at the Institute of Vietnamese Studies and Developmental Sciences, Vietnam National University, Hanoi. She contributed the country section on Vietnam. Yang Razali Kassim is a Senior Fellow with the Institute of Defence and Strategic Studies, Singapore. He contributed the country section on Indonesia.

Economic Outlook Rajenthran Arumugam is a Visiting Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “An Overview of Foreign Direct Investment Legal Rudiments in ASEAN”. Manu Bhaskaran is Partner and Head, Economic Research, Centennial Group, Singapore. He contributed the country section on Singapore. Nick J. Freeman is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Laos and Vietnam. Mya Than is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Cambodia and Myanmar. Denis Hew is a Fellow at the Institute of Southeast Asian Studies. He contributed the section “Regional Economic Trends”.

the contributors Lee Poh Onn is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Sakulrat Montreevat is a Fellow at the Institute of Southeast Asian Studies. She contributed the country section on Thailand. Aris Ananta is a Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Indonesia. Aladdin D. Rillo is a Senior Economist (Finance and Macroeconomic Surveillance Unit) at the ASEAN Secretariat, Jakarta, Indonesia. He contributed the country section on the Philippines. Lorraine Carlos Salazar is a Visiting Research Fellow at the Institute of Southeast Asian Studies in Singapore and Assistant Professor, University of the Philippines. She contributed the section “Competition Drives Growth: The Liberalized Telecommunications Sector in the Philippines”. Ng Boon Yian is a Research Associate at the Institute of Southeast Asian Studies. She contributed the section “The End of Textile Quotas: Implications for ASEAN Economies”. Chang Chiou Yi is a Research Associate at the Institute of Southeast Asian Studies. She contributed the section “The Future for Asia’s LowCost Carriers”. M. Shahidul Islam is a Research Associate at the Policy Consultancy Associates, Singapore. He contributed the country section on Brunei.

THE EDITORS Russell H.K. Heng is a Senior Fellow at the Institute of Southeast Asian Studies. Rahul Sen is a Fellow at the Institute of Southeast Asian Studies.

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