Regional Outlook: Southeast Asia 2010-2011 9789814279543

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REGIONAL OUTLOOK

Southeast Asia 2010–2011

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued almost 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing 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 2010–2011 Editorial Committee Chairperson K. Kesavapany Editors Michael J. Montesano Lee Poh Onn Production Editor Rahilah Yusuf

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Southeast Asia 2010–2011

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First published in Singapore in 2010 by ISEAS Publishing Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Road Singapore 119614 E-mail: [email protected] Website: 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.

© 2010 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. Economic forecasting—Southeast Asia—Periodicals. 2. Southeast Asia—Politics and government—Periodicals. 3. Southeast Asia—Economic conditions—Periodicals. DS501 S720 1992 ISSN 0218-3056 ISBN: 978-981-4279-53-6 (soft cover) ISBN: 981-981-4279-54-3 (E-book PDF) Typeset by International Typesetters Pte Ltd Printed in Singapore by Seng Lee Press Pte Ltd

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CONTENTS

Preface K. Kesavapany

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Introduction Michael J. Montesano and Lee Poh Onn

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POLITICAL OUTLOOK Southeast Asia’s Security and Political Outlook

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Southeast Asia’s Nuclear Ambitions

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Terrorism in Southeast Asia: A Strategic Assessment

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Prospects for Korean-Southeast Asian Relations

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The ASEAN-10 Brunei Darussalam

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Cambodia

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Indonesia

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Laos

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Malaysia

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Myanmar

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Philippines

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Singapore

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Thailand

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Vietnam

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CONTENTS

ECONOMIC OUTLOOK Regional Economic Outlook

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Facing the Storm through the Market: Harnessing Carbon Markets to Power Southeast Asia’s Green Development

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Undoing a Myth of the Global Financial Crisis and Growth Prospects: Evidence from Selected Asia-Pacific Economies

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Maritime Industry to Recover with Time Lag Only

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Public Infrastructure Financing in Southeast Asia

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The ASEAN-10 Brunei Darussalam

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Cambodia

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Indonesia

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Laos

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Malaysia

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Myanmar

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Philippines

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Singapore

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Thailand

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Vietnam

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The Contributors

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PREFACE

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his nineteenth annual edition of Regional Outlook continues the tradition of the series in reviewing the political and economic trends likely to inform developments in Southeast Asia in the near-term future. With its brief and accessible, but rigorous and well-informed, analyses of the region, it is a unique resource for readers interested in ASEAN and its member states and also in the wider region. The target readership is broad: businesspeople, professionals, diplomats, security specialists and others who follow Southeast Asian affairs. Stakeholders in those affairs all over the world have long recognized the value of the Regional Outlook series, and constituted its loyal readership. The Regional Outlook also includes some specially commissioned thematic contributions. Thus it examines this year the state of the maritime sector, recent initiatives to deepen and broaden relations between Southeast Asia and South Korea, harnessing carbon markets in Southeast Asia, and the nature and implications of a renewed interest in nuclear power in the region. The heart of Regional Outlook nevertheless remains the sections looking ahead to what 2010 and 2011 may have in store for Southeast Asia and for ASEAN. On the political front, highlights this year include the encouraging implications of the successful 2009 Indonesian elections, the consolidation in Malaysia both of the premiership of Najib Abdul Razak and of a newly competitive two-coalition political order, and Myanmar’s progress towards elections next year. Less encouraging have been Thailand’s continued lack of success in bringing peace to its far South, its tensions with Cambodia, and the continuing spectre of political violence in the southern Philippines. The successful APEC summit held in Singapore in November 2009 affirmed both Southeast Asia’s centrality to an international economic order defined

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PREFACE by prosperity through trade, and the region’s success in building partnerships with both China and the USA in order to further global economic integration. On the economic front, unlike the sharp dip in growth in several Southeast Asian countries in 2009, the next two years will see many regional economies recovering gradually, with East Asia, India and Southeast Asia expected to perform best. However, the need to resolve various imbalances remains to be addressed. The region now faces the need to rethink present economic policies and to depart from relying mainly on exports to drive growth. The key may lie in continuing the push for economic integration while maintaining trade openness. The prevailing state of the U.S. economy, the continuing rise of China and India, and oil prices will prove crucial for all countries. The editors of Regional Outlook: Southeast Asia 2010–2011, Michael Montesano and Lee Poh Onn, have assembled a distinguished team of talented experts to contribute to this volume. They have asked these contributors to incorporate their own views into their sections. Thus these views do not represent the views of the institutions or governments with which the contributors are affiliated. I wish to thank these experts for the keen focus and original insight of their contributions. We also owe our thanks to Rahilah Yusuf of the ISEAS Publications Unit for ensuring the volume’s timely appearance. K. Kesavapany Director Institute of Southeast Asian Studies 10 December 2009

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INTRODUCTION

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t has grown common in recent decades to hear veteran journalists in Southeast Asia bemoan their editors’ nearly exclusive interest in economic stories. These veterans chafe at the past quarter-century’s focus on the region’s successful economies, impressive rates of growth and maturing financial markets. They lament the passing of the era during which the region’s absorbing political stories and the crises that typically defined those stories commanded most of their time and attention. Thankfully, “politics” and “crisis” have long stopped serving as synonyms in Southeast Asia. Equally happily, the region’s record of economic success looks likely to stretch into the future, important challenges notwithstanding. But, as Southeast Asia arrives at the end of the first decade of the twenty-first century, fundamental political questions have again become as central to developments in the region as during the three or four decades after 1945. In many respects, there is reason to welcome the renewed centrality of politics in Southeast Asia. It points, first, to the region’s success in putting the turmoil occasioned by the 1997 Asian Financial Crisis behind it, once and for all. Second, in some parts of the region at least, it may prefigure the ability of increasingly open, self-confident and competitive domestic political systems — rather than only technocraticauthoritarian dispensations — effectively to address issues of difficulty and moment without violence, instability or crisis. Among these issues, the promotion of sustained economic growth and the pursuit of social equity, regional integration and the threat of terrorism, human rights and freedom of expression, decisions about food and energy policy and the region’s accommodation with an increasingly wealthy and assertive People’s Republic of China (PRC) all rank high.

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INTRODUCTION No case exemplifies the enhanced ability of an open domestic political system to confront these challenges so clearly as that of Southeast Asia’s largest nation-state, the Republic of Indonesia. Its successful 2009 legislative and presidential elections have affirmed the promise initially dashed in its first decade of independence and later betrayed by the long New Order dictatorship of General Soeharto. That promise reflected a conviction that Indonesia’s vast diversity, scale and ideological pluralism could prove fertile ground for a liberal and progressive political order. In Malaysia, too, the emergence of what may well prove an enduring pattern of electoral competition between two well-matched coalitions of parties bespeaks a return to the country’s less claustrophobic politics of the years before National Operations Council rule during 1969–71. This trend is particularly evident at the state level. The Singapore government’s announcement during 2009 of measures to guarantee a larger number of non-People’s Action Party members of parliament, the broadening of the membership of its Public Service Commission (a body empowered to shape the country’s future bureaucratic, military and political elite), the process of eventually identifying the ruling party’s “fourth-generation” candidate for prime minister and the growing vitality of at least two of its opposition parties may give politics in the country a rather different flavour in the years ahead. It is unclear whether or not one can view the continued efforts of the Sultan of Brunei to energize his government and people in a similar light. While as yet neither liberal nor competitive, the domestic politics of both Laos and Cambodia has evolved to meet the increasing complexity of those countries’ economies and societies. In this regard, they demonstrate certain similarities to their much larger Indochinese neighbour, Vietnam. An optimist might find in the run-up to that last country’s 2011 Party Congress encouraging signs of a rigid political system working to adapt itself to a decade of dramatic social and economic change. As 2009 drew to a close, Hanoi’s efforts to manage the potentially Sinophobic turn in currents of grass-roots Vietnamese nationalism during a time of economic insecurity have shed much

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light on this process of adaptation. Vietnam’s apparent dependence on Chinese resources for the support of its shambolic state-owned enterprise sector give this matter some gravity. Thailand’s confrontation with its own pressing need for political adaptation has given rise to the deepest confusion to characterize its basic political and social orders for many decades. Students of its efforts to grapple with fundamental, even existential, questions find themselves deeply troubled and also reminded of its pre-1980 past. Extreme division has coincided with — and is in some measure due to — the approaching end of a reign that has redefined without necessarily reinstitutionalizing the country’s monarchy. Foreign embassies in Bangkok report to their governments a variety of astonishingly contradictory scenarios for the transition to the next reign. In the meantime, political and social division has empowered illiberal forces to the point at which neither resolution of the crisis by means of early elections nor the sweetness and light of “national reconciliation” can be considered serious possibilities for the country. Both Myanmar and the Philippines are due to hold elections during 2010. A dwindling number of observers believe that polls in the former — the first under its controversial new constitution — will fail to take place. But the polls’ likelihood has already given rise to accelerated efforts to rationalize — by force if need be — Yangon’s relations with the armed “cease-fire” groups on its ethnically complex frontiers and to mounting concern with economic conditions on the Irrawaddy Delta, almost two years after Cyclone Nargis, and in the Burman heartland of Upper Myanmar. Further, the possibility of elections and uncertainty over the nature of the political order to which they will give rise has left the large, active, fractious post-1988 exile movement in a position of growing awkwardness. In the Philippines, the grisly massacre in late November 2009 of more than four dozen people in Maguindanao Province has focused attention on outgoing president Gloria Macapagal Arroyo’s dexterous use of provincial power in creating the strongest Philippine presidency since those of Manuel Quezon and Ferdinand Marcos. The hopes of Filipino liberals have congealed in support of the candidacy of the only son of the late Benigno Aquino, Jr., and the

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INTRODUCTION latter’s recently deceased widow, former president Corazon Cojuangco Aquino. But the real stakes in the coming elections and thereafter may not involve the integrity dear to those liberals so much as the nature of presidential power in the Philippine Republic’s troubled political order. Arroyo’s decision to run for a seat in the House of Representatives from her father’s native province of Pampanga and the resultant likelihood of a former president sitting in the lower chamber can only complicate efforts to stabilize and liberalize that order. At the regional level, the member states of the Association of Southeast Asian Nations (ASEAN) look forward to Vietnam’s assumption of its chairmanship after a year during which the domestic troubles facing the Thai government of Abhisit Vejjajiva left it struggling to bring effective leadership to the organization. ASEAN diplomats believe that Hanoi is determined to present a marked contrast to Bangkok’s weak performance. Questions of leadership notwithstanding, ASEAN continues to pursue an agenda of increasing integration in the realms of security, economics and cultural affairs. That agenda must, however, face up to such realities as bitter Thai-Cambodian tensions in defiance of putative norms of neighbourly ties among ASEAN member states. It must also accommodate Indonesia’s rediscovery of founding president Sukarno’s determination to act in foreign affairs on a broad global — rather than merely a narrow regional — stage; in this respect, Southeast Asia’s largest country is joining its fellow ASEAN member state Singapore. The United States’ decision to accede to ASEAN’s Treaty of Amity and Cooperation and President Barack Obama’s brief “summit” with ASEAN leaders on the sidelines of November’s Asia-Pacific Economic Cooperation (APEC) gathering in Singapore helped put paid during 2009 to what were always rather self-indulgent regional plaints that Washington had been ignoring Asia. Southeast Asia must nevertheless show greater ingenuity than heretofore in building the dynamic, substantive ties with Washington that the region needs in order to balance China’s political and economic clout in the latter’s “near abroad”. ASEAN’s aspirations to achieve consensus in matters of security continue to founder on questions relating to the South China

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Sea; Beijing’s claims and attitudes lie at the centre of those questions. Encouragingly, however, there are indications that the new Japanese government of Prime Minister Hatoyama Yukio will follow the lead of the South Korean government of President Lee Myung-Bak in revivifying the Northeast Asian democracies’ partnership with Southeast Asia. Inter-regional, intra-Asian partnership will also merit close observation as Southeast Asia navigates its near-term economic future. The scale of the global financial crisis of 2008 and of the broader economic crisis that followed in 2009 had no precedent since the Great Depression of the 1930s. Major global economies faced challenges of such magnitude as to provoke fear of systemic melt-down. Governments around the world implemented concerted plans to shore up their economies through massive stimulus packages and efforts to ensure that their banking systems remained sound. These efforts included guaranteeing banks’ local- and foreign-currency deposits. The crisis defied theorizing — common in 2008 — about the “decoupling” of the Asian and American economies. Indeed, America’s financial crisis confronted Southeast Asia with its most difficult economic challenge since the 1997 Asian Financial Crisis. While the region’s financial systems have remained relatively robust during this most recent period of turbulence, the crisis nevertheless made itself felt through declines in external demand. These declines hit many countries’ real sectors hard. Nevertheless, some of the region’s economies began to display “green shoots” of growth from as early as the second half of 2009. Industrial production has recovered in these economies, with stock markets in the region also on the uptrend. From a global perspective, the relatively small and historically open economies of ASEAN, hardest hit at the onset of the crisis in 2008, numbered among the fastest to recover by mid-2009. A gradual improvement in international economic conditions and the external trade environment helped account for this early recovery. The outlook looks better for Brunei in 2010 and 2011 than in the immediate past. Oil prices are forecast to increase. Brunei’s budding ecotourism sector and the continuing development of the Sungai Liang Industrial Park are likely to emerge as positive drivers of long-term

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INTRODUCTION growth. Real GDP growth is expected to return to positive territory, but below 2 per cent. Macroeconomic conditions in the country remain favourable, with inflation under control. In Cambodia, the global recovery in 2010 is expected to bolster GDP growth in the next two years. Construction activity in the country suffered from a sharp decline in foreign direct investment — above all from Korea — in 2009. Tourist arrivals from the United States and Europe also dropped significantly during the year. With world demand returning, garment exports from the country are expected to recover, although competition from China will continue to pose a serious challenge to Cambodia’s clothing sector. Indonesia weathered the global slump of 2008 and 2009 remarkably well. It maintained the third highest GDP growth rate among Group of Twenty (G-20) economies — lower only than China’s and India’s. The country’s large domestic market and its relatively low openness to trade shielded its economy from the global turmoil. Rising commodity and oil prices will work in the country’s favour in 2010 and 2011. Indonesia must, however, take steps to overhaul its infrastructure; that overhaul will be fundamental to any prospect of high rates of economic growth over the longer term. In Laos, too, the impact of the global crisis was minimal. The country enjoyed a growth rate of about 7 per cent in 2009. The resources sector and increasing government expenditure were the main sources of economic expansion. Growth is expected to be about 8 per cent in each of the next two years, with the development of the hydropower and mining sectors serving as the principal drivers. Inflation and exchange rates are also expected to be stable in the medium term. Myanmar’s economic performance in 2009 was weak; it is, however, expected to pick up from 2010 onwards. The agricultural sector remains an important source of growth. Its significance will persist. Myanmar also has ambitions to profit from its neighbours’ booming future demand for electricity. It plans to construct five dams on the Salween River over the next few years. China, India and Thailand remain important trading and investment partners for the country. They will continue in that role in 2010 and 2011. For Malaysia, 2009 brought change in

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the country’s political and economic leadership, as Prime Minister Datuk Seri Najib Abdul Razak assumed the helm on 3 April 2009 and formed a new National Economic Advisory Council (NEAC). That body is expected to articulate a fresh economic paradigm for Malaysia, intended to spur growth in the years to come. Challenges remain, but there are positive signs on the economic horizon. These signs include the continuing development of Iskandar Malaysia in Johor, a special economic zone designed to tap investments from around the region and across the globe. The improving external environment ought to bring further good news for the Malaysian economy in the two years ahead. In the Philippines, macroeconomic conditions are expected to improve modestly in 2010. The country’s electronics sector will benefit from the recovery in global demand and the restocking of inventories in global electronics markets. Rising government expenditure in 2010 is also expected to contribute strongly to growth, and the service sector will continue to underpin the steady expansion of domestic output. However, 2010 will be a crucial year for the Philippines as it prepares for a presidential election and the resulting administrative transition. Singapore’s recovery in the third quarter of 2009 was largely led by the manufacturing sector. The country’s economy has finally bottomed out. Barring any repeat crisis in 2010, it should achieve modest rates of growth in 2010 and 2011. Singapore’s growth rate will continue to hinge on external factors, with the manufacturing, construction and electronics sectors playing important roles. Inflation is expected to increase only slightly during the period of forecast. Economic recovery in Thailand will also hinge on external factors, especially the ongoing recovery of its major trading partners. Inflation is expected at only 2 to 3 per cent in the two years ahead, with expansionary fiscal policies and exports driving growth into positive territory from 2010 onwards. Vietnam must progressively transform its investment-led growth into productivity-led growth in the years to come, if the country is to remain globally competitive and to extend the record of growth enjoyed in recent years. Vietnam’s economy proved resilient during the global crisis because of Hanoi’s swift responses

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INTRODUCTION and prudent measures. Signs point clearly to better times to come, with improved circumstances due not least to more favourable global economic conditions. While Southeast Asia will continue to navigate uncertain economic currents as 2010 begins, many positive developments have appeared on the horizon. Barring another crisis, growth rates in the region — while perhaps modest during a time of global economic recovery — look set to follow an upward trend. Across the region, the implications of that trend for the distribution of the fruits of growth and for elite and popular sentiment will serve as the backdrop to the political developments of the near-term future. The trend will also continue both to reflect and to shape historically trade-dependent Southeast Asia’s interactions with the rest of the world. Michael J. Montesano Lee Poh Onn Editors 10 December 2009

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POLITICAL OUTLOOK

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SOUTHEAST ASIA’S SECURITY AND POLITICAL OUTLOOK By Jörn Dosch

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he increasing frequency with which natural disasters have recently struck Southeast Asia — in 2009 earthquakes and tropical storms resulted in thousands of deaths and in severe displacement in Indonesia, the Philippines, Vietnam, and other parts of the region — has sharpened ASEAN’s focus on non-traditional security (NTS) challenges. Having learned from the 2004 tsunami, the grouping has established various mechanisms for regional disaster management and emergency response to facilitate rapid, coordinated action when needed. At the same time, and despite terrorist attacks in Jakarta in July 2009, there is no indication that “man-made” security risks are on the increase in Southeast Asia. Overlapping territorial claims in the South China Sea and disputed land borders (most prominently the still lingering Thai-Cambodian conflict over a 4.6-square-kilometre area around Preah Vihear Temple), piracy, human trafficking, environmental hazards caused by trans-boundary haze pollution and illegal logging, food insecurity and other NTS issues remain causes for serious concern. However, national and regional policy approaches to these challenges have been strengthened, not least through increasing cooperation with extra-regional powers on security matters. The overall stability and security of Southeast Asia will further benefit from the current four-way competition among the United States, Japan, China and, to a lesser extent, the European Union for regional influence that has resulted in the growing constructive, involvement of these powers in the management of regional order. Barack Obama’s victory in the U.S. presidential race created an immediate expectation of improvement and expansion in Washington’s

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POLITICAL OUTLOOK relations with Southeast Asia. While the preceding administration of George W. Bush had briefly given ASEAN prominent attention in its “global war on terror”, there can be little doubt that Washington was losing interest in ASEAN as a regional bloc and increasingly opting for bilateral rather than multilateral approaches towards Southeast Asia and its constituent states during 2001–08. Hopes for a post-Bush revival of multilateralism and an upgrading of U.S.-ASEAN relations were not disappointed. In February 2009 Hillary Rodham Clinton not only included Indonesia on her first overseas trip after taking office but also paid the first ever visit of a U.S. Secretary of State to the ASEAN Secretariat. Following up on her meetings in Jakarta, the United States in July signed an agreement to accede to the ASEAN Treaty of Amity and Cooperation (TAC), after seventeen years of consideration, in an attempt to boost multilateral approaches to regional security. A total of twenty-six states have now signed the 1976 regional code of conduct, making the TAC one of ASEAN’s most significant international successes. The first ever ASEAN-U.S. Summit in Singapore in November 2009 (on the sidelines of the APEC summit) also seemingly points in the direction of ASEAN’s re-emergence as a significant international partner in Washington’s foreign relations. While Southeast Asia has undoubtedly regained its previously lost geostrategic importance and priority on the U.S. foreign policy and defence agenda, the nature of Washington’s approach to the region will remain bilateral in mode. Washington’s and ASEAN’s diverging views on Myanmar continue to be a major obstacle to long-term advances in the multilateral management of regional order. Although the Obama administration has announced a review of its Myanmar policy, based on the observation that neither sanctions nor engagement have moved that country’s military regime towards political liberalization, it is unlikely that U.S. policy-makers will warm to ASEAN’s pro-engagement approach any time soon. Much will depend on the outcome of the forthcoming elections in Myanmar, scheduled for 2010. Even if — as expected — the elections fall short of the mark in providing a free and fair contest, there are early indications that, in addition to the ASEAN member states, China and India and possibly also Japan will

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recognize the government that results from the elections. The Obama administration might find itself isolated on the election issue. It thus needs to keep its options open. It should be noted that the significance of Myanmar in Washington’s and also the European Union’s relations with Southeast Asia tends to be overstated. It is true, for example, that diverging views on Myanmar have been a major stumbling block in the negotiation of an ASEANEU Free Trade Agreement. But the more important reasons for the stalling of the talks, and the fact that the signing of a multilateral FTA treaty is now very unlikely, lie deeper and are of a structural nature. ASEAN remains highly diverse in its member states’ levels of economic development, political systems and approaches to governance, security interests and not least strategic significance in the perception of extraregional powers. The ASEAN Charter has provided the group with an identity makeover and legal standing. But it has essentially confirmed the traditional ASEAN way of soft institutionalization and consensusbuilding in the process of inter-governmental cooperation. The Charter has not marked the dawn of a new era of far-reaching regional integration, let alone supra-nationality. The envisioned full establishment of a Southeast Asian Community — resting on the three pillars of an ASEAN Security Community, an ASEAN Economic Community and an ASEAN Socio-Cultural Community — by 2015 remains a very ambitious and ultimately uncertain political goal. While a strong sense of ASEAN solidarity still exists among the member states, national governments no longer feel constrained by the “lowest common denominator” norm that has characterized decisionmaking within the grouping. They openly follow and promote their own political and security agendas instead. This unilateralism is particularly the case with an increasingly assertive Indonesian government that, benefiting from a major boost in international legitimacy after the largely peaceful, free and fair parliamentary and presidential elections of 2009 and the country’s emergence as Southeast Asia’s most consolidated democracy, has become a vocal champion of human rights and of a more dynamic approach to ASEAN’s sacrosanct non-interference principle.

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POLITICAL OUTLOOK For both ASEAN member states and external powers bilateralism increasingly offers a more flexible and effective approach to international challenges. This appeal holds as much for international economic relations — as in the case of the EU’s ongoing negotiation of bilateral free trade agreements with individual ASEAN members, including the Philippines and Thailand — as it does for security and defence arrangements. In 2003 the United States granted the Philippines and Thailand “major non-NATO ally” status, which entitles the two governments to special access to U.S. intelligence, among other privileges. In 2005 Singapore and the United States signed a Strategic Framework Agreement for closer partnership in defence and security cooperation. Other ASEAN states, particularly Malaysia, initially greeted the flirtation between Singapore and Washington with official rhetorical hostility or scepticism, but they soon intensified their military relations with the United States, too. Most crucially, Vietnam and the United States have significantly stepped up their security relations, which now include a formal “security dialogue” on political-military issues. The expansion of bilateral military ties in U.S.-Southeast Asian relations will continue because the process is perceived as a threefold positive-sum game in Washington and in most ASEAN capitals (Myanmar being the only exception). First, intensified defence cooperation enables the United States to balance China’s growing influence in the region, while it forms an important element of a hedging strategy on the part of Southeast Asia. Second, both individual ASEAN governments and Washington see a strong U.S. naval presence as the most important contribution to securing sea lanes, especially the Strait of Malacca. Third, security and the international political economy have increasingly become intertwined as part of a quid-pro-quo strategy in which economic benefits, such as access to the U.S. market via free trade agreements, are tied to the willingness of Southeast Asian governments to engage in military cooperation. It is equally important to stress that ASEAN has stayed true to its unwritten core principle of never leaning too heavily towards one big power. This strategy served ASEAN well during the Cold War, and it seems to be working under the current structural circumstances, too.

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While most Southeast Asian states accept the need for a U.S. role in the region, acceptance of Chinese leadership is growing. The PRC increasingly exerts regional leadership by organizing a growing network of bilateral and multilateral relationships in the economic and security — both traditional and non-traditional — fields. In May 2009 the PRC agreed to contribute US$38.4 billion (the same amount as Japan and significantly more than South Korea and the ten ASEAN members) to a US$120 billion emergency currency pool to boost liquidity and help the region overcome the current global financial crisis. With the rapid growth of its economy, China has involved itself deeply in Southeast Asia’s traditional security affairs in a very short time. Beijing has established military links with Thailand, the Philippines, Indonesia, Singapore, Myanmar, Cambodia, and Malaysia. These links extend not only to military aid and loans, bilateral talks on military issues, joint production of military equipment, and joint training exercises but also to participation in regional security forums and the signing of defence memoranda of understanding (MOU). The view among Southeast Asian elites that ASEAN and China share the benefits of security management in an overall win-win situation (to use the official Chinese catchphrase) has been growing. Increasing trust in Sino-Southeast Asian relations has not eliminated potential hotspots, but it has made military conflict less likely, particularly in the South China Sea. Despite occasional sabre-rattling — such as a brief diplomatic row between Beijing and Manila in the first half of 2009 concerning sovereignty over the Spratly Islands — provocative acts between the Philippines and China and between Vietnam and China in the South China Sea have been on the decline. Bilateral and multilateral cooperation on matters of common hard and soft security concern has been strengthened, in relations not only with China but also with Japan. For example, the Japan Coast Guard (JCG) has established a regular patrolling presence in the South China Sea in cooperation with individual ASEAN states. It also participates in Proliferation Security Initiative (PSI) exercises in the region. The PSI is a global, U.S.-led effort that aims to stop trafficking of weapons of mass destruction (WMD), their delivery systems and related materials to and from states and non-state actors of proliferation concern. Even though

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POLITICAL OUTLOOK the threat is relatively small in Southeast Asia, the possibility of the spread of nuclear, chemical and biological WMD cannot be completely discounted. The security of sea lanes of communication remains a top priority for ASEAN. In 2009 piracy hit a five-year high in the South China Sea, with ten reports of sea attacks reported there by October, surpassing the previous record of nine in 2005. Incidents of piracy have also slightly increased in the Straits of Malacca and Singapore in 2009. The current trend may be partly related to the global economic crisis. Overall, however, Southeast Asian responses to robbery at sea have been effective. Compared to 2003, when 121 attacks were reported in Indonesian waters alone, there has been a continued year-on-year decline with twenty-eight incidents reported in 2008, the majority of which were low-level attacks. At the centre of the regional antipiracy scheme is the successful “eye in the sky” initiative, joint aerial surveillance of potentially security-threatening activities in the Strait of Malacca involving Indonesia, Singapore and Malaysia. Southeast Asia’s most pressing security issues continue to be those areas in which ASEAN or subregional ad hoc coalitions have not yet been able — or allowed — to play a role in conflict management, namely the domestic conflicts within some member states, including the Philippines (Mindanao), Indonesia (West Papua) and Thailand (Patani) that have been caused by economic, political and socio-religious factors. In southern Thailand, which has seen the most violent of these intra-state conflicts in recent years, more than 3,500 people have been killed since insurgency resurfaced in January 2004. The Thai government has yet to identify suitable pathways to peace-building. The massive increase in security forces — there are now an estimated 60,000 security personnel in Yala, Narathiwat, and Pattani Provinces — initially helped reduce the violence as well as the death toll, which fell by 40 per cent year-on-year in 2008. But the bloodshed rose again in 2009, with an average of 100 incidents a month, the highest monthly figure since 2007. A sustainable solution is unlikely in the short or even mid-term as long as the underlying political problem is not addressed and Bangkok refuses to grant the southern region any real power over the management of local affairs.

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SOUTHEAST ASIA’S NUCLEAR AMBITIONS By Michael S. Malley

A

nuclear resurgence is underway around the world, and Southeast Asia is preparing to join it. Over the next decade, Indonesia, Thailand, and Vietnam plan to construct several nuclear power plants. Malaysia is drafting a nuclear energy policy, and Philippine leaders are debating whether to explore the nuclear option. Myanmar intends to acquire a nuclear research capacity that would put it on par with some of its neighbours, but there are suspicions that it harbours more ambitious and perhaps even military aims. Nuclear power plants are notoriously costly, complex, and controversial, and Southeast Asian governments already have scaled back their initial plans. Yet if only a fraction of these plans come to fruition, it would mark a major expansion in the region’s nuclear capabilities. So far, however, Southeast Asian countries have taken few steps to address the safety and security implications that nuclear energy inevitably poses. In particular, aspiring nuclear powers have not signed critical international agreements, and the Association of Southeast Asian Nations has not proposed any mechanisms to monitor nuclear developments in the region. Nuclear Power: Plans and Prospects As elsewhere in the world, Southeast Asian countries’ interest in nuclear power reflects growing concern over the economic cost and environmental impact of other fuel sources. The major economies in Southeast Asia rely heavily on natural gas, coal and hydropower. In recent years, the drawbacks of each have become more pronounced. Coal is abundant and easily transported, but dirty. Hydropower is clean, but dams upset fragile ecologies and displace communities; also, it cannot be transmitted easily across the mountains and seas of Southeast Asia. Natural gas is cleaner than coal, but reserves must be piped or liquefied for delivery by ship; both are expensive options. Supplies of each of these three fuel sources are subject to disruption, especially when they must be imported. Since the middle of this decade, these concerns have been exacerbated by sharp increases in the price of fossil fuels and by power shortages in some of Southeast Asia’s largest economies. These challenges have encouraged political and business leaders to consider alternatives. Despite growing interest in wind, solar and other forms of renewable energy, these leaders generally believe that nuclear energy is alone capable of producing a large, reliable quantity of electric power.

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POLITICAL OUTLOOK

SOUTHEAST ASIA’S NUCLEAR AMBITIONS (continued)

Vietnam’s nuclear power plans are the most advanced in Southeast Asia. By the early 2020s, it expects that four 1,000-megawatt reactors will be generating electricity at two plants in Ninh Thuan, about 250 kilometres northeast of Ho Chi Minh City. These plans have been moving forward steadily since the government adopted an official nuclear energy strategy in 2006, but they rest on preparations that began in the mid1990s. For these plans to remain on course, the government will need to commence a comprehensive feasibility study in 2010. In the long run, the government aims to construct many more nuclear plants in several other locations along the coast. Until 2007, Indonesia appeared to be moving as quickly as Vietnam to construct its own nuclear power plant. It has the oldest and largest nuclear research programme in Southeast Asia and had conducted extensive planning for nuclear power during the early 1990s. In the face of widespread blackouts during the early 2000s, the government revived these plans with the goal of constructing two 1,000-megawatt reactors. To be built on the slopes of the dormant volcano Gunung Muria, on Java’s north coast just northeast of Semarang, these reactors would begin generating electricity by 2017. Public opposition to them has mounted, especially near the site proposed for the plant. During his recent, successful re-election campaign, President Susilo Bambang Yudhoyono said that the government would pursue other forms of energy for the next twenty to thirty years. To date, however, no official policy changes have been announced. Like Indonesia, Thailand undertook extensive planning for nuclear power in the 1990s. These plans were revived in 2007 by the military-installed government of Gen Surayud Chulanond and have been continued by the current civilian government. In addition to rising demand for electricity, Thai governments face growing domestic opposition to the use of coal and are concerned about increasing dependence on Myanmar for natural gas supplies. The Surayud government adopted a long-range power plan that aimed for the construction of four 1,000-megawatt reactors by the early 2020s. This schedule will be revised following the completion in 2010 of a feasibility study and a broader national energy policy review. The Philippine government announced in 2007 that it would consider reviving its own plans for nuclear power. Ironically, this decision came just months after it finished paying off the debt incurred to build the only nuclear reactor meant to generate electricity ever constructed in Southeast Asia. The Bataan plant was built during the 1980s, but mothballed following the overthrow of President Ferdinand Marcos. It has never been used. The Philippine congress held hearings in 2009 to debate the plant’s rehabilitation, but no action is likely until after elections in 2010. In that year, the National Power Corporation is scheduled to issue its own recommendations on the plant’s future, following a three-year feasibility study by Korea Electric Power. Malaysia has not made any public commitment to pursue nuclear power and has not begun to create the regulatory framework needed to do so. In the course of a broad review of its national energy policy, the government has nevertheless begun

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to consider nuclear energy to supplement and diversify its power supply. In fact, the government discussed a draft of its nuclear energy policy with the parliament in late 2009. This option enjoys strong support from the country’s electricity provider, Tenaga Nasional, and is likely to receive even more attention when the government completes its new national energy policy, probably in 2010. Unlike its neighbours, Myanmar has no plans to use nuclear energy to generate electricity. But its efforts since the beginning of the decade to acquire a 10-megawatt research reactor from Russia have attracted international attention. Concern stems in part from the lack of transparency that characterizes all policy-making in Myanmar. But it also relates to reports, which have become more numerous in recent years, of close ties between Myanmar and North Korea. These concerns were exacerbated in 2009 by allegations, based on the testimony of Myanmar defectors, that the State Peace and Development Council government in fact seeks nuclear weapons. Nuclear Safety and Security Apart from suspicions about Myanmar’s intentions, there is no reason to suspect that Southeast Asian governments currently aim to acquire nuclear weapons. However, state-led proliferation is no longer the only threat to international security. As the A.Q. Khan network demonstrated, networks of non-state actors can exploit small weaknesses in far-flung places to similar effect. It is essential, therefore, that aspiring nuclear powers adhere fully to international conventions and guidelines designed to prevent proliferation. Moreover, national leadership and the international security environment can change over time; it is therefore equally important to devise regional mechanisms to reassure neighbouring states that nuclear materials and expertise cannot be diverted to non-peaceful purposes. Despite their well-established diplomatic opposition to nuclear proliferation, Southeast Asian states have delayed taking some desirable, concrete, internationally recognized steps to secure that goal. For instance, even though all Southeast Asian states have comprehensive safeguards agreements with the International Atomic Energy Agency, the more stringent “Additional Protocol” is only in force in Indonesia and Singapore; Malaysia, the Philippines, Thailand and Vietnam have signed it but left it unratified. Likewise, among aspiring nuclear powers in the region, only Indonesia and the Philippines are parties to the Convention on the Physical Protection of Nuclear Material. All countries in the region are party to the Treaty on the Southeast Asian NuclearWeapon-Free Zone, and in 2007 they reaffirmed their support for that treaty. In practice, they have focused more attention on securing the accession of nuclear weapons states outside the region than on developing the treaty’s provisions governing the peaceful use of nuclear energy on the part of states in the region. An opportunity to chart a new course will arise in 2010, when Vietnam assumes the chairmanship of ASEAN. With the most ambitious nuclear power plans in Southeast Asia, it has a special interest in assuring its neighbours that it will manage its capability safely and securely.

