Integration in Asia and Europe: Historical Dynamics, Political Issues, and Economic Perspectives 0387554033, 9780387554037, 3540287299

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Integration in Asia and Europe

Paul J. J. Welfens ´ Franz Knipping Suthiphand Chirathivat ´ Cillian Ryan Editors

Integration in Asia and Europe Historical Dynamics, Political Issues, and Economic Perspectives With 32 Figures and 30 Tables

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Professor Dr. Paul J.J. Welfens University of Wuppertal EIIW ± European Institute for International Economic Relations Rainer-Gruenter-Straûe 21 42119 Wuppertal Germany [email protected] Professor Dr. Franz Knipping University of Wuppertal Chair in Modern and Contemporary History Gauûstraûe 20 42119 Wuppertal Germany [email protected]

Professor Dr. Suthiphand Chirathivat Chulalongkorn University Faculty of Economics Phayathai Road Bangkok 10330 Thailand [email protected] Professor Dr. Cillian Ryan The University of Birmingham Department of Economics Edgbaston B15 2TT Birmingham United Kingdom [email protected]

Cataloging-in-Publication Data Library of Congress Control Number: 2005934194

ISBN-10 3-540-28729-9 Springer Berlin Heidelberg New York ISBN-13 978-3-540-28729-2 Springer Berlin Heidelberg New York This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer-Verlag. Violations are liable for prosecution under the German Copyright Law. Springer is a part of Springer Science+Business Media springeronline.com ° Springer Berlin ´ Heidelberg 2006 Printed in Germany The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Hardcover-Design: Erich Kirchner, Heidelberg SPIN 11550792 43/3153-5 4 3 2 1 0 ± Printed on acid-free paper

Paul J.J. Welfens, Franz Knipping, Suthiphand Chirathivat and Cillian Ryan (Eds.)

INTEGRATION IN ASIA AND EUROPE: HISTORICAL DYNAMICS, POLITICAL ISSUES, AND ECONOMIC PERSPECTIVES

Contents Introduction ...........................................................................................................1 Paul J.J. Welfens, Franz Knipping, Suthiphand Chirathivat, Cillian Ryan ASEAN Perspective on Joint Research................................................................7 Suthiphand Chirathivat A New Take-off: A European Perspective.........................................................11 Franz Knipping Festina Lente: An Introductory Sketch of the History of ASEAN..................13 Andrew J. Crozier Information and Communications Technology, Regulations and Growth: Theory and Key Policy Issues.............................................................................31 Paul J.J. Welfens International Oil Price Changes: Impact of Oil Prices on Growth and Inflation in the EU...............................................................................................67 Werner Roeger ASEAN’s Role and Interests in the Formation of East Asian Economic Regionalism..........................................................................................................79 Suthiphand Chirathivat Globalization-Criticism in Asia........................................................................105 Annamária Artner and Zoltán Bassa International Banking: The Influence of GATS and International Prudential Regulation .......................................................................................115 Cillian Ryan and Victor Murinde Emerging Market Financial Crises – Lessons for International Banking ..............................................................................................................135 Timothy Lane Asymmetric Stock Market Interdependencies: US Dominance and Spillover Effects into Asia and Europe............................................................145 Noer Azam Achsani and Hans Gerhard Strohe Monetary Policy and Real-Time Data: The Case of Europe, Asia and the US..................................................................................................165 Franz Seitz, Christina Gerberding and Andreas Worms

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Contents

International Cooperation and Environmental Policy: Asian Perspectives........................................................................................................ 183 Charit Tingsabadh Euro-Asian Environmental Cooperation – A European Perspective ........... 187 Philipp Schepelmann Towards an EU Constitution: Cooperation of Different Political Cultures.............................................................................................................. 197 Hans J. Lietzmann China’s Foreign Trade and Investment Links................................................ 201 Wolfgang Klenner Region Building in East Asia: ASEAN Plus Three and Beyond................... 217 Julie Gilson The Institutional and Legal Basis of European Union International Relations............................................................................................................. 235 Bernhard Losch International Competition Law and Regional Trade Agreements................ 241 Peter Hilpold The Intra-Community Effects of Mixed Agreements: Uniform Status Versus Division of Competence........................................................................ 255 Alexander Proelß EU and ASEAN/ ASEAN+3: World Region Developments, FDI and Multinational Corporation Strategies ............................................................. 267 Norbert Koubek A European Perspective on Asia ...................................................................... 277 Ulrich Junker ASEAN Exchange Rate Policies ....................................................................... 281 Dieter Wermuth List of Contributors .......................................................................................... 283

Introduction

Economic integration in the EU and ASEAN has made enormous progress in past decades. Regional integration requires at least free regional trade as well a common external tariff in the case of a customs union. Thus cooperation is necessary for economic reasons. The EU15 have achieved a true single market which means free trade in goods and services in addition to free capital flows and free labor movement. Extending this project (formally completed in 1992) to EU25 in the context of eastern EU enlargement of 2004 has turned out being difficult. ASEAN countries are discussing ways to deepen their regional integration. As regards true political integration progress has been much slower in both Europe and Asia; the negative referenda in France and in the Netherlands in May and June 2005 have raised doubts not only about the EU constitution but about the long term political course of EU integration. To some extent this is surprising, as the EU eastern enlargement of 2004 seemed to indicate that European integration is an ongoing success story. One could, however, also argue that the problems are not really surprising since the former West European fear of the Soviet Union no longer exists. Moreover, the Euro is not an overwhelming success so far, although one should emphasize that the main problems stem from Germany, France and Italy, countries which are facing globalization and EU eastern enlargement as well as the digital economic revolution while not having made as bold reforming efforts as most small EU member countries. The whole EU (and the US) are watching with great interest the enormous economic dynamics in Asia where China and ASEAN countries show high growth of output and of trade. The papers presented in this volume represent the proceedings of the first conference of the Jean Monnet transnational research programme organised by the Universities of Wuppertal, Birmingham and Bangkok. The programme brings together experienced and young researchers in an interdisciplinary attempt to analyze critical issues of economic and political development while also taking a look at historical and legal aspects of integration in Europe and Asia. Comparative research certainly is an important element of modern science, and a better understanding of the dynamics in both EU and ASEAN countries is important for global economic growth and stability. At the same time, our joint research points to gaps in analysis that need to be filled if policymakers are to base their decisions on a sound intellectual basis. Suthiphand Chirathivat’s introduction puts the emphasis on Asian and European integration dynamics. This includes basic reflections about China’s role for ASEAN. The integration dynamics in both Europe and Asia make it necessary to focus on trade and investment developments as well as cooperation of policymakers.

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Introduction

Franz Knipping takes a brief look back at previous cooperation in research between the EU and ASEAN; indeed Asian countries have had an interest in EU integration for decades. While one may point to economic and technological heterogeneity across countries both in Europe and Asia, it is also true that there are broad fields of joint research interests. The contribution of Andrew Crozier gives a broad historical perspective on ASEAN dynamics, which started as a group of countries interested mainly in security issues in 1967. Crozier points out the British role in Asia and the colonial heritage problems which affected most Asian countries excluding Thailand. ASEAN is shown to have embraced economic integration and various enlargement efforts in a pragmatic way. However, the natural emphasis on nationalism in the many newly independent Asian countries to some extent has made cooperation stronger in the sense that moving towards a supranational institution is rather difficult. However, there is visible progress in economic deepening, and there is continued emphasis on security issues. Paul J.J. Welfens takes a closer look at the information and communication technology (ICT) dynamics in Europe and Asia where he puts the focus on specific aspects of a digital economy, ICT dynamics and theoretical modeling of open economies. As regards key indicators of ICT, there are considerable differences across countries which thus stand to benefit in various degrees from network effects and digital networking facilitating the use of information and new knowledge. ICT has facilitated foreign direct investment, not least because ICT facilitates coordination in large multinational companies while allowing for more flexibility and to some extent decentralized management of certain tasks. Opening up telecommunications and privatization to network operators in Europe and Asia has itself been an interesting element of ICT modernization. The model with foreign direct investment shows that in contrast to the model of BARRO/ MANKIW/SALA-I-MARTIN which finds no impact of foreign direct investment on growth (under risk neutrality of economic actors), this alternative modeling clearly shows a positive impact on the level of the growth path and possibly on the growth rate itself. The oil price shocks of the period from 2001 to 2005 have caused a broad discussion in Europe, Asia and the US about their economic fallout. Werner Roeger takes a closer look at the dynamics of oil prices and the main routes through which higher resource prices affect the economy. The simulation results with the European Commission’s QUEST macroeconomic model show that a rise in the oil price of 50 per cent causes a modest increase in the inflation rate of nearly 0.5 percentage points compared to the baseline scenario. There is only a small impact on employment, while the impact on output amounts to a reduction of 0.5 percentage point. Oil and gas prices thus seem to have only a modest effect on the real economy in Western Europe. For the countries of the Euro zone, the dollar price increase in oil is less relevant than for the US and non-Euro EU countries if the Euro zone faces a real appreciation in the medium run. Suthiphand Chirathivat’s analytical focus is on ASEAN’s role and interests in East Asian economic regionalism. His analysis shows that ASEAN reflects an attempt by East Asian countries to strive towards deeper regional integration within

Introduction

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a strategy to cope with globalization on the one hand and uncertain multilateral arrangements on the other. Establishing a free trade area had been achieved by 2003 (for the six original ASEAN members), but trade creation also was achieved through enlargement and through bold plans for further regional economic integration. India, Japan and China are shown to be part of the broader integration picture in Asia. There is an analytical and political link to the EU and NAFTA to the extent that Asian countries closely watch the integration dynamics and problems encountered in Europe and North America. Tariff policies are shown to be an important policy element in Asia. Moreover, the author points to the key macroeconomic changes expected from non-tariff liberalization in Asia. The Asian financial crisis has reinforced the willingness for regional economic cooperation. Annamária Artner and Zoltán Bassa analyze the criticism of globalization in Asia. The authors point out that several groups from the European and Asian civil societies have become active as a critical voice against globalization in the 1990s. There are several source countries of critical movements in Asia. Particular criticism has focused on the effects of trade liberalization and problems of environmental protection. It seems there is a growing network of critical actors in Asia which find globalization to be unfair and too fast. The Asian financial crisis has raised regional and global concern about financial market instability. Globalization has reinforced the dynamics of capital flows on the one hand, while growing foreign direct investment in banking and finance has contributed to a wider network of financial market actors. Against this background Cillian Ryan and Victor Murinde use the evidence of changes in financial services provision following the GATS liberalization to assess the likely impact of the proposed Basel II changes in international prudential regulations. Originally it was believed that GATS would not be particularly influential in many ASEAN and Eastern European economies but the authors explain how the various financial crises in these regions altered the attitudes of domestic regulators and market participants leading to a significant shift in the pattern of international financial services. Their new analysis of Basel II suggests that it may reinforce these trends and that large international banks are likely to be the main beneficiaries. Particularly important for financial trade patterns will be the speed and evenness of implementation of the regulations, but cross-border lending to ASEAN and Eastern European countries is likely to decline further while international mergers with domestic banks rise. Timothy Lane takes a close look at emerging market financial crises and the lessons to be drawn for international banking. The author describes the key elements of the crises and 10 key lessons which should be useful for investors, bankers and governments. Among the interesting findings is that there are relatively high risks of short-term banking lending to emerging market countries and that foreign banks have a survival advantage in a crisis context. Noer Azam Achsani and Hans Gerhard Strohe look at asymmetric stock market interdependencies, namely the relative role of US stock markets and spillover effects into Europe and Asia. Applying various approaches – correlation analysis, Granger causality, VAR analysis, impulse response analysis and decomposition of forecasting error variance – the authors identify distinct patterns of interdepend-

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Introduction

ence, which, except for correlation analysis, show strong asymmetries in the world economy. Shocks in the US and EU markets will be transmitted quickly in the international system. Among the Asian markets, Singapore and Hong Kong seem to be relatively important sources of international stock market dynamics whose overall picture, however, is dominated by the US. Franz Seitz, Christina Gerberding and Andreas Worms present a critical analysis of monetary policy and real-time data: with a perspective on the EU, Asia and the US. There is a broad discussion in the literature about the course of monetary policy, but it is unclear whether there are mainly conceptual and implementation problems or whether the difference between the data available and the moment of monetary decision making and the data used by researchers is relevant here. The authors discuss the real time data issue and particularly discuss the initial and expost estimates of the output gap. The econometric evidence presented raises doubts about the widespread view that monetary policy typically can be described by a generalized Taylor rule. Charit Tinsabadh examines on international cooperation and environmental policy with an Asian perspective. Environmental issues have become increasingly important for ASEAN countries, and the author highlights key steps of regional cooperation in this field as well as in the area of EU-ASEAN cooperation. Philipp Schepelmann considers key environmental issues from a European perspective. After pointing out the basic strategy of EU environmental policy the author emphasizes fields of common concern. Moreover, there are opportunities for upgrading environmental policy in ASEAN and for stronger cooperation between the EU and ASEAN. Hans J. Lietzmann takes a closer look at EU constitutional issues. His analysis, written before the negative referenda in France and the Netherlands, emphasizes the basic problems of the EU constitution project and discusses aspects of the governmental structure in the EU. Asia has for decades been shaped by the rising sun of Japan but since the beginning of the 21st century it is to a considerable extent China which has become the focus of economic and political interest in Asia. Wolfgang Klenner’s contribution looks at China’s foreign trade and investment links. Among the crucial topics are the relationship between China and the EU as well as China’s access to the World Trade Organization and the crucial domestic challenges. ASEAN is a dynamic integration bloc in Asia with an interest in economic and political cooperation with the EU and the US. At the same time there is a need to cooperate with three main actors in Asia, namely China, Japan and South Korea. Julie Gilson’s analysis is on region building in East Asia and places its emphasis on the complex web of interests and institutions which are visible in the new Asia. Despite structural asymmetries among Asian countries, it is important to recognize that political cooperation clearly is playing an increasing role in East Asia. In Europe cooperation among countries is complex, and the EU itself is a key actor in shaping political networking. Bernhard Losch’s contribution is on the institutional and legal basis of the European Union’s international relations. The different rules of the supranational level and the member states are discussed and the dynamics of the EU institutional setup evaluated.