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TERRORISM IN SOUTHEAST ASIA: A STRATEGIC ASSESSMENT By Paul J. Smith

O

n 17 September 2009, Indonesian police called a news conference in Jakarta to announce the death of Noordin Muhammad Top. Top’s death had come during a police assault on the safe house near Solo in Central Java in which he and others had been hiding. Top, known for his skills in bomb-making, led a splinter group once associated with Jemaah Islamiyah (JI), Southeast Asia’s most notorious and deadly indigenous terrorist organization. Having eluded police for years, Top was credited with masterminding a number of violent attacks, including suicide bombings against the Australian embassy in Jakarta (2004), three cafes in Bali (2005) and Jakarta’s J.W. Marriott and Ritz-Carlton Hotels (July 2009). Perhaps most importantly, evidence recovered by police suggested close links among Top, his associates and Al Qaeda in Afghanistan, with the latter having formally recognized and supported “all actions of Top’s group in Southeast Asia”. Although the elimination of Top is widely seen as a serious blow to violent Islamist terrorism, one with implications beyond Indonesia, it does not diminish the reality that insurgency and terrorism continue to flourish in Southeast Asia. The Jakarta daily Republika cautioned in a September 2009 editorial against complacency regarding the terrorism threat, particularly as the ideology of radicalism developed by Top and others like him “continues to grow among certain groups in our society”. As the largest Muslim-majority country in the world, Indonesia is celebrated for its secular and relatively liberal democracy; simultaneously, however, there remains a significant level of support for radical Islamist ideologies. Moreover, in the past three legislative elections, Australian scholar Greg Barton has noted, “around 10 percent of voters have chosen to support radical Islamist parties — a higher percentage than in Pakistan.” Officially, there are a handful of first-tier, internationally recognized terrorist groups in Southeast Asia. The United Nations’ Consolidated List, maintained by the 1267 Committee, names three Southeast Asian organizations as active terrorist organizations: JI and the Philippines’ Abu Sayyaf Group and Rajah Solaiman Movement. Outside powers with major interests in the region, such as Australia and the United States, generally agree with such designations, although with some minor differences. For example, the United States, under section 219 of its Immigration and Nationality Act (INA), designates three Southeast Asian entities as “Foreign Terrorist Organizations (FTOs)”. These include the Abu Sayyaf Group, JI and the Communist Party of the Philippines/New People’s Army (CPP/NPA). In addition, the United States maintains a separate “terrorism exclusion list” under section 411 of the USA Patriot Act, which lists two additional Philippine organizations: the Communist Alex Boncayao Brigade and Mindanao’s Pentagon Gang. In addition to listed terrorist groups, Southeast Asia also hosts a number of secondtier or next-generation terrorist groups and individual terrorists. For example, in southern Thailand, anti-government insurgent violence resulting in more than 3,300 deaths has

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been conducted by a nebulous collection of individuals and groups, the most prominent of which appear to be the BRN-Coordinate (Barison Revolusi National-Coordinate) and the Patani United Liberation Organization (PULO). Similarly, Indonesia hosts a number of groups that do not receive the same level of attention as that devoted to JI. Some of these second-tier groups include or have included Ring Banten, an offshoot of the Darul Islam movement active between the early 1940s and early 1960s; Mujahidin KOMPAK; Jama’ah Tauhid wal Jihad; and Hizb-ul-Tahrir Indonesia (HTI), among others. Some of these groups have or have had close affiliation with JI, while other groups act independently or pursue different goals. In the Philippines, a previously unknown group, the Bangsamoro National Liberation Army, recently claimed responsibility for a bomb attack in late September 2009, which killed two American soldiers and a Filipino marine. The existence of second-tier groups — and the occasional dormancy of the first-tier, listed organizations — suggests that a strategic assessment of terrorism in Southeast Asia requires consideration of the underlying enabling environment, both ideological and functional. As many analysts have noted, the “root causes” of terrorism in Southeast Asia are complex and cannot be subjected to a single explanation or prescription. Also, the degree to which terrorism is “local” — reflecting unique historical circumstances, separatist movements or grievances — or “international” — influenced by international movements or organizations — adds another level of complexity to any analysis. Finally, there is the dichotomy between “old” terrorism resulting from classic and historically rooted insurgencies, such as the Marxist NPA insurgency in the Philippines, and the “new” terrorism represented by Al Qaeda and similar groups. Despite this complexity, however, the case can be made that at least three major drivers will shape the future of terrorism in Southeast Asia. The first centres on the international environment — in other words, how global trends, ideas and organizations may affect regional and local movements. In some cases, this “connectivity” is obvious, while in other situations it is barely detectable or simply non-existent. The second driver has a more local orientation and relates to questions of effective governance and state capacity. The underlying assumption is that effective and enlightened government policies may, in some situations, have an ameliorative effect that may obviate the need for harsher enforcement measures by the state. This analysis would also include consideration of such possible exogenous stresses as climate change, natural disasters and geopolitical tensions, each of which might reduce state capacity and thus constrain effective counterterrorism responses. The third driver is more strategic and focuses on the question of globalization — defined essentially as transborder flows of capital, products, culture and people — and the extent to which this global trend is perceived to be positive or negative within the region.

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TERRORISM IN SOUTHEAST ASIA: A STRATEGIC ASSESSMENT (continued)

Growing “Connectivity” between Local and Global Movements and Organizations As indicated earlier, one of the enduring debates among scholars of terrorism in Southeast Asia concerns the questions of the degree — and even the existence — of international connectivity to local movements and the extent to which such international movements affect the autonomy and agency of local groups. Although it is clear that Southeast Asian terrorism has uniquely “local” qualities — in many cases being the product of decades-long insurgency movements or activities — it is also apparent that international organizations and trends can, in some instances, play a major role in shaping the contours of regional terrorism. For example, key leaders in JI and Abu Sayyaf have had clear and documented links to Al Qaeda and its affiliated movement, some of which continue to this day. In southern Thailand, although insurgent violence is perhaps more genuinely local than most of the region’s other insurgencies, it is also clear that militant organizations are increasingly invoking global jihadi language and images — including referring to southern Thailand as Dar al-Harb (House of War) — as part of their recruitment efforts. Moreover, the growing role of the Internet may also foster growing ideological and functional connectivity between local and international groups. In Southeast Asia, jihadist websites are a growing phenomenon; they are increasingly merging local and international struggles. The number of extremist websites, including individual blogs, in Southeast Asia ranges between 150 and 200. According to one study, undertaken by Jarret Brachman, Southeast Asian jihadist websites are “equally, if not more, focused on global jihadist issues than they are on local or regional issues”. These websites act as a conduit facilitating the “promulgation and translation of global jihadist media and writings” throughout the region. Moreover, the ability of small groups to gather and train via the Internet has created what Thomas Friedman calls a “virtual Afghanistan” — a loose network of Internet websites, prayer associations and mosques (both electronic and real) that “recruit, inspire and train young Muslims to kill without any formal orders from Al Qaeda”. The spread of suicide bombing techniques into Southeast Asia also highlights the importance of international trends and techniques and their influence on local movements. Although such methods are not totally new to the region, their most recent appearance clearly derives from operational, or ideational, linkages between Southeast Asian groups and their South Asian or Middle Eastern counterparts. Recently, the youngest son of JI co-founder Abu Bakar Ba’asyir posted a justification of suicide bombings on the jihadist website . The statement reasoned that as long as these “acts of martyrdom” are conducted in a sincere manner and in accordance with the demands of Shari’ah, then suicide bombers will “be martyrs on the path of Allah”. The centre of suicide terrorism in Southeast Asia is clearly Indonesia, which has witnessed at least four major suicide attacks since 2003, causing at least forty-eight deaths in total. More ominously, terrorism analyst Adam Dolnik argues that the tactic may spread throughout the region, to include southern Thailand and the Philippines. Apart from suicide bombings, the longer-term factor likely to shape terrorism in Southeast Asia is the insurgency in Afghanistan, which appeared to be gaining in strength at the time of writing. Currently, foreign fighters are pouring into Afghanistan, reviving a similar trend that occurred in the aftermath of the Soviet Union’s invasion in 1979. If the

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International Security Assistance Force (ISAF) is not ultimately successful in the country, Afghanistan could once again emerge as a safe haven for groups involved in international terrorism. This outcome could have dire implications for Southeast Asia, particularly given the strong historical linkage between Afghanistan and certain individuals and groups in the region. Effective Governance and Resilient State Capacity A second factor that will play a leading role in shaping future terrorism trends in Southeast Asia is effective governance, including healthy state capacity. Effective governance refers to the ability, or willingness, of governments to address legitimate grievances or injustices that are uniquely “local” and often rooted in history. In the Philippines, for instance, taking this tack implies the adoption by Manila of enlightened policies designed to address underlying grievances in Mindanao and other parts of the country. In Thailand, it would entail Bangkok’s overcoming past insensitivity and disregard for the culture and values of ethnically Malay Muslim Thais and avoiding disastrous incidents similar to Krue Se and Tak Bai. A stress in the future on effective governance also implies minimizing corruption, which can have a variety of counterterrorism implications. First, widespread corruption often suggests relative disregard for the rule of law, which reduces the institutional capacity of governments. Second, corruption undermines confidence in government policies because of fears that partiality can be “bought” by opposing interest groups. A corollary to enlightened governance is healthy state capacity. Weak states are arguably more vulnerable to terrorist activities and groups, particularly as the latter may seek to take advantage of state weakness — including governments’ inability to enforce laws, to enforce border controls, to have effective control over parts of their territory, and to monitor financial transactions. Healthy states with resilient capacity also are positioned to engage in international partnerships with nearby states, which are critical for the sharing of intelligence and experience regarding best practices. However, state capacity can be undermined by a number of corrosive factors, including internal instability or various exogenous events. Natural disasters (including those stimulated by climate change), pandemics or geopolitical tensions involving outside powers all have the ability to reduce or at least circumscribe state capacity. In such cases, the “functional space” for terrorism may be increased. The Future Course of Globalization The third factor that will shape the future of terrorism in Southeast Asia is the evolving, protean and often disruptive phenomenon known as globalization. For many developed countries, globalization is often presented as an inevitable and ultimately positive trend. In other parts of the world, however, globalization is viewed as an economic, cultural and political threat. In 2004, the U.S. National Intelligence Council issued an assessment of the future global security environment in which it described globalization as an “overarching ‘mega-trend’, a force so ubiquitous that it will substantially shape all the other major trends in the world of 2020”. The same report warned that globalization is likely to produce “winners” and “those left behind”.

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15

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TERRORISM IN SOUTHEAST ASIA: A STRATEGIC ASSESSMENT (continued)

During the 1997–98 economic crisis, many individuals in Southeast Asia clearly felt — quite justifiably — that they had been “left behind”. More than ten years later, a new economic crisis has threatened to rekindle such feelings of insecurity. Although Southeast Asia has weathered the current economic crisis relatively well, the region remains vulnerable to occasional financial disruptions in the future, the inevitable by-products of a networked, globalized world. If future crises linked to globalization exacerbate unemployment — particularly among young and frustrated males — they may expand the enabling environment for terrorists. In addition, progress in poverty eradication, a particular challenge for the Philippines and Indonesia, remains vulnerable to the periodic economic disruptions that globalization may bring. Such an environment could be useful to such Marxist-oriented groups as the NPA in the Philippines, which thrive on grievance narratives centring on issues of poverty and injustice. Way Forward: A Cup Half Full? Although there is much cause for concern in Southeast Asia, a reasonable case for optimism can also be made. First, Southeast Asia in the early twenty-first century is much better positioned to address terrorism than it was during the 1990s; much of the collective denial that permeated the region prior to the Bali attack in October 2002 has dissipated. Cooperation on counter-terrorism among police, intelligence and other security agencies across the region is now common practice. The Association of Southeast Asian Nations (ASEAN) has helped foster this new cooperative spirit by hosting regular meetings and issuing proclamations, including the most recent (May 2009) communiqué produced by the Twenty-Ninth ASEAN Chiefs of Police Conference in Hanoi, which articulated the common goal of “develop[ing] capacity building amongst all member countries through specific training, sharing of experiences and best practices by relevant training institutions of the member countries”. Second, Southeast Asian countries benefit from the fact that major external powers have a keen interest in stability in the region, an interest related to its all-important sea lanes of communication, such as the Malacca, Lombok and Sunda Straits. As a result, such interested powers as the United States, Japan, Australia, and India are generally willing and eager to provide equipment, training and expertise upon request. In summary, terrorism is likely to remain a persistent but — generally — lowgrade threat in Southeast Asia. However, as terrorism is often a protean and evolving phenomenon, governments must continue to monitor local conditions and regional organizations, and pay particular attention to the international ideological, logistical and financial linkages that may develop in the future.

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PROSPECTS FOR KOREAN-SOUTHEAST ASIAN RELATIONS By Lee Jaehyon

T

he Republic of Korea is passing through three “years of Southeast Asia”, starting in 2008. A variety of anniversaries, summits and initiatives are scattered across these years. Korea and Thailand celebrated fifty years of diplomatic ties in 2008. The following year brought the sixtieth anniversary of Philippine-Korean relations and the twenty-fifth anniversary of ties between Brunei and Korea. Malaysia and Korea will in 2010 commemorate the establishment of diplomatic relations fifty years ago. In late 2008, the ASEAN countries and Korea signed a memorandum of understanding to establish in Seoul an ASEAN-Korea Centre to facilitate socio-cultural and economic interaction between those countries and Korea. The centre began operation in early 2009. ASEAN and the Republic of Korea celebrated two decades as dialogue partners in 2009. To mark this milestone, an ASEAN-Korea Commemorative Summit was held on Jeju Island in June. The national leaders of Southeast Asia and the Republic of Korea met again only four months later at the ASEAN+3 Summit in Thailand in October 2009. Korean president Lee Myung-Bak announced a “New Asia Initiative” (NAI) in March 2009, during a trip to Indonesia. Southeast Asia is one of the central foci of the NAI. It epitomized the way in which the events, anniversaries and initiatives of the 2008–10 period augur well for future relations between Southeast Asia and Korea. Although not widely appreciated among members of the general public in Korea and Southeast Asia, practical contacts and exchanges between the two surpass what is easily imaginable. Southeast Asian countries and the Republic of Korea have cooperated closely in the political-security field. Southeast Asian countries, individually and collectively through ASEAN, have supported the Republic of Korea’s position in efforts to address problems on the Korean peninsula. In return, Korea has not spared its support for ASEAN integration. Since the beginning of ASEAN+3 regional cooperation, space for cooperation between Southeast Asia and Korea to shape the newly emerging regional order has grown. Both Southeast Asia and Korea share similar strategic interests in a region where two great powers, China and Japan, compete for hegemony. Solid cooperation among middle powers such as the Southeast Asian countries and Korea can mediate, veto and lead the great powers, shaping a regional order rooted in principles of equality. Furthermore, there is still ample room for mutual cooperation in the increasingly important area of non-traditional security or human security.

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PROSPECTS FOR KOREAN-SOUTHEAST ASIAN RELATIONS (continued)

In the economic field, cooperation between Southeast Asia and the Republic of Korea has been particularly substantial. Southeast Asian countries are, taken as a group, Korea’s third most important trading partner, following only China and the European Union. While that latter grouping includes twenty-seven countries, ASEAN is an association of but ten. When measured by the average trade volume of individual countries, Southeast Asia thus outpaces Europe as a trade partner for Korea. Also, the ASEAN region is the second-leading destination of Korean foreign direct investment (FDI), trailing only China. More than US$5 billion flow into Southeast Asia from Korea annually. In addition, five Southeast Asian countries are included in the ten leading recipients of Korean overseas development assistance (ODA), with Cambodia at the top of the list. Economic cooperation will expand still further as ASEAN and Korea signed a free trade agreement at the 2009 Commemorative Summit. Socio-cultural exchange between Southeast Asia and Korea is no less significant. More than four million visitor move between the two annually, although the flow from Korea to ASEAN is much greater than that in the opposite direction. About 30 per cent of migrant workers in Korea are from Southeast Asia, while the same percentage of migrants by marriage in Korea is from the region as well. More than 20,000 long-term and short-term student exchanges take place annually. While Korean Wave or Hallyu is widely recognized in the Southeast Asian region, the Southeast Asian phenomenon — a penetration of Southeast Asian culture into Korea — is slowly but steadily growing in Korea; it is reflected not least in the fields of food, migration and tourism. The recent approach and initiatives of the Korean government relating to Southeast Asia, such as the Commemorative Summit and the NAI, reflect the depth and breadth of ongoing exchanges and cooperation. They also mirror Seoul’s recognition of the multi-dimensional importance of Southeast Asia to Korea. At the same time, the Korean government, by fulfilling a role in the region befitting its objective capacity, wants to position itself as a reliable friend to and middle power in the region, one that exercises an appropriate leadership role. During 2009, the Korean government made clear its many ambitious ASEAN-related plans. At the Commemorative Summit, three pillars of future Korea-ASEAN cooperation — development cooperation, green growth, and cultural and people-to-people exchange — were announced together with

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concrete programmes to support each area. The summit was followed by a more advanced plan of action, announced at the ASEAN+3 summit in October 2009. The Korean government is particularly keen on low-carbon and green-growth initiatives. It is preparing cooperative endeavours with ASEAN in this field. While 2009 was a year that saw preparation for cooperation between Southeast Asia and Korea, the fruit of the announcement of the NAI, of the Commemorative Summit and of the establishment of the ASEAN-Korea Centre will be harvested in 2010 and beyond. In the economic field, Korea, jointly with ASEAN, will endeavour to expedite the building of an East Asian Free Trade Area (EAFTA). Already in 2009, the ASEAN+3 finance ministers agreed to set up working groups to study it. Korea and ASEAN have a crucial role to play in the EAFTA, mediating among and managing the big regional economies. The Korean government will also extend more ODA to Southeast Asia, as promised at the Commemorative Summit. It will increase scholarships to Southeast Asian students for study in Korea. The ASEAN-Korea Centre is expected to produce concrete results and yield the benefits of cooperation in socio-cultural domains. Moreover, important progress in building a strategic partnership between ASEAN and Korea, as suggested by the ASEAN-Korea Eminent Persons Group, is to be expected in 2010. While most of Korea’s 2009 initiatives to enhance ties to Southeast Asia were with ASEAN as an association, an increased focus on bilateral relations will mark coming years. President Lee’s visits to Vietnam and Cambodia in October 2009 heralded this focus. In the longer term, it is clear that the breadth of exchange and cooperation between Southeast Asia and Korea has grown considerably in recent decades. What is required now is a qualitative leap-frogging in the relationship. To this end, the Seoul government must adopt a new diplomatic approach to Southeast Asia. Its diplomacy has previously been preoccupied with shortterm strategic and economic interests. It has concentrated on relations with bigger and stronger nations. In the future, Korea must eye mutual benefits and non-economic gains, as in its relationship with Southeast Asia. Judging from what the Korean government accomplished under the auspices of the NAI in 2009, it seems that its resolute approach to Southeast Asia has a solid basis for continued progress. The Republic of Korea and Southeast Asia are facing a new phase in their relations. The question is how to nurture the budding ties of recent years into a strong and mutually beneficial relationship in the years ahead.

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THE ASEAN-10

Brunei Darussalam By Pushpa Thambipillai As the most stable, predictable and wealthy of the Southeast Asian states, Brunei Darussalam is in no hurry to change the status quo. This generalization applies to the governmental apparatus as well as the peoples’ attitudes. The next few years will see continuity in present policies and processes, although some issues may be addressed more vigorously than in the past. One such issue must surely be the country’s general complacency with its comfortable economic status, a result of income from the oil and gas sector. Confidence has been shaken to some extent by the volatile energy markets of the recent past. A search for alternative means of maintaining comparable income levels and the comfort and expectations of the society has to some degree begun. A small state of about 390,000 people with a low annual rate of population increase, Brunei will continue to enjoy the benefits of its oil and gas income, overseen by a centrally managed political system under the Malay Islamic Monarchy. However, the main worry continues to be over its economic rather than its political system. As long as oil prices remain relatively high, it will bode well for the country in the medium term, as hydrocarbon reserves are still being discovered and added to sources of national income. Thus it is thought that national leaders expect the oil and gas sector to play a central role at least for the next two decades, even as they insist on the diversification of the economy. Efforts to shake off complacency seek to gear the population towards evolving into committed and productive citizens of the state.

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THE ASEAN-10

BRUNEI DARUSSALAM Land Area:

5,770 sq. km.

Population (2008 World Bank data):

397,000

Capital:

Bandar Seri Begawan

Type of Government:

Monarchy

Head of State and Government:

Sultan Haji Hassanal Bolkiah Muizzaddin Waddaulah

Currency Used:

Brunei dollar

US$ exchange rate on 16 November 2009:

US$1 = B$1.389

A “scathing” speech that Sultan Haji Hassanal Bolkiah, delivered in early 2009, jolted Brunei — and especially its ministers and senior bureaucrats — and gave those responsible for governance in the country a new outlook. From policy-makers at the ministerial level to civil servants and ordinary citizens, all have been instilled with purpose and urgency in certain areas of national concern. That focus is expected to carry over into the next few years as the Sultan offers more invigorating observations, concerned with the slow pace of policy-making and implementation. In this respect, the Sultan is, as head of state and government, exercising his role as the country’s prime minister; he expects his ministers to meet the challenges of good governance. Brunei Darussalam is a hereditary monarchy with an appointed legislature and cabinet. However, unlike in most other political systems, cabinet deliberations and outcomes are not disseminated regularly to the public. The public thus continues to speculate on important policies, on whether decisions are collective or derived from an individual ministry’s input. This speculation is especially strong as it relates to decisions that attract concern from citizens, including decisions relating to education policy. The trend in the past has been for individual ministers to assume responsibility for their policy areas. They also have

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POLITICAL OUTLOOK to respond to legislators’ queries during national assembly sessions and thus face some public scrutiny. Some of them also engage in public meetings to explain their proposals and policies to the people, for example, in areas related to district-level affairs or welfare. This practice has encouraged a certain measure of openness and a positive trend towards the transparency lacking in other instances. The cabinet will see changes in the coming year as the first ever five-year terms of ministerial appointment for ministers introduced by the Sultan near completion. The regular “movement” of senior permanent secretaries and other officials amongst various ministries is understood to signal that some are potential ministers or deputy ministers in the next line-up of cabinet appointments. That line-up will surely lower the median age of the cabinet, as some senior ministers retire. National attention continues to be focused on non-traditional security — especially economic security — through diversification away from dependence on oil and gas revenue. Food security has been given a great deal of emphasis. Rice cultivation and agro industry are expected to promote self-sufficiency and increase national productivity and employment opportunities. The aim of grain production is to increase the current local harvest of less than 10 per cent of consumption to about 20 per cent within the next two years and to 50 per cent within the decade. Brunei has sought expertise from rice-producing neighbours such as the Philippines and China. Another major concern is poverty reduction, highlighted by the monarch’s March 2008 speech on “zero poverty”. The government has begun to identify and classify people according to different levels of poverty, in accordance with Islamic interpretations. Measures taken have included providing cash and welfare services to the poor and, more recently, the distribution of cash collected from the Islamic tithe or zakat to overcome the immediate financial needs of those identified. The intention is that financial support contribute to making recipients more self-reliant in the future. Critics have been quick to point out that hand-outs are not the means to eradicate poverty and that the total elimination of poverty is not possible. The debate is likely to continue, as next year’s distribution of funds to the poor will again invite controversy. Some observers

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THE ASEAN-10 are in favour of introducing a form of micro-financing to alleviate the plight of a small group of welfare beneficiaries by encouraging them to be productive. In a country with a young population, issues associated with youth — education, skills training, employment opportunities and counterculture — are central to Brunei’s concerns. Religious education and the inculcation of values and practices have become entrenched as a means of ensuring that the population is focused on a moral and spiritual path. However, there is no concern over extremism as the state is fully involved in the implementation of the approved teachings of Islam. Nevertheless, as in most other societies, petty crimes like theft, smuggling of contraband items, drug peddling, corruption and the occasional homicide give Brunei Darussalam a measure of anxiety over the globalizing environment. The offenders are both local people and foreigners, despite the oft repeated claim that foreigners are behind the spate of crimes. The foreign workforce is gradually increasing after a few years of slump, as infrastructure building and the service sector pick up with a diversified approach to the economy. The tourism and halal products sectors are two promising areas that will see expansion in coming years. They will generate employment for local people and require the participation of foreign labour, too. In order to be less dependent on certain categories of foreigners, the government will see that education and training continue to grow to meet the increasing demand for special skills. The recurrent discussion of how to make Brunei more attractive to the foreign investor will continue; the country has not registered well in international rankings of investment destinations. Brunei will continue to enjoy domestic peace and stability. However, a major concern is natural disasters. Though not on a scale comparable to its neighbours, the country has had an alarming increase in floods and landslides, attributed to global environmental changes. Thus, Brunei is giving due attention to global warming and environmental protection. It is cooperating with external players in contributing its share — for example, through sustainable forest management — and protecting the biodiversity of selected areas in cooperation with its

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POLITICAL OUTLOOK Borneo neighbours, Indonesia and Malaysia, in the Heart of Borneo project. In mitigating disasters, Brunei is giving due consideration to national disaster preparedness and management in a professional manner, though not yet embarking on a national scheme of training its population in civil preparedness. The expressed interest in some sections of the population to introduce some form of national service for its youth, in moulding a strong and dedicated group of citizens, has also not been decided on. In the realm of defence, Brunei will gradually expand its human resources and skills in maintaining a trim but well-trained force to manage its strategic missions in tending to its land and marine responsibilities. In keeping with its small size, Brunei will maintain a correspondingly small force, without sacrificing the national needs for a dependable defence force. It will train with friendly forces and where feasible participate in external missions, such as the observer mission in southern Mindanao brokered by the Organization of the Islamic Conference (OIC) and the UN peace-keeping effort in southern Lebanon. Brunei regards those experiences as invaluable in giving exposure to its defence establishment. In Brunei’s external relations, the major emphasis is on close links with its ASEAN partners. In the next round of the rotating chairmanship of ASEAN, Brunei will be preparing to take the mantle in 2011. At the subregional level, it has high expectations for the close cooperation with neighbouring territories in the Brunei-IndonesiaMalaysia-Philippine East ASEAN Growth Area (BIMP-EAGA). Within the EAGA region, it will play a more energetic role in shaping some of the issues that directly interest it. Traditional partnerships with the United Kingdom will assure it links in defence and education, while its growing ties with the United States will enhance international security cooperation. The Prime Minister’s Office and the Ministry of Foreign Affairs and Trade, under the leadership of the Sultan and his brother Prince Mohamed Bolkiah, will steer the country’s external interests as they have done since even before the independence of Brunei Darussalam. Keeping to its preferred choice of not taking an active or vocal stand on certain issues, Brunei will let its bigger partners assume

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THE ASEAN-10 the major international role. Nevertheless, Brunei firmly supports its commitment to international organizations like the UN, the OIC and the Commonwealth, which provide the political and socio-economic support it seeks. The leaders perceive international diplomacy as the prime focus of the country’s external relations, and thus the security and economic well-being of Brunei Darussalam are assured through good and selective bilateral and multilateral relationships.

Cambodia By Sokbunthoeun So Stability has been basic to the substantial progress in Cambodia’s political development since the conclusion of its civil wars with the 1991 Paris Peace Agreement. Stability has also been a central factor contributing to the rapid economic growth that began in the early 2000s and continued until the onset of the current world economic crisis. Elections have been held regularly every five years since United Nations-supervised polls of 1993. Following the settlement of some difficulties in negotiating with the opposition parties to form a coalition government after the 2003 legislative election, the ruling party — the Cambodian People’s Party (CPP) — was able to consolidate its power. It has since maintained its firm political standing in Cambodia. In the coming years, stability under the Hun Sen government will endure as a result of the CPP’s political dominance, if there is no internal break-up of the party. Central to the ability of the CPP to achieve and maintain political dominance is its monopoly over national and local administration and the success of its political strategy. That strategy has included buying off important opposition activists and using political patronage to win popular votes through the distribution of gifts and the delivery of development aid. This aid has built schools, temples and roads. Despite the fact that some of its activities are financed through private funds gained through dubious processes and corruption, they have been very effective in garnering popular support for the party at the grass-roots level. With such political advantages and such a strategy, the CPP was able to capture an even larger share of seats

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POLITICAL OUTLOOK

CAMBODIA Land Area:

181,040 sq. km.

Population (2008 World Bank data):

14,700,000

Capital:

Phnom Penh

Type of Government:

Parliamentary democracy and constitutional monarchy

Head of State:

King Norodom Sihamoni

Head of Government:

Prime Minister Hun Sen

Next Election:

January 2011 (Senate elections)

Currency Used:

Riel

US$ exchange rate on 16 November 2009:

US$1 = 4,248.13 riel

in the National Assembly (90 out of the total of 123) in the 2008 election. This political dominance is crucial to future Cambodian political development in a number of ways. First, there will be increasing control over freedom of expression. The CPP’s overwhelming majority within the national assembly allowed the recent passage of a penal code without any changes. The code includes articles that broadly define and criminalize defamation and disinformation. Lawsuits charging defamation and disinformation have in the past been used to suppress freedom of expression. In recent years, a number of individuals, including journalists, opposition activists, and human rights workers, have been jailed on defamation and disinformation charges. They have only been released after apologizing. With the criminalization of defamation and disinformation in the Penal Code, freedom of expression is likely to be further curtailed. Second, if there is no meaningful unification of the major opposition parties, an end to meaningful opposition politics in Cambodia is possible. This outcome will be a major impediment to democratic development in the country. The opposition parties are currently in weak positions

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THE ASEAN-10 because of their lack of unity, internal conflicts, and the defections of politicians bought off by the CPP. In January 2009, the Human Rights Party (HRP) and the Sam Rainsy Party (SRP) formed the Democratic Movement for Change (DMC); they pledged to unite and run jointly in the 2013 election. While this decision was a major step for the political opposition to the CPP, the prospect that it can achieve a substantial presence in the National Assembly and thus influence the government’s policy is significantly diminished by the increasing effectiveness of the CPP’s political strategy and the possibility of the new movement’s breaking up. Last, policy reform and other important changes in governance that may occur will result from the CPP’s initiative, not from the political “competition” characteristic of established democratic states. The CPP’s power and its overwhelming majority in the parliament will allow the party to achieve national development goals by adopting and implementing policies to alleviate the extreme poverty suffered by fully one-third of the country’s population and realizing other development priorities. Widespread corruption within the government threatens, however, to set these efforts back. Consequently, national development goals and rapid poverty reduction depend on the Cambodian leadership’s commitment to fighting corruption and effecting other necessary institutional reforms. Economic and political relationships with major powers and other countries will continue to be important to Cambodia. Despite the fact that Cambodia is becoming a one-party state, it will still be open to the world and hold regular elections because the CPP has become accustomed to the presence of opposition parties and to formal electoral competition. Cambodian elites know that keeping the country open to the world will both allow it to prosper economically and give them the resources to sustain their political legitimacy in the eyes of the Cambodian people. Similarly, winning elections will give the Cambodian government international legitimacy and ensure the continuous flow of aid, financial assistance and loans that substantially underwrites the government’s budget and helps ensure the survival of the ruling regime.

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POLITICAL OUTLOOK The emergence of China as the largest investor in Cambodia and as a donor that provides aid to the country without imposing conditions has had a significant impact on its political development. Nonetheless, Cambodian elites will maintain a balanced relationship with major powers, including the Western powers and China. They will not orient the country so much toward China as to ignore the West, but the close relationship between Cambodia and China, embodied in both aid and trade, will allow those elites to avoid the critical reforms urged by Western donors that might jeopardize elite interests. The expected start of oil revenues in 2011 is likely to enhance Cambodian elites’ ability to avoid such reforms. Those revenues will not, then, significantly change the political environment in Cambodia. Elites will continue to hold regular elections as a means of legitimizing their power. The new revenue stream will increase the CPP’s ability to maintain its strong position. To a certain degree, oil revenue will trickle down to the local level through the political patronage strategy of the CPP, but it will by no means improve the lot of the majority of Cambodians. The influx of Chinese and other countries’ capital has helped fund increased economic activity in Cambodia, but it has also brought many problems in its wake. For example, the Cambodian government’s expropriation of large areas of land for private investment in natural resource extraction, the development of industrial-scale farms and the emergence of upscale urban housing projects have led to conflicts over land between companies and local people. Such land expropriation reduces people’s access to common property resources, disturbs areas of cultural and spiritual significance to them and displaces them from their living spaces. These land problems will continue to persist in the coming years. After a long delay and despite administrative and corruption scandals, the Extraordinary Chambers of the Courts of Cambodia (ECCC) finally concluded the trial of Kaing Guek Eav, or Duch, who served as the head of the Khmer Rouge regime’s infamous S-21 prison. Convicted of crimes against humanity, Duch was sentenced to life imprisonment. Another four surviving Khmer Rouge leaders are due for trial before the ECCC. Six senior officials, all of whom were former members of

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THE ASEAN-10 the Khmer Rouge and are current members of the CPP, have also been summoned to testify at the tribunal. It is questionable whether these trials can erase the emotional trauma of survivors of the Khmer Rouge, but one symbolic benefit is obvious: they will convey the message to Camdodia’s current leaders that they had best act accountably and responsibly.

Indonesia By Bernhard Platzdasch Indonesia’s political outlook for 2010 (and beyond) is broadly encouraging. Political stability, however, is connected to the question of whether the new government can achieve further success in promoting economic recovery. After a very convincing re-election victory in June 2009, President Dr Susilo Bambang Yudhoyono is now in his strongest position since first coming to power in 2004. He enjoys an even bigger mandate than before to undertake a wide range of economic reforms, including fighting corruption and improving the investment climate. Improvement of the country’s feeble infrastructure, law enforcement, the continuation of fiscal and bureaucratic reforms, the fight against Islamist extremism and religious intolerance and environmental issues (climate change, deforestation) are other areas in which his new government is expected to leave its mark. As the president cannot be elected to a third term, it is hoped that he will act more resolutely than during his first term. Overall, one can expect a solid yet somewhat conservative performance from the government. It will embark on a number of moderate and achievable goals in the above-mentioned areas, without taking great risks. While lacking a larger vision, it will prove dependable and stable. There are several other indications that Yudhoyono’s second term will bring the further consolidation of democracy, indications not related to economic issues. First, the triumph of the president’s Democrat Party in the 2009 parliamentary elections indicates that a return of a more authoritarian form of governance is very unlikely in the foreseeable future. None of the parties offering this alternative did well in the

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POLITICAL OUTLOOK

INDONESIA Land Area:

1,919,440 sq. km.

Population (2008 World Bank data):

228,249,000

Capital:

Jakarta

Type of Government:

Presidential republic

Head of State:

Dr Susilo Bambang Yudhoyono

Next Election:

2014

Currency Used:

Rupiah

US$ exchange rate on 16 November 2009:

US$1 = 9,372.70 rupiah

elections. The victory of the Democrat Party also made it clear that many Indonesians have left the Soeharto years behind them. Golkar, the New Order’s political vehicle, is no longer the dominant party on the Indonesian political landscape, and the Indonesian Democratic Party of Struggle (PDIP), once the main opposition party and main challenger to Golkar, has lost momentum to the Democrat Party. The leading role of the Democrat Party is likely to be durable if the president is perceived as having improved the lives of ordinary citizens in the years ahead. This durability may come despite the party’s strong dependence on the president and its institutional weakness. What is more, while the president’s new cabinet continues Indonesian governments’ tradition of incorporating most major political streams and allocating posts roughly in accordance with electoral shares, Yudhoyono’s new government is likely to be less brittle than the previous one. Circumstances suggest a new level of political continuity in a country in which, by contrast, incumbents lost previous recent elections (1999 and 2004). On the other hand, the reliance of the Democrat Party on the popular president renders its long-term future uncertain, a reflection of a continuous and somewhat unreasonable fixation of the Indonesian public on individual senior leaders.

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THE ASEAN-10 A second indication of the likely consolidation of democracy is that the unstable multi-party system characteristic of the early democratic period has entered a process of simplification in which the number of parties in the legislature is gradually reduced. This process was helped along by the election’s threshold requiring parties to gain 2.5 per cent of the electorate’s votes in order to take seats in parliament. There will be nine parties in the new parliament, compared to seventeen in 2004. From 2014 on, electoral thresholds will also be enforced at the local level. These are signs of a more mature Indonesian democracy. A smaller number of parties is likely to avert the lengthy and convoluted negotiations over legislation that characterized previous years. It should enable easier organization of future elections; organization was a shortcoming of the 2009 polls. Despite an overall positive trend towards democratic consolidation, however, a few trademark weaknesses are likely to persist in the foreseeable future. The first is the still unresolved question of a proper party financing system, an underlying cause for the corruption of party officials. The second shortcoming is uneven performance among cabinet ministers. Of thirty-four current ministries (comprising “coordinating”, “state” and “departmental” portfolios), twenty-one have been filled with party politicians. In deciding on ministerial appointments, the president’s concern was apparently to gain the support from a majority coalition in the legislature. He thus often resorted to compromise choices or appointed nominees with uncertain professional credentials. A promising sign of things to come in the areas of financial management and tax reform was the reappointment of Dr Sri Mulyani Indrawati as minister for finance. Sri Mulyani has been lauded for her efforts to reform Indonesia’s tax system and to battle corruption. The reappointment of Dr Mari Elka Pangestu as minister for trade, the election of Professor Boediono as vice-president, and a number of other ministerial appointments indicate that the President will continue to make technocratic competence and clean track records the guiding principles in his second term of office. On a less promising note, several other appointees have backgrounds little suited to their new portfolios. Examples are the new minister

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POLITICAL OUTLOOK for defence, Purnomo Yusgiantoro, previously minister for energy and mineral resources, and the current coordinating minister for economic affairs, Hatta Radjasa, who previously served as minister for transport and minister for research and technology. Both men are known to be personally close to the President. A challenge that the new government will inherit from the previous one is how to respond to the conservative trend in Indonesian Islam and uphold religious tolerance and pluralism. The replacement of the United Development Party (PPP) by the Wahabi-inspired Prosperous Justice Party (PKS) as the largest Indonesian Islamist party in the last elections is an indication of this trend. Most Muslim organizations have been affected by growing conservatism; it is echoed in increasingly strained inter-faith relations and the government’s belief that it has to cater to Islamic sentiments as shown in the broad support for the “anti-pornography” bill and a number of Shari’ah-inspired by-laws. It is potentially significant that some of the ministers in noneconomic portfolios have an anti-pluralistic record. Minister for home affairs Gamawan Fauzi (from the President’s Democrat Party) imposed regulations on women’s dress when he was governor of West Sumatra. Justice and human rights minister Patrialis Akbar (from the strong Islamist wing of the pluralist National Mandate Party or PAN) has in the past displayed a stronger dedication to religious dogmas than to human rights. He once said that “there is no place for non-religious people to live in Indonesia”, a statement reflecting Indonesia’s overall trend away from the secularism ostensibly represented by its state ideology Pancasila. The minister for social affairs, Dr Salim Segaf, is the head of PKS’s Shari’ah Council and a strong advocate of a bigger role for Islamic law in the constitution. The minister for culture and tourism, Jero Wacik (Democrat Party), endorsed a law on film productions (passed in September 2008) which limits the distribution of foreign films and increases censorship of Indonesian productions. The new minister for religious affairs, Suryadharma Ali, is chairman of the Islamist PPP. He made a controversial visit to the imprisoned leader of the Islamist vigilante group the Islamic Defenders Front (FPI), Habib Rizieq Shihab,

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THE ASEAN-10 after FPI thugs had attacked a peaceful rally of pro-pluralist activists at Jakarta’s Merdeka Square in May 2008. He also spoke out in favour of a ban of the Islamic Ahmadiyah sect. Taken together, these appointments may indicate a continuing preference for pro-Islamic stances in the new administration. Finally, Indonesia has fought Islamist terrorism with more determination and success than many countries. The September 2009 killing of Noordin M. Top was a significant blow against terrorism. The death of such a vital terrorist leader will make it harder for extremist groups to mount new operations and coordinate among themselves. This loss notwithstanding, the threat of terrorist acts on Indonesian soil has certainly not been eliminated, and the fight against terrorism will continue to be a main concern during Yudhoyono’s second term. In global affairs, Indonesia’s role is likely to remain slight despite a clearly demonstrated desire in the last few years to enhance the country’s international profile.

Laos By Martin Stuart-Fox If 2009 were anything to go by, it would be tempting to predict that 2010 will be more of the same — that is, that politics in the Lao People’s Democratic Republic (LPDR) will continue to reflect a consensus agreed upon by a remarkably secretive, but unquestionably cohesive, ruling elite. However, this view would be a mistake. The year 2010 will be a crucial one for the politics of the country’s ruling Lao People’s Revolutionary Party (LPRP). What will not change is the way in which politics is conducted in contemporary Laos, entirely within the upper echelons of the LPRP and with no publicity. Nothing reported in the tightly controlled Lao media will reflect differences in political opinion. There will be no political commentary, let alone speculation. Diplomats may pick up rumours and talk to one another, but what is really going on within the Party, and how decisions are arrived at, will as usual remain almost entirely opaque to outside observers.

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POLITICAL OUTLOOK

LAOS Land Area:

236,800 sq. km.

Population (2008 World Bank data):

6,205,000

Capital:

Vientiane

Type of Government:

Communist people’s democratic republic

Head of State:

President Choummaly Sayasone

Head of Government:

Prime Minister Bouasone Bouphavanh

Next Election:

2011

Currency Used:

Kip

US$ exchange rate on 16 November 2009:

US$1 = 8,647.22 kip

A large part of the reason for this lack of political transparency has to do with Lao political culture, and with how power is gained and used in the country. Throughout Lao history, political power has been personal and patrimonial, with politics dominated by a few powerful families. When the Lao revolutionary movement seized power in 1975, members of the Political Bureau of the LPRP became the dominant players. But since membership of the Party was theoretically open to all, it appeared at first that communist political institutions would break the hold of patronage politics. For the first fifteen years or so of the new regime this development still seemed possible. But while political leaders tried to cope with international challenges and a collapsing economy, the military leaders of the revolution were allowed the freedom to do their own deals (mostly with the Vietnamese military to exploit Lao timber resources). Junior officers became the natural clients of commanding generals. When the generals gained ascendency in the Party, they brought their own culture of patronage politics with them, using the resources of the state for personal gain and for the construction of networks of political patronage.

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THE ASEAN-10 The new patrimonialism benefited greatly from the introduction of a market economy from the second half of the 1980s onward, and particularly from the influx of foreign investment. Corruption flourished, as the example of Party leaders was adopted by lower level cadres. An anti-corruption law was introduced, but it has never been applied to any senior Party member. The only punishment for highly corrupt officials has been to move them to positions with fewer opportunities for personal gain. So pervasive had corruption become that when a younger civilian Prime Minister, Bouasone Bouphavanh, was appointed in 2006 to replace a succession of military figures, he promised to do something about it. But the leadership of the Party remained in the hands of the military: General Choummaly Sayasone is state and Party president, and four of the five top positions in the Politburo are still held by the military old guard. Since Bouasone owed his elevation to prime minister to the patronage of former Party president General Khamtai Siphandone, he has had to forge his own political support base since coming to office. This task has been made somewhat easier in that Khamtai has retired to southern Laos to manage his extensive business interests, but Bouasone has had to move carefully so as not to antagonize other powerful figures. Bouasone’s working life after returning with a doctorate in political science from Moscow was spent as a Party official. He has good contacts within the Party and is popular with younger and better educated Party members. Rumour has it that Bouasone has gained some powerful backers, including the foreign minister, Dr Thongloun Sisoulith, and Thongban Sengaphone, the minister for security, who is in charge of the police and secret service. But most significantly, again if rumour is to be believed, he has won over the defence minister, General Douangchai Pichit. It is unclear as yet whether Bouasone’s network-building strategy is on track. Politics took a back seat during the run-up to the Southeast Asian Games, which Laos hosted for the first time in December 2009, but the pace will quicken during 2010. Bouasone’s time frame is

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POLITICAL OUTLOOK determined by the date of the next Party Congress, due early in 2011. Politicking is always intense during the year leading up to a congress, to decide on membership and rankings in the Politburo and Central Committee, so that all that the congress itself has to do is rubber-stamp what has already been decided during months of horse trading. Will Bouasone’s support network be sufficiently cohesive to provide him with the political base he needs to force the retirement of the ageing generals in the Politburo? The answer remains to be seen. General Choummaly is likely to want another term in the top job (to reward his patronage network and add to his assets), and other powerful Politburo members may be reluctant to retire. The position of former foreign minister Somsavat Lengsavad is shaky, due to widespread criticism of the deal he brokered with Chinese business interests to build a new national sports stadium in return for rights to develop a large area of land near the sacred That Luang stupa in Vientiane. Foreign influence continues to play a significant, if equally opaque, role in internal Lao politics. The principal players are Vietnam and China. Senior Lao Party cadres still attend ideological training courses in Vietnam, which give the Vietnamese unique access to the upper echelons of the LPRP. Vietnam has two principal political interests in Laos: the maintenance both of its influence within the Lao Party and of close military-to-military relations as a security measure to protect the long and vulnerable Lao-Vietnamese border. Vietnam has become increasingly concerned about the Chinese penetration of Laos. The transfer of ownership of the Sepon gold and copper mine in southern Laos, the largest industrial enterprise in the country, from Australia’s OZ Minerals to China’s Minmetals caught both the Lao and the Vietnamese by surprise. Chinese commercial penetration of Laos has mainly been in the North, though there is a large Chinese market in Vientiane. The Sepon mine is close to the Vietnamese border, and Hanoi is far from happy at having what amounts to a Chinese base in such a strategically sensitive location. China’s influence in Laos is on the rise. China provides ideological and managerial training for Lao cadres, along with substantial aid and investment. Chinese companies have gained concessions for mining

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THE ASEAN-10 and for large areas of land for agricultural and forestry plantations, in return for which the Chinese government has granted Laos loans under favourable terms and cancelled debt. As Prime Minister, Bouasone is under pressure from both Vietnam and China to allow access to Lao resources. Both countries back him for his commitment to the LPRP, and his determination to preserve the Party’s monopoly of power. Bouasone may want to rein in corruption (as much as anything to protect the reputation of the Party). But he is no Gorbachev, and he has no intention of introducing multi-party democracy in Laos. Balancing the respective interests (and influence) of China and Vietnam is not the only political challenge facing Prime Minister Bouasone. The Lao economy has been battered by the global financial crisis, and government revenues are down. Mining royalties and the sale of electricity from the giant Nam Theun II dam to Thailand will go some way towards meeting the budget deficit in 2010, but reforms to reduce revenue “leakage” due to corruption are still a priority. Whether or not Bouasone will emerge from the 2011 Party Congress with the power to reform both the Party and the bureaucracy will depend on the intense behind-the-scenes politicking that will mark 2010. Competition for access to economic resources by powerful figures seeking benefit for themselves and their clients will remain intense, with little thought given to the national interest. But the tide of military influence in the country appears to be ebbing, and Bouasone may well find the support he needs to introduce the reforms that Laos so desperately needs.

Malaysia By Johan Saravanamuttu Najib Abdul Razak assumed the reins of government as the sixth prime minister of Malaysia on 3 April 2009. His first action was to free thirteen Internal Security Act (ISA) detainees. The new premier went on to announce a new twenty-eight-member cabinet with seven new faces; eight ministers were dropped. Predictably, his new

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POLITICAL OUTLOOK

MALAYSIA Land Area:

330,434 sq. km.

Population (2008 World Bank data):

26,993,000

Capital:

Kuala Lumpur (Administrative capital: Putrajaya)

Type of Government:

Federated parliamentary democracy and constitutional monarchy

Head of State:

Yang Di-Pertuan Agong Tuanku Mizan Zainal Abidin

Prime Minister:

Dato’ Seri Mohd Najib bin Tun Haji Abdul Razak

Next Election:

2013

Currency Used:

Ringgit (RM)

US$ exchange rate on 16 November 2009:

US$1 = RM3.376

deputy was Muhyiddin Yassin, who had won the UMNO (United Malays National Organization) deputy president race the previous month. Prominent among those dropped was Home Affairs Minister Syed Hamid Albar, while Sharizat Abdul Jalil, the new women’s chief of UMNO, was given the portfolio for women, family and community development. The foreign ministry went to Sabahan Anifah Aman, and GERAKAN party chief Koh Tsu Koon took the new ministerial post responsible for management and performance. The all-important finance ministry was retained by Najib, with the second finance minister’s post going to newcomer Ahmad Husni Hanadziah. Controversially, the new UMNO Youth chief, Khairy Jamaluddin, received no cabinet post, and Azalina Othman, tourism minister under former prime minister Abdullah Ahmad Badawi, was dropped. These moves suggested that Najib was instituting a real changing of the guard. Moreover, the defeated UMNO Youth chief candidate Mukhriz Mahathir received a deputy minister’s post, implying the extension of an olive branch

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THE ASEAN-10 to Mukhriz’s father Mahathir Mohamad, the severest of Abdullah’s critics. An early sojourn in China and a massive injection of RM67 billion into the economy imposed the Najib stamp on government. So did the proclamation of the country’s first alphanumeric national slogan, “1Malaysia”. As prime-minister-in-waiting, Najib had personally orchestrated a takeover of the opposition Pakatan Rakyat-run government in Perak in February 2009. Giving the country an inkling of the kind of leader the country was soon to have, Najib finessed that power grab through the crossovers of two Parti Keadilan Rakyat (PKR) assemblymen and one Democratic Action Party (DAP) assemblywoman to the Barisan Nasional (BN) coalition. However, this stratagem did not seem to help a fracturing BN, which then lost a string of seven by-elections. Through October 2009, it won just once, in Sarawak. Augmenting the BN’s woes were the political coup of former UMNO heavyweight Zaid Ibrahim joining the PKR and the defection of former Malaysian Chinese Association (MCA) leader and health minister Chua Jui Meng to the same party. The BN finally reversed the pattern of by-election losses with a landslide victory in the Negeri Sembilan state seat of Bagan Pinang on 11 October 2009, when former UMNO Negeri Sembilan supremo Mohd Isa Abdul Samad roundly defeated his Parti Islam Malaysia (PAS) opponent by a majority of 5,435 votes. Certainly, the Bagan Pinang outcome augurs well for the new prime minister and his government. Commentators opined that it had stemmed the political tsunami triggered by the 8 March 2008 general elections. What was interesting was the large non-Malay swing towards the BN, in particular the Indian vote, which constituted some 21 per cent of that constituency. However, actual physical fighting between UMNO and PAS supporters in the constituency also showed the intensity of intra-Malay politics. The Bagan Pinang result seems temporarily to seal a north-south divide in Malaysian politics which will remain for most of 2010 and a little beyond. The Perak situation is on hold and arguably unpredictable, but Pakatan control of Penang, Kedah and Selangor has largely firmed

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POLITICAL OUTLOOK up. Kelantan on the east coast will be PAS terrain for a long time to come. In short, Malaysia’s nascent two-party system will remain in place until the next general election. This likelihood comes despite the fact that both the BN and the Pakatan coalitions are facing internal problems. Pakatan leader Anwar Ibrahim’s second sodomy trial resumes in November 2009. It will dominate the BN-Pakatan political fisticuffs well into 2010. The continued haemorrhaging of BN component parties, with interminable leadership struggles in the Malaysian Indian Congress (MIC) and MCA, is bound to affect the BN. But the Indianoriented Makkal Sakti Party launched in October may be a sop for the BN’s woes. Sabah and Sarawak remain stable, although one party there, the Sabah Progressive Party (SAPP), has left the BN. A state election is due to be called in Sarawak in 2011. Health permitting, Malaysia’s longest serving chief minister, Taib Mahmud, looks likely to remain in the driver’s seat there. There is no guarantee that a new indigenous party, the Parti Rakyat Sarawak (PRS), which appears to be generating a new round of “Dayakism”, can help the politically divided indigenous communities of Sarawak. Still, if the PKR patches up internal squabbles, the state could be fertile ground for Pakatan inroads in the not too distant future. The party nevertheless faces new problems in Sabah, with Jeffrey Kitingan quitting his post as a PKR vice president at the end of October 2009. Lopsided centralized financing means that federal-state relations in Malaysia tend to trump state-level political mobilization. The Pakatanrun state of Penang has had its share of problems, but with its mature industries, services and tourism, this state seems to have a working relationship with the new premier. He has approved a RM250 million refurbishing of its international airport and a RM60 million upgrading of Penang Hill’s funicular railway. The construction of the multi-billionringgit, 22.5-km-long second Penang bridge — the longest span in the region — is also ongoing but will see a delay in opening till 2013. Civil society groups in Selangor continue to ask for the “third vote”, that is, locally elected city councils and local authorities. According to some legal interpretations, the Local Government Act of 1976 leaves

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THE ASEAN-10 open an option for state governments to “opt out” of the abolition of elected councils. That is, some councils could have partially or totally elected memberships. Some groups argue that Pakatan-governed states like Selangor and Penang should set the example of implementing elected local governments even before the next general elections. If such a development takes shape this could certainly lead to more effervescent and more pluralist Malaysian politics in the immediate future. Meanwhile, a Merdeka Centre opinion poll carried out in September and October 2009 showed how Malaysians viewed the state of their country and its political leadership, while offering hints on what could and should be expected in the short term. With a 56 per cent approval rate, the new premier suffered a 9 per cent drop in popularity from six months earlier. However, a large 21 per cent of those polled had no opinion or did not respond. What was interesting was that Indians and Malays were by far more approving than Chinese, who gave the premier a mere 36 per cent of their endorsement in the poll. About 47 per cent felt the country was moving in the right direction, as against 34 per cent who said it was not. More Malaysians appeared convinced of the viability of Pakatan at the state level (46 per cent) than were convinced of its viability at the federal level (32 per cent). The media spin has been to show a more astute, “thinking” prime minister in Najib, particularly after the successful conclusion of his first UMNO Assembly as party president, when all resolutions were passed in the twinkling of an eye, including one eliminating weighted nominations for the president’s post. Moreover, there was no keriswaving, and the UMNO Youth chief put on a conciliatory face, calling for a debunking of the Malay siege mentality and for Malay leadership instead. Some commentators are speculating on a possible early general election, in the context of a recovering economy. It is obvious that 2010 will prove important both for Prime Minister Najib and opposition leader Anwar. What one gains could well be what the other loses. This said, Malaysian politics would seem set to remain somewhat fluid but fairly stable all the way till 2013. The two-party system has come to stay, and, given that the Pakatan will be formalizing itself as a political entity, the political choices for

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POLITICAL OUTLOOK Malaysians will grow clearer and perhaps more meaningful in the future than in the past.

Myanmar By Richard Horsey The year 2010 looks set to bring the most important political changes in Myanmar for a generation. These changes will not necessarily be for the better, but their significance should not be underestimated. Multi-party elections, the first in twenty years, have been announced, although at the time of writing the date had not been fixed. The elections will bring into force a controversial new constitution that seeks to institutionalize the military’s political role and establishes a slew of new political structures and institutions. The ageing senior leaders of Myanmar — Generals Than Shwe and Maung Aye as well as many other members of the State Peace and Development Council junta — will either retire following the elections or move to ceremonial positions, handing over the reins of power to a new generation. These two major transitions — generational and constitutional — will inevitably alter the political landscape in fundamental and somewhat unpredictable ways. The elections are unlikely to be free or fair. While the long-awaited electoral legislation is yet to be promulgated, it will surely place heavy restrictions on campaign activities by political parties. Current draconian curbs on freedom of speech and assembly are unlikely to be lifted. And while the junta has given indications that it will release political prisoners before the elections, it seems that many of its most vocal critics, including Aung San Suu Kyi, will remain in detention. Indeed, since late 2008 there has been a marked increase in the arrest and incarceration of political activists in what is widely seen as an attempt to “clear the decks” in the run-up to the elections. Nevertheless, it is possible that even the more prominent political prisoners could be released shortly before the polls, provided that the regime feels that it has the situation sufficiently under control. In the elections, voters will cast three separate ballots: for representatives to each house of a bicameral “Union” legislature, as well

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THE ASEAN-10

MYANMAR Land Area:

678,675 sq. km.

Population (2008 World Bank data):

49,190,000

Capital:

Naypyitaw

Type of Government:

Military government

Head of State:

Senior General Than Shwe

Head of Government:

Prime Minister Thein Sein

Next Election:

2010

Currency Used:

Kyat

US$ exchange rate on 16 November 2009:

US$1 = 6.42 kyat (official rate)

for representatives to one of fourteen regional legislatures. One-quarter of the seats in all these legislatures will be reserved for military appointees. The two most powerful positions in the country will be the president and the commander-in-chief of the Myanmar Defence Services. The Union legislature will select the president from among three persons — one nominated by the upper house of the legislature, one by the lower house, and one by the legislature’s military appointees. The commander-in-chief is an unelected position. It is important to note that the cabinet will not be composed of elected members of the legislature, but rather of appointees named by the president. In the case of the key security ministries, he will make those appointments in “consultation” with the commander-in-chief. Despite the likely restrictions and possible risks, the prospect of the first elections in twenty years has galvanized political activity in the country. A number of veteran politicians, members of prominent families, and younger individuals will establish political parties to contest the elections or run as independent candidates. Many of these will occupy a political “middle ground”, not aligned with the regime but adopting less confrontational approaches than the present-day

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POLITICAL OUTLOOK opposition. This development could prove crucial, as the military will regard these parties as less of a threat. It may, therefore, be less concerned about the prospect of their winning legislative seats. It may indeed view them as viable partners in a gradual transition to greater civilian rule. It appears that few of the opposition parties that remain registered from the 1990 elections will contest the coming elections. Several smaller opposition parties have indicated that they will boycott the polls, and others — including the National League for Democracy (NLD) — have yet to take a final decision; there are divisions within the latter party on this issue. (Significantly, the electoral legislation and rules are likely to provide that parties that fail to contest the elections, or which do not field candidates in a minimum number of constituencies, will be deregistered.) Whatever the outcome, and regardless of whether the NLD decides to contest them, the elections may well mark the end of the party’s pre-eminence in the opposition. Twenty years on, its mandate from the 1990 elections — however unfairly denied — can no longer be the basis of its political platform, and it is doubtful whether the ageing leadership will be able to revitalize the party, or give the space to younger members to do so. However, the status and popular appeal of Aung San Suu Kyi will mean that she continues to be the symbol of the hopes and aspirations of the Myanmar people, and a key to achieving them. Tensions between the regime and non-Burman ethnic groups will remain high in the lead-up to the elections. Those groups are deeply unhappy with the new constitution, as it provides for only very limited powers at the regional level. Nevertheless, most groups see possibilities for somewhat greater space to address ethnic concerns in the new structure. They feel that the best way to expand that space is through participation in the process. Ethnic groups that have cease-fire agreements with the regime, as well as those that are still fighting, will try to retain their arms. But most will endorse — overtly or tacitly — independent candidates or ethnic parties. Myanmar’s “cease-fire groups” face increasing pressure from the regime to disarm or transform themselves into “border guard forces” under the partial

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THE ASEAN-10 command of the country’s armed forces. Although both sides are keen to avoid a resumption of major hostilities, the government’s September 2009 take-over of the Kokang area on the Chinese border has alarmed other cease-fire groups. It is possible that additional such groups could face a similar fate if they reject pressures to comply with the junta’s proposals. The Wa remain the most powerful cease-fire group, and any attempt to move against them is likely to lead to major hostilities. Stepped-up military operations against an increasingly fragmented Karen National Union, and against other insurgent groups, are likely in the pre-election period. The way in which the regime decides to handle the ethnic question now will have major medium-term implications. A careful approach could promote political rather than military solutions. But a poorly conceived approach could set the stage for another protracted period of conflict. Government decision-making is set to seize up as the elections begin to dominate the focus of the junta, key ministers resign to run for political office and civil servants become unsure of the postelection political direction and nervous about how their decisions will be judged. This paralysis will create some difficulties for humanitarian agencies. Similarly, much-needed policy reform to address the dire social, economic and humanitarian situation in the country will be left to the new government to tackle. Further civil unrest of the type seen in late 2007 cannot be ruled out, but is very unlikely to lead to any positive outcome. In the realm of international relations, economic and political ties between Myanmar and the region will change little, and the general view of these countries is that imperfect elections are preferable to the status quo. The West will continue to criticize the process. It has, however, little leverage with which to influence that process. It is becoming increasingly clear that two decades of sanctions have been ineffective at best, and probably counter-productive. The United States in particular is searching for an alternative approach, in the context of its renewed focus on Asia, and it has signalled that it is ready to embark on a gradual process of re-engagement with Myanmar. It remains to be seen whether the European Union will be able to reach consensus on

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POLITICAL OUTLOOK a similar approach; much depends on the outcome of the 2010 British elections, and on the policies of any new government in London. It will be important for the West to convey clearly to the new Myanmar leaders that a renormalization of relations is possible, provided that there can be some progress on important concerns over human rights and governance. However, many countries will feel constrained in sending such a message in the wake of flawed elections. Western policy may thus remain largely symbolic and reactive. The United Nations secretary general and his special adviser on Myanmar are unlikely to make much head-way in the pre-election period, but the UN process could be of great importance after the elections in convincing the new Myanmar leadership to adopt a more open and liberal approach, and in pushing a process of such change forward. The year 2010 will offer important new opportunities to promote change in Myanmar, but the multiple challenges facing the country should not be underestimated. Decades of conflict and decline will take many years to reverse, even in a best-case scenario, and the road will be bumpy.

Philippines By Patricio Abinales Annual reports on the challenges facing the Philippines are beginning to sound like a broken record. One already knows the essential — and quite painful — elements of the country’s year-end report and outlook. Just change the year and the disturbing descriptions found in the 2009–2010 edition of this volume continue to ring true: the Philippines has the same weak economy “characterized by fragile growth and persistent inequality … sustained mostly by the remittances of a huge army of overseas Filipino workers”. Its government continues to be characterized by “feckless leadership, political illegitimacy, systemic corruption, pervasive politicking and gridlocked policy-making … compounded by continuing communist and secessionist rebellions” and the terrorism of the Abu Sayyaf and “other lawless groups”.

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THE ASEAN-10

PHILIPPINES Land Area:

300,000 sq. km.

Population (2008 World Bank data):

90,348,000

Capital:

Manila

Type of Government:

Presidential republic

Head of State:

President Gloria Macapagal Arroyo

Next Election:

May 2010

Currency Used:

Philippine peso

US$ exchange rate on 16 November 2009:

US$1 = PhP46.67

The only detail to add to this persistently dark portrait is the horrific destruction wreaked by two typhoons on Metropolitan Manila and certain provinces in northern Luzon. The destruction of cities, towns and villages, including vivid incidents of people victimized by the floods, were captured by cell-phone cameras and transmitted via the Internet. A straightforward and parsimonious new version of this yearly report could therefore simply restate past prognoses of a country with the potential of a failed state, unravelling social cohesiveness and a “damaged culture” (to borrow a controversial phrase from writer James Fallows). However, two questions may still be asked: Are there other themes about the Philippines that can provide us with insights into the country’s fate? And are there any positives that offset her perennially gloomy condition? The second question receives an immediate response from scholars and political observers who point to the proliferation of non-government organizations (NGOs) and a small but growing number of administrative enclaves with strong left-wing or reformist politicians as evidence of some good news. However, the slow growth of the latter, the increasing incidence of compromise by some “people’s organizations”

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POLITICAL OUTLOOK with “traditional” politicians and the Stalinist communist movement’s unrelenting attacks against such “reformists, renegades and heretics” indicate that this populist current is unlikely to become dominant in the immediate future. It is nonetheless a source of comfort for many a democrat that a powerful civil society appears able to balance the state, and its presence sustains the faint hope that the country’s democracy will survive. However, it is the first question that is actually more intriguing because it compels us to probe deeper “inside the political system” to determine whether there is more to learn from the repeated stories of corruption, inefficiency and personal/family ambition. While there is no dispute that the presidency is the most apt symbol of the weak Philippine state, Gloria Macapagal Arroyo’s use of the executive branch has been notably distinct from that of her predecessors. Like other presidents, Arroyo has used the office to advance and defend both her patrimonial and programmatic agendas. Recurring stories of corruption in high places have dogged her almost decade-long administration, and Arroyo stands to end her term with the unsavoury distinction of being the most unpopular president in Philippine history. But public anger has never translated into potent electoral or extra-legal action against this president. No element of the anti-Arroyo opposition — from the Communist Party to traditional politicians to politicized military officers — has been able to turn mass opprobrium into a movement to replace (or “oust”, as the communists put it) Arroyo. Every serious attack on her presidency has only strengthened her position. Most recently, the death and apotheosis of former president Corazon Aquino and media revelations that Arroyo’s deputy national security adviser had beaten up his mistress (and refused to apologize) forced the president to back away from a purported plan to stay in power by changing the form of government. Neither episode, however, was toxic enough to undermine her fatally. Arroyo will run for a seat in the House of Representatives in the May 2010 elections. With no precedent on hand, even the Supreme Court — the only institution with the legal authority to undermine her — is not expected to block

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THE ASEAN-10 Arroyo’s bid to become the first sitting head of state to campaign for another elective post. Opponents and observers have been too caught up in highlighting Arroyo’s lack of popularity to say much about her adroit transformation of a weak state apparatus into a weapon of political domination. This silence may also be due to inordinate interest in political and institutional combat at the centre (Manila), when it has always been clear that Arroyo’s power lies in her intimate links with the provinces. Her shrewd move to allow local governments their constitutional share of national tax revenues and her patronage ties with powerful provincial bosses and clans whose relatives control the lower chamber of the national legislature are just two of the most potent weapons Arroyo has used. These are resources and connections that many of her opponents have lacked. Of the top leaders in the traditional opposition, only businessmen Eduardo Cojuangco and former Senate president Manuel Villar can match Arroyo’s largesse, but they have not been concerned with ousting her from office. Both are more focused on preparing for the 2010 elections, putting all their energy and money into building the nationwide patronage networks necessary to win. The Communist Party is the other force with the capability to mount a nationwide challenge, but its main forces are concentrated in the countryside, and its urban and town cadres are unable to match the rural expansion of its New People’s Army. This situation means that the revolution has a long way to go. With her own strengths and a disjointed opposition, Arroyo has had no problem dispelling every attempt to remove her from the presidency. This is an unusual feat given her extended term; unseating presidents through a combination of constitutional and extra-legal means has been an enduring feature of Philippine politics in the late twentieth and early twenty-first centuries. Two of Arroyo’s predecessors — Ferdinand Marcos and Joseph Estrada — were unseated through just such means. Thus, despite presiding over a political economy in perpetual crisis, the presidency of Gloria Arroyo has been largely secure. It shows us

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POLITICAL OUTLOOK that the very weakness of central state structures — especially their tendency to be penetrated and controlled by patrimonial elites — can help a leader establish an ascendant position over networks of power and authority outside of the capital. This development should force those who argue that weak states do not have the capacity to organize consent and cohesion to take pause. More than any other president, Arroyo has learned to appreciate the lesson here. She learned the pitfalls of over-centralization that eventually did in the Marcos dictatorship and was profoundly sensitive to how local power, if mishandled, could derail development programmes and damage one’s political standing. Attention to the provinces is the legacy that Gloria Macapagal Arroyo will bequeath to her successor. And from the way that the leading candidates for the presidency are putting all of their resources in courting provincial clans, bosses and warlords, it is clear that they appreciate the Machiavellian dexterity of the country’s second-longest serving president.

Singapore By Terence Chong Two months before the May 2006 general elections, the Straits Times published an informal poll of young Singaporeans to highlight issues that were important to them before they took to the ballot box. The poll showed, rather predictably, that “cost of living” and “employment” concerns ranked high among the concerns of the respondents, at 89 per cent and 73 per cent respectively. However, the brow-raising statistic was that 40 per cent of young citizens said that issues of “political freedom” and “freedom of expression” would sway their vote. This admission was not surprising even for a people famed for its political apathy and economic pragmatism. One of the many unique characteristics of Singapore politics is the desire to consume political pluralism without necessarily wanting a change in government. Like any developed nation with First World infrastructure, many Singaporeans, especially those born after

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THE ASEAN-10

SINGAPORE Land Area:

692 sq. km.

Population (2008 World Bank data):

4,839,000

Capital:

Singapore

Type of Government:

Parliamentary democracy

Head of State:

President S.R. Nathan

Head of Government:

Prime Minister Lee Hsien Loong

Next Election:

2012

Currency Used:

Singapore dollar

US$ exchange rate on 16 November 2009:

US$1 = S$1.386

independence, desire the substance of mature democracies such as political pluralism, checks and balances, and contestation. However, given the central role of the state in the economy, the opposition’s inability as yet to form a viable government and the general competence of the People’s Action Party (PAP) administration, many may be unwilling, at least for the time being, to exercise the right to vote in an alternative government. The ruling PAP is thus tasked with the balancing act of finding ways to open up spaces for political discourse without necessarily loosening, or jeopardizing in the near future, its grip on power. Four years after the 2006 general elections, several regulatory changes have been announced to satisfy the local political consumer’s thirst for political freedom and freedom of expression. Indoor events that do not deal with the topics of race and religion may proceed without a public licence. The ban on public demonstrations has been lifted for citizens at the Speakers’ Corner. The ban on party-political films has been partially lifted. The number of Non-constituency Members of Parliament has been increased from a maximum of six to nine. The Nominated Member of Parliament scheme is now permanent. The

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POLITICAL OUTLOOK number of Single-Member Constituencies will be raised from eight to twelve, while the average number of MPs in a Group Representation Constituency (GRC) team will be reduced from 5.4 members to 5 members. These regulatory changes may be underpinned by a shift in the ruling party’s governing strategy. In the past, when it came to politics, the PAP believed that it was better off nipping potential problems in the bud. Unfettered parliamentary dominance and the unchallenged control of the political arena were deemed crucial to its legitimacy and ability to implement unpopular public policies swiftly. However, with the electorate’s changing demographics, challenges and dissent are now treated as opportunities for younger PAP leaders to react and respond. This approach, to be sure, has less to do with the ruling elite’s own desire for political pluralism than with the realities of the new media and a younger, more sophisticated group of voters. Indeed, the relative political liberalization that these regulatory changes spell will be exploited in the coming year. The local community of opposition figures, civil society activists and independent filmmakers will continue to test the political boundaries, not to mention the resolve of politicos, in the interpretation and appropriation of these regulations. One would expect to see more pro-opposition films and documentaries produced, especially in the lead-up to the next general elections, due by February 2012. And, although the need for a public licence for indoor talks was lifted as early as 2004, growing ideological divisions in Singaporean society will see more groups take advantage of the new rules to mobilize like-minded individuals and garner support. The attempted takeover of a leading civil-society group, the Association of Women for Action and Research (AWARE), in early 2009 offered what may have been an early case in point. There is little doubt that ideological divisions, akin to the so-called “culture wars” in the United States, are emerging in Singapore, with religion — specifically conservative Christianity — playing a key role in accentuating the fissures. At the heart of the AWARE conflict was the apparent fear that society was losing its moral compass. As the city-state continues to globalize, more of

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THE ASEAN-10 these conflicts are to be expected in the coming years as conservatives and liberals compete to set the moral tone for Singapore society. For, as long as religion continues to enjoy “out-of-bounds” status in Singapore, protected from criticism and cultural interrogation, it will remain an unchallenged site for the convergence of the bigoted views of some individuals with regards to sexual minorities or alternative lifestyles, nurturing a moral intolerance that is at odds with the ideologically laissez-faire atmosphere in global cities like New York, London or Shanghai. Moving on, the question on everyone’s lips entering 2010 is whether this will be the year of the next general elections. If so, the PAP will have to negotiate several issues. The economy and employment will remain top priorities. Although there are signs that the economy is recovering, given the end of the recession in the United States, unemployment figures are likely to remain high for the time being. Government leaders fear that, in the near term, the unemployment figure may rise above the 3.3 per cent posted in the second quarter of 2009. Other perennial issues that will set the tone for the elections are the rising cost of living, the widening wage gap, and high ministerial salaries. Observers will also be watching to see if the most wellorganized opposition party, the Workers’ Party, will be able to claim its first GRC or if it will remain hemmed in with a single seat. The Singapore Democratic Alliance’s leader, Chiam See Tong, will similarly attempt to win a GRC. Finally, the wild card in the pack is the Reform Party. Founded by the late opposition veteran J.B. Jeyaretnam, it is now led by his eldest son Kenneth Jeyaretnam. Collectively, the opposition parties on offer provide an interesting mix of styles. The Workers’ Party and the Singapore Democratic Alliance play the role of “loyal opposition”, acknowledging that the PAP is best qualified to lead and campaigning on the need for minor tweaks in an otherwise efficient system. The confrontational politics and civil disobedience practised by the Singapore Democratic Party of Chee Soon Juan represent the appearance of a more marginal group who view the ruling party’s hegemony as a clear obstacle to

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POLITICAL OUTLOOK a more socially and politically equitable society. The Reform Party’s agenda to re-examine the economic and political fundamentals of the Singapore success story suggests a radical re-conceptualization of the country’s future. Whatever the styles, if these opposition parties play their cards right and take advantage of the recently relaxed regulations on political activity in the year ahead, the Singapore voter may edge one step closer to the greater consumption of political pluralism.

Thailand By Duncan McCargo Thailand remains deeply divided between two opposing camps: redshirted supporters and sympathizers of the self-exiled former prime minister, Thaksin Shinawatra, who was ousted from power in the September 2006 military coup; and those who back the country’s “network monarchy”, a loose alliance of the palace, the military, the ruling Democrat Party and their yellow-shirted mass movement, the People’s Alliance for Democracy (PAD). Much of the “pro-Thaksin” support is based in the North and Northeast of the country, while yellow-shirt support centres on Bangkok and the Upper South. Throughout 2009, the red-shirts pressed and sometimes literally besieged the Abhisit Vejjajiva government. Anti-government activity peaked in April 2009, when the red-shirts succeeded in aborting an ASEAN summit at Pattaya. In the Deep South, a violent insurgency that has already claimed more than 3,500 lives shows no sign of abating. Despite growing whispers about an autonomy option in the corridors of civilian power, most elements of Thailand’s security forces continue to deny that the southern conflict is a political problem which could find a political solution. Meanwhile, Thailand’s revered King Bhumibol, now 82, has been in poor health. Social and political divisions that will simmer during the coming year are inextricable from collective anxieties about an impending succession. Few Thais believe that the heir apparent, Crown Prince Vajiralongkorn, would make an ideal successor; and many are privately hoping, against all odds, that the

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THE ASEAN-10

THAILAND Land Area:

514,000 sq. km.

Population (2008 World Bank data):

67,386,000

Capital:

Bangkok

Type of Government:

Parliamentary democracy and constitutional monarchy

Head of State:

King Bhumibol Adulyadej

Head of Government:

Prime Minister Abhisit Vejjajiva

Next Election:

2011

Currency Used:

Baht

US$ exchange rate on 16 November 2009:

US$1 = 33.282 baht

popular Princess Royal Maha Chakri Sirindhorn might assume the throne instead. Thailand faces a range of political challenges in the year ahead. The first concerns the viability and longevity of the current government. The Democrat Party was able to form an administration following backroom factional manoeuvres in December 2008. One faction of the Thaksinite former People’s Power Party (PPP), led informally by ex-minister and heavyweight power broker Newin Chidchob, crossed the floor of parliament when the PPP was dissolved by the courts. But since then relations between Abhisit and Newin’s Bhumjaithai Party have been uncomfortable. Newin’s supporters — who regularly don blue shirts in public displays of strength — now occupy dangerous ground between the yellow-aligned Democrats and the latest ‘red’ party, Puea Thai (PTP). Newin’s opportunistic double-crossing of his former mentor Thaksin has led to an anti-Bhumjaithai backlash in his native Northeast. Recent byelection results suggest that Bhumjaithai will struggle to retain current levels of support. Newin is the man to watch in 2010: will he stick with the Democrats, or renew his alliance with pro-Thaksin forces?