Introduction

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With economic globalization there is an increasing need to design compatible competition rules at the national level or to jointly define competition policy in combination with regional trade agreements. Peter Hilpold analyzes key issues in this field, including the role of international competition law and the problems with the enforcement of rules at a regional level. Moreover, the potential role of competition policy in ASEAN is highlighted. Alexander Proelß analyzes the intra-community effects of mixed agreements. From a legal perspective the EU has created its own legal system, and there are areas in which the EU has exclusive competences. However, member states also have competences so that many multilateral arrangements fall in both the supranational and the national field. The author discusses the intra-community effects of such ‘mixed agreements’ and offers an interpretation of the decisive norms of the EU Treaty based on the jurisprudence of the European Court of Justice. Norbert Koubek’s analytical focus is on EU and ASEAN in the context of an investment perspective. His analysis highlights key elements of the World Competitiveness Report and discusses the question as to the role modern multinational corporations play in the international fragmentation of production and innovation dynamics. Ulrich Junker, the former German Ambassador to Japan, raises the issue as to what role grand projects such as the Euro have for EU integration and ASEAN integration. International organizations are seen as a vehicle for translating political visions into successful cooperation projects. The Asian financial crisis of 1997 had several roots, including problems related to the choice of the effective exchange rate regime. Dieter Wermuth examines ASEAN exchange rate policies. China’s exchange rate policy is considered a key challenge for the whole of Asia and indeed for the EU as well. The EU has become a successful economic integration scheme in Europe. However, it is unclear as to whether political leadership in the Union can be maintained. Germany has been weakened in economic terms, and France is also not very dynamic. This is not surprising considering that both Germany and Italy, two major trading partners, are facing serious problems. Facing a stalemate over the EU constitution, the Union is likely to lose integration momentum and influence over globalization simultaneously. ASEAN countries faced a serious crisis in 1997 and 1998, but renewed economic dynamics – which has both internal roots and broader regional sources – and the willingness to cooperate within a long term framework of a gradual deepening of integration have created the basis for further progress. Cooperation between the EU and ASEAN could be a very fruitful field for political and economic relationship building. However, a bridge between Europe and Asia can only be as stable as its institutional pillars in their respective region. Integration is always a learning process and one may be optimistic that the EU will regain some integration dynamics and political stability, and it is clear that not only can ASEAN learn from the EU but also the EU from ASEAN. The editors are quite grateful to the discussants Zoltán Bassa (Institute for World Economics, Budapest), Ulrich Hiemenz (OECD, Paris), Bernd Kempa (University of Essen-Duisburg), Rolf Langhammer (Kiel Institute for World Econimics), Jacqueline Lastenouse (Brussels), Joaquim Oliveira Martins (OECD),

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Introduction

Alexander Proelß (University of Tübingen), Helge Sanner (University of Potsdam) and Margot Schüller (Institute for Asian Affairs, Hamburg). We are grateful for the financial support of the European Commission within the framework of the Jean Monnet Action (Agreement Number – 2004-2421/001001), and we also appreciate the editorial assistance provided by Michael Agner, Chistopher Schumann and Stephanie Kullmann. Dora Borbély has been an excellent project manager throughout this endeavour. Building intellectual bridges between and within the Triad is a wonderful challenge.

Wuppertal, Birmingham and Bangkok in June 2005

Paul J.J. Welfens, Franz Knipping, Suthiphand Chirathivat, Cillian Ryan

ASEAN Perspective on Joint Research Suthiphand Chirathivat

It is a great pleasure for me to welcome all participants to the workshop. I hope, in particular, these two days of workshop will allow us to share some good thoughts on the subject, and to networking for future partnerships. I must congratulate our good friends, Professors Paul J.J. Welfens, Franz Knipping and Cillian Ryan, and their staff, with strong support from their own institutions for the excellent organization of this work and also for having invested much time and effort in making this venue a reality. I can see by the looks of all panels we have, from this morning up to tomorrow evening, we will address many topics related to the integration taking place in Asia and Europe. I am sure some of our colleagues like Franz, Paul and others here in Europe will discuss their experiences both in terms of its enlargement, and deeper integration’s latest agenda. I think I would like to take these few minutes to mention our experiences and perspectives in Asia, as we would like to encourage further discussion on our future cooperation. First, I would like to discuss the future of Asia, its growth, development and people. Because of its sheer size, population and market, growth of Asia or more precisely East Asia as well as India, continues to look impressive within the years to come, at least much more than the rest of our uncertain world. From the 1960’s up to the beginning of the 1990’s, we used to look at the economic and political development of Japan, Asian NIES and ASEAN. Today, we are starting to fully recognize the role and weight of China, a new locomotive of growth in the world economy, with an impressive growth rate of 8 to 9 per cent for more than a decade and a half. China has been named the factory of the world as much a source of world deflation. We start to see that China draws resources like raw materials and energy from the rest of world. At the same time, China plays a crucial role in world trade, technology and production for multinational enterprises. Without China, for example, Japan’s recession could be worse. Without strong growth in China, we will not be able to see ASEAN’s trade growth with China of 40 to 50 per cent in the last two to three years, reaching a total trade of probably 100 billion US dollars this year. There is as well in Asia at present a discussion on the emergence of India, the world’s second biggest country in terms of population. Finally, India’s new economic policy in the early 1990’s has started to bear its fruits. Its economic growth now stands at more than 6 per cent per year. Although lesser known than China or Russia and Eastern Europe here in Europe, India has been making strong advances in areas like ”back-office services”, with its exports contributing strongly to India’s overall trade. For a reference, India plays an increasing role as global out-

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sourcing for at least 220 out of the top 500 companies, according to one of the recent surveys by Fortune Magazine. These are a few words I could tell about India. Added to an increasing role of China and the emergence of India, Asia is also looking more to each other. Northeast Asian countries like Japan, Korea and Taiwan with its previous economic success, cannot stay still as much as the Southeast Asian countries like ASEAN. They are all subject to the changing conditions taking place in the world and finding needs to adjust to the new regional economic, political and social dynamism. Also in the last few years, Asia has been redrawing its geo-strategic interests. China, once completing its accession to the WTO, has started to look at its own ”peaceful ascendancy” policy with its neighbors like ASEAN-China pact and to a certain extent, its role in the upcoming East Asia Summit, involving the idea of an East Asian Economic Community. India also continuously projects its ”Look East” policy. It has entered agreements with ASEAN, China, Korea and Japan and looks forward to building an Asian Economic Community and Asian cooperation for peace and security. As the new Indonesian President, Susilo Bambang Yudhoyono, said recently in his debut at the ASEAN Summit: ”Our challenge today is to deepen our economic integration. Why? Two words: China and India”. Second, I will now address the problems of Asia as part of this new dynamism. It looks like a new history of Asia is on the creation. However, with these recent developments and the impact of such rapid changes on society and culture, the question that follows is where we put the place of our people and our resources in such developments. This is because such rapid developments would entail many resources needed for this transformation. And I think, here, unlike before, we cannot shy away from the problems we have created and will continue to create. Unlike before, many new problems are simply related to our own capabilities to deal with or to manage various areas. The latest Asian financial crisis, SARS, AIDS, terrorism and even the Avian flu are still fresh examples. And there are new attempts that need to be made as well for issues of the environment and its rapid degradation at the urban and rural areas. It is also the case that, unlike before, we cannot keep quiet or sweep our problems or conflicts under the carpet: the nuclear weapons of North Korea, the security issue related to terrorism in the Middle East, South Asia and even Southeast Asia, the record on democracy like for China and Myanmar, the China-Japan political tensions, or even the kinds of governance, corruption and quality of leadership we have in Asia. There are also new arising economic issues for Asia’s economic and monetary future like exchange rates and monetary regimes, monetary and financial markets, high debt problems and so on. There are also new social issues like how we address the education of new generation, immigrant people and the workforces of an aging and young population as well as family values and the like. In order to keep Asia growing more healthy and steadily, we need to address all these important problems more forcefully. Lastly, I would like to speak about the EU-Asian cooperation as a result of integration taking place in Asia and Europe. Perhaps, it is here we could also address much on each region’s own cooperation. Like in Europe, it is known that the

ASEAN Perspective on Joint Research

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region has been continuing to establish its own context of integration known now as the EJU for more than five decades now. The experiences of Asia in this regard are of only recent developments. The end of the Cold War, September 11 and its aftermath, and the new shape of the Asia to come are all proved for and are increasing the needs of Asia to cooperate together. It might be useful to dig down on our longstanding historical linkages as we are about to explore more the kinds of cooperation we will have in the future. It is evident at present that Asians need to discuss more among themselves the cooperation they aspire for and need to build a firmed foundation. Whatever the source of cooperation emanating from China, India, Japan or ASEAN, we all learnt that the first ASEM 1996 had indirectly encouraged them to think of a wide-region approach to cooperation. It has become known as ASEAN+3 or formalized after the Asian financial crisis. On the security front, they have collaborated more under the ASEAN Regional Forum known as ARF. There are other initiatives as well like the First East Asia Summit to be held in Kuala Lampur by the end of 2005 and the Asian-wide cooperation known as the Asia Cooperation Dialogue (ACD). All these new attempts point to the needs of increasing attention given among Asians to discuss regional integration as a key strategic element of economic and political development of the region. As for the cooperation between Asia and Europe, we could learn much about the very first EU-ASEAN dialogue since the 1980’s as a region-to-region cooperation. Then, we have Asia-Europe Meetings with its first Leaders’ Summit in Bangkok in 1996 up to the latest Summit in Hanoi in 2004. We might keep asking the question as to how these EU-ASEAN and EU-Asia types of cooperation could fit the scope of integration in Asia and Europe. These are the kinds of issues we will discuss further in this workshop. Hopefully we could provide a guiding light forward to making this cooperation even more useful. There is no doubt we need to support the track among academia, and we hope our institutions and our people will support our agenda. Please allow me again to thank colleagues and friends here in Europe for their kind participation. I would like to thank the organizers, especially Professors Paul J.J. Welfens and Franz Knipping, as well as their staff for their excellent preparation and hospitality. I hope we will enjoy this workshop we have together during these two days.

A New Take-off: A European Perspective Franz Knipping

For more than three decades, we have been witnessing parallel integration processes in Europe as well as in Asia. In Europe with its mature societies but also the fear of decline in the wake of bitter and repeated warfare, nation-states decided after the Second World War to pool their efforts and capacities together in order to become an ever closer Union, politically, economically, and most important, culturally. As of now 25 Member States are on the way to ratifying a European Constitution. In Asia, with its young and ambitious countries, ASEAN was set up somewhat later in 1967 in order to promote political, economic and cultural development and cohesion in the Southeast Asian region. Its actually ten Members are now following the vision of becoming a Community by 2020. Relations between both regions and their organisations have developed since 1972, which means that the former European Community is ASEAN´s oldest dialogue partner. Relations were put on a firm legal basis by the EEC-ASEAN Cooperation Agreement of 1980, which was enlarged by the EC´s Regulation on Financial Aid and Economic Cooperation of 1992. The geographic, cultural and political distance between the two continents notwithstanding, relations between both regions and their organisations have developed on this basis in a remarkably vital way. This reflects, certainly, in the first place mutual economic interest, but it has opened at the same time the door for political and cultural approaches. Furthermore, there is a strong feeling that the understanding of each other should be enhanced by mutual efforts of information and academic exchanges, research, training and peopleto-people contacts. Our conference may eventually open up a new perspective for academic cooperation which could also bridge the difference in mentalities. There are several aspects to be tackled by our conference. One derives from the experiences which have been made in the context of projects of the 1990s, the famous European Studies Programmes set up with the support of the European Commission in Thailand and other Southeast Asian countries and which have created substantial practical working habits between scholars and actors of both regions. Together with Professor Suthiphand Chirathivat, I had the honour of coordinating the first and most important of these projects at Chulalongkorn University in Bangkok from 1992 to 1999. A second point of departure for our Conference is a happy new personal constellation at the University of Wuppertal. Professor Paul J.J. Welfens and myself, both Jean Monnet Professors distinguished by the European Commission, became aware of shared interests and experiences conducive to a new effort of research and promotion of relations between the European and the Asian regions, which certainly has to go beyond Economics to include the disciplines Law, Po-

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litical Science and History. Evidently, the essential basis of our conference is the interest we find for it in both regions, in the academic world, in our institutions, in the public, and last not least in the European Commission which is giving tangible encouragement. The presence of Madame Jacqueline Lastenouse, formerly in charge of the Jean Monnet Programme and now Honorary Director of the European Commission, is certainly of good augury. With such reflections, our conference will certainly stand on its own merits. However, the idea is that it should moreover initiate a fresh start towards sustainable academic dialogue and co-operation between Europe and Asia centered around the relationship between the EU and ASEAN, two global players of the 21st Century. There are important issues on the agenda related to both continents, bilateral ones which engage individual nations from both sides, but increasingly multilateral issues governed by bloc-to-bloc relations. Among them are not only trade matters, but also questions of security, development, environment, intellectual property, information technologies, education, human rights, and many others. Our conference is therefore intended to be both a first forum for exchange of information and an observatory of trends and theories, and it may eventually look to the future and prepare a common effort for a substantial new international cooperation project. The needed competences are certainly present during these days. A second Conference is already scheduled for July 2005 in Bangkok. So why not try to move farther ahead?