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POLITICAL OUTLOOK The prospect of another general election in 2010 will provide a major test for Thailand’s future political direction. While technically speaking an election could be delayed until the end of 2011, some in the Democrat Party hope that a fresh election might give them a more legitimate mandate, bring a chastened Bhumjaithai into a more robust alliance, and finally demonstrate that the populist appeal of the Thaksin message is waning. Realistically, however, Abhisit must realize that calling an election is a high-risk strategy which could easily open the door for a return of pro-Thaksin forces. Apart from Thaksin in 2005, no Thai prime minister in recent decades has won a second consecutive term in a general election. Democrat support will be undermined by the recent launch of the PAD’s New Politics Party (NPP), led by the media magnate Sondhi Limthongkul. The PAD draws most of its backing from natural Democrat constituencies; and while the NPP stands little chance of gaining many parliamentary seats, those it wins will be largely at Democrat expense. While the NPP’s only realistic hope of power would be an alliance with the Democrats, it would sit awkwardly in any coalition government that included the ultra-pragmatic Bhumjaithai. Related to the question of fresh elections is the larger matter of constitutional revision, framed by even larger notions of “national reconciliation”. For much of 2009, there was broad agreement among the major parliamentary parties that some changes to the controversial, military-initiated 2007 constitution were desirable. Debate centred on whether to create a fully-fledged, all-singing-all-dancing, constitutiondrafting committee to revisit the entire charter, or simply to propose a set of very specific amendments for a national referendum. Among the suggested amendments are the abolition of the party-list system (under which some MPs are elected without specific constituencies, in a modified form of proportional representation) and the revocation of Article 237 (which provides for the dissolution of political parties whose executives have been involved in wrong-doing, and the banning of their executive members from politics for five years). Steps such as the revocation of Article 237 have been portrayed as offering an olive branch to pro-Thaksin forces and thus healing social divisions. The

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THE ASEAN-10 Democrat leadership had hoped to pass a number of constitutional amendments prior to calling an election, so allowing the party to occupy the moral high ground and present itself as the voice of reason and national unity. PTP was initially willing to go along with the plan, but by September 2009 the party was backing away from a simple referendum on amendments and calling for the restoration of the more liberal 1997 constitution. Without some constitutional reform and public concessions to the pro-Thaksin side, Democrat hopes of gaining credit for national reconciliation, to be parlayed into a winning election campaign, seem forlorn. On the face of it, genuine reconciliation between the major factions in Thai politics in the year ahead appears highly unlikely. Pro-Thaksin forces remain deeply hostile to the Abhisit government. While the redshirts saw their ability to stage major anti-government protests severely curbed by the use of the draconian Internal Security Act during the second half of 2009, their resentments and frustrations were unabated. If the Democrats decline to hold an election without passing charter amendments, those frustrations may only intensify during 2010. If Abhisit dissolved the house and were returned to power with a fresh electoral mandate, huge swathes of the Thai population would feel deeply alienated. But if PTP successfully formed a new government following the election, a powerful extra-parliamentary backlash from the PAD and its allies would be on the cards. The succession question looms over all of these speculations. If King Bhumibol were no longer on the throne, the risk of instability and violence would escalate, at least in the short term. In a worst-case scenario, Thailand’s colour-coded conflicts could move well beyond mere party-political preferences, and become linked with alternative monarchical choices. Should such developments ever come to pass, all bets concerning the country’s immediate political future would be off, and Thailand could quickly face nationwide civil conflict, not simply a lingering insurgency in the far South. The possibility of yet another military coup would be very real. In the light of these alarming alternatives, the need for overdue progress on political reforms is rather urgent. Above all, averting calamity might require an open national

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POLITICAL OUTLOOK debate, unfettered by current levels of informal and Internet censorship and by the prevailing lèse majesté laws. If a succession-related crisis could only be pre-empted, a genuine process of national reconciliation would be entirely possible.

Vietnam By David Koh The National Congress of the Communist Party, held every five years, is the lighthouse of politics in Vietnam. With a Party Congress due to be held in 2011, 2010 will bring Vietnam well within sight of the lighthouse’s powerful signal. Political winds will blow strongly. They will carry with them the seeds of changes in policies and in personnel and offer early indications of power shifts among major groups and factions in the Party and the state. Indications in three areas of interest merit particular interest. First, discussions of and debates over the country’s future direction will continue. None of these discussions or debates will concern the role of the Vietnamese Communist Party as the country’s leading political force, as provided for in Article 4 of its constitution. Echoes and noises will be heard from those who would have the Party enshrine this role into precise legislation — legislation that would effectively circumscribe Party power — rather than leaving it so general. But the Party has pre-empted such discussions; it has instructed the Party theoreticians whose work drafting documents for the congress began a year ago that Article 4 is not negotiable. Thee members of the Central Theoretical Council, responsible for drafting the direction-setting documents for the congress, will nevertheless be very busy. Indeed, they will need to work harder than ever to balance the rhetoric of Communist Party and its doctrines concerning such matters as state ownership of the means of production and political control by the Party with the demands of practical reality. This reality, for Vietnam in 2010, includes an economy ever more integrated with the world and a society less and less effectively dominated by Party values. Already, Vietnam’s private sector plays such a pivotal

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THE ASEAN-10

VIETNAM Land Area:

332,000 sq. km.

Population (2008 World Bank data):

86,211,000

Capital:

Hanoi

Type of Government:

Socialist republic

Head of State:

President Nguyen Minh Triet

Secretary General of the Communist Party of Vietnam:

Nguyen Duc Manh

Head of Government:

Prime Minister Nguyen Tan Dung

Next Election:

2011

Currency Used:

Dong

US$ exchange rate on 16 November 2009:

US$1 = 17,875 dong

role in the country that, in private conversations and closed-door discussions, no one seriously entertains thoughts of re-nationalization of major means of production or of state enterprises serving as an engine for the economy. On the other hand, the leading role of the state in the economy, a shining tenet of communism, will continue to provide a political foundation for those enterprises. Vietnam’s leadership understands that, in other countries, state-owned enterprise does not invariably suffer bad management. Its challenge is to improve the management of state enterprise in Vietnam and thus to enhance the credibility of state ownership of some means of production. In the meantime, state ownership will continue to serve as a haven for bad management. Exceptions notwithstanding, the sector’s loss-making firms represent a serious budgetary drain. The draft documents for the national Party Congress are to be presented to the wider population for comment in October 2010, after the conclusion of most serious internal preparatory discussion and debate. Nevertheless, the possibility remains that Party members or

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POLITICAL OUTLOOK factions not satisfied with the outcomes of that debate and discussion will raise sensitive issues at the 2011 Party Congress itself. The decision to raise those issues will depend on delegates’ political courage and on the likelihood of support among participants in the congress. A second area in which to look during the run-up to the congress for indications of future direction of the country is the extensive expected personnel changes at the district, provincial and ministerial levels. In advance of the national Party Congress, districts will hold their own congresses, to choose Party leaders and delegates to provincial-level congresses. This process will continue at the provincial level and within ministries; provinces and ministries will also hold congresses and select leaders and delegates. Vietnam is thus entering a period of competition for major positions in the Party and in the government hierarchy at these various levels, though according to the norms of the Vietnamese Communist Party and within its programmatic boundaries. This period will determine the fortunes and affect the careers of leaders at the district and provincial levels. A third area of political action in the year ahead will enliven the action in the first two areas. While Party and government officials fight for votes at district and provincial congresses, news of scandals, of corruption and of bad governance is likely to grow — or shrink — depending on the ability of the Party factions in each locality either to disseminate news advantageous to themselves or to control reporters’ coverage of disadvantageous news. Negative coverage poses strong challenges to the moral legitimacy of its targets and to their fitness for leadership. The inability of local Party leaders to control such coverage could give way to the closest that Vietnamese politics comes to trench warfare. At the national level, clampdowns on the mass media in 2008 and 2009 and on their coverage of government policies mean that the decibel level of reporting in the advent of the 2011 Party Congress is likely to be considerably lower than during 2005, in the advent of the 2006 Party Congress. Still, the major scandal of that earlier congress grew out of gambling in a park on the part of a few businessmen, not out of any deliberate investigation into the networks of high-level

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THE ASEAN-10 corruption or into the extravagant — even debauched — lifestyles of the group of top officials eventually dropped from candidacy at that congress. Success in muting Vietnam’s mass media has not left it dead. Journalists keen to see greater accountability and transparency in the selection of leaders are likely to make full use of the smallest scoop. In a fourth area, that of foreign relations, Vietnam will chair the ASEAN Standing Committee during 2010. Indications are that it intends to focus the Association’s energies on the fulfilment of members’ obligations and commitments under its charter. Vietnam’s foreign policy organs are doubtless up to the task of presenting concrete programmes and plans to promote this end. The likelihood that Hanoi, with its continued and unmistakable commitment to ASEAN values and the realization of the ASEAN Community, will provide much needed leadership to the association in the year ahead is therefore high. In summary, then, 2010 will bring steady, strong, and shifting political undercurrents in Vietnam’s districts, provinces and ministries and the completion of draft documents to be approved by the national Party Congress in 2011. News of scandals and corruption could well return, though such news may be less likely than half a decade ago. For corruption or wrong-doing in high places to have significant political impact might require a scandal of such magnitude that the Communist Party is forced to allow investigations to become known and to take their course. In the realm of foreign relations, Vietnam will celebrate and make the most of its leading role in ASEAN during the year.

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ECONOMIC OUTLOOK

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64

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REGIONAL ECONOMIC OUTLOOK By Sanchita Basu Das

S

outheast Asia has been at the mercy of the global financial and economic crisis, generated from the United States and United Kingdom, for the most of 2009. While it was not directly hit by the liquidity crunch, it did get affected by the collapse of demand for Southeast Asia’s exports. It further got a blow through reduced tourism and slower demand for immigrant labor services from the West. In addition to the real economy, the financial sector of the region suffered from the loss of confidence and disruption in trade credit. The more open economies — Singapore and Malaysia — ailed the most with the contraction in trade and subsequently in industrial production. This was mainly because the firms were drawing down

REGIONAL ECONOMIC OUTLOOK • 2009 economic growth for Southeast Asia is expected to dip sharply to 0.1 per cent before regaining a gradual and cautious pace in 2010 and 2011. • Inflation is likely to remain subdued in 2009 and is expected to pick up on gradual economic recovery in 2010 and 2011. • Current account surplus (as a percentage of GDP) for the region will be narrowed on higher imports, offsetting the moderate rise in exports in the next two years. • Several risks remain on the downside: hasty withdrawal of stimulus measures, the U.S. housing market, flu pandemics and rally in asset prices.

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ECONOMIC OUTLOOK their reserves and reducing production. The problem got aggravated as the domestic demand remained weak and investments trailed. Unemployment in much of the region rose, particularly in Singapore and Malaysia. Thailand’s economy, besides its dependence on exports, also lost confidence amongst consumers and investors due to severe political turmoil for most of the year. This prompted most of the Southeast Asia’s governments and central banks to implement stimulus measures through fiscal and monetary expansion. Households were given tax cuts and income support to increase consumption and hence national income. Monetary authorities reduced interest rates to provide liquidity and boost expenditures and investments. For example, Bank Indonesia brought down its policy rate by 300 basis points from December 2008 to August 2009 to a record low of 6.5 per cent. Much of the monetary policy easing was possible as the region remained soft on inflation and commodity prices. All these measures finally arrested the decline in GDP of the region and presented some “green shoots” of growth in the second half of 2009. For example, Singapore’s GDP emerged from a contraction of 9.5 per cent year-on-year (y/y) in the first quarter to an expansion of 0.8 per cent y/y in the third. GDP growth in Malaysia posted a 3.9 per cent y/y contraction in second quarter, a marked improvement from –6.2 per cent in the preceding quarter. Month-on-month data for industrial production indicated a V-shaped recovery for Indonesia, Malaysia, Philippines, Thailand and Vietnam. This is generally to meet domestic demand generated by the government’s stimulus package. The deterioration in the labour market was also stalled as industrial production picked up. In Southeast Asia, retail sales picked up in Malaysia and Vietnam. Tourism also seems to have come out of its worse in Malaysia. This and the improving global economic outlook supported the Southeast Asian stock markets to edge higher (Figure 1). The Singapore stock exchange jumped 70 per cent by October from its low in February 2009. Thailand stock market, SET, swelled more than 65 per cent since March 2009. The currencies also gained confidence from the growth

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Figure 1: Relative Performance of ASEAN-5 Main Stock Market Indices, 2005–2009 280.0

January 2005 = 100

250.0 220.0 190.0 160.0 130.0 100.0

Singapore STI Bangkok SET Manila PSE Composite

Sep-09

Feb-09

Jul-08

Dec-07

May-07

Oct-06

Mar-06

Jan-05

40.0

Aug-05

70.0

KLSE Composite Jakarta Composite

SOURCE: Bloomberg.

recovery with the Thai baht and Singapore dollar strengthening more than 4 per cent and 6.5 per cent since the start of the year (Figure 2). However, central banks in the region intervened to ameliorate any significant appreciation pressures from capital inflows into the region’s asset markets. This is because, for many countries in the region, maintaining export competitiveness still remains a key priority. Given these facts and figures, economic growth in the Southeast Asian region is expected to slow to 0.1 per cent compared to 4.1 per cent in 2008 (Asian Development Bank 2009). While Malaysia, Singapore and Thailand will contract the most, Indonesia and Vietnam will grow around 4 per cent each. In Indonesia, election-related spending from April to July 2009 helped to maintain a respectable growth. Other economies that are expected to shrink in 2009 are Brunei on lower energy exports and Cambodia on vulnerable tourism sector (Figures 3 and 4).

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ECONOMIC OUTLOOK Figure 2: Relative Performance of ASEAN-5 Currencies to the U.S. Dollar, 2005–2009 140.0

January 2005 = 100

130.0 120.0 110.0 100.0 90.0 80.0

MYR/USD PHP/USD

09 Se

p-

09 Fe

b-

8 l-0 Ju

D

ec

ay

-0

-0

7

7

6

SGD/USD IDR/USD

M

6

-0 ct O

-0 ar M

05 gAu

Ja

n-

05

70.0

THB/USD

SOURCE: Bloomberg.

Figure 3: Real GDP Growth in the ASEAN-5 Countries, 2005–2011 9.0 7.0

(% y/y)

5.0 3.0 1.0 –1.0 –3.0 –5.0

2005

2006

2007

Singapore Philippines

2008

2009*

2010*

Malaysia Indonesia

2011*

Thailand

NOTE: * 2009, 2010 and 2011 are estimated GDP growth rates. Source: ADB and author’s estimate.

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Figure 4: Real GDP Growth in Brunei, Cambodia, Laos, Vietnam and Southeast Asia, 2005–2011 14.0 12.0 10.0

(% y/y)

8.0 6.0 4.0 2.0 0.0 –2.0

2005

2006

2007

2008

Southeast Asia

2009*

2010*

Cambodia

Lao People's Dem. Rep.

2011* Vietnam Brunei

NOTE: * 2009, 2010 and 2011 are estimated GDP growth rates. SOURCE: ADB and author’s estimate.

As most of the economies in Southeast Asia are expected to see contraction or low growth, inflation will remain subdued in 2009. While Thailand may experience a mild deflation for the full year, Vietnam may end up with the highest inflation of 6.8 per cent y/y in the region. The regional inflation in 2009 is expected to be 2.5 per cent vis-à-vis 8.6 per cent y/y in 2008 (Figure 5). As the domestic demand fell for the Southeast Asian economies, industrial production was lowered and so was the demand for imports. This decline in imports was much sharper than the fall in exports in several economies, which supported their trade balance. As for the aggregate current account surplus, ADB projected a decline to 5.4 per cent of GDP from 6.8 per cent of GDP in 2008 (Figure 6). Moving into 2010–11, there will be a gradual but cautious recovery. While the recovery of the U.S. economy will be weak, China and other Asian countries will play a bigger role for the Southeast Asian region

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ECONOMIC OUTLOOK Figure 5: Inflation Rate in Southeast Asian Economies, 2008–2011 24.0 19.0 (% y/y)

14.0 9.0 4.0

2008

So

2010*

tn

am

nd

Vi e

ai Th

ng Si

2009*

la

e or

s pi

ap

ne

a Ph

M

ilip

al

ay

si

os La

a si ne

do

In

bo

di

a

ei un

ut

C

am

Br

he

as

tA

si

a

–1.0

2011*

NOTE: * 2009, 2010 and 2011 are estimated inflation. SOURCE: ADB, IMF and author’s estimate.

Figure 6: Current Account Balance in Southeast Asian Economies, 2008–2011 50.0 40.0 (% of GDP)

30.0 20.0 10.0 0.0 –10.0

So

2008

am

Vi e

tn

nd la

or e

Th ai

ng ap

ne s

2009*

Si

ilip pi

ia ys

Ph

al a

La os

2010*

M

In do ne si a

di a

am bo

un ei

C

Br

ut he as

tA

si

a

–20.0

2011*

NOTE: * 2009, 2010 and 2011 are estimated figures. SOURCE: ADB and author’s estimate.

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to emerge from its current situation. The Asian region itself is likely to generate more demand each year relative to other economies, like the United States. Expected higher oil prices will benefit countries like Brunei, Malaysia and Indonesia. In the next few years, the region is likely to witness a structural shift from export-led growth to more internally dependent growth. Meanwhile, the economic activities of the countries will be supported by more fiscal stimulus packages that would impart higher consumption demand, trade flows and hence growth. Monetary policies may be less expansionary as the year progresses. That said, all the Southeast Asian economies together are expected to grow by 4.3 per cent y/y in 2010 (ADB 2009) and another 5.4 per cent y/y in 2011 (author’s estimate based on IMF data). This is much lower than the average growth of 6.3 per cent attained during 2006–07. Inflation will pick up on gradual economic recovery, higher energy prices and low base effect. The current account surplus (as a percentage of GDP) for the region will be narrowed on rapidly rising imports, which is expected to offset the moderate increase in exports. However, several risks remain to the recovery outlook of Southeast Asia. Firstly, there are huge debates on how to withdraw the fiscal and monetary stimulus measures. Policy-makers must withdraw them slowly and cautiously without jeopardizing the nascent recovery while maintaining a low inflation. Secondly, although the GDP growth indicator suggests that the U.S. economy has bottomed, there are still concerns for the U.S. housing market. As the pick up in employment tends to lag the economic recovery, there is still rise in foreclosures as workers lose their jobs and wages remain flat. Thirdly, there could be a sharp run-up to the global oil prices in second half of 2010, as the recovery gains a little momentum. Fourthly, flu pandemics, like swine flu, avian flu or SARS, can have dire economic consequences. Finally, rally in asset prices (equity and property markets) in anticipation of economic recovery supported by loose monetary policy could be a source of major concern in future. REFERENCES Asian Development Bank, Asian Development Outlook Update, September 2009. International Monetary Fund, World Economic Outlook, October 2009.

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FACING THE STORM THROUGH THE MARKET: HARNESSING CARBON MARKETS TO POWER SOUTHEAST ASIA’S GREEN DEVELOPMENT By Catherine Wong Mei Ling The Vulnerabilities Southeast Asia is one of the most vulnerable regions to the impacts of climate change. With its long coastlines, high concentration of population and economic activity in coastal areas, and heavy reliance on agriculture, natural resources and forestry, the region stands to lose 6.7 per cent of its combined gross domestic product (GDP) each year by 2100 if emissions continue at “business-as-usual”.1 According to a 2009 Asian Development Bank (ADB) report, sea levels in the region will rise by 40 cm by 2100; Indonesia will likely lose 2,000 small islands by 2030 and the Philippines will see a 1 metre rise in sea levels by 2080, inundating 5,000 hectares of the Manila Bay area, and affecting 2.5 million people. By 2015, 55 per cent of greenhouse gas (GHG) emissions are projected to come from Asia’s cities due to a 44 million annual urban population increase. This will make the region one of the main contributors to global GHG emissions. The cost of climate change adaptation and mitigation is staggering, but the funding available to meet these needs are even more alarming — less

72

•

Southeast Asia will be one of the regions hardest hit by climate change, with an estimated loss of 6.7 per cent of combined GDP each year by 2100 due to climate change.

•

Funding for mitigation and adaptation efforts are currently at 5 per cent of projected needs, but carbon markets can potentially be a key source of funding.

•

China and India currently dominate the carbon market with 60 per cent of total Clean Development Mechanism (CDM) projects, but investors and project developers are starting to look to Southeast Asia for first-mover advantages in new markets.

•

CDM financial flows, however, tend to gravitate towards sectors with low-development impact. Therefore governments should target particular CDM sectors and design policies to make investments in these areas conducive and attractive.

•

Regional cooperation will be key to securing a low-carbon growth and development.

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Figure 1: Estimated Annual Climate Funding Required for a 2°C Trajectory Compared with Current Resources Mitigation: $140 billion– $675 billion

$ billions 700 600 500 Median: $400 billion

400 300 200 100 0

Funding for adaptation and mitigation: $10 billion 2008–12

Adaptation: $30 billion– $90 billion

Median: $75 billion 2030

SOURCE: World Development Report, Development and Climate Change (2009).

than 5 per cent of the projected needs. Funding available (up to 2012) for mitigation efforts amount to US$8 billion a year as opposed to the annual US$400 billion needed by developing countries. The funding gap for adaptation is even more jarring — the potential adaptation finance now available is less than US$1 billion a year, compared with the annual US$75 billion required (see Figure 1).2 A Market Solution The Kyoto Protocol’s Clean Development Mechanism (CDM) — a market-driven approach to reducing carbon emissions — can be a key source of funding for climate change mitigation and adaptation. The CDM, created under the Kyoto Protocol, allows industrialized countries to meet their carbon reduction targets

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ECONOMIC OUTLOOK

FACING THE STORM THROUGH THE MARKET (continued)

by investing in projects that reduce emissions in developing countries. Under this mechanism, projects in developing countries can earn certified emission reduction (CER) credits (or carbon credits) which can then be traded and sold to industrialized countries.3 The CDM market is currently dominated by China, and India dominate with close to 60 per cent of all CDM projects registered with the UNFCCC (the international governing body for CDM projects) and more than 67 per cent of total CERs issued (see Figures 2 and 3).4 Southeast Asia, on the other hand, is lagging far behind in its ability to attract CDM investment. Several endogenous factors account for this. The region lacks strong and reliable reporting regimes, which translates into the poor availability of good quality data needed by validators to register a project. This contributes to problems of defining project additionality, baseline determination and assessing CER (carbon credit) delivery risk. Local entrepreneurs looking to venture into the CDM market are also frustrated by poor language skills and technical know-how. They are further disadvantaged by their inexperience with international standards of project

Figure 2: Share of Registered CDM Projects by Host Country Registered project activities by host party. Total: 1,895 Others (16.15%) Republic of Korea (1.79%) Chile (1.85%) Philippines (2.11%) Malaysia (3.48%)

China (34.99%)

Mexico (6.28%) Brazil (8.71%) India (24.64%) SOURCE: http://cdm.unfccc.int. Accessed on 12 November 2009.

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Figure 3: Share of Total CERs Issued by Host Country

CERs issued by host party. Total 345,296,856 Mexico (1.76%) Others (7.25%) Brazil (10.43%)

China (46.26%)

Republic of Korea (13.41%)

India (20.89%)

SOURCE: http://cdm.unfccc.int. Accessed on 12 November 2009.

monitoring and reporting. This affects their ability to get projects approved and starves good ideas from the funding needed to help them take off. Furthermore, local financial institutions are unsure of how to treat Emission Reduction Purchase Agreement (ERPA) and prospective carbon revenue streams in their evaluation of loan applications. They also do not accept carbon credits as collateral. In the less developed countries in the region like Cambodia and Laos, the unreliable legal environment, primitive infrastructure and poor investment climate have caused investors to shy away. Nevertheless, there are signs that CDM flows are headed for Southeast Asia even as the Chinese and Indian markets start to become saturated. A CDM investment climate index released in April 2009 by DEG, a member of KfW Bankengruppe, showed that Malaysia and Thailand ranked first and third respectively, above China, while Indonesia and the Philippines ranked sixth and seventh respectively, trailing India only by small margins.

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FACING THE STORM THROUGH THE MARKET (continued)

A host of international CDM developers and Designated Operation Entities (DOEs) — organizations accredited by the UNFCCC to validate projects — have set up shop in the region in recent years. For example, Tricorona, the second most active buyer of carbon credits worldwide and CVDT Consulting, the seventh largest CDM developer globally, have opened branches in Singapore recently. DOEs like Det Norske Veritas Certification AS and TÜV NORD CERT GmbH (TÜV NORD) now have offices in Malaysia, indicating the growth of interest in the region’s CDM market. The presence of these third-party service providers alone, however, is not enough to propel growth of the CDM industry and ensure that the developmental needs of the region are met through it. Political will within the region must drive the shift towards a low-carbon growth and create the necessary conditions conducive for the carbon market to flourish, while at the same time steering the direction of financial flows towards the sectors with high developmental impact. A Possible Regional Approach The Association of Southeast Asian Nations (ASEAN) can help facilitate this process. It already has the institutional framework in place where ministers and experts at the technical and policy level can meet to discuss issues ranging from trade to security. The ASEAN environment ministers meet every three years with annual informal meetings in between. At the recent Eleventh Asean Ministerial Meeting on the Environment, ASEAN environment ministers announced the formation of a working group to address threats to eco-systems, coastal communities and marine environments posed by global warming. These issues are pertinent, but the function of such a group could be enhanced if the agenda is expanded to include CDM as an instrument to address these issues. In line with ASEAN’s triple bottom-line principle of profitability, social responsibility and environmental protection, such working groups should aim to match problems with viable solutions and funding. They could help identify new areas for project development, precipitate the flow of funds through CDM financing and promote public-private partnerships. ASEAN’s environmental instruments can also bring together the region’s DNAs (Designated National Authority, necessary to host CDM projects) to identify

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strengths and weaknesses at the national level and explore avenues for intraregional exchange and knowledge transfers. More importantly, such platforms should not be limited to environment ministers alone. Climate change will affect trade, stock markets, and food and energy security. The finance, trade, agriculture and energy ministers therefore, need to be included in such meetings in order to formulate policies that will not only meet environmental needs in a wholesome way, but also be economically viable. Securing the Developmental Externalities Left to free market forces, CDM may not deliver the type of developmental impacts and technologies needed to address the country specific vulnerabilities and mitigation needs. For example, out of over 2,000 CDM projects registered with UNFCCC, 1,383 are in the energy sector and only 2 are in transportation even though the sector is projected to be responsible for the largest growth in fuel emissions world wide, 80 per cent of which will come from developing countries, particularly Asia.5 Neither do projects guarantee maximum carbon emissions reduction in the host country — the most common projects are in renewables and energy efficiency, but they only generate about 25 per cent of all carbon credits through CDM.6 This has led critics like Pearson B. to argue that “the market will seek out the cheapest credits and not the best environmental outcomes”.7 Therefore to make CDM work for the development needs of the country, governments should target particular CDM sectors — such as transportation, waste management, forestry and agriculture — and design policies that will make investments in these areas conducive and attractive. The Collective Interest It is in the collective interest of ASEAN countries to cooperate in the growth of CDM in the region. Reduction of carbon emissions and economic growth are not mutually exclusive. In fact, by helping the region’s small and medium enterprises (SMEs) tap on this emerging market, ASEAN will be one step closer to its new growth model of greater emphasis on domestic and intra-regional markets. The disparity in the adaptive capacity among ASEAN countries means that its more developed nations must help their less developed counterparts.

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FACING THE STORM THROUGH THE MARKET: (continued)

Waiting on technology and knowledge transfers from the developed world will take too long, and may not be suited to the local context. More developed ASEAN countries like Singapore, Malaysia and Thailand can offer their knowledge, expertise and services to its less developed member countries to produce projects and build institutions that meet local needs. Given their greater familiarity with the socio-political and economic fabric of the region, ASEAN countries are better placed to navigate the local politics and help each other formulate localised solutions. Climate change is more than an environmental phenomenon. It comes with economic, social and political externalities that can develop into a contagion of instabilities across the region. It is pointless to have a good house in a bad neighbourhood. ASEAN countries therefore have a collective interest in ensuring its neighbourhood is safe, secure and sustainable. Notes 1. ADB (Asian Development Bank), The Economics of Climate Change in Southeast Asia: A Regional Review (Manila: ADB, 2009). 2. The World Bank, World Development Report, Development and Climate Change, Washington D.C., 2009. 3. Projects have to go through a rigorous process of validation before it reaches the UNFCCC. Third-party agencies called Designated Operational Entity (DOEs) need to validate the project to ensure that it results in real, measurable, and long-term emission reductions before it is submitted to the CDM Executive Board. The board then decides whether or not it qualifies to be issued carbon credits and registered under the United Nations Framework Convention on Climate Change (UNFCCC). 4. UNFCCC CDM website . 5. Asian Development Bank media release, “ADB Urges New Approaches to Ease Traffic Congestion in Asia’s Gridlocked Cities”, 7 October 2009. 6. Hamburgisches Welt-Wirtschafts-Archiv (HWWA) report, “From GHGs Abatement Potential to Viable CDM Projects — The Cases of Cambodia, Lao — PDR and Vietnam”, 2006. 7. Pearson B., The CDM is Failing, TiemPo (2005), quoted in the HWWA report.

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UNDOING A MYTH OF THE GLOBAL FINANCIAL CRISIS AND GROWTH PROSPECTS: EVIDENCE FROM SELECTED ASIA-PACIFIC ECONOMIES By Aekapol Chongvilaivan

Global Financial Crisis and the Asian Economies It was previously expected that the Asian economies would have been able to decouple themselves from the outbreak of the global economic downturn due to their growing domestic markets and less exposure to the collapses of the international financial institutions in the economic powerhouses, especially those in the United States and the United Kingdom. However, the downswing in the region has been unprecedented. The annual GDP growth of the ASEAN-6 economies, as shown in Figure 1, exhibited a sharp plummet from 5.5 per cent in 2007 to 3.6 per cent in 2008 on average while the CLMV (Cambodia, Laos, Myanmar and Vietnam) economies experienced slower growth from 8.8 per cent in 2007 to 6.3 per cent in 2008. The plunges in the annual GDP growth figures were attributable to the drastic downturns in the last quarter of 2008. World Bank (2009) further projected a GDP contraction in the region by 1.5 per cent in 2009. A foremost question is why the Asian economies are among the hardest hit by the global economic catastrophe even though they are geographically isolated from the crisis epicentres in the United States and European Union. In principle, there are at least three mechanisms through which the global financial crisis paints a bleak picture of the real economic fortunes. 1. Global Trade Collapses: The economies import the economic shocks via the commodity markets. Figure 2 portrays the shares of exports and imports in GDP for ASEAN and China. Since the 1960s, these economies have thrived on

•

Asian economies have not been able to completely decouple themselves from the outbreak of the global economic downturn.

•

Economies have imported economic shocks through commodity markets.

•

Foreign direct investment (FDI) inflow reversals and declining remittances were, however, the main catalysts of the global economic recession, not reductions in trade.

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UNDOING A MYTH OF THE GLOBAL FINANCIAL CRISIS AND GROWTH PROSPECTS (continued)

Figure 1: Annual GDP Growth among ASEAN+3 Economies, 1990–2008 GDP Growth among ASEAN+3 Economies 20

Percent

15 10 5

20

08

06 20

04 20

20

02

00

98

–10

20

19

19

96

94

92

19

–5

19

19

90

0

Year ASEAN-6 CLMV

China Japan

Korea

SOURCE: World Development Indicators (WDI), World Bank.

Figure 2: Share of Exports and Imports in GDP in Selected Asian Economies, 1990–2008 Trade Openness (% of GDP) 250

Percent

200 150 100 50

08 20

06 20

20

04

2 20 0

00 20

8 19 9

19 96

94 19

92 19

19

90

0 Year ASEAN-6

CLMV

China

SOURCE: World Development Indicators (WDI), World Bank.

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trade-led policies whereby ever-increasing exposure to the international markets potentially offers robust economic growth, accelerated poverty reductions, rapid productivity growth, and outward-looking industrialization. Yet, with the global economic meltdown underway, the trade-led growth strategies spawned a susceptibility to a momentous drop in commodity trade. Asian Development Bank, for instance, estimated remarkable declines in exports from key exporting Asian economies — 32 per cent for Vietnam, 25 per cent for Indonesia, 18 per cent for Thailand, and 13 per cent for Malaysia. In addition, the momentum towards free flows of goods and services pertains to other welfare costs including inadequate domestic consumption and investment in addition to inefficiency in the resource allocation. 2. FDI Inflow Reversals: The deleveraging process in the capital markets accounts for the pernicious effects of the global economic unrest, which have become increasingly discernible. Figure 3 highlights the fact that the Asian countries have relied heavily on foreign direct investment (FDI) as the means to maintain their competitiveness and economic growth. The multinational activities deliver numerous economic benefits including capital resources, new technologies, marketing techniques and managerial skills and know-how (Blomström and Kokko 1998; Mody 2004). Nevertheless, the data released by International Monetary Fund (IMF) pointed to recent drastic capital inflow reversals as a

Figure 3: Share of Net FDI Inflows in GDP in Selected Asian Economies, 1990–2008 Share of FDI (% of GDP)

10

Percent

8 6 4 2

08 20

6 20 0

20 04

02 20

00 20

19 98

96 19

94 19

92 19

19 9

0

0 Year ASEAN-6

CLMV

China

SOURCE: World Development Indicators (WDI), World Bank.

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UNDOING A MYTH OF THE GLOBAL FINANCIAL CRISIS AND GROWTH PROSPECTS (continued)

Figure 4: Share of Worker Remittances in GDP in Selected Asian Economies, 1990–2008 Share of Remittance (% of GDP) 5

Percent

4 3 2 1

08 20

06 20

20

04

02 20

00 20

98 19

96 19

94 19

92 19

19

90

0 Year ASEAN-6

CLMV

China

SOURCE: World Development Indicators (WDI), World Bank.

consequence of the deleveraging process in the advanced economies that slashed the net FDI flows to emerging markets by about 2 percentage points of GDP in comparison with 2007. 3. Declining International Remittances: The global economic crisis has propelled the Asian economies into the worst post-1997 recession through the squeezing labour markets in advanced economies. The International Labour Organization (ILO) estimated the spiralling unemployment rates across the major East Asian economies, meaning 7.2 more million people becoming unemployed. As shown in Figure 4, the Asian economies, especially for the CLMV economies, have increasingly depended on workers’ remittances from overseas. This implies that the falling inflows of international remittances may inflict economic hardships into the regional economies in terms of deteriorating economic vulnerabilities and worsened poverty reductions as well as rural development. Empirics This section is devoted to the empirical investigation of the three mechanisms through which the global financial crisis inflicted the ripple effects on economic growth. Throughout this section, I utilize the World Development Indicators (WDI) dataset for the period 1960–2008, provided by the World Bank, to obtain various macroeconomic and

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trade variables of the selected Asia-Pacific economies including ASEAN-10 (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam), in addition to Australia, China, Hong Kong, Japan, Korea, and New Zealand. In so doing, I consider the empirical framework as follows. GDPGit = α0 + α1GFCFit + α2TRADEit + α3FDIit + α4REMITit + α5CRISISit + uit

(1)

where uit is the error term, and the subscripts i, i = 1, …, N, and t, t = 1, …, T, denote an economy i at the time period t, respectively. GDPG is the growth rate of annual GDP. There are five explanatory variables taken into consideration. The first is the gross fixed capital formation as a percentage of GDP, given by GFCF. It aims to capture country-specific productivity levels as suggested by Siegel and Griliches (1992) and Siegel (1997). Ones would expect that the fixed capital accumulation results in higher productivity performance, thereby enhancing GDP growth. Central to my analysis are the next three variables. TRADE is the index of international trade openness measured by the ratio of exports and imports to GDP. It captures the impacts of the global financial crisis on an economy vis-à-vis the commodity markets. FDI is the share of net foreign direct investment in GDP, and REMIT is the share of workers’ remittances as a percentage of GDP. The former accounts for the effects of capital inflow reversals whereas the latter aims to capture the worker retrenchment in the foreign labour markets. CRISIS is the dummies representing the structural break of the 1997 Asian financial crisis. It takes the value of unity for the years 1997–98, and zero otherwise. The estimations of the model specification (1) are not straightforward, however. First, the cross-country variations in growth pose a potential problem of heteroscedasticity. As is well known, if this is the case, the standard ordinary least squares (OLS) estimates are biased. I tackle this problem by employing the heteroscedasticity-robust standard error estimators. More importantly, the model specification (1) tends to suffer from the potential endogeneity problem in that all explanatory variables, particularly GFCF, TRADE, FDI and REMIT, are endogenously determined by other unobserved factors, like macroeconomic policy, trade policy, financial market development, industrialization policy and so forth. In this sense, the standard OLS procedure is likely to produce inconsistent estimates. To account for the potential endogeneity biases, I adopt the Arellano-Bond Generalized Method of Moment (GMM) estimation (Arellano and Bond 1991). Accordingly, the model specification (1) is modified as follows: ∆GDPGit = β0 + β1∆GDPGit–1 + β2∆GFCFit + β3∆TRADEit + β4∆FDIit +

β5∆REMITit + β6∆CRISISit + εit

(2)

where εit is the error term, and ∆ is the first-differenced operator. It should be highlighted that the additional advantage of the Arellano-Bond GMM estimation as in (2) rests with its capability to account for the dynamic adjustments of economic growth captured by the coefficient of ∆GDPGit.