Festina Lente: An Introductory Sketch of the History of ASEAN Andrew J. Crozier

The term Southeast Asia is today a readily understood geographical and economic-political concept. Thus, when mention is made of the Association of Southeast Asian Nations, there is in the mind of even the least well-informed listener/ reader a rough idea of the area and states that such an association must embrace. It was not always so. While the concept of Southeast Asia had some currency among scholars prior to 1939, it was one that had scarcely any vogue outside the realm of academe. What catalyzed the definition of a distinct region was the Second World War. The Japanese ‘by destroying colonial distinctions between the individual trees…set off the long process whereby Western politicians were forced to recognize the forest as a whole and in its own right, and to specify its borders’ (HALL, 1968, p. 7). War promoted the concept of Southeast Asia in three ways: first, and not least because of Britain’s greatest military catastrophe, the area became visible; secondly, the term was legitimated in the formation South-East Asia Command, placed under the command of Lord Louis Mountbatten, at the AngloAmerican Quebec Conference of 1943; finally, war conferred also upon Southeast Asia a political connotation (CROZIER, 1999, pp. 37-9; MCCLOUD, 1992, p. 12; FIFIELD, 1992, p. 20). It should also not be overlooked that a book published by K.M. Panniker in 1943, entitled The Future of South-East Asia: An Indian View, did much to establish Southeast Asia conceptually. Given the importance of Southeast Asia in the history of Britain’s global imperial adventure it is surprising and somewhat baffling that modern analyses of the British Empire still refer so fleetingly to the region. This is all the more puzzling in that Britain’s involvement in the region over a period of some three centuries did so much to confer upon it its modern configuration. Within the British Empire there can be no doubting the importance of Malaya, which, prior to 1939, accounted for some one third of the world’s tin and a considerable proportion of global rubber production, most of which was exported to the United States. This made Malaya a vitally important dollar earner, whose trade was worth more than that of New Zealand and exceeded more than half that of India. Yet even magisterial studies of the British imperial experience, such as that of Cain and Hopkins, cannot find space to discuss Britain’s role in Burma, Malaya, Singapore and Thailand (CAIN/ HOPKINS, (1993a and 1993b). Undoubtedly, the historical profession still reflects the obsessions of nineteenth century empire builders with India, China and the Dominions. Southeast Asia might, however, right at the end of the British imperial experience have come into its own.

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By 1945 it was clear that Indian independence would have to be conceded, although it was hoped to do so on terms that would preserve special links with the imperial system. Furthermore, as a result of the war and the increase in American political and economic influence, Britain had lost her dominating position in China. Such a bleak imperial prospect did not, however, precipitate imperial withdrawal, but rather imperial retrenchment in which Southeast Asia was to play an important part. In 1947 the British Foreign Office produced a Stock-Taking Memorandum on the Far East, which was surprisingly upbeat. If Britain went about the matter with sufficient energy, it was thought that she could regain her fair share of the China trade. Southeast Asia, though, was conceived as being of cardinal importance in such a revival. It was considered that the region was a significant link in the chain of Commonwealth defence, with British leadership being recognised in even non-British territories. The memorandum stated: It should not prove impossible in the course of the next few years to build up a regional system, with Singapore as its centre, which should not only strengthen the political ties between the territories concerned and facilitate defensive strategy, but also prove of considerable economic and financial benefit to the United Kingdom. This is an area from which we may hope to derive products with soft currency (e.g. sugar, vegetable oils, tea and coffee) which may enable us to cut down our purchases from hard currency areas. In short, South East Asia is an area to which we should devote close attention and where we should make every effort to try to improve our position (NATIONAL ARCHIVES UK).

Furthermore, a Cabinet Office memorandum sent to Lord Louis Mountbatten in February 1946 stated: Before the war South East Asia was a comparatively unimportant and little known area. The war has demonstrated its political, economic and strategic importance. At present the existence of South East Asia Command provides a link between the various territories which did not previously exist. But the functions of South East Asia Command are dwindling as the various civil governments prepare to take over…Yet there will be many problems of common concern to some if not all of the territories in the area, and consideration has therefore to be given to the desirability of some representative of His Majesty’s Government who can look at the problems of the area as a whole and who can promote coordination of the views and needs of the British territories involved and relate them with developments in the non-British territories in the area ( STOCKWELL, 1995, No. 71).

It would, of course, be inappropriate to suggest any causal link between British imperial needs in the late 1940s and the foundation of the Association of Southeast Asian Nations (ASEAN) in 1967. The major purpose, however, of these introductory remarks has been to attempt to demonstrate that, for the principal imperial hegemonic power in the region during the immediate post-war period, the structural situation in the area and the world in general suggested the need to integrate the territories over which it had direct or indirect control, and those in which it had influence, into a synchronized whole. Much British thinking on imperial issues in the late 1940s was predicated upon the assumption that Britain’s imperial mission, mutatis mutandis, would stretch way into the foreseeable future. Within, however, a comparatively short period of time, the continued decline of Britain’s economic position, coupled with the rise and clamour of nationalism and demands for independence, ensured that within

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twenty years the British imperial presence in Southeast Asia would come to an end. It proved impossible to deny independence to Burma (Myanmar) or even to maintain effective informal links as she opted not to join the British Commonwealth; Thailand, that fascinating example of informal empire, had already in the 1930s begun to fall into the political and economic orbit of the United States, a process that was hastened by the war and developments thereafter; in Malaya the British presence lingered on because of the needs of the so-called Emergency, but the country was effectively independent by 1957 to be expanded into Malaysia in 1963 as the British territories in Kalimantan (Borneo), Sarawak and Sabah, became independent and merged themselves into the Federation of Malaysia. Singapore too became a member for a short period, but the ill-starred relationship came to an end in 1965 when Singapore became a separate state. Only in Brunei did Britain stay on until 1984. In Indo-China the French, whom the British had been anxious to reinstall in 1945 as a means of ensuring their own continued presence in Southeast Asia, were effectively ousted by the middle 1950s, leaving in their wake the independent states of Laos, Cambodia and North and South Vietnam. Finally, the Dutch were compelled to leave Indonesia in 1949 and the Philippines were conceded formal independence by the United States in 1946. All these countries, however, achieved their independence in a much-changed world. Japan was, of course, well on her way to becoming an economic superpower and the United States had in many respects, witness the Vietnam War in the 1960s, replaced Britain as the hegemonic power in the region. But the historic verities of Asian history were also beginning to reassert themselves. Indian independence and the slow and painful reorganisation of China under Communist leadership implied potential future domination of this region, which had for centuries served as the interface between Chinese and Indian culture. Moreover, the ruling doctrine of Marxism in China was not welcome among most of the ruling elites in Southeast Asia. If the external context in which Southeast Asia found itself in the post-war era was potentially threatening, rivalries and disputes between the newly independent states and internal conflicts within them could only serve to weaken the region further internationally. Myanmar-Thai relations, for example, have been through many vicissitudes during the past fifty years, centring on frontier problems relating to minority populations and the trade in opium and timber; during the 1960s Indonesia attempted to crush the development of the Malaysian Federation by ‘confrontation’; and there have been internecine strife and genocide in Vietnam and Cambodia. By the middle of the 1960s it was clear to some of the political leadership in Southeast Asia that combination was the answer to the area’s external and internal threats. If the newly independent states of Southeast Asia did not hang together then they would be hanged separately. In other words, many of the structural factors that had induced the British to see the future of the area in co-ordination and integration began to work on the leaderships of the newly independent states in the region. One of the most important individuals in the creation of ASEAN, Thanat Khoman, the Thai Foreign Minister, did not, however, see things in quite this light. In his view the states of Southeast Asia had been compelled by their colonial masters to live in ‘cloisins etanches’ in a state of isolation from one another and

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he was clearly unaware that the British had had every intention of co-ordinating the Southeast Asian territories over which they had had direct and indirect control (THANAT KHOMAN, 1992, p. xvii). That similar pressures to those that induced the British to begin to consider Southeast Asia as a whole were impacting on the post-colonial leadership in Southeast Asia can be seen in the varied motives that lay behind the formation of the forerunner of ASEAN, the Association of Southeast Asia (ASA) in 1961. The Malayan prime minister, Tunku Abdul Rahman, and the President of the Philippines, Carlos P. Garcia, were the principal proponents of this grouping. The Tunku believed that regional co-operation was essential for dealing with communist subversion in the region, while Garcia and the government of the Philippines emphasised the need for political and economic emancipation (VELLUT, 1965, p. 65). During talks with President Garcia of the Philippines and Tunku Abdul Rahman held at Manila in January in 1959 agreement was reached on a proposal for a Southeast Asian Friendship and Economic Treaty. There was, nevertheless, considerable rivalry between Kuala Lumpur and Manila for leadership of the region. In March 1959 the Malayan government sent President Garcia a grandiloquently phrased proposal, entitled ‘The Tunku Abdul Rahman Plan for a Treaty of Friendship and Closer Association between the Countries of South-East Asia in Economic, Cultural and Allied Matters’, which eventually emerged as the Garcia-Rahman Plan. Nevertheless, in advance of its completion on 28 October 1959, the Tunku unilaterally invited all prospective interested parties to send representatives to Kuala Lumpur to discuss the scheme. Understandably, there was outrage in Manila prompting the Philippines foreign minister, Felixberto Serrano, to write to President Garcia in the following terms: While full credit should be given to the Tunku, it would not be fair to our country to make it appear in his invitation that he alone is asking the other countries to subscribe to this idea. As a matter of fact you will recall that the idea was broached by you to Premier Rahman when he was here, and, Mr. Rahman, grasping its implications, immediately accepted it (MORRISON/ SUHRKE, 1978, p. 267).