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UNDOING A MYTH OF THE GLOBAL FINANCIAL CRISIS AND GROWTH PROSPECTS (continued)

Table 1: Panel Growth Regressions for Selected Asia-Pacific Countries with OLS, Fixed Effects and Random Effects Dependent Variable: GDPGit OLS GFCFit TRADEit FDIit REMITt CRISISit Constant

.2520*** –.0008 .1650** .2017*** –4.971 –1.785*

R-squared F Test Wald Chi-squared No. of Obs.

.2536 18.47*** — 320

(.0306) (.0046) (.0740) (.0557) (1.347) (.9308)

Fixed Effects .1777*** –.0084 .2528*** .4034*** –5.284*** .3092 .2152 13.70 — 320

(.0359) (.0078) (.0731) (.1289) (1.308) (1.185)

Random Effects .1786*** –.0087 .2463*** .3785*** –5.252*** .4610

(.0325) (.0061) (.0728) (.0936) (1.275) (1.426)

.2189 — 65.82*** 320

NOTES: (1) Robust standard errors in parentheses; (2) *** statistically significant at 1 per cent level; (3) ** statistically significant at 5 per cent level; and (4) * statistically significant at 10 per cent level.

Table 1 presents the parameter estimates based on the model specification (1). The first column portrays the standard OLS estimates while the second and third columns correspond to the fixed and random effects estimations, respectively. However, should there exist the endogeneity bias problem, these estimations convey inconsistent results. To provide consistent and robust results, I obtain the Arellano-Bond GMM estimates based on the model specification (2). As expected, the coefficient of CRISIS is negative and statistically significant, implying that the Asian financial crisis in 1997–98 entailed a sharp contraction in the Asia-Pacific economies. The main findings can be briefly summarized as follows. First and foremost, the Asia-Pacific economies have potentially decoupled themselves from sharp plunges in global trade in a backdrop of the global financial crisis since freer flows of goods and services trade in the region do not have a significant contribution to output growth. As shown in Table 2, the consistent estimate of ∆TRADE is statistically insignificant. The weak evidence may be explained by trade creation and trade diversion (Viner 1950) associated with the persistent increases in the degrees of openness. The former is welfare-enhancing as it promotes trade among the members without interrupting trade with non-members, whereas the latter is welfare-deteriorating since it diverts greater trade among the members away from the non-members. The evidence implies that trimmed tariff and non-tariff barriers through regional trade arrangements (RTAs) among the Asia-Pacific countries, especially those under ASEAN+3

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Table 2: Arellano-Bond Dynamic GMM Estimations for Selected Asia-Pacific Countries Dependent Variable: ∆GDPGit Arellano-Bond GMM ∆GDPGit ∆GFCFit ∆TRADEit ∆FDIt ∆REMITit CRISISit Constant Wald Chi-squared No. of Obs.

.2817*** .0742*** –.0050 .2351*** .3067*** –5.186***

(.0701) (.0271) (.0094) (.0572) (0.493) (1.323)

–.0056 (.0199) 166.29 302

NOTES: (1) Robust standard errors in parentheses; (2) *** statistically significant at 1 per cent level.

and ASEAN+6, tend to trigger trade diversion wiping out gains from free trade in terms of output growth. Second, the FDI inflow reversals and the declines in international remittances appear to be the crucial mechanisms through which the global financial crisis propelled the regional economies into a recession. Table 2 shows that the coefficients of ∆FDI and ∆REMIT are positive and statistically significant, suggesting that the Asia-Pacific economies have thrived on FDI and workers’ remittances. The deleveraging process in the capital markets and retrenchment in the foreign labour markets taking place around the globe therefore account for a sharp contraction of economic growth in the region. Lastly, the Asia-Pacific economies tap on gross fixed capital formation as a key catalyst of economic growth. The coefficient of ∆GFCF reported in Table 2 turns out to be positive and statistically significant. This result is strikingly consistent with Thangavelu, Yong and Chongvilaivan (forthcoming) who showed that the capital accumulation is a crucial source of economic growth in the East Asian economies. Conclusions This article examined three potential mechanisms through which the global financial crisis affected the Asia-Pacific region. These include the collapsed export and import demands, FDI inflow reversals, and a substantial plunge in international remittances. An empirical exercise revealed that while the Asia-Pacific economies were immune to a drastic contraction in world trade, the capital inflow reversals and the sweeping retrenchment

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85

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UNDOING A MYTH OF THE GLOBAL FINANCIAL CRISIS AND GROWTH PROSPECTS (continued)

in the foreign labour markets appear to be the key catalysts through which the global financial crisis has propelled them into the worst economic recession. These results suggest that the efforts to put in place the shield against the global economic downturn must weigh in on macroeconomic policy that essentially rebalances overdependence on FDI inflows and international remittances. References Arellano, M. and S. Bond. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and An Application to Employment Equations”. Review of Economics and Statistics 58, no. 2 (1991): 277–97. Blomström, M. and A. Kokko. “Multinational Corporations and Spillovers”. Journal of Economic Surveys 12, no. 2 (1998): 1–31. Mody, A. “Is FDI Integrating the World Economy?”. The World Economy 27, no. 8 (2004):1195–1222. Siegel, D. “The Impact of Computers on Manufacturing Productivity Growth: A Multiple-Indicators, Multiple-Causes Approach”. Review of Economics and Statistics 79 (1997): 68–78. Siegel, D. and Z. Griliches. “Purchased Services, Outsourcing, Computers, and Productivity in Manufacturing”. NBER Working Paper, No. 3678, and in Output Measurement in the Service Sector, edited by Z. Griliches. Chicago: University of Chicago Press, 1992. Thangavelu, S.M., Y.W. Yong and A. Chongvilaivan. “FDI, Growth and the Asian Financial Crisis: The Experience of Selected Asian Countries”. The World Economy. forthcoming. Viner, J. The Custom Union Issue. New York: Carnegie Endowment for International Peace, 1950. World Bank. The Global Monitoring Report 2009. Washington, D.C.: World Bank, 2009.

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MARITIME INDUSTRY TO RECOVER WITH TIME LAG ONLY By Philip Clausius

W

ith the Strait of Malacca, Southeast Asia is home to one of the world’s most important sea lanes. Singapore derives about 7 per cent of its GDP from the maritime industry and its ancillary services and is host to the world’s busiest container port. Also, Southeast Asian economies generally have a very significant export orientation. These are all good reasons to analyse the outlook for the maritime industry in the next two years. Such outlook for Southeast Asia, however, hinges directly on the global state of the sector. What one experiences regionally mirrors the developments worldwide. The maritime industry is a truly global business as freight rates are a function of aggregate global supply and demand for shipping capacity. Ship design has been largely standardized over the last three decades and shipping companies will trade their vessels wherever in the world they can derive the greatest profits. There are countries which have introduced protectionist measures for the domestic shipping trade, also known as cabotage laws. Prominent large countries with such laws in place include the United States and Indonesia. This article shall not focus on such special situations as it affects only selectively domestic shipping. Domestic shipping, however, is dwarfed in importance by international shipping. About 90 per cent of international trade is today conducted by sea. Since the fourth quarter of 2008, the global shipping industry has suffered from its most severe crisis since the 1980s. Massive demand destruction as a result of the global economic and financial crisis has coincided with an unprecedented orderbook for new ships. These ships have been contracted primarily in the shipyards of the three main shipbuilding nations, South Korea, China and Japan. The result of the oversupply of ships has been a very substantial drop in freight rates across all maritime sectors.

•

Shipping demand will recover in line with global economy.

•

Market Absorption of Shipping Overcapacity has been a multi-year event.

•

A period of shipyard subsidies and export credit is looming.

•

Singapore as a leading maritime service centre will continue to grow in the years ahead.

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MARITIME INDUSTRY TO RECOVER WITH TIME LAG ONLY (continued)

Figure 1 shows about a 75 per cent freight rate index decline from mid-2008 across all major ship types. Whilst demand for shipping capacity has started to recover from the second and third quarters this year, in line with the tentative recovery of the global economy and trade, such demand improvements come now from a much lower base and continue to be overcompensated by the uninterrupted supply of new ships. In November 2009 the aggregate orderbook of ships yet to be delivered represents about 42 per cent of existing shipping capacity and about US$500 billion in value (see Figure 2). The problem for shipping companies is further exacerbated by a massive withdrawal of bank credit from the industry, in particular from European banks which have dominated global ship finance for many years. In 2008 the top nine banks in terms of outstanding shipping loan portfolios were European representing outstanding loans of about US$240 billion to the industry (see Figure 3).

Figure 1: ClarkSea Index ($/Day)

46,020 41,020 36,020

$/Day

31,020 26,020 21,020 16,020 11,020 6,020

Feb ʼ90 Jul ʼ91 Dec ʼ92 May ʼ94 Oct ʼ95 Mar ʼ97 Aug ʼ98 Jan ʼ00 Jun ʼ01 Nov ʼ02 Apr ʼ04 Sep ʼ05 Feb ʼ07 Jul ʼ08

SOURCE: Clarkson Research Studies Ltd.

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Figure 2: World Fleets and Orderbook 1,400.0 1,200.0 1,000.0 800.0

Orderbook % of Fleet – 42

600.0 400.0 200.0 0.0

2005

2006

2007

2008

Oct-09

Nov 09 to 2011+

Orderbook in 2011 and beyond Orderbook in 2010 Historical World Fleet and Orderbook for the rest of the months in 2009 SOURCE: Clarkson Research Studies Ltd.

In other industries the absence of bank credit has been somewhat mitigated by the resurgent debt capital markets, but the shipping industry has historically made only very limited use of alternative debt sources. It is questionable whether the industry can adapt quickly. Capital markets’ funding solutions require far higher corporate governance and transparency standards than what is practised in many family-controlled shipping companies today. Hence, many shipping companies today are faced with freight rates insufficient to cover the operating and capital costs for assets acquired at the peak of the last boom cycle. In addition they lack funding solutions for new capacity commitments. The consequence for the majority of shipping companies so far has been at best technical breaches of bank covenants and at worst outright payment defaults and ultimately bankruptcy. The optimists in the industry believe (or want to believe) that the oversupply situation will disappear much faster than the current orderbook might indicate. They think that many ships will simply never deliver due to the absence of industry funding and that another part of the orderbook will be substantially delayed.

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ECONOMIC OUTLOOK

ICBC Alpha Bank Bank of Ireland Helaba Natixis Fortis Bank of Scotland Dresdner Bank SEB Lloyds TSB Dankse Bank / Fokus Bank Citi SMBC Bremer Landesbank HVB (only) Danish Ship Finance Deutsche Bank BNP Paribas BTMU DVB Commerzbank

Deutsche Schiffsbank

30.0

RBS

36.0

DnB NOR 0.0

10.0

20.0

30.0

40.0

SOURCE: Marine Money.

KfW

HSH Nordbank 50.0

60.0 58.0

70.0

Piraeus Bank

Nordea

Total Portfolio (US$ bn) 02 EcoOutlk p63-96.indd 90

JP Morgan

Calyon

22.9 20.7 19.5 18.7

Figure 3: 2008 Shipping Portfolio League Table

16.1 14.6 13.0 12.0 11.3 11.3 11.2 10.0 9.6 9.5 8.2 6.5 6.5 5.8 5.7 5.1 5.0 3.5 2.9 2.7 2.2 2.0 1.8

MARITIME INDUSTRY TO RECOVER WITH TIME LAG ONLY (continued)

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Whilst there is evidence that quite a number of important newbuilding programmes have been successfully delayed and there is some limited evidence that a few selected newbuilding orders have effectively been cancelled, it is not believed that this will have a sufficient impact to result in a more favourable supply/demand balance in the near future. Specifically, the scheduled shipyard deliveries for 2010 look particularly daunting and as such it seems likely that 2010 will be the year of maximum pressure on the freight markets. The outlook, however, differs somewhat from sector to sector. What the optimists conveniently omit to mention is that in particular China and South Korea will not watch passively as their shipyards suffer from defaults on existing shipbuilding contracts and a complete dearth of new contracts. Shipbuilding is simply a too important economic factor in both of these countries. As such we can expect another cycle of substantial shipyard subsidies, ballooning export credit schemes and other measures to ensure busy shipyards going forward. In the short term, the renaissance of export credit will help certain shipping companies with replacing commercial bank credit and therefore finding a funding solution for their committed orderbook; in the long run, however, export credit and shipyard subsidies will delay the full recovery of the industry as artificial demand for new shipping capacity will be created at below cost price levels, resulting in a cycle of market distortion. The overriding long-term concern has to be that in particular China might have concluded that the benefits of low freight rates — given the enormous raw material imports — far outweigh the costs of shipyard and shipping subsidies. Whilst the outlook for freight rates is challenging as just discussed, it is likely that Singapore will continue to grow as a global maritime centre. To the author’s knowledge there is no other country in the world in which shipping constitutes as much as 7 per cent of GDP. The result is that shipping features prominently on the priority list of Singapore’s policy-makers. The Government has and continues to be very successful in creating a rapidly growing maritime cluster of companies which include shipowners, -operators, -brokers, -financiers, maritime lawyers, marine insurers as well as specialist education providers. For most medium to large size shipping industry participants, a significant Singapore presence is extremely attractive given the conducive legal, tax and regulatory environment in addition to the rapidly growing “cluster-effect”. The author expects this trend to continue as other countries can simply not compete with this well-thought out holistic approach to the industry by the Singapore Government.

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PUBLIC INFRASTRUCTURE FINANCING IN SOUTHEAST ASIA By Benjamin Loh

H

istory does have its leveraging powers, and the ability to learn from past experience over the past decade has contributed to Southeast Asia’s better position in addressing the multifaceted impacts of the recent global downturn, which include financing the huge investment needs of the region. A key lesson learnt from the 1997 Asian financial crisis has been that reductions in infrastructure investments put future recovery at risk. Many Asian economies slashed public and private infrastructure investments where it was already too low. Private investment in infrastructure fell by more than half collectively in East and Southeast Asia after 1996. Public investment also declined sharply as budget constraints and international financial institutions cut their infrastructure lending. Infrastructure programmes were among the first to be cut in developing Asian economies, and these countries are still suffering from a large infrastructure deficit. Like all investment activities, investments in public infrastructure will add value if the social benefits exceed the social costs. The question is not solely on “how to mitigate the short-term impacts of the crisis and to safeguard existing financial institutions” but rather “how to protect post-crisis funding capacity and to allocate that capacity to the most beneficial infrastructure projects”. The emphasis on development-enhancing public infrastructure finance ensures that fiscal stimulus and investment funds are put to uses that create

•

Well-targeted infrastructure investment has the strong potential to underpin sustainable economic growth and social development in Southeast Asia.

•

There has been an encouraging increase in public infrastructure spending in some Southeast Asian economies over the course of the recent financial crisis to sustain demand, create jobs, and raise long-term growth.

•

Further investment is still needed to address the regional shortfall in infrastructure spending, and to meet World Bank benchmarks of approximately US$750 billion annually for the region.

•

Priorities need to be established in providing institutional instruments, building a pipeline of long-term projects, and setting in place more transparent and competitive ways of project funding.

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93

the most value, where value is not confined to alleviating short-term adverse recessionary pressures. Well-targeted infrastructure investment has the strong potential to underpin sustainable economic growth and social development in Southeast Asia. Although an economic crisis may relieve some pressure on existing infrastructure, it does not lessen the need for upgrading and investing in infrastructure over the medium to long term. Some Asian economies have responded to the crisis by increasing public infrastructure spending to sustain demand, help create jobs, and raise long-term growth. Some noteworthy infrastructure developments in Southeast Asia over the course of the recent financial crisis have been paving the way. In Vietnam, the government has agreed financing for its Thanh Hoa City comprehensive socio-economic development project. The project is part of a nationwide plan to promote sustainable development in Vietnam’s mid-sized cities and includes road and bridge construction and rehabilitation. In Singapore, the government announced plans to spend between S$10 to S$20 billion (US$11.9 to US$ 13.2 billion) on infrastructure projects in the wake of the crisis, is expected to invest a further S$15 to S$17 billion (US$9.9 to US$11.3 billion) in 2010 and 2011 for building and infrastructure projects. “Here in Singapore we are taking the opportunity of this downturn to build our own highways to prepare for the next phase of Asia-centric growth”, said Ms Grace Fu Hai Yien, Senior Minister of State for the Ministry of National Development in Singapore. “The upgrading of our infrastructure is a key part of our growth strategy.” In Thailand, fiscal stimulus including increases in public investment is expected to bolster the economy. However, this will not translate to growth as confidence is still tenuous over sentiments of political instability and the deepening rift in Thai-Cambodian relations, with the most recent development of Thaksin’s appointment as economic adviser to Cambodia. The Philippines has announced a PhP330 billion (US$6.9 billion) fiscal package for spending on infrastructure and social programmes to alleviate the impacts of the economic slowdown. Spending is intended to be fast-tracked in the first half of this year. Similarly, Indonesia announced a Rp73.3 trillion (US$6.8 billion) package focussed on tax cuts and infrastructure projects. Infrastructure projects account for approximately 13 per cent of the package and will focus on labour-intensive works involving water supply, low-cost

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PUBLIC INFRASTRUCTURE FINANCING IN SOUTHEAST ASIA (continued)

housing, roads and ports. A further 1 per cent of funds will be allocated to extend the community empowerment programme which encourages villagelevel participation in planning and carrying out rural infrastructure projects. Malaysia has introduced two stimulus packages totalling RM67 billion (US$18 billion) to fund infrastructure, encourage private investment and support families and employment. At the recent Twelfth ASEAN-China Summit in October 2009, ASEAN approved the ASEAN Master Plan on Connectivity and has commissioned the Asian Development Bank to study the feasibility of establishing an infrastructure development fund for the region. China’s initiatives to promote infrastructure development, including a US$10 billion China-ASEAN Fund on Investment Cooperation and US$15 billion credit, including US$1.7 billion preferential loans was also positively endorsed by leaders at the summit. In addition, China’s increase from US$1.7 billion to US$6.7 billion in preferential loans as part of the US$15 billion credit was certainly a positive gesture. These initiatives are expected to address the development needs of the Great Mekong Subregion, such as the highways from Kawkareik to Mawlamyine in Myanmar and from Siem Reap to Stung Treng in Cambodia, upgrading of the Singapore-Kunming Rail Link to double track railways, and development of secondary roads linking the planned ASEAN highway network plan. These will certainly benefit intra-regional trade and investment. However, when we look at what’s being spent, and compare it with the region’s needs, it consistently falls short of the amount that would be required to meet the huge demand for new and upgraded water, transportation, communications, energy, and social infrastructure facilities. Further investment is needed to ensure greater self-sufficiency and ongoing regional integration, and to enable the quality of life and social stability that comes with good infrastructure. This will also enhance its competitiveness vis-à-vis other regions and emerging markets. To better appreciate the extent of the regional shortfall in infrastructure spending, it helps to consider that recent World Bank estimates call for $25 to $30 trillion dollars to be invested globally over the next couple of decades — almost half of that in Southeast Asia. This suggests an annual spend of $750 billion for the region. To put it another way, an often-quoted rule of thumb for a country’s annual infrastructure expenditure would be 5 per cent of its GDP, especially in the developing countries. China has met this in recent

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95

years, but much of Southeast Asia only devotes about 2 per cent of GDP to infrastructure. By these measures, investment levels in both the public and private sectors are inadequate. According to a 2009 Standard and Poor’s ratings assessment, the region’s governments have earmarked a little more than $650 billion in economic stimulus over the next couple of years. This falls short of the World Bank’s suggested $750 billion annually. And further to that, not all the stimulus funding is for infrastructure. In the private sector, the roughly $284 billion invested during 1985–2005 does not even cover one year’s requirements, and this was when liquidity was still plentiful. Despite the visible steps taken in infrastructure developments in Southeast Asia over the course of the recent crisis, there are critical measures that must still forge ahead in the coming years. Firstly, governments need to ensure that intermediate instruments carry with them the legal sanctity and institutional capacity to function as systemic and long-term options. Much of this is down to policy-making and prioritizing. Governments need to establish national priorities for public funding that can filter down to the sectoral and regional levels. To help with this decision making, governments also need to build the capacity to determine which projects will create the most value and underpin sustainable economic growth and social development. The second priority is to build a pipeline of projects that meet the national criteria of contributing to balanced long-term economic development instead of leaping at quick-fix projects that may not afford the best outcome over time. This is what is most lacking at present in many administrations in the region. An example of such a project could potentially be on green development as suggested by Wong in her article in this volume “Facing the Storm through the Market”. Finally, policy-makers can help revamp public finance by setting in place more transparent and competitive ways of determining which projects receive government fudning, as well as ways of assessing which entities have suitably strong financial management systems in place. This demands that the public sector undertakes a well-structured and sustained engagement with the markets to facilitate the creation of a public sector asset class, which will enable major market participants to formally allocate portions of their portfolios to this important investment need.

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PUBLIC INFRASTRUCTURE FINANCING IN SOUTHEAST ASIA (continued)

The slowdown in Southeast Asia is being mitigated by considerable government stimulus initiatives. However, it remains important that public infrastructure projects continue to be targeted in Southeast Asia. Governments, private sector and multilateral institutions need to emphasis on developmentenhancing public infrastructure finance measures that ensures current and fiscal stimulus and projected investment funds are put to uses that create the most value, where value is not confined to alleviating short-term adverse recessionary pressures, but also to mobilize capital into infrastructure for the region. References ADB. Infrastructure for a Seamless Asia. Tokyo: Asian Development Bank Institute, 2009. Loh, Benjamin. “Disaster Risk Management in Southeast Asia: A Development Approach”. ASEAN Economic Bulletin 22, no. 2 (2005): 229–39. Schiller, Thomas G. “For public and infrastructure finance to grow as an asset class in Asia, the public sector has some work to do”. Standard and Poor’s Ratings Direct, 11 June 2009. Skinner, Steve. “Stimulus helps growth in the Asia-Pacific region”. International Construction, 12 June 2009.

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Brunei Darussalam By Lee Poh Onn Brunei Darussalam’s economic growth prospects in 2010 and 2011 will be slightly better than that in 2009. In 2009, real GDP is expected to grow by only 0.2 per cent. This is because of the global slowdown and lower energy prices. Brunei’s major trading partners, the United States and Japan, are expected to recover from 2010 onwards, albeit only moderately after the global economic crisis, with the Bruneian economy is likely to follow suit also in achieving a modest economic pick up because of better export prospects.

BRUNEI DARUSSALAM • The outlook looks challenging for Brunei Darussalam for 2010 to 2011, because of the global economic crisis in 2009 with only very gradual recovery in the U.S., Japanese, EU, and ASEAN economies the next two years ahead. • Oil prices have fallen in the first three quarters 2009 because of the global downturn. Moderately increasing energy prices from 2010 are however expected to improve Brunei Darussalam’s growth prospects in 2010 and 2011. • Economic diversification is continuing and would help to safeguard the country’s growth prospects in the years ahead. • The China-ASEAN Free Trade Area would also help to bolster Brunei’s trade prospects and economic development.

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Latest Available Demographic and Economic Data Brunei had a recorded population of about 401,000 as at mid-2009. Inflation stood at 1.2 per cent. Per capita constant GDP based on purchasing power parity (international dollars) was 50,102 in 2009.1 Brunei’s literacy rates are among the highest in ASEAN with an adult literacy rate of 96.5 per cent for males and 93.1 per cent for females in 2007. Brunei is ranked twenty-sixth best in terms of the Human Development Index, the highest in Southeast Asia.2

Growth Forecast for 2010 and 2011 During the forecast period of 2010 and 2011, real GDP is expected to increase by 0.595 and 1.257 per cent respectively. This is based on the IMF, World Economic Outlook Database in October 2009.3 Higher growth rates follow because of the continuing development of Brunei’s ecotourism industry, exports from the completed methanol plant project, and the continuing development of Sungai Liang Industrial Park (SPark) project which has positive impacts on the construction sector. SPark, located on a 271-hectare site at Sungei Liang, is being developed as a world-class petrochemical hub. A US$450 million methanol plant by the Brunei Methanol Company, a joint venture between Petroleum Brunei and two Japanese companies, Mitsubishi Gas Chemical and Itochu, will be completed by end 2009. The plant is also expected to be commissioned in April 2010, with most of its output exported to Japan. The construction of the Single Point Mooring System required to transport methanol to export vessels at sea is also scheduled to be completed by end 2009. Higher petroleum prices, which are expected to prevail in 2010 and 2011, are expected to shore up Brunei’s growth in the next few years, even if Brunei does not increase its production in line with increasing demand. The oil and gas sector made up 70.1 per cent of GDP in 2008,4 with this proportion expected to continue in the years to come. Brunei’s oil and gas fields are, however, expected to continue to underperform because of ageing oilfields and the government’s policy of managing its oil supplies to conserve energy reserves and to develop non-energy alternatives.5

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THE ASEAN-10 The current slowdown in the United States and Japan has been a major reason for the fall in energy prices in 2009. However with the expected pick-up in these economies and also economies in ASEAN, energy prices would at least increase, if only moderately, during the forecast period of 2010 and 2011, thus impacting positively on Brunei’s growth prospects. Many of Brunei’s trading partners have also reported slowdowns in their economies in the first three quarters of 2009, but recovery has begun in the last quarter. Brunei’s major export markets6 include Japan (33.5 per cent), ASEAN (28.1 per cent), South Korea (13.7 per cent), and Australia (12.1 per cent) and it imports mainly from ASEAN (47.9 per cent), Japan (12.8 per cent), EU (10.3 per cent) and the United States (9 per cent). The economies of Thailand, Malaysia, and Singapore has been particularly affected by the economic crisis in the first three quarters of 2009. Exports in 2007 were dominated by oil and gas which accounted for 96.2 per cent of Brunei’s total exports.7 This proportion remained about the same in the first half of 2008.8 Again, to the extent that the growth prospects of these countries have been affected by the current downturn and are just in the wake of recovery, so will Brunei’s economy be influenced to move in tandem with developments in these economies. In terms of gas, Japan is the largest importer (about 92 per cent of Brunei’s total output). Policy-makers in Brunei realize that the economy is currently too dependent on oil and gas. It has been reported that supplies of oil in the country are expected to run out in about twenty years’ time. As such, future growth prospects must look beyond oil and gas into the other relatively undeveloped sectors in the Bruneian economy that could prove promising to the country in the medium- to long-term prospects of economic growth. Nevertheless, it has been acknowledged that the process of diversification has remained a challenge for the country.9

Developments Influencing the Growth Forecast What are the developments that will bode well for Brunei during the forecast period?

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ECONOMIC OUTLOOK Diversification, although slow, is beginning to show its fruit. From the latest available figures, the non-oil and gas sector has helped to boost year-on-year GDP with growth rates in 2007 of about 9.5 per cent. Government services recorded the highest growth rate (15.7 per cent increase), followed by the private sector of about 5.9 per cent.10 In 2010, the methanol plant will start its exports from the country and, again, this would bode well for the country. The completion of the methanol plant in 2010 represents one major achievement as this directly competes with the oil and gas sector which has predominated the Bruneian economy so far. The Brunei government has also been very receptive of foreign investors, not for their funding but rather the “expertise, talent, technologies and marketing contacts” brought in by foreign partnerships.11 For example, the present methanol plant at Sungei Liang is a joint venture which is 75 per cent Japanese and 25 per cent Brunei government. The bilateral trade between Brunei and China has increased by 66 per cent in the first four months of 2009, and China’s imports from Brunei has increased 1,441 per cent compared with the same period last year. This is set to increase even further when the China-ASEAN Free Trade Agreement (CAFTA) takes effect in 2010.12 Presently, China’s exports to Brunei include food, textile, construction materials and ICT products while the major import to China from Brunei is crude oil. However, with CAFTA coming into play, China is looking to participate in other sectors in the Bruneian economy. So far there have been high level visits between the two countries with defence ties developing rapidly and agricultural cooperation agreements on rice cultivation being implemented gradually. In summary, although Brunei may not face bleak times in 2010 and 2011, growth rates will not be spectacular. Diversification efforts must continue to be intensified if the country is to break out of the overt dependence on oil and gas as its main source of income. NOTES 1. International Monetary Fund (IMF), World Economic Outlook Database, October 2008 Edition.. Accessed 28 October 2009.

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THE ASEAN-10 2. Key Economic Indicators for Asia and the Pacific 2009 (Philippines: Asian Development Bank, August 2009), pp. 159 and 163. 3. Ibid. 4. “Country Report, Brunei”, United Kingdom: The Economist Intelligence Unit, September 2009, p. 6. 5. Ibid., p. 9. 6. Ibid., p. 6. 7. Brunei Economic Bulletin: Brunei Darussalam Economic Review Outlook and Recent Economic Developments, Department of Economic Planning and Development, Prime Minister’s Office, Volume 5, 2007 Special Edition, May 2008. 8. “Brunei Economy Seen to Contract to 0.4% this Year”, Brunei Times, 1 April 2009. . 9. Ibid. 10. Brunei Economic Bulletin. 11. “Foreign Investors Bring in Expertise”, Bru Direct.Com, 28 October 2009. . 12. “CAFTA to Boost Brunei-China Trade”, BruDirect.Com, 22 October 2009. .

Cambodia By Jayant Menon Gross domestic product grew by 6.7 per cent in 2008, marking the end of almost half a decade of sustained double- digit growth. This signalled a clear turnaround, with the most spectacular decade of economic growth performance in Cambodia’s history coming to a halt, caused by a global financial crisis. Although growth is expected to turn slightly negative in 2009, it is expected to rebound to positive territory in 2010 and beyond. Growth in the first half of 2008 was robust, with the momentum of high growth in 2007 spilling over. During this period, exports of garments and tourism receipts were buoyant, while agriculture remained resilient and construction activity continued to grow. Things turned quite negative in the second half of 2008 as a result of both global and regional factors. Growth is expected to turn negative in 2009, with both ADB and EIU expecting it to come in at –1.5 per cent, but the IMF being more

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CAMBODIA • The global financial crisis will result in negative growth in 2009, representing the worst economic performance in Cambodia’s modern history. • Despite this, growth is likely to rebound to between 3 and 4 per cent in 2010 and 5 per cent in 2011, as the global recovery sets in. • A silver lining from the domestic growth contraction is the easing of inflationary pressures, which had been looming as a major problem in 2008. • It appears unlikely that the deterioration in diplomatic ties with Thailand will have any significant economic impacts.

pessimistic with a forecast of –2.7 per cent. Even if the more optimistic forecast prevails, it will still represent the worst economic performance since the mid-1990s, the first time that records were kept in Cambodia’s modern history. Growth is expected to rebound to between 3 and 4 per cent in 2010, and to around 5 per cent in 2011. The extent of the slowdown in 2009 will depend mostly on world demand conditions, as will the recovery in 2010. It is still too early to estimate the impact of the recent deterioration in diplomatic ties with Thailand on economic performance in Cambodia. Based on experience from the 2008 Thai political crisis, and the extent and nature of economic ties, it is likely that the economic impacts will be small but non-negligible. A sharper than forecast drop in clothing exports, tourist arrivals and construction activity accounts for the downgrading of prospects for 2009. The only bright spot is continued positive growth in agriculture. Improvements in irrigation and other investments to improve productivity underlie the positive performance, and may offset to some degree reductions in prices going forward. The drop in clothing exports, that account for the bulk of export earnings, has played a major part in the overall slowdown in growth. Clothing exports to its principal market, the United States, are estimated to have fallen by about 25 per cent in the first half of 2009, compared with the corresponding period in the previous year. Apart from the reduction in demand as a result of the slowdown in global growth, the lifting of restrictions on Chinese

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THE ASEAN-10 garment exports to the United States and the EU at the end of 2008 compounded the negative impact on Cambodia’s garment exports. Construction activity has suffered from a sharp decline in FDI, especially from Korea. For the nine months until September 2009, the Council for the Development of Cambodia estimates that investment approvals were down to just US$1.6 billion, a year-on-year drop of more than 80 per cent. The tourism and related services sectors have borne the brunt of this decline. Tourist arrivals from higher spending regions such as the United States and Europe also declined, but regional land and water (as opposed to air) transport flows have increased. In fact, overall tourist numbers are expected to increase in the second half of 2009 and in 2010. The fiscal deficit remained unchanged between 2007 and 2008, at 2.7 per cent of GDP. Falling revenue as a result of a weak economy, accompanied by a boost in counter-cyclical government spending is estimated to increase the fiscal deficit to above 6 per cent in 2009. Forecasts from the EIU see the deficit remaining relatively unchanged, with only a slight decrease to 6 per cent in 2010 and then 5.5 per cent in 2011. The overall deficit continues to be financed by concessional loans and grants. In light of the impacts of the global financial crisis, donors have pledged about $1 billion in assistance for 2009, an increase of about a third from the previous year. The Government has also asked donors to accelerate disbursements of existing projects, in order to offset the effects of the contraction in private domestic demand and exports. Money supply growth came off its highs of 2007 and moderated in 2008. After having increased sharply to more than 60 per cent in 2007, broad money (M2) growth slowed to just around 5 per cent in 2008. The year-on-year increase until July 2008 was still a high 37 per cent, but fell off sharply in the second half of the year. In July 2008, the National Bank of Cambodia (NBC) doubled the reserve requirement for commercial banks from 8 per cent to 16 per cent, in an attempt to limit growth in credit. The onset of the global financial crisis forced a rethink in the monetary position, however. In January 2009, the NBC lowered the reserve requirement for commercial banks to 12 per cent, partly reversing the earlier increase. Year-on-year growth in broad

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ECONOMIC OUTLOOK money until July 2009 stood at 13.8 per cent, significantly higher than the 0.5 per cent recorded in February. Despite these efforts to boost domestic demand through monetary expansion, its impact is likely to be limited because widespread dollarization renders this instrument of policy relatively ineffective. With limited macroeconomic policy instruments as a result of dollarization, inflation was looming as a major problem without a domestic solution in 2008, when rising food and oil prices, together with rapid growth in broad money, pushed it to an estimated 25 per cent. But that was before the global crisis hit. A silver lining from the domestic growth contraction, and the drop in oil and other commodity prices, has been the easing of inflationary pressures in Cambodia. Inflation is expected to ease significantly in 2009. The highest forecast is for a rate of just 0.8 per cent (ADB), while the IMF and EIU predict that it will actually turn negative (–0.6 and –1.1, respectively). With growth expected to pick up in 2010, inflation is forecast to be around the 5 per cent range. The EIU predict that it will be little changed from this level in 2011 as well. The current account deficit is expected to narrow to around 5 per cent of GDP in 2009 as a result of lower oil prices and a reduced trade deficit, with imports falling by more than exports. For the first half of 2009, imports fell by 18.1 per cent, significantly more than the drop in exports of 10.3 per cent for the same period. But as the recovery begins to take hold in 2010, the current account deficit is expected to widen again to around 7 per cent of GDP. Gross international reserves remained healthy at $2.7 billion in mid-2009, slightly up from $2.3 billion at end 2008. In sum, it appears that the worst of the global financial crisis is over, and that this external constraint to domestic growth will be significantly loosened in 2010 and beyond. With world demand returning, Cambodia's exports of garments should recover, although it will still have to deal with increased competition from China in particular. In short, it will need to improve on its competitiveness. Since wages are already relatively low, other costs of production will need to be reduced. Cambodia's electricity tariffs are among the highest in the

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THE ASEAN-10 region. Despite significant increases in capacity through interconnections to regional grids, electricity prices have remained relatively unchanged. Unless the price of electricity falls, it will continue to be a significant constraint on competitiveness, and growth. Looking further ahead, a challenge facing Cambodia over the next decade or so relates to its changing demographics. The Government will need to create an economic environment in which the private sector can generate enough jobs to absorb Cambodia's demographic imbalance. The Government also has to ensure that there is sufficient investment in social infrastructure to ensure that the looming bulge in the labour force has sufficient access to education and training, Currently, more than half the population is less than 21 years of age. Many of them, particularly those in the poorer rural areas, still lack a proper education, and therefore sufficient productive skills to be easily employable. Unless this challenge is met very soon, Cambodia risks a sharp increase in unemployment, and resultant poverty.

Likely Economic Impacts of the Thai-Cambodian Spat Diplomatic relations between Cambodia and Thailand has seen its fair share of ups and downs in recent years. Nationalist passions have been running high on both sides of the border since Thailand opposed Cambodia's bid to have an ancient temple designated a UNESCO World Heritage site. The Preah Vihear temple was awarded to Cambodia by the World Court in 1962, but the 4.8 square kilometre area around it was never fully demarcated, and remains in dispute. Tensions have been on the rise since mid-2008, when the UN approved Cambodia's application to have the temple listed as a World Heritage Site. Both countries have been deploying increasing numbers of troops to the border over the dispute, leading to skirmishes that have left at least seven soldiers dead so far. Against this backdrop, the visit of former Prime Minister Thaksin Shinawatra in November 2009 strained relations even further. Deposed in a coup in 2006, and subsequently convicted in absentia on a conflict of interest charge, Mr Thaksin faces a two year jail sentence if he returns to Thailand. Thailand's request to him extradited was summarily

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ECONOMIC OUTLOOK dismissed by the Cambodians, claiming that he was a political victim, not a criminal. Thailand recalled its ambassador in Phnom Penh, and Cambodia retorted by doing the same. What are the likely economic impacts of the worsening relations between these two neighbours? As noted earlier, it is still too early to be sure about the full impacts, or indeed how this dispute will evolve. Since the effects will operate through trade, tourism, investment and labour flows, the economic impacts are likely to be widespread, but they are also unlikely to be very significant in economic terms, however. Although Thailand exports about US$2 billion worth of goods a year to Cambodia, this is less than 1.0 per cent of its total export value. Cambodia’s exports account for an even smaller percentage of total exports, amounting to less than US$100 million a year. Because of this, Cambodia’s exporters would not be greatly affected by a trade embargo, which is currently being threatened. But Cambodia does rely on Thailand for some of its critical imports, most notably fuel, cement and a host of consumer goods. Thus, a cancellation of trade could be disruptive to economic activity in the short-run, until new sources of such imports are found. Thailand is also a significant donor and investor in Cambodia, and has already moved to cancel a road project involving loans to Cambodia of some 1.4 billion baht. Thailand is now threatening to cancel a memorandum of understanding over the joint exploration of oil and gas resources in disputed waters in the Gulf of Thailand. If this leads to a prolonged dispute that threatens exploration, then is will be detrimental to both parties. Only time will tell. REFERENCES Asian Development Bank. Asian Development Outlook 2009. Manila: ADB, 2009a. ———–. Asian Development Outlook 2009 Update. Manila: ADB, 2009b. EIU. Cambodia Country Report. EIU, November 2009. Menon, Jayant. “Cambodia’s Persistent Dollarization: Causes and Policy Options”. ASEAN Economic Bulletin 25, no. 2 (2008): 228–37. ———–. The Global Financial Crisis: Regional and Local Impacts”. In Annual Development Review 2008–09, pp. 85–114. Phnom Penh: Cambodia Development Resource Institute, 2009.

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15.8 –2.5

Fiscal balance (as % of GDP)

6.4 6.4 6.4

–2.7

40.5

6.1 6.1 6.1

3,693 –4,771 –1,078 0.4

5.5 18.3 10.1

15.7 12.7 13.1 2,910 –3,918 –1,008 –3.6

10.8 10.8 10.8

2006A

13.3 13.3 13.3

M2 money supply growth (% change)

Inflation/CPI average (% change) ADB Asian Development Outlook 2009, Update IMF World Economic Outlook, October 2009 Economist Intelligence Unit, Cambodia Country Report, October 2009

Exports, goods FOB (US$ million) Imports, goods FOB (US$ million) Trade balance (US$ million) Current account balance (% of GDP) (ADB Asian Development Outlook 2009)

GDP growth (% change) ADB Asian Development Outlook 2009, Update IMF World Economic Outlook, October 2009 Economist Intelligence Unit, Cambodia Country Report, October 2009 — Agriculture sector growth (% change) — Industry sector growth (% change) — Services sector growth (% change)

2005A

–2.9

61.8

7.7 7.7 7.7

4,089 –5,471 –1,382 –2.8

5.0 8.4 10.1

10.2 10.2 10.2

2007A

–2.9E

5.4A

25.0 25.0 25.0

4,708A –6,534A –1,826A –7.3

2.0b 8 4.9

6.7 6.7 5b

2008A

Cambodia: Selected Economic Indicators, 2004–2011F

–6.2

16.0

0.8 –0.6 –1.1

3,582.00 –5,374 –1,792 –5.0 b

3.0 –6.5 –0.9

–1.5 –2.7 –1.5

2009E

–6.0

2.8

5.0 4.1 5.9

3,919.00 –5,754 –1,834 –7

3.5 3.0 3.3

3.5 4.3 3.3

2010F

–5.5

11.5

n.a. n.a. 5.6

4,200 –6,126 –1,926 n.a.

3.3 6.5 5.3

n.a. n.a. 5.1

2011F

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0.6

0.7

1,411 4,057

3,317.7

3,154.7

1,159 4,112

3,527.0

3,515.0

2006A

2,143 3,999

0.5

3,537.1

3,761.0

2007A

2,641A 4,077A

n.a.

n.a.

4,127

2008A

2951.0 4,146

n.a.

n.a.

4,157

2009E

(continued )

2881.0 4,213

n.a.

n.a.

4,390

2010F

2,983 4,247

n.a.

n.a.

4,625

2011F

NOTES: A — actual; E — estimates; F — forecasts; Numbers from ADB for the individual year only. SOURCES: Unless otherwise noted, all data are from the Economist Intelligence Unit, 2009. Cambodia Country Report, November 2009.

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

Total debt outstanding and disbursed (US$ million), ADB Statistical Database System Long-term debt (US$ million), ADB Statistical Database System Debt service ratio (as % of XGS), ADB Statistical Database System

2005A

Cambodia: Selected Economic Indicators, 2004–2011F

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Indonesia By Reza Siregar Having been among the most severely hit economy by the Asian financial crisis of 1997–98, Indonesia, based on many measures, weathered the global slump of 2008–09 remarkably well. The country maintained the third highest gross domestic product (GDP) growth in the Group of Twenty economies (G-20) — slower only to China and India, averaging higher than 4 per cent quarterly during the first half of 2009. The country’s large domestic market and its relatively low dependency on external trade fuelled the country’s economic growth amidst global economic recession. Robust growth in private consumption, underpinned by both moderate inflationary pressure and a surge in election-related spending, contributed close to 60 per cent of GDP during the first half of 2009. Annualized headline inflation bottomed in July 2009 at around 2.7 per cent from over 11 per cent at the end of 2008. However, with the return of rising commodity prices

INDONESIA • Indonesia has weathered the global slump of 2008-09 remarkably well. The country maintained the third highest gross domestic product (GDP) growth in the Group of 20 largest economies in the world (G-20) — slower only to China and India. • The country’s relatively limited reliance on tradeable sectors and more on domestic (household) consumption played a huge factor in its ability to emerge from the recent crisis in a better shape relative to its regional partners. • The country must take a step forward in tackling its dire need of infrastructure overhaul if it aims to have a real chance to achieve its potential growth. • Assuming that the worst phase of global economic malaise is over, particularly in the United States and the European economies, stronger growth momentum is expected in 2010 and 2011. However, the overall real GDP growth in 2010 will likely to remain below 6 per cent, achieved in 2007 and 2008.

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ECONOMIC OUTLOOK since the second half of 2009, especially with the crude oil price in the global market, a stronger inflationary pressure was registered in third quarter 2009. Following three consecutive quarters of current account deficits in 2008, the country reported a surplus in average of US$3 billion during the first two quarters of 2009. The strength of the trade surplus mitigated the impacts of the deterioration of the capital and financial account, and improved the overall balance of payment position, contributing to the rise in the foreign exchange reserve from US$51.6 billion at the end of 2008 to US$57.4 billion in July 2009. The relative vigour of the Indonesian economy, and the success of parliamentary and presidential elections, particularly the successful re-election of President Susilo Bambang Yudhoyono to his second term, brought about a healthy return of investor confidence. Between January and August 2009, the Indonesia stock market index has gained 95 per cent in the U.S. dollar term, albeit still below its 2008 peak. Accordingly, the return of the capital inflow triggered an appreciation trend in the local currency. Rupiah strengthened against most major currencies, particularly against the U.S. dollar. The Indonesian rupiah appreciated to around US$1 to Rp9,400 in early October 2009, from its weakest point at US$1 to Rp12,200 in November 2008. Despite the gains, however, the exchange rate of rupiah against major world currencies continued to be volatile.

Commodity-based Exports As in most other regional economies, Indonesia experienced sharp contractions in both exports and imports during the first half of 2009, by about 27.2 per cent and 34.3 per cent year-on-year, respectively. However, strong recoveries were reported in the third quarter of 2009. The country’s relatively limited reliance on tradeable sectors, particularly the manufacturing sector, played a huge factor in its ability to emerge from the recent crisis in a better shape relative to its regional partners. The country’s exports only represented less than 30 per cent of nominal GDP at the end of 2008, compared to 185 per cent for Singapore and 90 per cent for Malaysia. The net exports of Indonesia at the first half of 2009 were amounted to less than 10 per cent of the country’s GDP.

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THE ASEAN-10 Furthermore, Indonesian exports are dominated by commodity goods, raw materials, and non-electronic manufacturing goods. The key sectors of the economy, such as the agriculture and mining, benefited from the strength of the global prices of the commodities. Oil and gas sector contributed close to 15 per cent of the total exports of the country during January to August 2009. In addition, mining, agriculture, raw material (such as rubber), and labour-intensive (such as textile, garment and foot ware) industries delivered over 35 per cent of the total non-oil exports for the same period. In 2009, Indonesia has become the world’s largest palm-oil exporter. In contrast, exports of electronics constituted around 50 per cent of Singapore’s total exports and 40 per cent of Malaysia’s total exports in 2008. In addition, the destinations of the Indonesian exports are relatively diverse. The big traditional export destinations such as the United States and the European markets, countries severely affected by the recent crisis, absorbed only around 25 per cent of the Indonesian exports during the first three quarters of 2009. While the Southeast Asian neighbours consumed around 22 per cent of the country’s exports for the same period. In 2009, Indonesia has in fact exported more to China and India, than to the United States. A similar general picture can be drawn from the import number. Hence, the Indonesian trade sector arguably faced more of second-round effects of the recent global slowdowns.

Navigating Domestic Monetary and Fiscal Policies in the Midst of the Global Financial Crisis The quality of the country’s management of macroeconomic policies, particularly those of monetary and fiscal measures, is a crucial factor contributing to the strength of the economy. At the same time, the recent experiences underscore the structural weaknesses of the policies and the overall limitations. On the fiscal side, the ministry of finance employed both expenditure and tax measures. Indonesia’s decision to allocate up to 84 per cent of their stimulus to faster moving measures such as tax breaks and subsidies have helped to support the resilience of private consumption. This proved to be essential, especially in harnessing and strengthening domestic demand. However, critics have

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ECONOMIC OUTLOOK long been pointing out that the government has often underestimated tax revenue growth, while overestimating its ability to targeted projects. The speed of government spending continued to be hampered by bureaucratic inefficiencies, and lack of institutional capacity, partly due to the devolution of power to provincial and district-level governments in recent years. At the end of 2008, the budget deficit was only of 0.1 per cent of GDP, much lower than its 2.1 per cent target. The absorption and disbursement pace of expenditure is unlikely to accelerate in 2009. The government has introduced a stimulus package totaling around Rp.73 trillion, and is targeting a budget deficit of 2.4 per cent of GDP in 2009. It is very doubtful that it would achieve its 2009 target. On the monetary policy side, Bank Indonesia (BI) had also embarked in massive expansionary monetary policy measures. Its key policy rates declined from 9.5 per cent in December 2008 to 6.5 per cent in August 2009, and the rate is expected to be kept for the rest of 2009. BI also took measures to ease pressure on the bank liquidity by cutting the reserve requirement for bank’s reserve at 5 per cent from 9 per cent. To help instill confidence in the domestic banking sector, the monetary authority raised the deposit guarantee limit from Rp100 million to Rp2 billion. Despite the expansionary efforts, lending growth declined significantly from the peak of 40 per cent per annum recorded in October 2008 to at most around 15 per cent by the end of 2009. Furthermore, even with aggressive cuts of the policy rate by a 300 basis point, lending rate declined only moderately, especially compared with that of deposit rate. At the end of July 2009, the interbank rate in Indonesia stood at around 7 per cent, among the highest in the region. Only after coordination among fourteen major commercial banks, we see the narrowing of the gaps between lending rates and deposit rates against the policy rate.

Dismal Stage of Infrastructure The country must take a step forward in tackling its dire need of infrastructure overhaul if it aims to have a real chance in achieving its potential growth. The World Bank estimates around 55 per cent of the road network in Java will be congested by 2010, a further rise from 43 per cent in 2007. Limited access to electricity and clean water

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THE ASEAN-10 system has also hampered overall productivity of the country. Today, approximately 40 per cent of the country’s population does not have access to electricity. Similarly, key sectors, such as health and education, also urgently need much improved hard and soft infrastructures. Unlike in early 2000s, Indonesia has presently the fiscal space to progress forward in addressing its infrastructure bottlenecks. Looking at the composition of stimulus package for 2009 budget, and the proposed budget for 2010 however, many questions remain unanswered on the overall commitment of the government to address the dismal stage of the country’s infrastructures.

Key Assumptions The sharp deceleration of the GDP growth during the first half of 2009 was largely be attributed to severe decline in investment spending and exports, reflecting the heightened caution on the part of the business community. It is therefore important to underscore the importance of sustained global economic recovery to realize stronger growth of the Indonesian economy. Due to innate level of global integration, the overall strength of the global banking sector should play a detrimental role in stimulating a much-needed recovery in bank lending in Indonesia. Assuming that the worst phase of global economic malaise is over, particularly in the United States and the European economies which is still a brave assumption to make during the third quarter of 2009, the GDP growth rate is forecasted to reach around 4.2 per cent for 2009. At the outset of economic downturn, price level increase is expected to moderate to 4.5 per cent, well below the targeted inflation rate of Bank Indonesia in 2009. Going forward, inflationary pressure is expected to rise with the return of healthier demand and escalating commodity price, especially fuel price. It is also likely that the government would continue to phase out general price subsidies domestically. The growth momentum is expected to continue in 2010 and 2011, with the nominal GDP growth rate to reach around 5.5 per cent and 6 per cent, respectively. Domestic demand continues to be the backbone of the 2010 growth, with trade and investment to soar, albeit only moderately.

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ECONOMIC OUTLOOK Indonesia : Selected Economic Indicators, 2006–2010F

% change over previous year Real Gross Domestic Product Real Private Consumption Gross Fixed Investment

Merchandise Exports (f.o.b. US$ billion) Merchandise Imports (f.o.b. US$ billion) Current account balance (% of GDP)

Inflation/CPI average (% change)

Fiscal balance (as % of GDP) External debt (% of GDP)

Foreign exchange reserves (US$ billion) Exchange rate at year-end (IDR/US$1)

2006

2007

2008

2009E

2010F

5.5 3.7 2.9

6.3 5.0 9.2

6.1 5.3 11.7

4.2 5.0 2.7

5.3 5.2 9.0

103.5 73.9 3.0

118.0 84.9 2.5

139.6 116.1 0.1

99.8 75.5 1.0

1.5

13.1

6.1

11.1

4.5

6.0

–1

–1.3

–0.1

–1.9

–1.0

37.0

32.0

34.0

30.0

28.0

42.6 9,143

56.9 9,163

52.1 9,767

64.0 9,400

72.0 9,250

NOTE: E is an estimate; F is a forecast. SOURCES: Consensus Forecast, International Monetary Fund Database, Asian Development Bank Database, and author’s estimates.

Laos By Kyophilavong Phouphet Economic Performance A number of developing countries have suffered from the global financial crisis, however, the crisis seems to have had a minor impact on the Lao economy because the Lao financial system is not directly linked to the global financial system, and its main trading partners are from the Asian region. Gross domestic product (GDP) declined from 7.9 per cent1 in 2008 to 7.1 per cent in 2009 due to the impact of the global financial crisis.

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THE ASEAN-10

LAOS • Despite the global financial crisis, Laos has enjoyed economic growth; the resource sector and the expansion of government expenditures are the main sources of this growth. • In the medium term, high growth is expected to continue due to mining and hydropower activities. • However, the challenges to growth are effective macroeconomic management to deal with massive foreign capital inflows in the resource sector and increasing the competitiveness of non-resource sectors.

Some mining and hydropower projects have been delayed and others halted; however, the projects that have been carried out and have contributed to growth. Economic growth in 2009 stems from 15 per cent growth in the industry sector, 3.0 per cent growth in the agriculture sector and 6.5 per cent growth in the service sector. Meanwhile, inflation and the exchange rate have remained stable. Laos’ currency, the kip, appreciated about 1 per cent against the U.S. dollar in 2009, mainly due to the monetary authority’s policy to stabilize the exchange rate and inflation for de-dollarization;2 capital inflows from mining and hydropower projects; and a weakened U.S. dollar. Inflation and the exchange rate are highly correlated. Appreciation of the exchange rate has led to lower inflation; as a result, inflation was stable at about 3 per cent in 2008 and 2009. Laos’ fiscal balance has been aggravated because of the impact of the global financial crisis and the expansion of government expenditures. As world demand for minerals declined, mining exports and production also declined, which has led to reduced government revenue, mainly from natural resource taxes, income taxes, and profit taxes. On the other hand, government expenditures have expanded for improving infrastructure and facilities for the SEA Games, road construction, and increased salaries for government officers. As a result, the budget deficit as a share of GDP increased from 2 per cent in 2008 to 7.8 per cent in 2009.

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ECONOMIC OUTLOOK Even though Laos has exported minerals in recent years, it is still facing a trade deficit.3 The trade deficit is expected to decrease slightly from US$776 million in 2008 to US$544 million in 2009. The main reasons for the declining trade deficit are delays or halts in some mining and hydropower projects which have lead to decreasing imports of investment goods. The external debt burden remains high, at about 50 per cent of GDP in 2009. Most of this debt is long-term public debt and it exceeds the accepted threshold. However, external public debt is expected to decline in the medium term.

Economic Outlook Despite the impact of global financial crisis, growth is expected to be robust, about 8 per cent for 2010–11.4 This prediction assumes that the world economy will recover from the global financial crisis and that the hydropower and mining sectors will remain active. The industry sector is forecast to continue to grow in the double digits. Agriculture sector growth might decline slightly due to crop damage from heavy floods in the south, while the service sector might expand due to increasing tourism. The inflation and exchange rates are expected to be stable in the medium-term. The inflation rate is expected to stabilize around one digit. The exchange rate (kip/US$) is expected to be about 8,500 in 2010–11, assuming increased capital inflows from FDI, expanding mineral and electricity exports,5 and prudent monetary and exchange rate policies. The trade deficit is expected to narrow during 2010–11 due to increasing exports in mining and hydropower. The ratio of budget deficit to GDP is expected to decline from 7.5 per cent in 2009 to about 5 per cent in 2010–11 because tax revenues from the resource sector are expected to increase and government expenditure trends to decline.

Main Challenges of Development Although high growth in the medium term is expected, Laos is facing three main challenges. Firstly, appropriate macroeconomic adjustment is

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336 9,655

— 3.6

2,351

–3.0

4.7 37.2

660 1,133 –473 –10.3

14.2 9.7 2.5

8.1 8.4 8.1

2006

536 9,341

— 4

2,521

–2.9

5.6 58.8

663 1,321 –658 –15.8

4.4 9.1 8.6

7.9 7.5 7.5

2007

636 8,466

— 4.2

2,931

–2.0

3.2 20.2

863 1,639 –776 –16.5

10.4 9.1 3.7

7.9 7.2 7.0

2008

536.0 8,400

— 6.9

3,084

–7.8

3.3 10–15

749 1,293 –544 –15.4

12.5 6.3 2.8

7.1 4.6 5.6

2009E

512.0 8,500

— 6.2

3,323

–5.7

3.3 10–15

999 1,671 –672 –8.1

15 6.5 3.0

8.0 5.4 6.5

2010E

595 8,500

— 6.1

3,550

–5.4

3.5 10–15

1,103 1,935 –832 –12.4

15 6.5 3.0

8.0 8.4 7.2

2011E

NOTES: E refers to estimated values. a. values from 2009 to 2011 are from government planning which are based on 5 year socio-economic development plan (2011–15); 2011–15 plan of government (GoL, 2009) and consultation with economist at National Economic Research Institute (NERI); Other years are from IMF (2009a and 2009b). b. this value is end of period. SOURCES: IMF (2009a and 2009b); Government of Laos (2009); World Bank (2009).

238 10,767

— 7.4

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

2,203

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

4.5

Fiscal balance (as % of GDP)

Total debt outstanding (US$ million)

8.8 18

684 1,270 –586 –17.8

10.6 9.9 0.7

7.1 8.8 7.1

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

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

— industry sector growth (% change)a — services sector growth (% change)a — agriculture sector growth (% change)a

GDP growth (% change) Lao government IMF World Bank

2005

Laos: Selected Economic Indicators, 2005–2011E

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ECONOMIC OUTLOOK necessary in order to cope with massive foreign capital inflows.6 These massive foreign capital inflows not only appreciate the real exchange rate but also affect price stability because the monetary authority lacks instruments of monetary and exchange rate policy to control capital inflows and because the financial system is in the early stages of development. Secondly, monetary and fiscal policy discipline, including the lack of monetary tools, should be improved in order to maintain macroeconomic stability. Thirdly, continuing domestic reforms (especially in the banking sector and state-owned enterprises) are required. In addition, improving the business climate for small and medium enterprises (SMEs) is an important factor for promoting sustained growth. NOTES 1. There are currently several mining and hydropower projects underway (IMF 2008). In addition, increased domestic demand from preparations for the Southeast Asia Games (SEA Games) has driven growth. 2. Laos is a highly dollarized economy (U.S. dollar and Thai baht are widely used); the dollarization rate (the ratio of foreign currency deposits to broad money) was about 50 per cent in 2008. Dollarization has both benefits and costs for Laos but its costs seem to be higher than the benefits. Therefore, since 2003, the monetary authority has implemented policies to encourage de-dollarization. For a more detailed discussion of dollarization in Laos see Menon (2006) and Kyophilavong (forthcoming). 3. Laos’ main trading partner is Thailand. Laos imports a wide range of products, from consumption goods to fuel, especially from neighbouring countries. 4. The Lao government and international organizations such as the IMF, ADB and World Bank have predicted different rates of growth. However, the official Lao government’s estimation used here is based on the Seventh Socio-Economic Development Plan (2011–15) and in consultation with economists at the National Research Institute (NERI), Ministry of Planning and Investment. 5. The Nam Theun 2 project will produce and sell electricity to Thailand by 2010, which will boost exports. 6. Laos plans to establish a stock exchange market by 2010, which is expected to increase foreign capital inflows. REFERENCES Government of Laos. 7th National Socio Economic Development Plan (NEDP) for 2011 to 2015. Vientiane: Ministry of Planning and Investment, 2009.

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THE ASEAN-10 International Monetary Fund. IMF Executive Board Concludes 2008 Article IV Consultation with the Lao People’s Democratic Republic. 2008. ———–. Staff Report for the 2009 Article Consultation. 2009a. ———–. Joint IMF/World Bank Debt Sustainability Analysis 2009. International Monetary Fund and International Development Association, 2009b. Kyophilavong, P. “Lao PDR: Coping with Multiple Currencies”. In Dealing with Multiple Currencies in Cambodia, Laos and Vietnam: The Scope for Regional Cooperation. Manila: ADB, (forthcoming). Kyophilavong,P. and T. Toyoda. “Impacts of Foreign Capital Inflows on the Lao Economy”. In Empirical Research on Trade and Finance in East Asia, edited by Toyda and Chou. Research Series, Vol. 142, Hiroshima Shudo University, 2009. Menon, J. “Would You Like to Pay in Dollars, Baht, or Kip? Economic Consequences of Multiple Currencies in the Lao People’s Democratic Republic”. Journal of Greater Mekong Subregion Development Studies 3, no. 2 (2006). World Bank. Impact of the Global Financial Crisis and Recent Economic Developments in Lao PDR. Vientiane: World Bank, 2009.

Malaysia By Kian-Teng Kwek There is an old Chinese New Year blessing which states, “With three yang begins prosperity” (yang means positive force in Chinese). A good example to demonstrate the “three yang” is Shandong, a province located in Northeast China. Shandong is China’s biggest successful industrial producer, one of the top manufacturing provinces, and one of the best Chinese tourism destinations featuring rich cultural

MALAYSIA • New leader under Prime Minister Datuk Seri Najib Tun Razak has set a new vision for Malaysia’s economic future. • Many reforms have been planned which, if implemented, can work positively for Malaysia’s short- and long-term economic prospects. • Malaysia also plans to move beyond its traditional export-oriented model into a knowledge- and innovation-based approach that will transform the country into a high income economy.

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ECONOMIC OUTLOOK heritage. The success of Shandong is believed to be attributed to its “Three Mountains” — Mount Taishan, Mount Laoshan, and Mount Mengshan. If yang comes in threes, so does ying. However, the ying that emerged recently was a “three-crises” of unprecedented proportion — the Subprime Mortgage Crisis of 2005, the Global Financial Crisis of 2008, and the Great Recession of 2009. These crises have derailed the calendars of many country’s economic growth plans. For Malaysia, it affected the achievement of Vision 2020, a policy formulated to develop Malaysia into a knowledge- and innovation-based economy, and to be a developed nation as laid out in the Outline Perspective Plan (OPP3) (2001–10). The original plan of the Economic Planning Unit (EPU) in the Prime Minister’s Department was to catapult Malaysia to a high-income economy (HIE) defined by an income of US$21,000 gross national product (GNP) per capita by 2020. However, Malaysia was required to grow at 9 per cent per annum to achieve its Vision 2020. The Asian financial crisis (AFC) of 1997/98 saw the EPU revising again the target to US$15,000 GNP per capita (based on World Bank’s definition) with a desired 7 per cent annual growth to attain Vision 2020. However, the post-AFC real gross domestic product (GDP) growth was approximately 5.5 per cent per annum, as opposed to the required 7 per cent. In 2010, the GDP economic growth rate is expected to expand at 2–3 per cent as compared to –3 per cent in 2009; manufacturing sector to grow at 1.7 per cent; and services sector at 3.6 per cent. Exports are anticipated to rebound at 3.5 per cent. Private consumption is to grow at 2.9 per cent, while private investment is to recover at 3.4 per cent.

Renewing Ties and Relations The year 2009 marks a new change in the leadership not only in United States, where Barack Obama took office on 20 January 2009 as the forty-fourth President, but also in Malaysia, where Datuk Seri Najib Tun Razak was sworn in as the sixth Prime Minister on 3 April 2009. Datuk Seri Najib is the son of the second prime minister of Malaysia, Allahyarham Tun Abdul Razak. On 17 September 2008, Najib, then the Deputy Prime Minister, launched www.1Malaysia.com.my in an effort to

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THE ASEAN-10 communicate with the citizens of Malaysia (rakyat), and as a platform to provide a forum for Malaysians to discuss government matters. The discontent of the rakyat and the Barisan National ruling coalition being out of touch with the rakyat were the reasons behind the 8 March 2008 political tsunami, which toppled the Barisan Nasional governments in five states and ended its unbroken two-thirds parliamentary majority. Barisan National had always won two-thirds parliamentary majority since Independence Day in 1957. Datuk Seri Najib Tun Razak started his premiership with the slogan “1Malaysia. People First. Performance Now”. To reach out to the rakyat, interestingly Datuk Seri Najib thus became the first Malaysian Prime Minister who used Facebook , the Twitter page and Youtube to connect to the increasingly Internet-savvy rakyat. These new media tools are embraced as a fast channel to micro-blogging on government activities, as they are used as a strategy of the Prime Minister to promote “Green IT”, i.e. the economics of using networking and communications systems to efficiently and effectively save energy with minimal or no impact on the environment. In line with the 1Malaysia strategy, the Prime Minister intends to increase transparency and government accountability by introducing transparency initiatives, which include the use of Key Performance Indicators (KPIs) and national key result areas (KRA). In terms of ties with the external front, Datuk Seri Najib recognized the importance of Asia becoming the centre of the global economy in this millennium. In particular, ASEAN will be playing a central role in the East Asian economic and financial integration. On diplomatic relations, Malaysia and China celebrated the thirty-fifth anniversary of the establishment of bilateral diplomatic relations on 1 June 2009 in a big way. Three areas of common interests were discussed: (a) more investment by China in Malaysia, (b) more new technologies which China could offer, and (c) more Chinese tourists to Malaysia. Malaysia was the first country in Southeast Asia to initiate bilateral ties with China when Tun Razak paid a six-day visit to China’s Communist Party chairman Mao Zedong in May 1974. The year 2010 will mark another important milestone in bilateral diplomatic relations when Malaysia and Republic of Korea celebrate the fiftieth anniversary of their diplomatic relations.

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ECONOMIC OUTLOOK

A New Growth Model On the eve of Prime Minister Datuk Seri Najib’s 100th day as Prime Minister (10 July 2009), he announced a nine-member panel comprising of local and foreign experts who would make up the important National Economic Advisory Council (NEAC). The NEAC was set up to articulate a New Growth Model, which is growth-centric laced with new economic strategies that would enable the country to move away from its old export-oriented growth model and evolve into a HIE that would be underpinned by a vibrant services sector. This essentially entails moving Malaysia towards a knowledge- and innovation-based economy. It would also shift the emphasis from industrial manufacturing, which depends on semi-skilled and low-cost labour, to one that is based on high technology and modern services, driven by skilled and highly paid workers. The new economic growth model will be included in the Tenth Malaysia Plan (2011–15), a five-year economic blueprint, and to be presented on 10 June 2010. Tan Sri Nor Mohamed Yakcob, Minister in the Prime Minister’s Department who is overseeing the EPU announced that for the first time the Malaysian government will unveil projects that it plans to undertake during the period on a “revolving two-year basis”, instead of announcing them all at one go. The nine experts in the NEAC are Universiti Sains Malaysia academic and National Innovation Council member Professor Tan Sri Dzulkifli Abdul Razak; former Bank Negara Malaysia Assistant Governor Datuk Seri Panglima Andrew Sheng; former Institute of Strategic and International Studies (ISIS) deputy director Datuk Dr Zainal Aznam Yusof; former ISIS research director Datuk Dr Hamzah Kassim; corporate adviser Datuk Nicholas S. Zefferys; ISIS director-general Dato’ Dr Mahani Zainal Abidin; senior adviser to the World Bank and the Asian Development Bank Dr Yukon Huang; Senior Fellow in the Wolfensohn Centre for Development, Brookings Institution Dr Homi J. Kharas; head of the Economics Department of the London School of Economics Professor Dr Danny Quah. Former University of Malaya’s dean of the economic and administration faculty Professor Dr Norma Mansor is the NEAC secretary general,

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THE ASEAN-10 and Tan Sri Amirsham A. Aziz, former chairman of Maybank, was appointed as chairman. On 30 June 2009, Malaysia undertook another important step of structural reform in the deregulation of the Foreign Investment Committee (FIC) Guidelines, which included an abolishment of guidelines over equity stakes, mergers and takeovers for Malaysian companies seeking public listing. In particular, it saw the abolishment of 30 per cent bumiputera equity requirement that involves equity ownership at firm level. This deregulation complements the liberalization process of the services sectors to increase competitiveness and to attract new business opportunities. In future, the 30 per cent bumiputera equity ownership will be applied in the macro context, particularly in strategic sectors. These steps are a win-win approach whereby the abolishment of equity conditions removes hindrance to growth and participation of non bumiputera, while the establishment of Ekuiti Nasional Berhad (EKUINAS), a new investment institution which will invest in bumiputera companies based in high growth sectors, will ensure an effective bumiputera participation in the economy. Datuk Seri Najib’s new economic strategy has received much applause, and was described by a market research house CLSA Asia-Pacific Markets in September 2009 as Najibnomics . As Malaysia moves towards a knowledge- and innovation-based economy, it is also crucial to respect and protect intellectual property rights. In this regard, the Intellectual Property Corporation of Malaysia (MyIPO) , an agency under the Ministry of Domestic Trade, Cooperative and Consumerism, was tasked to regulate and supervise on issues relating to intellectual property. MyIPO has earmarked four knowledge areas, i.e. traditional knowledge, genetic resources, traditional cultural expressions, and geographical indications, in line with the promotion of green innovation by intellectual property organizations all over the world. Going forward, MyIPO has also the tasks in managing and converting such knowledge into marketable products, which involve more research and development, branding, marketing, and distribution.

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ECONOMIC OUTLOOK On the external front, on 26 October 2009, at the end of the Fifteenth ASEAN Summit, Datuk Seri Najib said that East Asia, which is expected to be the world’s economic growth area in the near future, also needs a new economic model. He said the vision of the twenty-first century being the “Asian Century” had become clearer as East Asia was assisting in the recovery process of the current global economic situation. Extending the 1Malaysia slogan, Najib proposed a 1ASEAN, and said the Fifteenth ASEAN Summit and Related Summits had made positive decisions which became benchmarks in ASEAN’s goal of establishing the ASEAN Community by 2015.

Directions of Trade and Fiscal Stance The direction of trade in Malaysia is dependent on the East Asian trade growth. Overall, the rest of the East Asian countries have been enjoying trade balance surplus except for the Philippines and Hong Kong. With an astronomical performance, China’s trade surplus in 2008 recorded a surplus of US$297 billion. Malaysia’s trade surplus in 2008 was US$42.6 billion (US$1 = RM3.48). As a comparison, the U.S. trade deficit has been deteriorating since early 1990s, with a sizeable deficit of –US$865 billion. Roughly, China’s total trade is equivalent to 18 per cent of U.S. GDP. Malaysia and China have both achieved impressive figures in terms of trade, the numbers rising over the years. Bilateral trade reached US$39.6 billion in 2008, up by more than 10 per cent from 2007. China is Malaysia’s fourth largest trading partner and the fourth largest export market. Malaysia was the ninth largest investor in China in 2008. At the same time, as China grew, so too has Asia’s hands strengthened. China has replaced the United States as the biggest trading partner for most of the region’s economies. In 2002, U.S. two-way trade with Japan, South Korea, Thailand, Indonesia, Malaysia and Singapore exceeded Chinese trade with those countries. In 2008, each of those countries traded more with China than with the United States. On the ASEAN Free Trade Area (AFTA) which would come into force on 1 January 2010, Datuk Seri Najib said that Malaysia was committed to realizing this and the tariffs of only eighty-nine products

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THE ASEAN-10 had not been abolished. As at 2009, Malaysia had free trade agreements with eleven APEC member nations which consisted of six ASEAN countries, China, Japan, South Korea, Australia and New Zealand. Two more deals — with the United States and Chile — are being negotiated. Malaysia would also like to see a conclusion at the Doha Development Round despite eight years of discussions. In terms of volume of trade as a percentage of world trade (Table 1), Malaysia’s trade is just slightly over 1 per cent of total world trade. Overall, ASEAN+3 expects that regional trade will continue to increase steadily at 23 per cent. Malaysia is world’s seventeenth largest exporter, registering an export value of US$198 billion and world’s twenty-sixth largest importer with a value of US$156 billion in 2008. These trade numbers are to show that Asia is still relatively smallish, and not as large as the European Union which consists of twenty-seven members. Eichengreen and Irwin (2009) have warned on countries sliding into protectionism, that is, on how the Great Depression was marked by protectionist trade policies (an economic mistake that the world undertook), and on the breakdown of the multilateral trading system.

Table 1: Regions’ Trade as a Percentage of World Trade (In percentages)

Indonesia Malaysia Philippines Singapore Thailand Japan Rep. Korea China HK 9EA U.K. EU15 U.S.

1985

1990

1991

1995

2000

2005

2006

2007

2008

0.73 0.71 0.25 1.24 0.41 7.64 1.55 1.65 1.50 15.68 5.31 24.63 14.36

0.68 0.84 0.00 1.62 0.81 7.45 1.93 0.00 0.00 13.33 5.86 13.78 13.01

0.77 0.99 0.30 1.75 0.92 7.71 2.15 0.00 0.00 14.60 5.31 39.17 13.02

0.82 1.44 0.44 2.32 1.22 7.46 2.49 2.69 3.54 22.42 4.75 34.10 12.96

0.73 1.36 0.55 2.07 0.99 6.52 2.52 3.60 3.16 21.48 4.72 33.57 15.46

0.67 1.20 0.41 2.01 1.07 5.20 2.56 6.66 2.77 22.56 4.22 33.70 12.35

0.66 1.19 0.41 2.08 1.06 4.99 2.59 7.17 2.68 22.83 4.28 33.44 12.04

0.67 1.14 0.38 1.99 1.05 4.73 2.58 7.69 2.55 22.78 3.77 33.56 11.25

0.82 1.09 0.34 2.02 1.09 4.74 2.24 7.87 2.35 22.55 3.34 29.95 10.65

SOURCE: UN COMTRADE and WTO.

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ECONOMIC OUTLOOK In the early months of 2009 as the world plunged deeper into recession with the worst economic contraction since the days of the 1930s Great Depression, the Malaysian government called for an urgent implementation of fiscal policy measures to ensure that the Malaysian economy continues to experience positive growth in 2010. The First Stimulus Package of RM7 billion was unveiled on 4 November 2008 to stem the recessionary tide. On 10 March 2009, the then Deputy Prime Minister Datuk Seri Najib Tun Razak tabled the Second Stimulus Package, a RM60 billion “mini budget”, to help Malaysia weather the global economic crisis. Relatively, the Malaysian fiscal stimulus was a mere fraction as compared to China’s 4 trillion-yuan (US$586 billion) stimulus plan in lifting the Chinese economy out of recession. The RM60 billion package was to be implemented over 2009 and 2010. It includes RM15 billion as fiscal injection, RM25 billion in Guarantee Funds, RM10 billion for equity investments, RM7 billion for private finance initiatives and off-budget projects, as well as RM3 billion in tax incentives. This RM60 billion accounted for almost 9 per cent of Malaysia’s GDP as it is an unprecedented fiscal step in the nation’s economic history. On 23 October 2009, Datuk Seri Najib tabled his first 1Malaysia Budget . In this annual budget, the government plans to spend about RM192 billion, about a tenth less than 2009, but it will still reduce the deficit to 5.6 per cent of the economy. In the 2010 Budget, with the theme “1 Malaysia, Together We Prosper”, the Budget reinforces its call on three strategies, namely: (a) driving the nation towards a high-income economy; (b) ensuring holistic and sustainable development; and (c) focusing on the wellbeing of the rakyat.