Nevertheless, what is important is that this proposal was received with particular enthusiasm in Thailand, where the Thai foreign minister, Thanat Khoman was very enthusiastic about economic co-operation. It was clearly in the minds of all the statesmen concerned that the prosperity that economic co-operation might bring would offset the attractions of communism. As Singapore’s prime minister articulated it some sixteen years later: ‘The basic question is how to ensure continuing stability by stimulating economic development to resolve social and political problems. Otherwise, increasing disaffection and discontent fuel incipient insurgencies into full-scale revolutions’ (IRVINE, 1982, pp. 47-8). Likewise President Marcos of the Philippines argued that: ‘The principal danger and threat against our individual states should be subversion and the economic crisis…Social or economic development, when utilised as an instrument of social justice, will answer these two questions, and thus the concentration on our economic problems’ (IRVINE, 1982, p. 47). In Thanat’s view economic co-operation should extend throughout the entire region. He was, however, unsuccessful and when ASA

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was formally established in July 1961 it comprised only Malaya, the Philippines and Thailand. Moreover, it was a loose rather than tight organisation that emphasised economic co-operation, although, of course, with an eye to combating the attractions of communism (TURNBULL, 1992, p. 615). In the circumstances of the time, however, ASA was little more than a statement of intent and the obstacles in the way of complete regional co-operation remained formidable. Although ASA did not overtly deal with security matters its members were aligned with the principal Western powers and in many respects its primary raison d’être was the containment of communism. Both Thailand and the Philippines were allies of the United States and Malaya was tied to Britain in the Anglo-Malayan Defence Treaty. For President Sukarno of Indonesia ASA was a most unattractive proposition and, indeed, Indonesia had been all but ignored in the negotiations leading up to the tabling of the ASA proposal. In Jakarta it appeared as a neocolonialist inspired organisation, closely bound up with the West. The opposition of Indonesia was well articulated by the Indonesian foreign minister, Sumitro, who stated: ‘The spirit behind the proposal [ASA] is…anti-this and anti-that…and Indonesia does not want any part in a negative policy in international affairs’ (FAR EASTERN ECONOMIC REVIEW, 13 JULY 1961). Indonesian hostility was further stimulated in 1963 when Malaya determined to form the Federation of Malaysia by incorporating the former British colonies on Kalimantan. There then ensued the period of confrontation, which was only to come to an end with the fall of Sukarno. Even more inauspicious for the future of ASA was the dispute that flared up in 1962 between the Philippines and Malaya over the future of Sabah when in June of that year the Philippines formally laid claim to it. As a means of solving these problems, President Macapagal of the Philippines proposed that the Philippines, Indonesia and Malaya should constitute a ‘Greater Malay Confederation’, to which the Indonesian foreign minister, Subandrio, gave the name ‘Maphilindo’, a concoction made up of the first syllables of the names of the putative member countries. Maphilindo, though, could only have limited appeal and was not a realistic prospect. In so far as it was accepted, it was as a means of satisfying Philippino amour propre and of papering over ‘the serious remaining differences between the three countries’ (IRVINE, 1982, p. 10). Furthermore, it could only have appeal to the Malay speaking states of Southeast Asia and not the region as a whole. In 1965 and 1966, however, two events took place that were to help resolve the differences between thre Malay-speaking states. In November 1965 the election of President Marcos in the Philippines resulted in a downgrading of the Sabah dispute in Manila. Meanwhile during the previous month an abortive coup in Indonesia indicated the fragility of Sukarno’s position; by March the following year he had been effectively deposed. The real ruler of the country was now General Suharto who became Acting President in 1967. The consequence of these changes was a willingness in Jakarta to bring confrontation to an end. This turn of events was very much to the liking of Thanat Khoman, the Thai foreign minister, who was to play a formidable role in the creation of ASEAN. He had for many years been suggesting the establishment of a Southeast Asia grouping and had written articles arguing the case for such a step while a young diplo-

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mat. Thanat’s most important argument for the creation of such an organisation was ‘the fact that, with the withdrawal of the colonial powers, there would have been a power vacuum which could have attracted outsiders to step in for political gains’. Secondly, he believed that the Southeast Asia Treaty Organisation (SEATO), founded in 1954 largely on American initiative and to which only Thailand and the Philippines acceded, was weak because some of the principal members were located far from the region. It was, therefore, essential in his mind ‘to build co-operation among those who lived close to one another and shared common interests’. Thirdly, he thought ‘the need to join forces became imperative for the Southeast Asian countries in order to be heard and to be effective’. For Thanat this was ‘the truth that we sadly had to learn’. Finally, it was ‘common knowledge that co-operation and ultimately integration serve the interests of all – something that individual efforts can never achieve’ (THANAT KHONAM, 1992, pp. xviixviii). In addition two further points should be made. Thanat was very clear that the American presence in Southeast Asia was by no means ‘necessarily permanent or desirable’. Throughout his career a determining factor in his promotion of regional co-operation was the need for ‘regional cooperation as a supplement to, and eventual replacement for, the American alliance’ (MORRISON/ SUHRKE, 1978, p. 269). Thanat was also impressed by the example of the European Community. He wrote: It should be put on record that, for many of us and for me in particular, our model has been and still is, the European Community, not because I was trained there, but because it is the most suitable form for us living in this part of the world – in spite of our parallel economies which are quite different from the European ones (MORRISON/ SUHRKE, 1978, p. 269).

Given Thanat’s mindset, once there was an evident will among the states of Southeast Asia to put past disagreements behind them, he became active in mediating a solution to confrontation and the Philippine claim to Sabah. He was so successful that, in effect, one can speak of a revival of ASA from March 1966. During the preceding months a number of discussions took place between Malay and Indonesian officials with a view to bringing about a cessation of confrontation, which was achieved in a formal agreement in August of that year. This was preceded by formal talks between Malaysia’s deputy prime minister, Tun Abdul Razak, and Indonesia’s foreign minister, Adam Malik, which took place between 29 May and 1 June in Bangkok under the auspices of Thanat. It was, in fact, the brokering of this dispute, and the Malay-Philippine dispute over Sabah, by Thanat Khanom that was decisive in launching a new organisation that would facilitate co-operation between the states of Southeast Asia. At the end of the May-June talks Adam Malik made it clear that a new regional grouping had been discussed and he thereafter ‘remained at the forefront of subsequent diplomatic endeavours to establish such a grouping, with active support from Thanat’ (IRVINE, 1982, p. 10). Later the latter recalled: At the banquet marking the reconciliation between the three disputants, I broached the idea of forming another organization for regional cooperation with Adam Malik [the foreign minister of Indonesia]. Malik agreed without hesitation but asked for time to talk with

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his government and also to normalize relations with Malaysia now that the confrontation was over. Meanwhile, the Thai Foreign Office prepared the draft charter of the new institution. Within a few months everything was ready. I therefore invited the two former members of the Association for Southeast Asia (ASA), Malaysia and the Philippines, and Indonesia, a key member, to a meeting in Bangkok. In addition, Singapore sent S. Rajaratnam, then Foreign Minister, to see me about joining the new set-up. Although the new organization was planned to comprise only the ASA members plus Indonesia, Singapore’s request was favourably considered (THANAT KHONAM, 1992, p. xviii).

At the beginning of August 1967, therefore, an historic meeting of foreign ministers took place at Bang Saen, a coastal resort to the south-east of Bangkok, which resulted in the signature and publication of the Bangkok Declaration, 8 August 1967. This was the result of much hard work and give and take. The historical and political backgrounds of the various participants varied sharply. Nevertheless, the congenial surroundings of Bang Saen and goodwill and good humour on the part of the participants resulted in success. The Bangkok Declaration established the Association of Southeast Asian Nations (ASEAN), the name being suggested by the Indonesian foreign minister. The purposes of ASEAN were described as the acceleration of ‘economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of South-East Asian nations’; the promotion of ‘regional peace and stability through abiding respect for justice and the rule of law in the relationship of among countries of the region’; the promotion of ‘active collaboration and mutual assistance’ in economic, social, cultural, technical, scientific and administrative matters; the provision of mutual assistance in training and research facilities in respect of the educational, professional, technical and administrative fields; more effective collaboration regarding increased agricultural activity, the expansion of trade, and transport and communications facilities; the promotion of Southeast Asian studies; and the development of links with similar international organisations. The Bangkok Declaration also provided for institutional machinery. There was to be an annual meeting of foreign ministers chaired by in rotation by the host country, with special meetings as required; a standing committee chaired by the host foreign minister consisting of the ambassadors of the participating powers; ad-hoc and permanent committees for specific subjects; and national secretariats in each country to deal with the work of ASEAN in the separate states (ASEAN SECRETARIAT, 1988, pp. 27-8). ASEAN as outlined in the Bangkok Declaration was clearly an intergovernmental organisation that did not aim at supranationalism. Nonetheless, the founding fathers of the association were clear that national advancement and security could only be accomplished through regional co-operation. The Philippine foreign minister at the time, Narciso Ramos, spoke as follows: The fragmented economies of Southeast Asia (with) each country pursuing its own limited objectives and dissipating its meagre resources in the overlapping or even conflicting endeavours of sister states carry the seeds of weakness in their capacity for growth and the self-perpetuating dependence on the advanced, industrial nations. ASEAN, therefore, could

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marshal the still untapped potentials of this rich region through more substantial united action (FLORES/ ABAD, 1997, pp. 12-3).

Adam Malik, the Indonesian foreign minister, envisaged Southeast Asia becoming ‘a region which can stand on its own feet strong enough to defend itself against any negative influence from outside the region’. This he thought was not impossible given the population and raw material resources of the region; the very real differences between the various peoples he opined could be overcome through goodwill and understanding (FLORES/ ABAD, 1997, p. 14). Tun Abdul Razak, the deputy Malaysian prime minister, and, like those mentioned above, a signatory of the Bangkok Declaration, stated: We the nations and peoples of Southeast Asia must get together and form by ourselves a new perspective and a new framework for our region. It is important that individually and jointly we should create a deep awareness that we cannot survive for long as independent but isolated peoples unless we also think and act together and unless we prove by deeds that we belong to a family of Southeast Asian nations bound together by ties of friendship and goodwill and imbued with our own ideals and aspirations and determined to shape our own destiny (FLORES/ ABAD, 1997, p. 15).

For Razak the establishment of ASEAN was a milestone in that direction. The Singaporean representative at Bang Saen made it clear that the signatories were not against anything and anybody, but for a stable and not a balkanised Southeast Asia, which he argued should be the preferred option of those with goodwill towards the region (FLORES/ ABAD, 1997, p. 15). The Bangkok Declaration represented, therefore, the vision of these men, who believed in the elaboration of ASEAN by small, but incremental steps; who believed in the states of the region working together on the basis of voluntary and informal arrangements which might eventually lead to more binding and institutionalised agreements. Nevertheless, it should be borne in mind that the Bangkok Declaration represented a leap in the dark. As the Singaporean representative, Mr. S. Rajaratnam, recalled in 1974: You may recollect that at the first meeting in 1967, when we had to draft our commnique, it was a very difficult problem of trying to say nothing in about ten pages, which we did. Because at that time, we ourselves having launched ASEAN, were not quite sure where it was going or whether it was going anywhere at all (FROST, 1990, p. 5).

ASEAN came into being at a most wretched time in the history of parts of Southeast Asia. The Vietnam War was in full flood, shortly to be followed by the tragedy of Cambodia. It was not until the fallout from these events had finally settled that ASEAN was to be further enlarged in the 1990s. There had, however, been one accession in the 1980s. On achieving full independence, Brunei Darussalam joined in 1984. By this time ASEAN had become a prestigious institution and, once the former French colonies that constituted Indo-China had achieved a certain equilibrium, there was an overwhelming inclination to join. Thus a fully united Vietnam became a member in July 1995 to be followed by Laos in July 1997 and Cambodia in April 1999. Myanmar that mysterious country, joined with Laos in 1997. By the beginning of the twenty-first century ASEAN, therefore, embraced all the states comprising Southeast Asia. Such was its standing that the Secretary-General of the United Nations was able to pronounce on 16 February

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2000: ‘Today, ASEAN is not only a well-functioning, indispensable reality in the region. It is a real force to be reckoned with far beyond the region. It is also a trusted partner of the United Nations in the field of development…’ (http://www.aseansec.org/64.htm). Nevertheless, for the first decade of its existence ASEAN for many commentators achieved little: ‘ASEAN appeared to many observers to be merely an empty shell within which reverberated the sound of insincere rhetoric and unfulfilled promises’ (JORGENSEN-DAHL, 1982, p. 48). Its raison d’être appeared as vague as much of the diplomacy that had surrounded its original negotiation, in which the claimed main purpose of the proposed combination, the economic cooperation and development of its members was hardly discussed (MORRISON/ SUHRKE, 1978, p. 271). It was described as being ‘long on words and short on performance, concentrating on the differences of opinion that must inevitably arise between regional partners rather than on their capacity to reach agreed regional positions through discussion and compromise’. It was said that its greatest achievement was merely to have survived (IRVINE, 1982, p. 37). Such progress as it had made was modest. There had been some inexpensive social and cultural projects. Economic co-operation had been limited to an approach to Japan regarding the production of synthetic rubber in 1973, while the previous year a dialogue with the European Community had been initiated (FROST, 1990, pp. 5-6). Until the mid-1970s the Bangkok Declaration was virtually the only constitutional instrument binding the membership of ASEAN together (JORGENSENDAHL, 1982, p. 45). In November 1971, however, a start was made in the accumulation of what might be called a kind of acquis associational when the five constituent powers signed a declaration of intent to make every effort to secure the recognition of and respect for Southeast Asia as a Zone of Peace, Freedom and Neutrality ‘free from any form or manner of interference by outside Powers’ (ASEAN SECRETARIAT, 1988, pp. 34-5). More significant, though, was the first ASEAN summit that took place in Bali in 1976 which produced the Declaration of ASEAN Concord and the Treaty of Amity and Cooperation in Southeast Asia (TAC) (ASEAN SECRETARIAT, 1988, pp. 39-42). What precipitated the Bali Summit and gave it significance was the surprisingly rapid turn of events in Indochina that had ended in total communist control of the region by 1975. This was ‘the obvious catalyst for the speeding up and implementation of a wider and more concrete ASEAN co-operation’ (IRVINE, 1982, p. 39). In the weeks before the convening of the Bali Summit the members’ economic ministers for the first time became directly active in the life of the organisation when they met in Jakarta in November 1975 to prepare the basis of the forthcoming meeting of heads of government. This was a major turning point because the Bali Summit was to mark the beginning of a much more serious emphasis on economic co-operation. It was the Declaration of ASEAN Concord that was to be the vehicle for this containing as it did a quite precise economic agenda. The central focus of the organisation’s activity was now to be not so much the annual meeting of foreign ministers, but rather the regular meetings of economic ministers (JORGENSEN-DAHL, 1982, pp. 51-2). In the wake of the Bali Summit the ASEAN economic ministers determined that the current ASEAN permanent, spe-

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cial and ad hoc committees should be folded up and replaced by committees composed of senior officials in five areas of activity: food and agriculture, trade, commerce and transportation, industry and finance and banking. The previously existing committees were formally subsumed into the new five at the second ASEAN summit in August 1977. It was determined that ‘the economic committees would be responsible to the economic ministers who in turn could communicate directly with heads of government’ (MORRISON/ SUHRKE, 1978, pp. 2801). These changes clearly presaged the beginnings of serious, if steady, advance in the economic field. The year 1976 was also significant in that a central secretariat in Jakarta was now established consisting of a secretary-general, three bureau directors and supporting staff (MORRISON/ SUHRKE, 1978, pp. 280-1; ABAD JNR, 2003, p. 34). The TAC provided that in their relations with one another the signatories should be guided by mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations; expressed the expectation that all nations should have a right to conduct their national existence free from external interference, subversion or coercion; asserted the principle that none of the signatories should interfere in the internal affairs of any of the others; declared that peaceful means should be the appropriate method of resolving disputes between members and renounced the use of force; and, finally, promised effective future co-operation among the signatories. This was the charter of political and security dialogue and co-operation that aimed at maintaining stability in Southeast Asia by co-operation on the basis of self-confidence, self-reliance and mutual respect. Significantly, since the foundation of ASEAN and the conclusion of the TAC in 1976, no inter-state tension has escalated to armed confrontation amongst ASEAN members. Chapter IV of the TAC provided the mechanisms through which disputes should be resolved peacefully. Article 13 enjoined the signatories to avoid disputes, but, where they are inevitable, it stipulated that ‘they shall refrain from the threat or use of force and shall at all times settle such disputes among themselves through friendly negotiations’. Article 14 authorised the establishment of a High Council composed of representatives of each of the powers which, where no mutually agreed solution to a dispute could be reached, could, under Article 15, recommend means of arbitration or act as an arbitrator itself. The accompanying Declaration of ASEAN Concord (DAC) also took the association further. It was agreed that there should be summit meetings as and when necessary and that there should be more serious co-operation in the social and cultural fields. It was the economic section, however, that contained the most detailed commitments. Section B (3 i) of the DAC stated: Member states shall cooperate in the fields of trade in order to promote development and growth of new production and trade and to improve the trade structures of individual states and among countries of ASEAN conducive to further development and to safeguard and increase their foreign exchange earnings and reserves.

(3 ii) obliged the member states of the association to ‘progress towards the establishment of preferential trading arrangements’ that would be appropriate and

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unanimously agreed. (3 iii) envisaged co-operation directed at expanding intraASEAN trade, while the following provision stated: Member states shall accelerate joint efforts to improve access to markets outside ASEAN for their raw material and finished products b seeking the elimination of all trade barriers in those markets, developing new usage for these products and in adopting common approaches and actions in dealing with regional groupings and individual economic powers.

Clearly the aim of ASEAN was not merely co-operation and security, but also economic development, essential if the member states were collectively and singly to maintain genuine independence (ABAD JNR, 2003, p. 34). By the end of the 1980s ASEAN progress was evident if still slow. IntraASEAN trade still only accounted for 20 per cent of the organisation’s total trade, the bulk of which was external with the main trading partners being Japan, the USA and Europe. Manufacturing accounted for 28 percent of ASEAN’s total exports, agricultural products for 30 percent and metals and minerals for 42 percent. ASEAN members, however, provided ‘most of the world’s traded rubber, tin and some vegetable oils…’. They also provided the bulk of Japan’s timber requirements and much of her foodstuffs (FROST, 1990, pp. 10-1). While economic initiatives post-1976 may have been pursued cautiously, the achievements were, nonetheless, significant. ASEAN had ‘developed strength and cohesion’ and other states were demonstrating an interest in closer asscociation. Moreover, not one state had shown signs of wanting to abandon the organisation (FROST, 1990, p. 28). As Thanat Khonam put it in 1992, while the spirit of true partnership was often still lacking and while there was a lack of political will, trust and sincerity at times, ‘yet each and everyone in their heart realizes that the advantages of ASEAN accrue to them all, and no-one is thinking of leaving it!’. In his view further economic co-operation was the key to the future and he attributed great importance to the creation of a single and unified market in Southeast Asia (THANAT KHONAM, 1992, p. xx). By 1992 ASEAN was indeed able to move further forward in economic cooperation with the Agreement on The Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area concluded at Singapore on 28 January. The rationale for this was clear, for there was a conviction that preferential trading arrangements within ASEAN would strengthen the economic resilience of the individual members and the association as a whole by expanding investment and production opportunities, trade, and foreign exchange earnings. Article 4 of the agreement provided for the reduction of existing tariff rates to 20% within the time frame of 5 to 8 years from 1 January 1993, while the subsequent reduction of tariff rates from 20% or below was to be accomplished in seven years. There can be no doubt that the strategic objective of the ASEAN Free Trade Area (AFTA) was to increase the ASEAN region’s competitive advantage as a single production unit. It was anticipated that the elimination of tariff barriers and non-tariff barriers among the member states would promote greater economic efficiency, productivity and competitiveness (ASEAN SECRETARIAT, 1992, p. 5). The fifth ASEAN summit held in Bangkok in 1995 adopted an accelerated sched-

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ule for the completion of the AFTA in a ten year time frame rather than the original fifteen (ASEAN SECRETARIAT, 1999, pp. 23-4). The fourth ASEAN summit of 1992 also made changes to the function of the ASEAN secretariat. First, the Secretary-General became such for ASEAN as a whole and not merely the secretariat itself. Secondly, the secretariat was made properly professional by the introduction of ‘open and competitive recruitment’. Finally, the Secretary-General would be able to ‘initiate policies for the consideration of concerned ASEAN bodies’ (ABAD JNR, 2003, p. 34). The early 1990s were also significant for the beginning of the rapprochement with Indochina that would be fully effected by the end of the decade. In 1986 the communist Hanoi government had set out on the road to the creation of a market mechanism economy with the introduction of the policy of doi moi or ‘renovation’. By 1991 the Chairman of Vietnam’s State Pricing Commission, Pham Van Tiem, was making public noises about ‘institutionalising’ Indochina-ASEAN relations. From the point of view of Hanoi there were several advantages that would accrue from the normalisation of relations with ASEAN, such as the prospects of attracting foreign direct investment and reducing dependence on the Soviet Union. In 1991 statements made by the leadership in Hanoi reassured ASEAN regarding the sincerity of change of course as did the departure of most of the Soviet forces from Cam Ranh Bay which removed the putative threat to the region’s sea lanes (ACHARYA, 1993, pp. 43-5). In 1995 the ASEAN leaders meeting in Kuala Lumpur adopted the so-called ASEAN Vision 2020 which called for partnership in dynamic development, the purpose of which was the encouragement of closer economic integration within the region. The Vision document stated that the parties involved would undertake to: …advance economic integration and cooperation by undertaking the following general strategies: fully implement the ASEAN Free Trade Area and accelerate liberalization of trade in services, realise the ASEAN Investment Area by 2010 and free flow of investments by 2020; intensify and expand sub-regional cooperation in existing and new sub-regional growth areas; further consolidate and expand extra-ASEAN regional linkages for mutual benefit, cooperate to strengthen the multilateral trading system, and reinforce the role of the business sector as an engine of growth (ASEAN SECRETARIAT, 1999a, pp. 6-7).

The Ha Noi Plan of Action of 1998 was the first of a series of plans of action which it was hoped would help accomplish the ASEAN Vision (ASEAN SECRETARIAT, 1999b, pp. 7-27; TAY, 2003, p. 493). It could, of course, be contested that all these agreements and plans constituted so much flummery. Yet the statistics tend to confirm the benefit of actual cooperation and commitment. Between 1993 and 1996 exports between ASEAN countries expanded from US$43 billion to almost US$80 billion in 1996, representing an annual growth of some 28 per cent. Inevitably the share of intraregional trade as a percentage of ASEAN’s total trade rose from 20 to almost 25 per cent. Interestingly, and perhaps a sign of increasing prosperity, tourists from the ASEAN countries themselves accounted for an increasingly important share of tourism in the region. In 1996, of 28.6 million tourist arrivals in ASEAN, 40 per-

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cent or 11.2 million came from within ASEAN itself (http://www.aseansec.org/ 64.htm). Today ASEAN is a major economic actor, having a total population in excess of 500 million, an area of 4.5 million square kilometres, a Gross Domestic Product of $737 billion and a total trade of US$720 billion (http://www.aseansec. org/64.htm). From 1995 until the economic crisis of 1997 it is evident that ‘the provisions of AFTA were gradually implemented’, although targets were not always fulfilled. Moreover, during the economic crisis of 1997-8 governments within ASEAN continued to see intra-regional trade as the means of ending it, witness the agreement of the AFTA signatories at the 1998 Hanoi Summit to accelerate the implementation by 2002 rather than 2003 of the tariff reduction to below 5 per cent on all items in the ‘Inclusion List’ (STUBBS, 2003, p. 209). In addition, ASEAN has become a major economic partner for the European Union (EU). In 2002 the EU was ASEAN’s second largest export market and the third largest trading partner after the United States and Japan. In 2002 EU exports to ASEAN are estimated to have totalled 30 billion Euros, while EU imports from ASEAN were valued at 62 billion Euros. The EU, therefore, maintained its commitment to keep its markets open after the Asian Financial Crisis of 1997 (http://europa.eu.int/commexternal_relations/asean/intro/). The 1990s and the early years of the twenty-first century also witnessed important political developments within ASEAN. Twenty-four years after the declaration making ASEAN a zone of neutrality, a treaty was concluded in Bangkok that committed the signatories to making Southeast Asia a nuclear weapon-free zone. This was an important step not only because of the commitment to eschew the manufacture and detonation of nuclear devices, but because of its environmental implications. Article 3(3) bound the signatories not to ‘dump at sea or discharge into the atmosphere anywhere within the Zone any radioactive material wastes’ or to ‘dispose of radioactive material or wastes on land…’ Nevertheless, the right of member states to develop nuclear energy for peaceful purposes was safeguarded (http://www.aseansec.org/2082.htm). Perhaps, however, the most important general political development in recent years has been the Declaration of ASEAN Concord II (DAC II) at a meeting in Bali in 2003. DAC II declared that: An ASEAN Community shall be established comprising three pillars, namely political and security cooperation, economic cooperation, and socio-cultural cooperation that are closely intertwined and mutually reinforcing for the purpose of ensuring durable peace, stability and shared prosperity in the region.

Within the Security Community the High Council of the TAC was to continue as the main component. The ASEAN Regional Forum (ARF), established in 1994, was, however, to be the principal forum for dialogue that would promote confidence building, preventive diplomacy and conflict resolution in the region. Section A 10 promised co-operation over a whole range of issues: The ASEAN Security Community shall fully utilize the existing institutions and mechanisms within ASEAN with a view to strengthening national and regional capacities to counter terrorism, drug trafficking, trafficking in persons and other transnational crimes; and shall work to ensure that the Southeast Asian Region remains free of all weapons of

26

Andrew J. Crozier

mass destruction. It shall enable ASEAN to demonstrate a greater capacity and responsibility of being the primary driving force of the ARF (http://www.aseansec.org/15159.htm; FUKUSHIMA, 2003, pp. 276-9).

In many respects, though, it was Section B, which elaborated the ASEAN Economic Community, that marked a decisive step forward. This would be the realisation of the process of economic integration as outlined in ASEAN Vision 2020. It was B 3 that was the critical provision: The ASEAN Economic Community shall establish ASEAN as a single market and production base, turning the diversity that characterises the region into opportunities for business complementation making the ASEAN a more dynamic and stronger segment of the global supply chain. ASEAN’s strategy shall consist of the integration of ASEAN and enhancing ASEAN’s economic competitiveness. In moving towards the ASEAN Economic Community, ASEAN shall, inter alia, institute new mechanisms and measures to strengthen the implementation of its existing economic initiatives including the ASEAN Free Trade Area (AFTA), ASEAN Framework Agreement on Services (AFAS) and ASEAN Investment Area (AIA); accelerate regional integration in the priority sectors; facilitate movement of business persons, skilled labour and talents; and strengthen the institutional mechanisms of ASEAN, including the improvement of the existing ASEAN Dispute Settlement Mechanism to ensure expeditious and legally binding resolution of any economic disputes.