Directions of Banking and Finance The fall of Lehman Brother in September 2008 gripped the world stage as it threatened the fragility across financial markets in the global financial system. In addition to fiscal stimulus, countries have been rapidly applying monetary stimulus. Bank Negara Malaysia (BNM) started to actively respond through its monetary policy on 24 November 2008 when the Monetary Policy Committee (MPC) took

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THE ASEAN-10 immediate quantitative easing to reduce the Overnight Policy Rate (OPR) from 3.5 per cent to 3.25 per cent. However, as the global growth outlook deteriorated further in December 2008, the MPC drastically reduced the OPR by 75 basis points to 2.50 per cent on 21 January 2009 from 3.25 per cent. On 24 February 2009, MPC consecutively reduced the OPR by another 50 basis points to 2 per cent. Since then BNM decided to leave the OPR unchanged at 2 per cent. The Statutory Reserve Requirement (SRR) was also reduced from 3.5 per cent to 2 per cent, effective from 1 February 2009. With the slow decline in the heightened downside risks to global growth, the magnitude of the reductions in the OPR and the SRR are aimed to provide a continued stable and supportive monetary environment for the domestic economy. In contrast, as the global financial crisis interfered with the U.S. Federal Reserve’s ability to operate a conventional monetary policy, the Malaysian monetary policy was not directly affected by the 2008 global financial crisis. However, the key concern for all central bankers was on the primary focus of lender-of-last-resort measures. Given that the Malaysian banking system remains fundamentally sound and robust after the banking and financial reforms of 1997/98, BNM’s efforts are now aimed at ensuring access to credit to all sectors of the economy, as reflected in lowered borrowing costs. Overall, the OPR was cut by 150 basis points in three different periods, i.e., 25 basis points in November 2008 to 3.25 per cent, the largest cut by 75 basis points in January 2009 to 2.5 per cent, and by 50 basis points in February 2009 to 2 per cent. Comparatively, these levels are not serious, compared to Reserve Bank of Australia’s (RBA) reduction of 425 basis points, which had lowered its interest rates to a forty-nine-year low of 3 per cent in early 2009 (on March 2008 the level was at 7.25 per cent) to deal with the threat of the global financial crisis. On 24–25 September 2009 in the Pittsburgh Summit, the world leaders of G-20 nations all desire to seek unity to an economic exit strategy, in particular to align economic policy, and to build up capital buffers, and to work together to end their massive economic stimulus programmes. Interestingly, RBA was the first central bank that started to its exit

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ECONOMIC OUTLOOK policy from the monetary stimulus by increasing the benchmark Cash Rate from 3 per cent to 3.25 per cent on 6 October 2009. Chinese demand for minerals boosted the Australian economy enough to make it as the first country to raise interest rates in the G-20. Malaysian foreign direct investment declined to RM26 billion, as compared with RM51 billion in 2008. The global meltdown in equity markets has also led to a significant decline in Bursa Malaysia, which has also adversely impacted investor and consumer sentiment as well as the services sector, which normally is a high-growth sector. However, Iskandar Investment Bhd, a government company tasked to build catalytic projects in Iskandar Malaysia in Johor, will give out RM2 billion worth of contracts in the year 2010. These contracts include jobs to build hotels and a shopping mall surrounding the Legoland theme park. WCT Bhd, an infrastructure firm, had in July 2009 won contracts valued at RM767 million to build roads and sewerage. The year 2009 also marks the fiftieth anniversary of BNM. In February 2009, BNM announced the process of submitting to Parliament a new Central Banking Act 2009, implemented in November 2009, which empowers BNM to act decisively in enhancing transparency and accountability. The Act would provide greater flexibility in monetary policy implementation and allow a diversified range of instruments to be deployed. In terms of regulatory cooperation, BNM continues to seek new ventures for financial growth and stability. On 3 June 2009, a Memorandum of Understanding (MOU) between BNM and China Banking Regulatory Commission were signed. Building on the Joint Action Plan on Malaysia-China Strategic Cooperation between the Government of Malaysia and the Government of the People’s Republic of China the signed MOU would forge deeper cooperation between the two regulatory authorities on banking supervision, including the sharing of information and the promotion of regional financial integration. The MOU was signed by Mr Liu Mingkang, Chairman of China Banking Regulatory Commission and Tan Sri Dr Zeti Akhtar Aziz, Governor of BNM. A key focus of BNM is to continue on institutional building, financial market development and putting in place the appropriate financial

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THE ASEAN-10 infrastructure. The global financial crisis also gave a wake-up call to securities regulators. In this respect, the Securities Commission realized the need to examine more critically the role of financial services in the domestic markets. Effective September 2009, the amended Central Bank Act established BNM as the financial stability authority for the financial sector, where within this financial stability framework is the establishment of structured coordination processes, including the setting up of the Financial Stability Executive Council (FSEC) of which the Securities Commission is a member. The deliberations that impact the capital markets will be under the purview of the FSEC. With a 2012 deadline set by the G-20 in the September 2009 meeting for reform of the financial system, the Securities Commission is tasked to design and implement the next stage of the Capital Market Master Plan for the next decade. In the design is an emphasis on strengthening its institutional framework and a broad direction for change in regulation that will affect the size and stability of financial institutions; capital adequacy ratios; hedge funds; OTC products; credit rating agencies; marked to market; corporate governance; and new cross-border macroprudential arrangements. The strength of currencies is regionwide-related. In 2009, the Malaysian ringgit rose 2 per cent against the U.S. dollar, trailing the 17 per cent rise of the Indonesian rupiah and the South Korean won’s gain of nearly 9 per cent. Many analysts expect the ringgit to strengthen in line with the country’s recovery, which has been relatively weak compared with other economies in Asia. The ringgit is expected to appreciate 15 to 20 per cent against the U.S. dollar over the next twenty-four months. In 2010, Asia expects Mr Ben Bernanke, Chairman of Federal Reserve, to be “attentive” to the slide in the U.S. dollar as it is important to keep the greenback strong as part of its effort to maintain economic stability. This is because Asia will be at a competitive disadvantage as a declining or weak U.S. dollar will sink Asia. Most of the Central Banks in Asia have increased their holdings of U.S. dollar assets, including Treasuries, to prevent their currencies from appreciating and thus making exports more expensive relative

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ECONOMIC OUTLOOK to China’s in 2009. While China’s holdings of U.S. Treasuries rose 10 per cent in 2009, Japan’s increased 16 per cent, and those in the rest of Asia by 25 per cent. China’s purchases of the U.S. dollars is to prevent the renminbi’s appreciation, as China has a holding of its foreign exchange reserves totalling US$2.3 trillion in the third quarter of 2009, and is the world’s largest. The country is the biggest foreign holder of U.S. government debt, with $797.1 billion in August 2009, up 10 per cent from 1 January 2009. Relatively, Malaysia’s foreign exchange reserves stood at US$96 billion.

Conclusion The year 2009 saw a sluggish global demand due to the Great Recession, and Asia was being driven by a highly synchronized contraction in demand and output across the global economy. However, IMF Managing Director Dominique Strauss-Kahn has put Asia as the new growth engine, and that Asia should play a leading role in guiding the global economy to more sustainable path for global growth. This put Malaysia as an important nation in supporting the Asia-wide growth network. For the last four decades, Malaysia’s economic growth has depended on trade. As global demand remains weak, can Malaysian domestic consumption be a source of economic growth? For Malaysia to grow in the Shandong style, it needs a strong political leadership, a strong trade sector, and a strong banking and financial system. Without these support, it will be hard for Malaysia to implant innovations into a HIE by 2020. There is no immediate panacea for Malaysia to leapfrog to achieve a HIE and to rise to prosperity. Malaysia needs to search not only for a new growth model, but fundamentally it needs to search for a new mechanism for pricing discovery. For example, many asset prices have increased beyond the affordability of the rakyat. A new affordable pricing discovery is required for at least three basic/ necessary consumables: cars and mode of transportation, housing, and fees for usage of broadband and other telecommunications services. This pricing discovery is imperative to kick-start Malaysia into succeeding in the Shandong style.

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69,377 3.78

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

81,724 3.53

56,491 43,233 4.0

–3.3

3.6 17.1

160,666 130,487 30,179 16.3

5.8 7.1 7.2 2.6

2006

100,635 3.31

53,717 38,467 4.6

–3.2

2.02703 9.5

176,213 146,992 29,221 15.7

6.2 3.7 9.7 2.2

2007

90,605 3.46

68,182 45,192 2.6

–4.8

5.4 13.4

217,864 185,129 32,735 17.6

4.6 0.9 7.2 4.0

2008

95,954 3.56

65,495 41,275 8.0

–7.4

–0.1 14.7

186,261 151,126 41,373 17.9

–3 –3.8 2.1 –2.3

2009

106,270 3.45

— — —

–5.6

1.2 8.4

148,962 122,992 30,944 17.3

2.3 2.0 3.6 2.5

2010

112,473 3.43

— — —

–4.0

1.9 9.2

156,922 131,182 30,970 17.6

4.05 2.5 5.0 3.0

2011

SOURCE: Bank Negara Malaysia Monthly Statistical Bulletin, Economic Report 2009/2010, Asian Development Bank (ADNB), IMF World Economic Outlook.

51,981 38,805 5.6

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

–3.6

3.06251 15.6

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

Fiscal balance (as % of GDP)

140,980 113,619 27,361 15.0

5.3 5.3 6.7 4.7

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)

2005

Malaysia: Selected Economic Indicators, 2004–2011F

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Myanmar By Mya Than For the financial year (FY) 2008/09 ending 31 March, the Government of Myanmar (GOM) did not publish economic data, running against tradition. Here, estimates of the GDP growth rates are just drawn from the GOM’s targets for FY2007 to FY2010 of about 10 per cent (Third Five-Year Plan: 2006–10) each year, as the official growth rates. The high rates of growth are based on output from the oil and gas sector, agricultural products, mining, and forest estimates and projections. According to Myanmar officials, GDP growth rates (percentage change) have been in the double-digit range since 1999/2000 and have continued in successive years. However, several resident and international economists are doubtful of these figures. To compare Myanmar authorities’ GDP data with that of other international institutions and sources, the Economist Intelligence Unit’s (EIU)1 has estimated growth rates of 1.1 per cent, 1 per cent and 3.1 per cent from 2008/09 to 2010/11. On the other hand, the IMF’s estimates were 3.9 per cent in 2008/09, 4 per cent in 2009/10 and 5 per cent in 2011/12. Other growth rates estimated by Post-Nargis Macro-economy (PONJA) were 3.9 per cent in 2009/10, 5 per cent in 2010/11 and 3.9 per cent in 2011/12. After comparing the country’s official statistics with that of other international institutions, it seems

MYANMAR • The country’s economic performance was weak last year and remains weak in 2009. However, better growth prospects lie ahead in 2010 and 2011. • Gross agricultural production growth and exports of goods (FOB) would drive economic performance. • Government borrowing continues to rise since government budget deficits have been growing since 2009.

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THE ASEAN-10 that the main objective of the authorities in Myanmar has been to present excellent GDP figures to its top leaders. According to the EIU (September 2009), the State Peace and Development Council’s (SPDC) management of the economy will remain poor. “It denies that the current global economic recession has had any impact on Myanmar, despite evidence of flagging industrial production and weak merchandized exports. However, even if governments were to accept that the local economy was suffering along with others in the region, it is unlikely that it would be capable of taking effective action to limit the damage.” Concerning population and income, firstly, Myanmar’s mid-year population increased from 54.745 million in 2004 to 58.510 million in 2009–10; however, GDP per head (US$ at PPP) has declined from US$491 in 2004–05 to US$428 in 2009–10, mainly due to the real GDP growth — from 13.6 per cent to 1 per cent (EIU’s forecast, 2009–10). On the fiscal policy side, the government continues to spend heavily on its military and the new capital, Naypyidaw, with few initiatives in the pipeline to support households and businesses or to stimulate the economy. The government is always ready to borrow heavily from the Central Bank of Myanmar, by printing more currency notes, and sometimes by borrowing from the domestic banks to finance current expenditure. If the government could increase such borrowing after already borrowing heavily from the Central Bank, “this would put further upward pressure on inflation”. Average consumer price inflation is set to slow in 2009–10 from a high of 26.8 per cent in 2008, largely owing to fuel and food prices. According to the EIU report (September 2009), the inflation forecast assumes no major rice shortages. The Central Bank is set to continue to fund the government’s budget deficits by printing money, and the consequent growth in domestic credit will continue to push up the general price level. However, because of easing supply-side pressures, the average rate of inflation will drop to 7.7 per cent in 2009, before increasing to 11.2 per cent in 2010. According to the Central Statistics Organization (CSO), the consumer price index (CPI) rose by 1.2 per cent month-on-month in April 2008,

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ECONOMIC OUTLOOK after falling to 0.9 per cent in March 2008, the lowest in the year (the highest was 16.3 per cent in January 2008). Although official inflation data may understate the extent of price rises, however, the trend may have changed. On a year-on-year basis, prices in the food category of the CPI rose by 6.9 per cent in April 2008, from 7.8 per cent in March 2008. Prices in clothing category rose by 7.2 per cent in April 2008, the fuel and lighting category rose by 10.7 per cent, and price increases in the housing and utilities category of the CPI rose by 10 per cent in March 2008 (CSO 2008). For some years, the government has not published regular data on government expenditure or its overall budget, but the junta is believed to be running a large deficit, which would be in line with the strong rise in government borrowing. The regime has also continued to borrow from the domestic sector. After borrowing from the Central Bank and the domestic sector, the GOM is likely to continue spending heavily on large projects that provide benefits to the military and its leaders (such as the development of the new administrative capital, Naypyidaw). The fiscal indicators (percentage of GDP) are also important so we have to look at the central government’s budget revenue and the central budget expenditure to compare whether there has been a surplus or a deficit. Regarding exchange rates, the country has been using a multiple exchange rate system with the use of strict foreign exchange controls. There exist two exchange rates: official exchange rate for kyat to U.S. dollar (average; official rate) and free market exchange rate of kyat to U.S. dollar (average; free-market rate). Currently, the official exchange rate has risen from 5.75 kyat in 2004 to 5.36 kyat (actual) in 2008, and in 2009 would increase to 5.57 kyat. The free-market exchange rate in 2004 was 910 kyat and was 1,185 kyat in 2008 and in this year, it would decline slightly to 1,090 kyat in 2009 (EIU, September 2009). Recently, the new 5,000 kyat denomination banknote (valued roughly at US$5 as the value of US$1 ranges from 1,050 to 1,080 kyat) began circulating on 2 October 2009, and the regime is giving pressure to traders not to increase prices. At the official exchange rate, the value

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THE ASEAN-10 of the new banknote was about US$926. The new banknotes were printed by the Central Bank of Myanmar. For better economic performance, agriculture is quite important for the country in terms of sectoral share compared to other sectors — much higher than the shares of industry and services sectors. Agriculture was hit hard by cylone Nargis in 2008 and the cyclone’s ill effects are still expected to be felt in early 2009–10 but favourable weather conditions may bring better output from 2010 onwards. Rice production is expected to be enough for consumption and exports in 2009 and expected to increase from 2010 onwards. However, small-scale fishing and farming, along with salt farming, collapsed in the cyclone Nargis affected areas. Agriculture, industry and services sectors are the three pillars of the country’s economy. All these sectors’ declined steeply from 2005–06 to 2009–10; agriculture fell from 12.1 per cent to 1.2; industry from 19.9 to 0.2 per cent; and services from 13.1 to 1.1 per cent. According to the EIU, agricultural production suffered due to poor productivity and the lack of incentives. Moreover, among the neighbouring countries, Myanmar’s sectoral share of agriculture (including crops, fishing and forestry) was the largest at about 47 per cent, which accounts for nearly half of GDP; that of the industry sector (manufacturing and processing) was the lowest at 13 per cent and the services sector was 27 per cent; sector shares are increasing (ADB 2007). In 2009–10, Myanmar’s industry sector would be sluggish to some extent, due to the impact of global recession in middle and higher income countries. Among the agricultural products for exports, the Ministry of Agriculture is aiming to boost rubber output to export to China. The authorities are planning to expand rubber production to aid rising demand from China (Xinhua Press, September, 2009). About 90 per cent of the rubber produced is exported to China and five ASEAN countries — Malaysia, Singapore, Vietnam, Thailand and Indonesia. According to Myanmar’s Rubber Entrepreneurs Association, between 2007 and 2010, the area under plantation is to expand by more than 100,000 hectares to a total of almost 470,000 hectares. Exports are one of the most important sources of foreign income, boosting real GDP growth. Exports increased from US$2,927 million

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ECONOMIC OUTLOOK in 2004 to US$6,695 million in 2008, more than 2.3 times between 2004 to 2008. However, in 2009, exports declined to US$6,112 million, because of the global economic recession and the economic downturn in neighbouring countries.2 The largest trading partners (both export and import partners) are Thailand (US$65.4 million), China (US$42.8 million), India (US$17.6 million), Singapore (US$16.8 million) and Japan (US$9.5 million) in the fiscal year. According to the CSO, Thailand was the top trading partner of Myanmar in the fiscal year 2008–09 with bilateral sales reaching US$6.7 million and the sale of the natural gas alone to Thailand was US$2,65 billion. Thailand currently depends on Myanmar’s natural gas for 12.2 per cent of its total installed power capacity and has recently suffered from supply interruptions of the dam which would significantly increase Thailand’s dependency on Myanmar. By 2013, Thailand’s state oil and gas developer, PTT Exploration and Production Company ( PTTEP), plans to have gas flowing from the new M-9 block of offshore site in the Gulf of Martaban. PTTEP has confirmed gas reserves in the block of at least 50 billion cubic meters. The Thai Energy Ministry said PTTEP hopes to sign an agreement soon with Myanmar’s state-owned Myanmar Oil and Gas Enterprise (MOGE) to begin producing 300 cubic feet per day by the end of 2013. It said that 240 million cubic feet is earmarked for Thailand, with the remainder going to Myanmar. PTTEP says it will spend at least US$1 billion to develop the M-9 block, which promises to be one of Myanmar’s richest sources of gas. Another future electricity boom will benefit Myanmar’s neighbouring countries. Five large dams are being planned on the Salween River in Myanmar, four to export power to Thailand, and one to China. China and India are also waiting for the purchase of gas from Myanmar. China plans to to start construction of the gas pipelines in September 2009 which will be completed by 2012, one year ahead of schedule. According to The China Security Journal, “the pipelines, constructed by the China National Petroleum Corp (CLPC), will run from the Western Burma port of Kyaukphyu to Kunming, capital of Yunnan Province. The pipelines will carry an estimated 85 per cent of China’s imported

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THE ASEAN-10 energy requirements, cutting about 4,000 km off the route through the Straits of Malacca that tankers carrying Middle East oil and gas bound for China must now take.” (Beijing, China 2009). The pipeline was already planned but there are political issues such as armed conflicts between Myanmar army and Kokang, one of the national ethnic groups equipped with arms. Meanwhile, Myanmar-China trade reached US$2.6 million in 2008. Myanmar’s main exports to China include fisheries products, agricultural products, minerals, teak and precious stones, while it imports electronics, machinery, fertilizer, clothing and medicines from China. China is Myanmar’s second-largest trade partner after Thailand, which buys most of Myanmar’s main export, natural gas. On the other hand, the Indian government is reportedly spending at least US$1.5 million to finance feasibility studies for two potential hydroelectric dams in western Myanmar. According to reports from India, the money will be used by the Indian state-linked engineering firm National Hydroelectric Power Corporation (NHPC) to conduct tests on the Chindwin at Tamanti, the site of a stalled dam project. The managing director of NHPC quoted that the money to be provided by India’s Ministry of External Affairs as “part of India’s effort to improve diplomatic and economic ties with its eastern neighbour and counter China’s growing influence” (October 2009). Myanmar’s regime signed a memorandum of understanding with India’s NHPC in 2004 to develop a dam at Timanti, but the development has not been started. The dam, earmarked to have a 1,200-megawatt electricity generating capacity, would cost US$3 billion, and 80 per cent of the power generated would be sent to India (The Irrawaddy, October 2009). It is said that gas from the large Shwe field in Myanmar waters of the coast of Rakhine State will begin flowing in 2012. India’s stateowned Oil and Natural Gas Corporation (ONGC) said that it expected income from its assets in Myanmar and Brazil to begin producing within the countries to make up for declining production elsewhere in its oil and gas portfolio. ONGC has a development stake in two blocks of the Shwe field, with partners Daewoo of South Korea and the Indian state firm, GAIL (India) Limited. The two blocks have proven reserves

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ECONOMIC OUTLOOK of about 200 billion cubic metres of gas — virtually all of which will be sold to China. China has no hand in the field development, but Daewoo and two Indian firms lost out in bids to buy the gas they will produce. Instead, they will earn income from the gas sales, along with the Myanmar Oil and Gas Enterprise (The Irrawaddy, July 2009). The rest of export goods were mining products (including jewellery, gems, and jadeite), forest products, and agricultural products valued at US$400 million. In 2008–09, exports had increased to US$190 million from 2007–08. “Demands for gems have been hit by slowing regional demand, and by U.S. sanctions, which were tightened in mid-2008 to make it harder to ship gems from Myanmar via third countries. However, output of jade has bucked this trend, rising by 11.7 per cent year-on-year in April to 4,297 tonnes, after rising by 63 per cent in 2008–09 to almost 33,000 tonnes (EIU, September 2009). Moreover, sales of electricity to the industrial sector remained well below the rate of growth recorded for all electricity sales of 13.2 per cent year-on-year in April. According to the CSO of Myanmar, its data covers output by stateowned enterprises (SOEs). The output of natural gas, crude oil, paint, fertilizer, cement, paper and cotton yarn all rose on a year-on-year basis reversing the downward trend recorded in the previous twelve months. The most important output, natural gas, the main source of export revenue, rose by 11.1 per cent year-on-year in April, after falling by 15 per cent year-on-year in 2008–09 as a whole. From the mining sector, total output of gems dropped by 82.5 per cent year-on-year basis in April to 391,759 carat, down sharply from 891,773 carat in March. In 2008–09, total output of gems dropped by 17.7 per cent year-on-year to 18.7 million carat. Last year, even though the United States imposed sanctions for gems from Myanmar via third countries, Thailand send finished gems successfully to reach the residents in the United States, illegally. Cross-border trade between Myanmar and China is located in the northeast of Myanmar and the west of Yunnan province. In September 2009, the Sino-Myanmar cross-border trade was disrupted by fighting in the Kokang area on the Myanmar side — apart from political and social issues — and caused shortages of Chinese goods in markets according to the local traders. Most of the goods in the markets are

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THE ASEAN-10 consumer goods from China. The local traders said 70 per cent of the made-in-China goods are formula milk powder, biscuits, dried noodles, medicines and electronic equipments, and dropped by one-third in August and September 2009. “Cross-border trade in the Kokang capital, Laogai, came to a standstill, while trading at two other border check points decreased. According to Chinese official statistics, China-Burma bilateral trade amounted to US$2.6 billion in 2008. Of this, China’s exports to Burma accounted for $1.98 billion.” (The Irrawaddy, October 2009). Apart from Yunnan Province, cross-border trade is going on Thailand, Bangladesh, and India. Tourism was growing strongly until 2007 when it was affected by the violent crackdown on the peaceful protesters, including monks. Tourists visiting in 2008–09 numbered only 255,280, many of whom were day-trippers crossing the border from Thailand. In 2008, the country earned a modest US$165 million from tourism because of cyclone Nargis in May 2008 which destroyed many pagodas and buildings and caused damage to the landscape. Another factor was the economic downturn in other countries. Imports of US$1,999 million in 2004–05 increased to US$3,427 million in 2008–09; 1.7 times increase between 2004–05 and 2008–09. In 2008–09, EIU estimated imports to comprise consumer goods, capital goods, raw materials and intermediate goods and mostly machinery, transport equipments, refined mineral oil, chemicals, edible oil and paper. For the year 2009–10, the forecast remain the same. Trade balance increased from US$928 in 2004–05 to US$2,603 in 2009–10 (forecast) — an increase of 2.8 times. Myanmar’s total of exports and imports trade (total trade) was US$10,011 million in 2008–09, population was 58.5 million in 2008. Compared with other ASEAN members (minus Brunei which does not publish trade statistics), Myanmar had a total trade size that was less than that of each of the ASEAN countries, with the exception of Lao PDR which had US$4.2 million total trade and population of 5.8 million. Table 1 shows the per capita total trade values of all ASEAN countries (without Brunei). Singapore has the highest per capita total trade value at US$186.88 and Myanmar the lowest at US$0.17.

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Population (million) Total trade* (Export+Import) (US$ million) Per Capita Total Trade values

14.70 11.0

0.75

—

Cambodia

0.4 —

Brunei

1.11

228.5 253.6

Indonesia

0.72

5.8 4.2

Laos

12.4

27.9 346.1

Malaysia

0.17

58.5 10.0

Myanmar

1.29

90.5 116.2

Philippines

186.28

4.8 894.1

Singapore

ASEAN Members: Population, Total Trade and Per Capita Total Trade Values (2008–2009)

5.40

66.5 357.5

Thailand

111.70

86.20 146.80

Vietnam

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THE ASEAN-10 Why does Myanmar have the lowest per capita total trade (total exports plus imports) in the Southeast Asia region? It is partly because of sanctions (see above). One of the reasons is political. For example, during the Clinton presidency, in 1994, the United States imposed sanctions on Myanmar; at the same time, Vietnam’s sanctions were lifted by President Clinton. The junta and the pro-democracy groups, including the Aung San Suu Kyi (ASSK)-led National League of Democracy, are interested in seeing the sanctions lifted for political and economic reasons. Prime Minister Thein Sein, addressing the UN General Assembly in September 2009 stated, “Sanctions are being employed as a political tool against Myanmar (Burma), and we consider them unjust. Such acts must be stopped.” Almost at the same time, ASSK sent a personal letter to the Commander-in-Chief, Senior General Than Shwe, to seek permission to meet with Western and Australian Ambassadors to discuss a possible end to sanctions. The Senior General quickly responded and initiated a series of contacts. There was a meeting of the three diplomats from the United States, Britain and Australia, and ASSK in October 2009. Meanwhile, Kurt Campbell, U.S. Assistant Secretary for East Asia, announced the new U.S. Burma policy, initiating a “direct dialogue” with the government of Myanmar. According to Campbell, “lifting sanctions now would send the wrong signal” and “(W)e will tell the Burmese that we will discuss easing sanctions only if they take action on our core concern. We will reserve the option to apply additional targeted sanctions, if warranted, by events inside Burma”. Both the United States and Myanmar are maintaining a hard-line stand — to some extent. However, a Washington Agency admitted the efforts to keep gems out of the United States are failing; gem stones such as jades and rubies are among the core targets of economic sanctions imposed by the United States, the EU, the Western countries and Japan, against the military junta running Myanmar. According to the Government Accountability Office (GAO), U.S. agencies have not shown that they

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ECONOMIC OUTLOOK are effectively targeting imports of Myanmar-origin rubies, jadeite and related jewellery. GAO is the policing agency of the US Congress charged with assessing whether laws are being effectively enforced, “Impediments remain to restricting trade in Burma rubies and jadeite” (49 Report of Jade 2008). China and Thailand are highly unlikely to impose sanctions. Thailand remains a major source of finished ruby and jade jewellery for the United States and the EU but insists that its production although often sourced to Myanmar for raw materials are substantively finished in Thailand and therefore not sanctionable Thai jewellery exports to the United States in 2008 were valued at US$8 billion, said GAO. Furthermore, new U.S. President Obama has been sending signals that there will be changes in Washington policy towards the Myanmar junta, including constructive contacts. The United States and the EU have imposed more sanctions on Myanmar; Australia has also imposed sanctions again in 2009: specifically, the Speciality Fashion Group (including Millers, Cross Roads, Katies, Autograph, City Chic and Queenspark) has stopped dealing with companies that trade with Myanmar “due to continuing repression of Burmese people and ongoing presence of military rule” (Burma Campaign Australia (BCA)). The above companies contributed up to US$2.8 billion to Myanmar. Also, others such as insurers QBR and engineering company, Downer EDI, stopped trading with Myanmar. However, the Chief Executive of a major Australian airline recently said it will not pressure its subsidiary Jet Star Asia to stop flying into Burma. The budget carrier flies three times a week between Singapore and Yangon. Anyway, “(T)here is a total absence of sanctions applied within the region notably by China, Thailand and Russia” (Tomkin 2008). Sanctions are affecting foreign investors who are hesitant to invest in Myanmar due to the political reasons. Since 1989, there were about twenty-six countries that invested in Myanmar, including the United States, Britain, Australia France, Germany, China, India, South Korea, Thailand, etc. After 1994, FDI was reduced and several investor countries have stopped investing. Most of the foreign investors’ FDI

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THE ASEAN-10 are approved only by the Council of Trade and Investment but it does not announce the real amount of FDI. For example, Thailand had applied for the approval for FDI for investing in Salween River project in 2006, but the country did not invest in Myanmar; instead it is buying natural gas every year. Why is Myanmar’s economic performance weak in 2008–09 and 2009–10? The reasons are as follows: weakness in institutional quality (Transparency International 2006), weakness in good governance (Transparency International 2006), political repression, lack of competitiveness (International Financial Statistics 2006), lower ranking of economic freedom (Economic Freedom of the World, 2004, The Cato Institute), lowest corruption ranking before Sudan (Global Corruption Report 2009), lack of business environment, government restrictions, and weakness of reforms. Overall, the short-term economic outlook is not encouraging due to Myanmar’s real GDP growth rates in 2008–09 and 2009–10 being estimated at 1.1 per cent and 1 per cent respectively. Most probably, the economy can be expected to grow up to 3.1 per cent in 2010–11. On the other hand, IMF’s real GDPs are estimated at 4 per cent in 2008–09, 4.2 per cent in 2009–10 and 5 per cent in 2010–11. However, in practice, IMF’s estimates seem to be overestimated. To conclude, “(T)he junta’s management of the economy will remain poor” (EIU, September 2009). NOTES 1. September 2009. See bibliography. 2. Economic downturn in neighbouring countries are Singapore, Thailand, Malaysia and Vietnam. BIBLIOGRAPHY Economist Intelligence Unit Country Report, September 2009, Economist Intelligence Unit Limited, London, 2009. The China Security Journal, Beijing, 2009. Xinhua Press, Beijing, China, 2009. The Irrawaddy, Chiang Mai, 2009. Tomkin, D., Burma Perspectives. Network Myanmar, Guildford, Surrey, 2008.

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3,170 5.8 1,305

6,645 6,648 2.1

–2.2

12.6 27.3

3,753 1,744 2,009 570

13.2 13.6 13.6 19.9 13.1 12.1

2005/06

3,207P 5.8 1,280

6,828 6,828 1.8

–2.6

20 27.2

4,555 2,343 2,212 759

12.7 13.9 3.4 8.2 1.7 3

2006/07

3,240P 5.8 1,290

7,022 7,000 0.20

–3

35 30

6,170 2,964 3,206 1,453

10.0F 11.9 3.4 9 3.5 1.4

2007/08

3,269P 5.6 1,210

7,112 7,100 1

–3.5

38.7 22.3

6,359 3,652 2,707 935

10.0F 4 1.1 13 0.6 –3

2008/09

3,301P 5.3 1,300

7,163 7,200 1.2

–3.6

28.5 22.5

6,227 3,798 2,429 630

10.0F 4.3 1 6.8 2.9 1.5

2009/10

n.a. 5.5 1,350

7,185 n.a. n.a.

–3.6

12.7 22.7

6,534 4,105 2,429 580

10.0F 5 3.1 7.9 3.6 2.5

2010/11

SOURCES: CSO, Selected Monthly Economic Indicators; Economic Intelligence Unit, Country Report, Myanmar, September 2009. IMF Report, Myanmar, September 2007.

2,970 5.8 1,280

Foreign exchange reserves (US$ million) Official Exchange rate (kyat/US$1) Market Exchange rate (kyat/$1)

–1.9

Fiscal balance (% of GDP) 7,239 7,239 2.4

7.7 32.4

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

Total debt outstanding (US$ million) Total external debt (US$ million) Debt service ratio (% of exports)

2,927 1,999 928 112

13.6 13.6 13.6 21.4 14.4 11

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

GDP (% change) (Official) GDP (International Monetary Fund) GDP (Economist Intelligence Unit) — Industry sector growth (% change) — Services sector growth (% change) — Agriculture sector growth (% change)

2004/05

Myanmar: Selected Economic Indicators

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Philippines By Aladdin D. Rillo Macroeconomic conditions in the Philippines are expected to improve in 2010, albeit modestly, as global economic recovery goes underway. Real GDP is projected at 3.1 per cent from 1.4 per cent in 2009. As in previous years, consumption and exports will be the main drivers. The country’s electronics exports (which account for 60 per cent of total merchandise exports) will benefit from recovery in global demand and restocking of inventories in global electronics markets. Private consumption will also remain robust, with growth increasing to 4.5 per cent from 2.8 per cent a year ago, underpinned by steady remittances inflows (projected to rise by 5 per cent from 4 per cent in 2009) and improvement in labour markets (due to increased share of wage and salaried workers in total employment). However, the prospect of private consumption accelerating to higher gear this year is not so good. According to the World Bank, the global economic recession will throw 1.4 million Filipinos into poverty by 2010 compared with a no-crisis situation. Public consumption will continue to contribute strongly to growth, as the government expenditures expand much faster to sustain the recovery in output and support election-related spending. Thus the budget deficit is likely to widen from 3.1 per cent of GDP in 2009 to 3.4 per cent in 2010. The increasing trend in government spending

PHILIPPINES • Macroeconomic conditions in the Philippines are expected to improve modestly in 2010. • External balances will remain favourable to the Philippines due to the improved external environment. • The Philippine financial system has remained relatively unscathed from the worst global financial crisis in decades. However, it is crucial that the country continues its financial and corporate sector reforms.

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ECONOMIC OUTLOOK (particularly in infrastructure and social services) is likely to be sustained in the coming years as the government abandons its fiscal consolidation programme this year and moves the same to 2013. This also suggests that there may be room for larger spending than budgeted within the overall deficit projection. Relative to other components of expenditure, the outlook for private investment remains weak. Fixed capital investment has been declining by an average rate of 3.2 per cent annually since 1998, and the investment-to-GDP ratio falling since 1996. Although capacity utilization is recovering and business sentiment has risen (due to the maintenance of low inflation and interest rates in the country), this will not be enough to generate enough investments in the country. With declining competitiveness (in the 2010 Doing Business Report by the International Finance Corporation, the Philippines further slipped in ranking to 144th from 141st in 2009), and judging from a modest increase in foreign direct investment inflows in the country last year (estimated at US$400 million), it seems that a higher intensity of investment is needed to raise the potential growth rate of the economy. On the supply side, the services sector will continue to underpin the strong growth in domestic output. Over the last nine years (2000– 08), growth in services (6.1 per cent) has outpaced that of agriculture (3.8 per cent) and industry (3.9 per cent), and has been crucial in real GDP and employment growth in the country. This year services will remain buoyant, growing by 7.9 per cent, with strong performances from traditional growth drivers such as trade and transport, storage and telecommunications services, as well as from private and financial services adding new momentum. In particular, the rapid growth of business process outsourcing (BPO) in the country is worth noting, given the strong interest in this sector by foreign investors (currently more than 90 per cent of BPO firms in the Philippines are foreign-owned). The IMF expected the growth in BPO to accelerate in the coming years, expanding by 38 per cent per year to over $12 billion by 2010, and becoming a key growth driver in the country. According to the Business Processing Association of the Philippines, the BPO industry is expected to grow by 128 per cent a year in the next twelve years,

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THE ASEAN-10 and has the potential to capture a sizeable share of global BPO market in the next ten years. After last year’s weather-related disturbances which saw a decline in output of agriculture sector, the sector is seen to recover and grow by 3.9 per cent in 2010. The US$255 million supplemental budget allocated by Congress for disaster and recovery reconstruction will help the recovery in the agriculture sector. The expansion in agriculture output can also benefit from increase in agricultural exports due to increase in demand from industrial countries. This should offset the steady growth in industrial output (5 per cent) as growth in manufacturing remains modest. Although the average capacity utilization in manufacturing has started to increase recently (81.5 per cent as at end-June 2009), the expansion in industry can be limited by rising oil prices expected this year. The country’s external balances will remain generally favourable due to improved external environment. However, given a slow recovery process in global economy, the impact on the country’s external indicators will be mixed. Exports growth is seen to recover to 3.1 per cent from estimated growth of –19.1 per cent in 2009 due recovery in global trade and increased intra-regional trade particularly in ASEAN. However, merchandise imports are also expected to rise by almost 6.4 per cent to reflect the increased activity in electronics export industries and rise in global oil prices, thus creating a trade deficit of US$12.8 billion compared to its level of US$10.8 billion a year ago. But with positive services account due to strong capital inflows from improving global economy and remittances from overseas workers, the current account should generate a surplus (2.5 per cent of GDP) by end 2010. Reflecting this, the official reserves are seen to improve at US$44.2 billion by year-end as the peso consolidates at PhP46 against the U.S. dollar. Monetary policy will remain accommodative consistent with inflation targets. It is expected that the monetary authorities will keep the policy rates unchanged for the time being until indications of strong recovery in global and local economy become evident. Strong overseas income remittances and steady growth in deposits will also

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ECONOMIC OUTLOOK help domestic liquidity (M3) to ease further to 14.3 per cent from 15 per cent in 2009. The slowdown in public sector credit is also expected to contribute to modest growth in domestic liquidity. This will allow domestic interest rates to be low (with a benchmark 91-day T-bill rate averaging 4 per cent), aided by benign inflation rates (averaging 4.5 per cent) and the generally low interest rates in major central banks around the world. On the fiscal front, the commitment by the government to further stimulate the economy will not only widen the budget deficit, but will also serve as an opportunity for the Philippines to go back to the capital market with longer tenors. The Philippines is looking to raise US$2 billion from the sale of debt papers in the international market to plug its budget deficit next year. Moving forward, important challenges exist for the country to sustain the growth momentum and facilitate the slow recovery. Although not yet a problem in the near-term, fiscal sustainability risks need to be constantly monitored. The decision by the government to postpone fiscal consolidation carries with it high responsibility to ensure that priority spending (particularly in health, education, and infrastructure) is well undertaken. Otherwise the country runs the risks of falling into a trap of unsustainable debt. This implies that to improve the debt dynamics, the recent fiscal gains need to be sustained. Fiscal reforms related to tax administration and effective enforcement of tax regulations to broaden revenue base have to be fully implemented. Plans to further pursue power reforms and accelerate privatization programmes are also in the main fiscal agenda. While these restructuring measures are encouraging, they represent at best a small step in a long road towards completely overhauling the entire tax system — a key towards a near-term improvement in revenue collection. While the Philippine financial system has remained relatively unscathed from the worst global financial crisis in decades, it is crucial that the country continues its financial and corporate sector reforms. Although the Philippines has come a long way to strengthen its financial systems (as seen for example in a decline in non-performing

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4.9 4.8 1.6 –3.0 40,263 48,036 –7,773 2.0 7.6 9.0 5.8 –2.7 31.7 54.9 18,494 53.07

5.3 5.5 6.1 –0.5 46,526 53,258 –6,817 4.6 6.3 21.9 5.1 –1.0 31.7 50.5 22,967 49.13

2006 7.4 5.8 14.9 11.2 50,466 55,514 –5,048 4.3 2.8 10.5 5.0 0.2 33.1 38.1 33,751 41.40

2007 3.8 4.7 0.3 1.7 49,078 61,978 –12,900 2.3 9.3 18.4 5.1 –0.8 24.1 32.3 37,600 48.09

2008 1.4 2.8 7.2 –11.9 39,100 49,900 –10,800 2.8 3.2 15.0 4.2 3.1 24.0 32.8 42,300 46.5

2009E

NOTE: * 91-day T-bill rate. SOURCES: Country websites; WB Economic Update; ADB Economic Outlook; EIU; author’s estimates.