This document also called for the implementation of both liberalization and cooperation measures and enhancement of co-operation and integration in other areas, such as human resources development, infrastructural matters and communications. Section C of DAC II adumbrated the ASEAN Socio-Cultural Community which promised collaboration in the raising of the standard of living of the disadvantaged, improving educational opportunities and collaboration in fighting AIDS and SARS (http://www.aseansec.org/15159.htm). Although economic co-operation and development are today at the forefront of ASEAN’s activities, there are some commentators who see a hidden agenda of ‘security’ as its primary rationale. According to Michael Leifer, while ASEAN does not have the form or structure of an alliance and its ostensible concern is with economic development, it is best considered as a security organisation. He writes: …although its [ASEAN’s] members have engaged in cooperative enterprise directed against protectionist practice by industrialized states, a common denominator has been a desire for mutual protection on the part of conservative governments which wish to uphold the status quo.

Yet ASEAN cannot assume the structure of a formal alliance because there is really no common external threat. Nonetheless, ASEAN is …a security organization because its members share a common interest in preventing radical internal political change. Indeed the five governments which established the Association…bear a resemblance in outlook and priorities to those which adhered to the Act of Holy Alliance.

Conflict avoidance in the interests of conservative stability was the name of the game (LEIFER, 2003, pp. 265-7; LEIFER, 1989, pp. 1-16).

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27

While there is for this writer considerable truth in this assessment, it still remains valid that during the almost forty years since ASEAN was established it has in many ways become a success story both collectively and from the point of view of the individual nations. One only has to consider the enormous economic progress in the Malaysian Republic to see how much the region has advanced. Individual success stories cannot of course be attributed to ASEAN alone, but collaboration and dialogue in the region have undoubtedly contributed to the stability necessary for success. In many ways the ASEAN region is much more politically and culturally diverse than its comparator, the European Union. Supranationalism has, therefore, been to some degree irrelevant to the success of ASEAN which has been marked by a cautious intergovernmentalism on the part of its members. The collaboration has also had to be marked by a certain degree of tolerance. Without wishing to provoke controversy, democracy in ASEAN is a somewhat elastic concept; or, as one authority has put it, each state has its own negation of the democratic principle. It is, though, surely better to pursue policies of constructive engagement, as Thailand did towards Myanmar, and to have a somewhat authoritarian state such as the latter within ASEAN than to have her disgruntled on the sidelines. Undoubtedly combination in the ASEAN region has enabled the individual states that are part of the association to exercise a political and economic independence greater than could have been achieved by going it alone. It is significant that, despite all the fluctuations of fortune within the individual states over almost forty years ASEAN has not only been a constant, but has increased in membership as well as developed institutionally. Writing in 1992 S. Rajaratnam stated: …creating and managing within a brief period of only 25 years, an ASEAN community of…economically and industrially underdeveloped peoples who had no experience of administering a modern, complex multi-racial regional organization verges…on the miraculous (RAJARATNAM, 1992, p. xxiv).

The same words easily hold true today. To get where they are today the states of ASEAN had hurried slowly.

References ABAD JNR, M.C. (2003), The Association of Southeast Asian Nations: Challenges and Responses, Sharon Siddique and Sree Kumar (Eds.), The 2nd ASEAN Reader, Singapore: Institute of Southeast Asian Studies. ACHARYA, A (1993), A New Regional Order in South-East Asia: ASEAN in the PostCold War Era, London: The International Institute for Strategic Studies. ASEAN SECRETARIAT (1988), ASEAN Documents Series 1967-1988, Jakarta: Asean Secretariat. ASEAN SECRETARIAT (1992), Annual Report of the ASEAN Standing Committee 1991-2, Jakarta: Asean Secretariat. ASEAN SECRETARIAT (1999a), ASEAN Documents Series 1994-1995, Jakarta: Asean Secretariat.

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ASEAN SECRETARIAT (1999b), ASEAN Documents Series 1998-1999, Jakarta: Asean Secretariat. CAIN, P.J. AND HOPKINS, A.G. (1993a), British Imperialism: Innovation and Expansion, 1688-1914, London: Longman. CAIN, P.J.AND HOPKINS, A.G. (1993b), British Imperialism: Crisis and Deconstruction, London: Longman. CROZIER, A.J. (1999), Britain and Southeast Asia 1850-1945, Franz Knipping, Piyannart Bunnag and Vimolvan Phatharadom (Eds.), Europe and Southeast Asia in the Contemporary World, Baden-Baden: Nomos Verlagsgesellschaft. EMMERSON, D.K. (1984), ‘Southeast Asia’: What’s in a Name?, Journal of South-East Asian Studies, 15. FAR EASTERN ECONOMIC REVIEW, 13 JULY 1961. FIFIELD, R.K. (1992), The Southeast Asia Command, K.S. Sandhu, Chandran Jeshurun, Ananda Rajah, J.L.H. Tan and Pushpa Thambipillai (Eds.), The ASEAN Reader, Singapore: Institute of Southeast Asian Studies. FLORES, J.M. AND ABAD, J. (1997), ASEAN at 30, Jakarta:Asean Secretariat. FROST, F. (1990), Introduction: ASEAN since 1967 – Origins, Evolution and Recent Developments, Alison Broinowski (Ed.), ASEAN into the 1990s, Basingstoke: Macmillan. FUKUSHIMA, A. (2003), The ASEAN Regional Forum, Sharon Siddique and Sree Kumar (Eds.), The 2nd ASEAN Reader, Singapore: Institute of Southeast Asian Studies. HALL, D.G.E. (1968), A History of South-East Asia, London: Macmillan. IRVINE, D. (1982), Making Haste Less Slowly: ASEAN from 1975, Alison Broinowski (Ed.), Understanding ASEAN, London: Macmillan. IRVINE, R. (1982), The Formative Years of ASEAN: 1967-1975, Alison Broinowski (Ed.), Understanding ASEAN, London: Macmillan. JORGENSEN-DAHL, A. (1982), Regional Organization and Order in South-East Asia, London: Macmillan. LEIFER, M. (1989), ASEAN and the Security of South-East Asia, London: Routledge. LEIFER, M. (2003), Is ASEAN a Security Organization?, Sharon Siddique and Sree Kumar (Eds.), The 2nd ASEAN Reader, Singapore: Instituteof Southeast Asian Studies. MCCLOUD, D.G. (1992), Southeast Asia as a Regional Unit, K.S. Sandhu, Chandran Jeshurun, Ananda Rajah, J.L.H. Tan and Pushpa Thambipillai (Eds.), The ASEAN Reader, Singapore: Institute of Southeast Asian Studies. MORRISON, C.E. AND SUHRKE A. (1978), Strategies of Survival: The Foreign Policy Dilemmas of Smaller Asian States, New York: St. Martin’s Press. THE NATIONAL ARCHIVES U.K., FO371/63549/F2616/616/61, Stock-Taking Memorandum, n.d. PANNIKAR, K.M. (1943), The Future of South-East Asia: An Indian View, London: Allen & Unwin. RAJARATNAM, S. (1992), ASEAN: The Way Ahead, K.S. Sandhu, Chandran Jeshurun, Ananda Rajah, J.L.H. Tan and Pushpa Thambipillai (Eds.), The ASEAN Reader, Singapore: Institute of Southeast Asian Studies. STOCKWELL, A.J. Ed (1995), British Documents on the End of Empire, Series B, Vol. III, London:HMSO. STUBBS, R. (2003), AFTA and the Politics of Regional Economic Co-operation, Sharon Siddique and Sree Kumar (Eds.), The 2nd ASEAN Reader, Singapore: Institute of Southeast Asian Studies.

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TAY, S.S.C. (2003), ASEAN Vision 2020 and the Hanoi Plan of Action, Sharon Siddique and Sree Kumar (Eds.), The 2nd ASEAN Reader, Singapore: Institute of Southeast Asian Studies. THANAT KHONAM (1992), ASEAN: Conception and Evolution, K.S. Sandhu, Chandran Jeshurun, Ananda Rajah, J.L.H. Tan and Pushpa Thambipillai (Eds.), The ASEAN Reader, Singapore: Institute of Southeast Asian Studies. TURNBULL, C.M. (1992), Regionalism and Nationalism, Nicholas Tarling (Ed.), The Cambridge History of South East Asia II, Cambridge: Cambridge University Press. VELLUT, J.L. (1965), The Asian Policy of the Philippines 1954-1961, Canberra: Australian National University.

Information and Communications Technology, Regulations and Growth: Theory and Key Policy Issues Paul J.J. Welfens

1 Introduction ........................................................................................................31 2 Digital Dynamics and Liberalization of Telecommunications ...........................35 2.1 ICT Expansion, Trade, FDI and Growth.....................................................40 2.2 Selected Specifics of a Digital Economy ....................................................42 3 Foreign Direct Investment Inflows and Economic Growth................................49 4 New System Design and Strategic Policy Aspects.............................................54 Appendix 1: Dynamic Limit Pricing – A New Model...........................................57 Appendix 2: Data Appendix: EU and ASEAN......................................................60 References .............................................................................................................64

1 Introduction The world economy has become increasingly shaped by regional integration efforts in the 1990s. According to the WTO Report from 2002, only North Korea, Japan and Libya had not been involved in regional integration schemes at the beginning of the 21st century. Many motives stand behind regional integration schemes with economic aspects being a major element of the respective policy initiatives. Relatively poor countries are expected to gain from economic integration and to benefit from enhanced growth (BRETSCHGER, 2004). As regards economic growth, it is clear that not only integration and technological progress play a role but that monetary dynamics – including exchange rate changes (real appreciation in EU accession countries in the late 1990s vs. a real depreciation in most ASEAN countries) – can affect economic performance. The EU has reinforced the integration process with the introduction of the Euro and the European Central Bank in 1999, but it also has expanded by way of EU eastern enlargement in 2004. In 2004, ASEAN countries decided to accelerate full steps towards a free trade area for the six original member countries of 1967. Fast

32

Paul J.J. Welfens

trade integration in Asia where ASEAN countries are eager to expand free trade arrangements with both China and India and possibly other countries indicates that the creation of regional trading blocs might be reinforced. At the same time economic globalization is continuing, mainly through high foreign direct investment and increasing “digital integration” which is partly based on the internet and new information and communication technology (ICT). ICT has become a key field of innovation and investment in the triad in the 1980s and 1990s. Since the 1990s, new technological opportunities and competition-enhancing effects have emerged through digital convergence – the fact that digitization has blurred traditional market demarcations for voice transmission, TV transmission and data transmission. The liberalization of telecommunications worldwide has stimulated international communication and trade: x In the 1990s, the internet emerged as the first global communication platform; main activity is business to business (B2B), only smaller fraction of ecommerce is business to consumer (B2C) or consumer to consumer (C2C). A prominent case for B2B is Covisint, a joint digital platform of automotive firms for buying intermediate inputs, and in the field of C2C, Ebay. These serve as examples of WALRAS meets Gates, that is digital auctioning on a softwarebased digital platform; x Telecommunications markets were liberalized in most countries in the 1990, which not only helped to reduce telecommunications prices and stimulate digital innovations. It also gave new impulses to the telecommunications equipment industry where firms learned to deal less and less with state-owned monopoly operators but more and more with privatized telecommunications operators facing sustained competition; x These technological and political developments have contributed to global standard setting in the telecommunications equipment industry; x Digital communication in virtual networks have become a cheap highperformance option to effectively organize activities of multinational companies (MNCs). Given the imperfections of the markets for information, the long term move towards knowledge-based societies in Europe, Asia, North America and elsewhere is likely to reinforce the role of firm-internal transactions and hence the role of MNCs. The long term rise in the ratio for R&D expenditures to national income is reinforcing the growing role of MNCs, whose prime impulse for expansion is the drive to internationally exploit ownership specific advantages or to reinforce such advantages by international asset-seeking investment (read: investment in technology-intensive firms); x E-government has become a growing field of government activity and naturally also a new element of cross-border cooperation; x The WTO is involved in defining a global framework for digital products (GATT) and digital services (GATS; weaker set of rules), which is necessary in a world economy with a rising share of tradable digital goods and services; x National governments and regional integration clubs – such as the EU and ASEAN – have started digital initiatives to promote regional integration and cooperation.

Information and Communications Technology, Regulations and Growth

33

Research by VAN ARK/PIATKOWSKI (2004) shows that not only leading OECD countries benefit from an increasing use of ICT, but that relatively poor eastern European countries also have experienced increased productivity in the context of the accumulation of ICT capital. Indeed, ICT has been found in many studies to be quite important for productivity growth (e.g. VAN ARK, 2001; RÖGER, 2002; WELFENS, 2003). There is no doubt that technological progress in the production of ICT goods is high which implies high productivity and output growth in the ICT producing sector. The high rate of technical progress in the ICT producing sector reduces the relative price of ICT investment goods and therefore stimulates accumulation of such investment goods. The relative price fell by about 8% p.a. in the US and France in the period from 1970 to 1991. From 1991 to 1999, relative price fell by about 15% in the US in but only by about 10% in France during the same period. In Germany, the producer prices of the OCM industry (OCM=office, computing and accounting machinery) fell by only 1.2% p.a. in 1970-91 and 4.4% p.a. in 1991-99 (FALK/KOEBEL, 2004). This might partly explain the relatively modest IT-investment-GDP ratio in Germany as compared to leading EU countries and the US. In the US, the total stock of quality adjusted computer equipment in constant prices increased with a growth rate of 20% over several years with its peak of about 30% p.a. in the 1990s (JORGENSEN, 2001). It is not fully clear that the use of ICT – and hence the accumulation of ICT capital – contributes to higher productivity and output growth. From a theoretical perspective, however, one may state a broad range of arguments for such growthenhancing effects (WELFENS, 2003). This does, of course, not rule out that there could be considerable adjustment costs in the context of reorganization of firms with a rising share of ICT capital. It has been argued that a rising share of ICT equipment in the total capital stock raises the demand for skilled labor and reduces the demand for unskilled labor. With respect to Germany, a recent study (FALK/ KOEBEL; 2004) found that in the non-manufacturing sector there is some evidence for substitutability between office and computing machinery and unskilled workers. However in the manufacturing sector, this is not the case. By implication one can expect a relative fall of unskilled labor demand if the economy is moving towards a higher share of the service sector in the long run. However, one has to be careful with long run conclusions for a very simple reason. If ICT would contribute to higher long term growth, one may anticipate that the demand for personal services – ranging from gardening services to childcare – will rise in the long run so that the relative demand for unskilled labor will increase as full employment is almost being reached. Since the share of ICT in aggregate output had reached about 10% in such countries as the US and Germany in 2000 – which represents is a doubling compared to that seen in 1990 –, it is clear that ICT can hardly be a dominant driver of economic growth. However, expansion of ICT could contribute to an acceleration of growth for quite some time. To the extent that the expansion pace of ICT is different across countries, there could be considerable international differences in economic growth. Several countries in Europe and Asia – including Japan, Korea, Singapore and Malaysia – have strongly emphasized the opportunities of ICT and digital mod-

34

Paul J.J. Welfens

ernization. If mainly ICT production is the driver of digital growth one should expect only countries with considerable ICT output shares – in Europe above all Finland, Sweden, the Netherlands and the UK – to show an acceleration of growth. In Asia, mainly Japan and some Asean countries could expect strong benefits from ICT production. However, it is not fully clear whether screwdriver factories in some newly industrializing countries – concerning such countries as Malaysia in Asia or Poland in Europe – really generate high growth impulses for the respective countries. Since many ICT goods are product cycle goods, it would not be surprising if high profits were generated for the headquarters of the respective countries where innovation and product design take place for which firms can charge a relatively high price in world markets (including a Schumpeter innovation rent). If not only ICT production but also the use of ICT is important, nonICT producing countries can benefit as well, namely by importing rising amounts of ICT goods whose prices are falling with time in world markets. If the use of ICT were the dominant source of ICT-based growth, the accumulation of ICT capital in combination with adequate organizational changes in firms could be critical ingredients of growth. Reorganization of firms will often require outsourcing which, however, could be difficult in countries with high unemployment where resistance against outsourcing is high. This is a major problem in large continental EU countries. ICT expanded strongly in the 1990s when it became a major driver of growth in the US, the EU and Asia. ICT consists basically of the three pillars (EITO, 2002, p. 454): x information technology, including IT services; x telecommunications equipment; x telecommunications services. In terms of markets, ICT is comprised of ICT equipment (hardware for office machines, data processing equipment, data communications equipment, software and IT services), software products, IT services and carrier services. From a theoretical aspect, one may consider several links between ICT and growth: x role of ICT capital formation. In the context of analyzing a macroeconomic production function one may distinguish between traditional capital – machinery and equipment (without ICT) – and ICT capital. Growth accounting then shows a considerable role for ICT (VAN ARK, 1998; 2004); x role of network effects (an issue picked up subsequently); x role of the digitization of trade and foreign direct investment. While one may argue that digitization and in particular the internet reduces transaction costs both nationally and internationally, one also can argue that a digital world economy is one with larger markets offering new international intra-company networking options so that the expansion of ICT ultimately encourages foreign direct investment. Modern ICT allows firms to flexibly and more easily combine production, scale economies and reputation effects abroad with locational advantages for production in many countries.

Information and Communications Technology, Regulations and Growth

35

In the following analysis, we will at first take a closer look at the process of liberalizing telecommunications and the role of ICT and digitization in the 1990s. The analysis will include comparative analysis of EU countries and ASEAN countries. To some extent, one may compare East European accession countries and ASEAN countries which show similar per capita incomes in the case of a small subgroup of countries (section 2). We also want to take a closer look at ICT characteristics, including the role of network effects where we will use both a partial equilibrium approach and a simple two sector model (section 3). Moreover, we want to focus on the role of foreign direct investment (FDI) and growth while taking into account the impact of modern communications (section 4. It is shown that FDI positively contributes to a higher gross domestic product in the host country, but not always to a higher national income per capita). Finally, we raise some policy issues.

2 Digital Dynamics and Liberalization of Telecommunications Key ingredients to a modern networked economy are high telecommunications densities and a high user rate of personal computers – the combination of both plus a considerable share of knowledge-based firms should lead to a high user rate of internet users (reflecting the demand side in the net) and a high internet host density (the supply side: read servers operated with the aim of supplying digital information on the net). Neglecting mobile telecommunications in the figures for EU countries, ASEAN countries, Japan and the USA, the US clearly is the leading economy in the world. Only in mobile telecommunications does the EU show a global lead. Facing a totally underdeveloped fixed line network in the 1980s at the end of communist era, east European accession countries showed an impressive jump in terms of mobile telecommunications density in the late 1990s. As regards the internet, the decade after 1995 has shown a real explosion of the internet in OECD countries. As regards ASEAN countries, Singapore is close to EU average or even leading EU countries; Brunei Darussalam, Malaysia and Thailand are leading in terms of the digital economy. In terms of PC density, these three countries are better than the EU’s weakest country, Greece. The Philippines show a relatively good position in mobile telecommunications density, but are weak in other segments. Malaysia is known for its ambitious digital modernization program as is Thailand. As these countries continue in their economic catching-up process one may anticipate a rise of digital indicators. Such a rise probably is needed for sustained economic growth: x with rising per capita income, the opportunities for economic growth through workers shifting from low productivity agriculture to industry and services will gradually phase out; x opportunities for imitation could slow down if countries do not invest in the infrastructure needed for rapid diffusion of new knowledge;

36

Paul J.J. Welfens

x as China, with its comparative advantage in labor intensive production, continues its modernization process, there will be growing pressure on ASEAN countries to gradually move up the technology ladder and to accelerate the move towards a services society in which computers – as well as complementary software – and modern telecommunications play a considerable role; x some ASEAN countries (and also some EU accession countries) might develop a comparative advantage in telecommunications equipment or in the production of PCs and related equipment, which could accelerate accumulation of ICT capital. Table 1. Telecommunications Density, Computer Density and Internet Indicators for the EU, US, Japan and ASEAN Countries. Main telephone lines per 100 inhabitants

Cellular mobile telephone subscribers per 100 inhabitants

Personal com- Internet hosts puters per 100 per 100 inhabi- Internet users per 100 inhabitants inhabitants tants

1995

2003

1995

2003

1995

2002

1995

Cyprus

55,2

67,5

7,1

74,4

5,6

27,0

6,2

2003 1995

2002 2003

77,9

0,0

Denmark

61,1

66,9

15,7

88,7

26,8

29,4 33,7

57,7

96,7 2314,4

0,2

51,3 ..

Germany

51,3

65,9

4,6

78,5

Sweden

68,0

61,5

22,7

88,9*

17,8

43,1

58,0

315,5

0,0

43,6 47,3

24,9

62,1 163,9 1050,7

0,1

57,3 ..

Netherlands

52,4

61,4

3,5

76,8

20,0

46,7 110,9 2162,7

0,2

50,6 52,2

France

56,0

56,6

2,3

69,6

14,7

34,7

26,1

401,2

0,0

31,4 36,6

Luxembourg

57,1

54,4

6,6 106,1*

36,6

59,4

45,9

624,9

0,1

37,0 ..

Malta

45,9

52,1

2,9

72,5

8,1

25,5

2,3

177,9

0,0

30,3 ..

Unit. Kingdom

50,2

49,9

9,8

84,1*

20,1

40,6

75,0

545,3

0,1

42,3 ..

Finland

54,3

48,8

20,1

90,1

23,2

44,2 416,7 2436,5

0,2

50,9 ..

Ireland

36,3

48,6

4,4

84,5

18,3

42,1

37,3

394,6

0,0

28,0 31,3

Italy

43,3

48,4

6,8

101,8

8,4

23,1

13,1

114,0

0,0

35,2 33,7

Austria

47,8

48,1

4,8

87,9

16,4

37,4

67,1

713,4

0,1

41,5 46,2

Greece

49,4

45,4

2,6

78,0

3,3

8,2

7,4

170,5

0,0

13,5 15,0

Belgium

46,3

44,1

2,3

78,6*

17,8

24,1

30,3

202,6

0,0

32,8 ..

Spain

38,5

42,9

2,4

91,6

6,1

19,6

13,1

222,4

0,0

19,3 23,9

Portugal

36,7

41,4

3,4

90,4

5,5

13,5

11,9

219,6

0,0

19,4 ..

Slovenia

30,9

40,7

1,4

87,1

10,1

30,1

28,3

214,8

0,0

37,6 .. 32,8 ..

Estonia

27,7

40,6

2,1

68,0

10,1

21,0

24,1

498,9

0,0

Czech Rep.

23,6

36,0

0,5

96,5

5,3

17,7

21,1

274,4

0,0

25,6 26,8

Hungary

21,1

34,9

2,6

76,9

3,9

10,8

15,4

357,8

0,0

15,8 23,2

Poland

14,8

31,9

0,2

45,1

2,9

10,6

6,0

203,8

0,0

23,0 23,2

Latvia

27,9

28,3

0,6

52,9

0,8

17,2

5,2

178,8

0,0

13,3 40,6

Lithuania

25,4

25,3

0,4

66,6

0,6

11,0

1,2

203,8

0,0

14,4 21,4

Information and Communications Technology, Regulations and Growth

37

Table 1. continued Main telephone lines per 100 inhabitants

Slovak Rep.

Cellular mobile telephone subscribers per 100 inhabitants

Personal com- Internet hosts puters per 100 per 100 inhabi- Internet users per 100 inhabitants inhabitants tants

1995

2003

1995

2003

1995

2002

1995

2003 1995

2002 2003

20,8

24,1

0,2

68,4

4,1

18,0

5,4

212,2

16,0 25,6

0,0

United States

60,4

62,1

12,8

54,3

32,6

65,9 228,9

60,1

0,0

55,1 ..

Japan

49,6

47,3

9,3

68,0

12,0

38,2

21,4 1016,5

0,1

44,9 ..

Singapore

40,5

45,0

8,7

85,2

19,9

62,2

64,6 1155,3

0,1

50,4 54,8

Brunei Darus.

24,0

25,5*

12,6 40,1**

3,9

7,7

5,5

176,9

0,0

Malaysia

16,6

18,2

Thailand

6,1

Viet Nam

1,1

Philippines

2,1

0,2 ..

5,0

44,2

3,0

14,7

2,1

42,9

0,0

32,0 34,5

10,6

2,3

26*

1,4

4,0

0,7

16,6

0,0

7,8 9,6

5,4

0,0

3,4

0,1

1,0

0,0

0,0

0,0

1,8 4,3

4,2*

0,7

19,1*

1,0

2,8

0,3

3,5

0,0

4,4 ..

Indonesia

1,7

3,9

0,1

8,7

0,5

1,2

0,1

2,9

0,0

2,1 3,8

Lao P.D.R.

0,4

1,1*

0,0

1* 0,1***

0,3

0,0

0,0

0,0

0,3 .. 0,1 0,1

Myanmar

0,4

0,7

0,0

0,1

0,1~

0,5

0,0

0,0

0,0

Cambodia

0,1

0,3*

0,1

2,8*

0,0

0,2

0,0

0,6

0,0 10,2** ..

Ø EU unweighted

41,7

46,6

5,2

80,2

12,5

29,8

51,5

571,5

0,1

31,7 ..

Ø ASEAN unweighted

9,3

11,5

3,0

23,1

3,0

9,4

7,3

155,4

0,0

10,9 ..