GDP growth (%) — Private Consumption — Public Consumption — Gross Fixed Invest Exports (US$ million) Imports (US$ million) Trade Bal (US$ million) Current Account (% GDP) CPI Inflation (average; %) M3 growth (average; %) Interest Rate (%; end-period)* Fiscal Balance (% GDP) Public sector debt (% GDP) Ext Debt (% GDP) Reserves (US$ millionn) Exch Rate (end-period)

2005

Philippines: Selected Economic Indicators, 2005–2011F

3.1 4.5 8.9 2.1 40,300 53,100 –12,800 2.5 4.5 14.3 4.0 3.4 23.5 31.5 44,200 46.0

2010F

4.1 4.8 7.5 2.9 43,356 54,000 –10,644 3.2 5.0 14.0 4.5 2.7 24.0 32.0 46,350 45.5

2011F

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ECONOMIC OUTLOOK loans and assets since 1997), vulnerabilities remain. The challenge therefore is for the Philippines to sustain the foundation for a strong upswing through reforms that promote healthy banking and corporate balance sheets and accommodative financial conditions. Restoring the health of the banking sector will allow the resumption of lending activities that are critical to much needed growth in investment and manufacturing. In addition, the Philippines should continue to promote financial regulatory reforms, including enhancing its risk-assessment and cross-debt management capabilities. Finally the year 2010 will be a crucial year for the Philippines as the country prepares for presidential election and transition in government. In addition to implementing credible and consistent macroeconomic reforms, political stability matters if the hard-won gains of reforms are to be preserved. Thus it is critical that the elections go smoothly in order to maintain investor and consumer confidence so as not to hurt the country’s modest recovery.

Singapore By Sanchita Basu Das Earlier in 2009, Singapore’s economy took a severe pounding as a result of the global slowdown. Economy shrank by an alarming 9.5 per cent year-on-year (y/y) in the first quarter of 2009, far worse than the 4.2 per

SINGAPORE • The Singapore’s economy emerged from a recession and expanded by 0.8 per cent y/y in the third quarter of 2009. • The recovery was largely led by the manufacturing sector. • The government expects Singapore’s GDP to shrink between 2 and 2.5 per cent in 2009. GDP is likely to rise by 4–5 per cent in 2010–11 as global growth recovers. • Inflation is predicted to remain flat in 2009 and register 1.0-2.0 per cent growth in 2010.

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Figure 1: GDP Growth Moved from Negative to Positive

15

% y/y

10 5 0

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

Sep-05

–10

Mar-05

–5

GDPGDP Growth (% y/y) Growth SOURCE: CEIC Database.

cent contraction registered in the fourth quarter of 2008 (Figure 1). This was largely due to a marked contraction in manufacturing sector as production was badly depressed by the fall in global export demand over the earlier two quarters. The global recession also took its toll on the services sector, which contracted by 5.2 per cent y/y in the first quarter of 2009 vis-à-vis –1.3 per cent in the fourth quarter of 2008. Some blips of hope emerged in the second quarter of 2009, when the economy grew by 20.7 per cent quarter-on-quarter (q/q) (–3.5 per cent y/y) on sharp recovery in the manufacturing sector (Figure 2). Both non-oil domestic exports (NODX) and the industrial production index (IPI) showed a “V-shaped” recovery (Figure 3) (although in the last two months pharmaceutical output lost some steam). The surge in the manufacturing sector was primarily driven by a pick-up in production of pharmaceutical products and by inventory restocking in electronics industry. The economy further expanded by 0.8 per cent y/y in the third quarter of 2009. The services sector recovered gradually with trade-related and tourism sector improving on the back of a recovery in global trade flows and international travel.

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ECONOMIC OUTLOOK

Figure 2: Sharp Rebound in Manufacturing Industry 35 25

% y/y

15 5 –5

Jun-09

Mar-09

Sep-08

Dec-08

Jun-08

Mar-08

Dec-07

Jun-07

Sep-07

Mar-07

Dec-06

Jun-06

Sep-06

Mar-06

Sep-05

Dec-05

Jun-05

–25

Mar-05

–15

Manufacturing Construction Services SOURCE: CEIC Database.

Figure 3: “V-shaped” Recovery in NODX and IPI 130

17 16

100

13 12

90

11

80 May-09

Jan-09

Sep-08

May-08

Jan-08

Sep-07

Jan-07

9

May-07

10

70

Sep-09

SGD bn

110

14

2007=100

120

15

NODX IPI (rhs) SOURCE: CEIC Database.

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THE ASEAN-10

Figure 4: Unemployment Rate Has Stabilized

4.0 3.5

%

3.0 2.5 2.0 1.5 Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

1.0

Overall Unemployment Rate

SOURCE: CEIC Database.

With Singapore’s economy bottoming out, unemployment rate, after rising from 2.5 per cent in fourth quarter of 2008 to 3.3 per cent in first quarter of 2009, remained stable thereafter (Figure 4). With slew of government policies — skills programme for upgrading and resilience, professional skills programme and job credit — the impact of the crisis on the labour market seems to be less severe than initially feared. Continuing with this trend, the overall unemployment rate is expected to stabilize around 3.3 per cent in 2009 and 3.4 per cent in 2010.

Economic Forecast Taking these factors into account, the Ministry of Trade and Industry (MTI) upgraded the official growth forecast for 2009 to –2.5 to –2 per cent, from the previous –4 per cent to –6 per cent. This is almost in line with International Monetary Fund’s (IMF) forecast of 1.7 per cent contraction in 2009 and a much better outlook compared with 4.5 per cent contraction predicted by Economic Intelligence Unit (EIU) and 5 per cent contraction predicted by Asian Development Bank (ADB).

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ECONOMIC OUTLOOK

Figure 5: NODX Recovering for Most of the Markets

45.0 35.0 25.0 % y/y

15.0 5.0 –5.0 –15.0

Aug-07

Aug-08

China

South Korea

Taiwan

Hong Kong

Japan

EU

–35.0

USA

–25.0

Aug-09

SOURCE: CEIC Database.

Moving into 2010, the recovery of the Singapore economy will weigh much on the external factors. The country’s export markets are expected to show gradual recovery in demand as it will take a few years for the global growth to return to its pre-economic crisis levels. With gradual resumption of trade flows (Figure 5), the manufacturing sector is likely to expand moderately (although growth of pharmaceutical sector remains doubtful). Indeed, leading indicators for the electronics industry, namely the electronics Purchasing Manager’s Index (PMI) and the U.S. SEMI book-to-bill ratio, points out for a higher trend (Figure 6). Internally, the government is likely to spend heavily on big investment projects and this will continue to make a positive contribution to growth. The two integrated resorts (IRs), the Marina Bay financial sector, and the new MRT line will maintain its support for the construction sector. The government will also continue with its fiscal stimulus measures in the

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THE ASEAN-10

56 54 52 50 48 46 44 42 40

1.2 1.0 0.8 0.6 0.4 Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

Apr-08

Jan-08

Oct-07

Jul-07

Apr-07

0.2 Jan-07

%

Figure 6: PMI and SEMI Book-to-Bill Ration Pointing Towards Higher Trends

PMI- Manufacturing PMI- Electronics SEMI: Book to Bill Ratio (rhs)

SOURCE: CEIC Database.

near term. Finance Minister Tharman Shanmugaratnam already hinted of the same in 2010–11 (April–March) earlier in October. Financial services will be buoyed by the booming property market and better investor sentiments. However, high unemployment rate will weigh down on private consumption. Thus, with a modest rebound in economic activities, the Singapore economy is likely to grow by 4 per cent in 2010 (IMF: 4.3 per cent, EIU: 3.8 per cent, ADB: 3.5 per cent). For 2011, a sustained recovery in private consumption and investment in the developed economies is expected to support the growth momentum. In addition, measures to strengthen long-term competitiveness will ensure respectable growth in future. The Singapore government is likely to implement measures so as to increase domestic consumption and shift the economy away from export-led growth strategy. The government will look for new sources of growth such as education, healthcare and tourism.

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ECONOMIC OUTLOOK While a chance of a W-shaped “double-dip” recession is small in the next two years, there remains a downside risk of premature exit from the loose fiscal and monetary policies pursued by countries around the world. That said, the Singapore economy is expected to expand by around 4.5 per cent in 2011.

Inflation Outlook As the economy contracted for most of the year, inflation rose very modestly to just 0.4 per cent y/y in the first nine months of 2009 (Figure 7). On the other hand, due to high base effect last year, it generated some “dis-inflation” scenarios for six months of the year. External inflationary pressure also remained subdued for most of this time as oil prices hovered around 70–80 per bbl. However, with growth picking up and higher average oil prices, it is expected to exert upward pressure on the housing and transportation components of the consumer price index (CPI). A gradual rise in domestic demand is also likely to push higher the inflation. Thus, the central bank

Figure 7: Inflation Still Benign 8 7 6 % y/y

5 4 3 2 1

Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

Apr-08

Jan-08

Oct-07

Jul-07

Apr-07

Jan-07

0 –1

Inflation SOURCE: CEIC Database.

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THE ASEAN-10 expects inflation to be about zero in 2009, before accelerating to a range of 1 per cent to 2 per cent in 2010.

Exchange Rate As inflation remains benign and recovery is gradual, in October the Monetary Authority of Singapore (MAS) maintained a zero appreciation stance in its currency policy. Prior to that, in April 2009, MAS decided to move down the centre of the band by 1.5 per cent. It adopted a devaluation of the Singapore dollar (SGD) to help reverse a collapse in exports. However, after hovering around 1.44–1.46 level during May–August, the SGD surged to 1.39 level against the U.S. dollar (USD) towards end-October. This was partly due to better economic data and return of foreign investor’s risk appetite (evident from higher Straits Times Index, Figure 8). USD weakness against major currencies is another factor contributing to SGD appreciation. Moving forward, the MAS would engineer some SGD strengthening, as the economy gains momentum and inflation tends higher. Moreover, SGD would appreciate amid continued USD weakness and better investor’s sentiments.

Figure 8: STI Gains Pushed Up the SGD 1.60

4000 3650

1.55

3300

1.50

2950

1.45

2600 2250

1.40

1900

1.35

1550 1200 3-Jan-07

26-Jul-07

19-Feb-08

Straits Times Index

8-Sep-08

2-Apr-09

1.30 22-Oct-09

USD/SGD (rhs)

SOURCE: Bloomberg.

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7.0

Net Foreign Direct Investment (US$ billion)

SOURCE: EIU

1.66

–0.3

Fiscal Balance (% of GDP)

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

0.5 6.2

232.5 195.5 37.0 18.4

7.3 8.0 7.2 n.a.

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

Goods: exports fob (US$ billion) Goods: imports fob (US$ million) Trade Balance (US$ million) Current account balance (% of GDP)

GDP Growth (real, % change) — Industry Sector Growth (real, % change) — Services Sector Growth (real, % change) — Agricultural Sector Growth (% change)

2005

1.53

12.5

0.5

1.0 19.4

275.1 231.7 43.4 21.4

8.4 10.8 7.5 n.a.

2006

1.44

11.8

3.3

2.1 13.4

303.1 254.0 49.1 23.4

7.8 7.3 7.6 n.a.

2007

1.43

13.6

1.5

6.5 12.0

342.7 309.6 33.1 14.2

1.1 –0.8 3.8 n.a.

2008

Singapore: Selected Economic Indicators, 2005-2011F

1.42

9.6

–3.2

0.5 11.1

245.0 209.7 35.3 16.0

–4.5 –9.0 –2.4 n.a.

2009F

1.40

10.2

–4.3

2.0 8.5

279.5 251.6 28.0 12.7

3.8 4.0 3.7 n.a.

2010F

1.38

10.5

–2.5

1.8 7.5

317.2 285.1 32.1 13.8

4.1 3.2 4.6 n.a.

2011F

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THE ASEAN-10

Thailand By Sakulrat Montreevat The Thai economy is estimated to contract by 3 per cent in 2009, for the first time since the recession in 1998. This was attributed to the dramatic fall of exports and weak domestic demand. The global economic downturn caused a sharp decline in Thailand’s exports, mainly manufacturing goods. The rising political tension also contributed to weak private consumption and investment demand. Unemployment rate, as a result, was on the rise. On the production front, the agricultural, manufacturing and services sectors indicated a poor performance in 2009. A contraction of rice and oil palm yields was due to unusual weather conditions, a decline in world crop prices, and a reduction in demand for alternative energy. Capital and technology manufacturing production faced the steepest drop of 35 per cent in the first half of 2009 due to weak domestic and external demand. This also affected the production of raw materials in the supply chain. Tourism and related industries were also on the wane since the closure of the airports in late 2008, followed by the declaration of a state of emergency in Pattaya and Bangkok in April 2009, and the outbreak of H1N1 in mid-2009.

THAILAND • Since the beginning of 2009, Thai authorities have implemented various fiscal and monetary measures in order to pull the Thai economy out of recession. • The massive stimulus package over FY2010–FY2012 paves the way for longterm economic development. • The country is forecast to grow about 3–4 per cent per year in 2010–11. Risks to the economy still centre on global economic conditions, political instability, rising oil prices, and the influenza pandemic. • If the economy struggles on the path of recovery, servicing public debt will become an issue of concern.

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ECONOMIC OUTLOOK To shore up the economy, the Abhisit government has implemented various fiscal and monetary measures. The first economic stimulus package (SP1), which came into effect in March 2009, included a supplementary budget of 116.7 billion baht, tax measure, and price insurance schemes for rice, tapioca and maize. The SP1 aimed at supporting domestic demand within six to nine months. The Bank of Thailand lowered the policy rates aggressively from 3.75 per cent to 1.25 per cent during December 2008 to April 2009 in order to support the economy through reducing borrowing cost and restoring consumer and investor confidence. However, the policy rate cuts did not fully transmit into commercial banks’ lending rate. Moreover, the contracting economy prompted commercial banks to be more prudent in credit extension. The SP1 and the policy rate cuts could not stimulate domestic consumption and investment sufficiently to compensate the sharp decline in exports in the first half of 2009. The Cabinet, therefore, approved the second economic stimulus package (SP2) with a budget of 1.43 trillion baht for the three consecutive fiscal years starting in October 2009. The SP2, named Thai Khemkhaeng (Strong Thailand), targets at 3,000 public investment projects in the northeast, the central, the north and the south of Thailand. The public investment projects cover thirteen sectors and subsectors, including transport and logistics (39.9 per cent of the 1.43 trillion-baht budget), water management for the agricultural sector (16.7 per cent), energy and alternative energy (14.4 per cent), education (9.8 per cent), healthcare (6.9 per cent), rural community development (6.4 per cent), telecommunication (1.7 per cent), creative economy (1.2 per cent), science and technology (0.8 per cent), tourism infrastructure (0.7 per cent), tourism development (0.6 per cent), public welfare (0.6 per cent), and resources and environment (0.3 per cent). According to the plan, the SP2 will be financed through the annual budget (15.3 per cent of the 1.43 trillion-baht budget), domestic borrowing (1.1 per cent), foreign borrowing (17.6 per cent), public-private partnership (2.5 per cent), and extra borrowing via the Borrowing Act (63.4 per cent).

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THE ASEAN-10 The SP2 aims to boost private investment, create employment, and enhance the country’s competitiveness in the long term. The effectiveness of the SP2 depends upon transparency, project prioritization, and budget disbursement. The government estimated that the SP2 would additionally increase the country’s growth by 1.3 per cent per annum over the period 2010–12, private consumption by 0.7 per cent per annum, and private investment by 2.6 per cent per annum. Employment is estimated to increase 1.5 million persons by 2012. Public debt is projected to reach 58 per cent of GDP by 2012 and fall down below the debt ceiling of 50 per cent of GDP by 2018. On the exchange rate, the Bank of Thailand in August 2009 relaxed regulations on investment in securities abroad and on derivatives transactions aiming at facilitating capital outflows and easing upward pressure on the baht. The central bank keeps the baht in tandem with regional currencies. In the financial sector, the Basel II framework has been implemented since January 2009. As a result, capital adequacy ratios of commercial banks were above the regulatory requirement of 8.5 per cent. On asset quality, NPL to total loan declined to a low level of 3.06 per cent in the second quarter of 2009. The NPL ratio is expected to increase at the end of 2009 due to the contraction in the real sector. To alleviate firms’ liquidity problems, the government in May 2009 injected 8 billion baht into state-owned financial institutions to provide credit guarantees to SMEs and exporters. For the household sector, the Ministry of Finance launched a debt restructuring programme in November 2009. It is expected that 800,000 non-bank debtors will sign up for the programme. Each debtor will be offered a long repayment period and entitled to no more than 200,000 baht. Informal household debts will be transferred to state-owned financial institutions. According to the National Statistical Office, the average debt per household rose from 68,405 baht in 2000 to 133,293 baht in 2009. Household expenses were mainly for housing, household goods, and foods and beverages. Almost 83 per cent of household debt was owned to financial institutions and the rest to non-bank lenders.

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66,985 36.1

59,643 41,089 11.3

0.1

4.7 8.2

127,941 126,947 995 1.1

5.2 5.8 4.8 4.6

2006

87,455 34.7

61,739 40,097 11.8

–1.1

2.3 6.3

150,048 138,476 11,572 5.7

4.9 6.1 4.6 1.8

2007

111,008 33.4

65,094 40,884 7.0

–1.3

5.5 9.2

175,298 175,060 237 0.0

2.6 3.8 1.1 5.0

2008P

131,000 34.5

64,000 40,192 8.7

–4.7

–0.9 5.5

145,497 125,693 19,804 5.5

–3.0 –4.0 –2.3 –2.0

2009E

152,000 34.0

65,000 40,820 8.1

–2.7

2.0 5.7

152,772 144,547 8,225 3.1

3.3 2.5 4.0 3.0

2010F

SOURCE: National Economic and Social Development Board, Bank of Thailand, Ministry of Finance, and author’s estimation.

52,066 41.0

International reserves (US$ million) Exchange rate at year-end (baht/US$1)

0.2

Fiscal balance (as % of GDP) 52,039 35,631 10.8

4.5 6.1

Headline Inflation (% change) M2 money supply growth (% change)

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

109,362 117,616 –8,254 –4.3

4.6 5.4 5.2 –1.8

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)

2005

Thailand : Selected Economic Indicators, 2005–2011F

148,000 34.0

67,000 42,076 6.8

–4.4

2.7 6.0

164,994 173,457 –8,463 –2.2

4.0 3.0 5.0 3.0

2011F

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THE ASEAN-10 Manufacturing exports and tourism sector showed an improvement in the second half of 2009. The economic recovery however has remained fragile. The government has set a budget deficit of 350 billion baht for FY2010. It is expected that 85 per cent of the budget will be disbursed. The Bank of Thailand maintained its policy rate at 1.25 per cent. According to the central bank, any rate rise would come after the economy enjoys a period of sustained recovery. The Thai economy for 2010–11 is forecast to expand 3-4 per cent per year given ongoing recovery of major trading partners, continued expansionary fiscal policy, and accommodative monetary policy. Headline inflation is projected to rise to 2–3 per cent per year due to rising oil prices. Exports are forecast to recover in 2010–11. The rising imports of capital goods for the public investment projects and for oil are forecast to pull down trade surplus. Current account is projected to turn deficit in 2011. With ample international reserves, the baht is expected to remain stable at 34 baht per US$1 in 2010–11. Risks to the outlook still centre on global economic condition, political instability, rising oil prices and the influenza pandemic. If the economy struggles on the path of recovery, the main concern of public debt management will be that of servicing the public debt. To sustain economic recovery, Thailand needs to install political stability and reduce its dependence on manufacturing exports and oil import.

Vietnam By Omkar Lal Shrestha Not many countries have been able to achieve a sustained high growth rate as Vietnam and reduce its poverty incidence considerably in a relatively short period. Vietnam’s recent growth started only from 1990 onward. The global crisis had led to conspicuous slowdown of economic growth in Vietnam with the growth decelerating from 8.25 per cent in 2007 to 6.2 per cent in 2008 (the slowest rate since 1999). However, in response to the timely strong policy response, Vietnam’s economic

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ECONOMIC OUTLOOK slowdown bottomed out in early 2009 with real GDP growing by 3.9 per cent during the first half of 2009 with the growth for the second half of the year projected at 5.4 per cent. Expansionary monetary and fiscal policies helped strengthen domestic demand. As a result, manufacturing, construction, and services sectors accelerated again. The lower interest rates and a sharp drop in the prices of construction materials like cement and steel helped in the growth of the construction sector. Agriculture also grew particularly in the second quarter of 2009 supported by rice harvests. Notwithstanding this, there is a noticeable increase in unemployment and underemployment in rural and urban areas on account of noticeable fall in the remittances, and foreign direct investment.

VIETNAM • The year 2009 has been a challenging year. The Government can be commended for its swift response to the global economic crisis of late 2008. The loose monetary policy and the expansionary fiscal programme have been successful in preventing the severe economic downturn. GDP is expected to grow in the range of 4.6–5.2 per cent in 2009 and by 6.5 per cent in 2010. • The fiscal deficit in 2010 is expected to narrow down to about 4.5 per cent of GDP due to the anticipated increase in world oil prices, deferred tax payments shifted from 2009 to 2010, and projected faster economic growth. In addition, public expenditures in 2010 may decline as several programmes have already been advanced in 2009 under the stimulus programme. • The current account balance in 2010 is likely to widen to around 9–9.4 per cent of GDP as imports surge in response to stronger economic growth activities, higher import prices, increased foreign-financed investment projects and improved trade credit availability. • Short-term objectives for the economy will be to sustain growth momentum maintaining at the same time price and exchange rate stability. • Long-term prospects of the country remains strong but will need to increasingly focus on enhancing the level of productivity in its capital investment programmes.

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THE ASEAN-10 As a part of stimulus package, Vietnam started to adopt loose monetary policy from November 2008 onward. The introduction of the 4 percentage point interest rate subsidy scheme helped increase M2 to 35.8 per cent in the second quarter of 2009 from 20.3 per cent in the 2008 fourth quarter. Other measures adopted towards lose monetary policy included the reduction in key policy rates and drop in the required reserve ratio. The State Bank of Vietnam (SBV) also brought back huge amount of compulsory bonds that had been issued in March 2008 as anti-inflationary measure. Expansionary fiscal measures were adopted during the first half of 2009. Corporate tax for the SMEs was cut by 30 per cent. Social welfare provision of financial assistance was extended to the poorest households, poorest districts and low-income civil servants. Provision was made for increased spending on infrastructure. The total stimulus package is estimated at 145 trillion dong (around US$8 billion). The fiscal revenue in 2009 on the other hand is expected to decline due to tax breaks like personal income tax exemption and also as oil income (accounting for 30 per cent of government revenue) is hit by the fall in world crude oil prices. Notwithstanding this, the fiscal deficit (including off-budget expenditures) in 2009 is expected to rise only slightly from 9.8 per cent of GDP in 2008 to 10.1 per cent in 2009 as some of the planned capital spending under the stimulus programme may not be fully disbursed due to financial as well as implementation capacity constraints. The fiscal deficit thus may not pose a threat to the country’s public debt sustainability position. After peaking in August 2008, inflation has fallen significantly from 23 per cent in 2008 to 8.3 per cent during January–August 2009. The government had to rein in the excessive credit growth that had resulted in rampant inflation in 2008. However, the global economic crisis required the Government to quickly reverse the credit contraction policy and boost credit demand to stimulate the economy. There seems to be some concern that the continuation of cheap credit policy and any possible increase in world commodity prices could again bring high inflation in the second half of 2009. This is because food and foodstuffs account for more than 40 per cent of the basket of goods

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ECONOMIC OUTLOOK in the calculation of inflation in Vietnam. The latest consumer price inflation data from the General Statistics Office, however, does not suggest recurrence of such rise in inflation. The consumer price inflation for 2009 is projected at 7.3 per cent. On the external sector, exports declined by 10.2 per cent during the first half of 2009 as a result of weak external demand in Vietnam’s traditional markets. Drop in the exports of wood products and crude oil was partly offset by increase in the exports of rice and re-export of gold (US$2.5 billion). Imports on the other hand dropped by some 34 per cent reflecting economic slowdown, reduced FDI inflows and shortage of trade credit. In the first half of 2009, trade deficit declined sharply to US$0.2 billion from US$11.4 billion during the same period in 2008. Mainly because of this and the gold re-export, the current account during this period showed a surplus of 0.4 per cent of GDP compared with 23.8 per cent deficit in the comparable period in 2008. For the year 2009 as a whole, the GDP growth is forecast in the range of 4.6 per cent to 5.2 per cent as a result of large fiscal stimulus and increased oil output (as it reaches peak since coming on stream in late 2008). The current account balance is projected to show a deficit of 7 per cent of GDP as imports start picking up while Vietnam’s exports markets continue to remain weak. In addition, the reduced remittances fall in income from tourism, outflows of portfolio investment and decline in FDI inflows cumulatively are expected to cause the overall balance of payments deficit for the year 2009. The Government can be commended for its swift response to the global economic crisis of late 2008 just as for its measures in restraining the inflationary surge in late 2007 and early 2008. The rapid loosening of the monetary policy and the expansionary fiscal programme has been successful in preventing the severe economic downturn. There are now clear signs of a recovery with inflation under control. As such, it is assumed that additional fiscal stimulus measures may not be adopted. In anticipation of relatively improved global financial conditions and resumption of FDI inflows, GDP growth in 2010 is projected to grow at 6.5 per cent. For various reasons including the likely increase in

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THE ASEAN-10 world oil prices, deferred tax payments shifted from 2009 to 2010, reduced public expenditures in 2010 on account of their advancement in 2009 under the stimulus programme, and projected faster economic growth, the 2010 fiscal deficit is expected to narrow to about 4.5 per cent of GDP. The current account balance in 2010, however, is likely to widen to around 9 per cent to 9.4 per cent of GDP as imports surge in response to stronger economic growth activities, higher import prices, increased foreign-financed investment projects and improved trade credit availability. The 2009 economic performance to date shows the resilience of the Vietnamese economy. The macroeconomic performance of Vietnam has been relatively better than in many other countries in terms of unemployment and business bankruptcies — a reflection of both the timely stimulus policies adopted by the government as well as the economy’s strong initial conditions. The worst has been avoided and the economy is on its way to recovery. The question now arises as to which direction in the medium and long term the economy should be geared to. It is a country with an ambitious aim of becoming an industrialized country within one generation by 2020. Rapidly expanding working age of population (1.6 million entering in the labour force each year) and the new entrants more skilled than those from the earlier years is a great asset towards realizing that potential. The country has been prudently making massive investment in much-needed infrastructure. However, the high speed of annual growth is outpacing the progress made in the field of infrastructures. Much of the investment comes from within the country. As such, government public debt sustainability is not much of an issue unlike in several other developing countries. The flexibility of labour market is such that underemployment seems to be common than unemployment. A large part of the new job creation for the new entrants in the labour market each year is generated by the private sector and the Vietnamese have displayed a remarkable entrepreneurial capacity as shown by their rapid expansion of exports in coffee and rice, placing themselves as world’s second biggest exporter of the items after Brazil and Thailand respectively.

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ECONOMIC OUTLOOK Poverty incidence has been brought down from as high as 58 per cent in 1993 to less than 15 per cent by 2008 indicating inclusive nature of its growth. Many of the Millennium Development Growth targets set by the UN have either already been accomplished ahead of the target date or are well on their way of achieving them by the date set. In the immediate term, there are some risks that the economy could encounter macroeconomic instability in terms of higher rate of inflation, budgetary deficit and current account deficit in 2010. The risk of increased bad debt can not be ruled out. Ensuring transparency and proper accountability will be critical against the increased resources allocation under the stimulus programmes. Maintaining growth with price and exchange rate stability in 2010 will thus be critically important. Over the long term, as the country prepares for its next fiveyear development plan (2011–15) and as long-term strategy of SocioEconomic Development for 2011–20 is formulated, several major issues beg for clear policy directions and their effective enforcement. With its increasing contribution to the proportion of GDP and in view of the country’s cherished goal of becoming an industrialized nation soon, reforms in industrial sector becomes extremely important. In this context, there needs to be careful and determined move towards transforming the state-owned enterprises (SOEs) into commercially oriented entities at par with the private sector enterprises. There is clear lack of industrial strategies, action plans, incentives structures and institutional and organizational capacities to achieving the above vision. This is equally true in the banking and financial sector where effective policy-making and skilful regulation need to be balanced against profitable risk-taking. Given its open economy, remaining globally competitive is critically essential for Vietnam. This in turn will require Vietnam to ensure that its investment-led growth is progressively shifted to productivity-led growth. Enhancing the level of productivity would entail considerable strengthening of its labour force in terms of training and education, improving its governance structures, increased progress in public administration reforms, updating institutional setups, and upgrading its management and technological capacities.

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THE ASEAN-10

169

Vietnam: Selected Economic Indicators, 2006–2010F 2006

2007

2008

84.4

85.3

86.1

87.0

87.8

Recorded Unemployment (average %)

4.8

4.6

4.7

6.5

6.2

Gross Domestic Product (Nominal US$ billion)

61.0

71.2

90.2

90.5

97.3

GDP growth (% change)

8.2

8.5

6.2

4.6 to 5.2

to 5.2

10.4 8.3 3.4

10.6 8.7 3.7

6.3 7.2 3.8

4.2 5.1 2.0

6.5 4.2 3.0

7.5

8.3

23.0

6.8 to 7.0

7.0 to 11.0

Exports (US$ billion) Imports (US$ billion)

39.8 42.6

48.6 58.9

61.3 77.3

54.7 66.0

58.6 72.0

Current Account Balance (% of GDP)

–0.3

–9.8

–11.8

–7.8

–9.0 to 9.4

Foreign exchange reserves (US$ billion)

13.6

23.7

24.2

21.6

22.7

Population (million)

Industry growth (% change) Services growth (% change) Agriculture growth (% change) Inflation (%)

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2009

2010F

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THE CONTRIBUTORS

Political Outlook Patricio Abinales is Professor in the Division of Economics and Political Dynamics of the Center for Southeast Asian Studies, Kyoto University. He contributed the country section on the Philippines. Terence Chong is Fellow in the Regional Social and Cultural Studies Programme of the Institute of Southeast Asian Studies. He contributed the country section on Singapore. Jörn Dosch is Professor of Asia-Pacific Studies in the Department of East Asian Studies of the University of Leeds. He contributed the section, “Southeast Asia’s Security and Political Outlook”. Richard Horsey is a former representative of the International Labor Organization in Myanmar, a former advisor to the United Nations, and a current Fellow at the Open Society Institute in New York. He contributed the country section on Myanmar. David Koh is Senior Fellow in the Regional Strategic and Political Studies Programme of the Institute of Southeast Asian Studies. He contributed the country section on Vietnam. Lee Jaehyon is Visiting Professor at the Institute of Foreign Affairs and National Security in Seoul. He completed the section, “Prospects for Korean-Southeast Asian Relations”. Duncan McCargo is Professor of Southeast Asian Politics at the University of Leeds. He contributed the country section on Thailand. Michael S. Malley is Assistant Professor in the Department of National Security Affairs, Naval Postgraduate School, Monterey, California. He contributed the section, “Southeast Asia’s Nuclear Ambitions”.

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172

THE CONTRIBUTORS Bernhard Platzdasch is Visiting Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Indonesia. Johan Saravanamuttu is Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Paul J. Smith is Associate Security Decision Making in Newport, Rhode Island. Southeast Asia: A Strategic

Professor in the Department of National of the United States Naval War College He contributed the section, “Terrorism in Assessment”.

Sokbunthoeun So holds the Southeast Asia Visiting Fellowship of the East-West Center in Washington. He contributed the country section on Cambodia. Martin Stuart-Fox is Emeritus Professor of History at the University of Queensland. He contributed the country section on Laos. Pushpa Thambipillai teaches in the Faculty of Business, Economics and Policy Studies of the University of Brunei Darussalam, Bandar Seri Begawan. She contributed the country section on Brunei Darussalam.

Economic Outlook Sanchita Basu Das is Associate Fellow at the Institute of Southeast Asian Studies. She contributed the overview section on “Regional Economic Outlook” and the country section on Singapore. Aekapol Chongvilaivan is Fellow in the Regional Economic Studies Programme of the Institute of Southeast Asian Studies. He contributed the section, “Undoing the Myths of the Global Financial Crisis and Growth Prospects: Evidence for Selected Asia-Pacific Economies”. Philip Clausius is Chief Executive Officer of FSL Trust Management Pte Ltd in Singapore. He contributed the section, “Maritime Industry to Recover with Time Lag Only”. Kian-Teng Kwek is Associate Professor in the Department of Economics, Faculty of Economics and Administration, University of Malaya. She contributed the country section on Malaysia.

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THE CONTRIBUTORS

173

Lee Poh Onn is Fellow in the Regional Economic Studies Programme of the Institute of Southeast Asian Studies. He contributed the country section on Brunei Darussalam. Benjamin Loh is Research Associate at the Institute of Southeast Asian Studies. He contributed the section, “Public Infrastructure Financing in Southeast Asia”. Jayant Menon is Principal Economist in the Office for Regional Economic Integration at the Asian Development Bank. He contributed the country section on Cambodia. Sakulrat Montreevat is Senior Researcher at the Fiscal Policy Research Institute, Bangkok, Thailand. She contributed the country section on Thailand. Kyophilavong Phouphet is Deputy Director, Department of Economics, Faculty of Economics and Business Management, National University of Laos. He contributed the country section on Laos. Aladdin D. Rillo is International Consultant (Macroeconomist) at the Asian Development Bank. He contributed the country section on the Philippines. Omkar Lal Shrestha is Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Vietnam. Reza Siregar is Senior Lecturer, Adjunct Faculty, School of Economics, University of Adelaide, South Australia. He contributed the country section on Indonesia. Mya Than is Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Myanmar. Catherine Wong Mei Ling is Research Associate at the Institute of Southeast Asian Studies. She contributed the section, “Facing the Storm Through the Market: Harnessing Carbon Markets to Power Southeat Asia’s Green Development”. THE EDITORS Michael J. Montesano is Visiting Research Fellow at the Institute of Southeast Asian Studies. Lee Poh Onn is Fellow in the Regional Economic Studies Programme of the Institute of Southeast Asian Studies.

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