Source: ITU World Telecommunication Indicators * 2002 Data; ** 2001 Data; *** 1996 Data; ~1999 Data

Denoting national output as Y, non-ICT capital as K, ICT capital as Q’, labor as L, the use of telecommunications as T (which is proportionate to the stock of capital in the telecommunications sector) and Harrod-neutral technological progress as A, we may write the production function as: Y= Y(K, Q’, L, T, A)

(1)

Assuming a simple Cobb-Douglas production function, a growth-accounting perspective gives (with partial output elasticities for K, Q’, T, L - and A - denoted as ß, ß’, ß” respectively) output Y and the growth rate of output gY, respectively: Y= Kß Qß’ T ß” [AL]1-ß-ß’- ß

(2)

g Y = ßg K + ß’g Q + ß”gT + (1-ß-ß’- ß”) [gA+g L]

(3)

Denoting per capita GDP as y=Y/L, non-ICT capital intensity k=K/L, ICT capital intensity q’=Q’/L, the number of telecommunications calls per capita – which may be assumed to be proportionate to effective telecommunications density – as

38

Paul J.J. Welfens

t’=T/L and the growth rate of Harrod-neutral technological progress as dlnA/dt=a (t is the time index), we can write the growth rate of per capita GDP therefore as: gy = ßg k + ß’g q’ + ß”gt’ + (1-ß-ß’-ß”)a

(4)

As the ratio of net investment (in non-ICT capital) to Y is [dK/dt]/Y and taking into account that under profit maximization Y/K=r/ß, we can rewrite the above equation as gy = ß[I/Y][r/ß] + ß’gq’ + ß”gt’ + (1-ß-ß’-ß”)a

(5)

Under profit maximization and competition, the parameters ß, ß’ and ß” should correspond to the income shares of non-ICT capital, ICT capital and telecommunications firms. Growth accounting does not, however, tell very much about economic reality unless there is a theory for explaining technological progress a. One may assume that a depends on several elements x the ratio of ICT capital in overall capital: the higher this share is – assuming that ICT capital represents more embodied technological progress than non-ICT capital –, the stronger the capital embodied technological progress, and hence the higher a is; x the higher T and T* are in an open economy (* denotes foreign variables), the higher the opportunities for exploiting network effects which are typical in both telecommunications and digital services. In an open economy with international telecommunication calls and data traffic, it is not only the domestic stock of telecommunications capital T but also the foreign stock of telecommunications capital whose use contributes to broader innovation networks and hence innovation opportunities (and ultimately innovations themselves); one may assume that the trend growth rate depends on TȥT*ȥ*; x the higher the degree of specialization Z’ of high-technology – here we are following JUNGMITTAG (2004) – the higher the growth rate of a will be. This might be linked to dynamic learning/scale effects in high technology firms; x the higher the ratio of R&D promotion per capita (z”), the higher a is. Hence we can state the hypothesis that a=a(q’/k, T, T*, Z’, z”). This is a testable hypothesis whereby one will have to additionally take into account that q’/k will positively depend on the ratio of p/p”, where p is the price of non-ICT investment goods and p” is the price of ICT-investment goods. It is well known that rapid technological progress in ICT productions led to a long term increase of p/p” worldwide in the 1980s and 1990s. Telecommunications As regards the expansion of telecommunications, fixed-line networks as well as mobile telecommunications are important. While digital telecommunications is rather competitive in the EU, the US and many Asian countries, fixed line telecommunications continues to be a problem in the sense that in many countries the former state-owned monopoly operator still enjoys a dominant position in the local network as well as the access market. Government has considerable responsi-

Information and Communications Technology, Regulations and Growth

39

bility for exploiting opportunities in achieving higher static and dynamic efficiency in the telecommunications sector. The liberalization of telecommunications network operation and voice telephony in the EU in 1998 (UK already under Thatcher in 1984) stimulated competition in telecommunications. Due to EU enlargement in 2004, the EU framework directive on telecommunications in the EU affects 25 member countries directly (EU candidate countries such as Croatia, Bulgaria and Romania plus potentially Turkey will also adopt EU rules in anticipation of membership). Through the European Economic Area Treaty, which concerns Norway, Liechtenstein and Island, there are another three countries involved. Moreover, the EU has pushed in its neighbourhood policies – concerning other countries in Europe – that EU rules and policy approaches are also be adopted in EU neighbour countries. Regional integration has thus created larger markets for network operation and telecommunications services in the EU. Fixed line telecommunications in the EU is subject to asymmetric regulation (i.e., the dominant operator faces special conditions in such fields as interconnection and access pricing). The basic idea is that the regulatory authority wants to avoid prices being fixed above long term costs. Competition in the EU telecommunications market is rather imperfect in fixed line telecommunications for three reasons: x The incumbent operator enjoys a very high market share – an exception are countries such as the UK, the Netherlands or Belgium where modern cable TV networks also have been used to provide telecommunications services. x The incumbent operator is not only a competitor to other telecommunications network operators, it also provides intermediate input through the dominant local access network. This creates a bias in the competition process. The local access problem is only partly remedied through the expansion of mobile telecommunications. x The incumbent operator tends to offer bundled services – say fixed line telecommunications and internet services (or mobile communications) – so that barriers to market entry are high. With the bundling of services becoming a fairly standard product in digital telecommunications, the entry of newcomers becomes more difficult since a newcomer which wants to provide several services at once has to enter more markets – hence needs more capital and faces higher risks – than in the case of entering a small market niche. Mobile telecommunications traditionally is viewed as complementary to fixed line telecommunications. Liberalization of fixed network telecommunications also occurred in the US in long distance after 1984 and then through the 1996 Telecommunications Act which has opened the local loop to competition. In Asia, the liberalization of telecommunications is rather advanced in Singapore and in Japan but not so much in other Asian countries. There is, however, a worldwide tendency towards liberalization, privatization and regulation in the fixed line network. Moreover, there is increasing competition due to “convergence” in the sense that digitization has

40

Paul J.J. Welfens

blurred the market demarcation between TV and telecommunications and between data traffic and voice telephony. In traditional fixed line telecommunications – with monopolistic state-owned network operators in EU countries – there was considerable cross-subsidization in the sense that universal service obligations meant uniform access prices across all regions and that long distance calls and international calls were overpriced compared to the respective costs. This provided the extra profits needed to provide subsidized access or subsidized local calls. With liberalization, privatization and asymmetric regulation – with the latter aimed at imposing cost-oriented pricing or at least encourage such pricing for a broader bundle of services (price caps are imposed for baskets of services in many countries) – there are incentives in favour of rebalancing so that prices for long distance calls and international calls (and long distance calls) can be expected to fall relatively strongly. This tendency is reinforced by technological progress which also has helped to cut the costs of digital distance. In addition, one should take into account that national ex-monopolists have embarked upon foreign direct investment abroad, and the mutual invasion of national markets clearly amounts to downward pressure in telecommunications prices and also to higher innovativeness. This implies that there will be relatively strong incentives for rising international trade to expand as international information and transaction costs fall in line with increased global competition in telecommunications. With effectively falling international trading costs, the size of markets will increase and so will the optimum plant size of firms which in turn suggests national or international consolidation through mergers and acquisitions. Thus, FDI in telecommunications will grow. At the same time, there will be incentives for more intensive innovation efforts so that one may anticipate a higher rate of product or process innovations. 2.1 ICT Expansion, Trade, FDI and Growth The expansion of information and communication technology (ICT) in the 1990s raised new challenges for OECD countries and Newly Industrializing Countries. With a share of about 10% in the US, Germany and Scandinavia, the ICT sector is still rather small, but its sustained technological and economic dynamics clearly influence overall structural change in a decisive way. High US economic growth in the 1990s and some EU countries has largely been attributed to ICT, whose expansion requires a high share of skilled labour and a strong emphasis on innovations so that research and development (R&D) become more important. Since ICT facilitates production of many new varieties, representing network effects in certain sectors and stimulating innovation, it has those ingredients which are considered particularly important in the New Growth Theory. In the Lisbon agenda of 2000, the EU declared its desire to become the most competitive and dynamic knowledge-driven economy by 2010. Higher growth and higher participation rates – hence more jobs – are expected from this initiative in which “open coordination”, based largely on the incentives associated with

Information and Communications Technology, Regulations and Growth

41

benchmarking and political peer pressure, plays a prominent role. National governments and the EU have adopted various policy initiatives to promote expansion of the digital knowledge economy. E-government and e-commerce are expected to grow strongly in the medium term. The falling prices of telecommunication services and in particular of narrow and broadband internet use are expected to stimulate digital networking, innovation, diffusion and growth. Moreover, the growth of mobile internet can be expected to further accelerate the diffusion of information and the creation of digital services. In the long run, one should also expect expansion of VOIP (internet) telephony to contribute to high growth of the telecommunications market. As telecommunications is – apart from being a platform for consumption – an input in all sectors, productivity growth and innovations in telecommunications and digital services stimulates the expansion of information intensive sectors considerably. ICT expansion is crucial for productivity growth since in almost all sectors, ICT contributes to higher factor productivity: x ICT production is certainly associated with high productivity growth. Moor’s law, which suggests a doubling a chip power every 3-4 years, is as much a driver here as are scale economies. x The use of ICT is also important for productivity growth. However, this type of productivity growth not only requires ICT capital accumulation but also training of complementary-skilled labor (as well as additional organization restructuring quite often). In certain fields of ICT use, positive network effects will contribute to productivity growth. This plays a particular role in the field of software. In a broader perspective, it is the interplay of various elements of ICT dynamics which contributes to productivity and output growth (Fig. 1). Information technology and telecommunications equipment are characterized by falling relative prices and hence one should expect a faster accumulation of the respective capital goods; most ICT goods are technology intensive goods so that they typically are produced in multinational companies: that is, ICT expansion is associated with rising foreign direct investment. Part of foreign direct investment is, of course, product cycle trade and involves e.g. production of telecommunication equipment and computers.

42

Paul J.J. Welfens

Telecomms Regulation

ICT Dynamics TelecommuTelecommunications nications Equipment Services Software

Information Technology (incl. IT Services)

Falling Relative Prices of ICT Goods

Economies of Scale

Rise of FDI

Expansion of Telecommunications Networks

Rise of Trade

New Digital Markets

Network Effects

Higher Productivity of Economic Growth

Fig. 1. ICT Dynamics and Growth

2.2 Selected Specifics of a Digital Economy We already have seen in a simple model that there could be a temporary acceleration of aggregate real income growth. However, there are certain traits of the ICT sector which makes a long term growth bonus rather uncertain. A key aspect of a digital services economy is that the majority of workers is actively involved in generating, storing and processing information. However, information markets are rather imperfect since the supply side has to reveal part of information for free in order to let the buyer assess the value of the information good. Thus it is difficult to recover an adequate price for information in the market. Main elements of the digital economy thus are as follows: x Information markets are imperfect (Arrow): Thus there is a natural tendency that firms swap information or rely on intra-company transactions. In electronic networks information can easily be disseminated and stored, the marginal costs are close to zero. However, creating new useful information and storing it so that new knowledge becomes accessible requires the use of much scarce resources. The very fact that diffusion of new knowledge is rather easy through digital networks makes it difficult for creators of new knowledge to earn an

Information and Communications Technology, Regulations and Growth

x x

x

x

43

adequate income from “breeding knowledge”. Hence digital intellectual property rights are quite important. Information is a confidence goods, hence building reputation and bundling is important; as regards bundling the idea is to combine selling of a normal good (e.g. hardware: inspection good) and a confidence good. Bundling plays a crucial role in the selling of software (BAKOS; BRYNJOLFSSON, 1999; 2000): Software stands for a system of subprograms – each containing algorithms to solve a subproblem – whose usefulness differs across potential customers. By creating software packages software firms are able to fetch a rather average (high) price in the market while incurring only minimal costs in terms of added programming for a complex programme. There are problems of sustained competition in telecommunications; and in software markets. Economies of density in fixed network telephony create a tendency towards a certain dominance of a single operator in the access market, economies of scope and economies of bundling can stimulate vertical integration which then creates the problem of transfer of market power from one market to another market. The role of the communications infrastructure for the digital economy is high. The faster and the more ubiquitous and the cheaper the use of networks is the larger the network effects and the greater the opportunities to launch digital product innovations. Modern regulation allows to impose pricing regimes which create an incentive to get an efficient output in network industries (here telecommunications).

Imperfections of information markets, lack of digital intellectual property rights, monopoly problems in fixed line telecommunications and in software markets could undermine the long term dynamics of a digital market economy. A permanent growth bonus in the digital market economy cannot be rule out, but one carefully will have to watch whether not specific problems of the digital economy undermine growth dynamics. Network Effects In principle network effects are an endogenous outward rotation (or rightward shift) of the demand curve. Network effects occur basically in markets in which users of goods and services interact systematically: E.g. if all use the same telecommunication standard, interconnection is easy and this increases the usefulness of being linked to the telecommunications network; if all partners in a project group have access to fax (or SMS or MMS), there are better opportunities of coordination. Correct and adequate anticipation of network effects is not always easy as we know from the fragmented patches of telecommunications networks in the UK in the 19th century when telecommunication operators finally called for consolidation through nationalization of the network. A single national operator could find it rather easy to establish regions with mutually competitive networks, and it also will be able to anticipate network effects with a low degree of uncertainty. However, having a single firm creates monopoly problems and hence static and dynamic inefficiency. In the case of network effects there is a large difference between monopoly output and competitive output, hence the welfare loss from mo-

44

Paul J.J. Welfens

nopolization is large. Conversely, adequate regulation which forces firms to follow the rule marginal costs=marginal willingness to pay – or as a second-best solution: average costs=marginal willingness to pay – could yield enormous benefits for consumers and society, respectively. The following graph shows for the case of a natural monopoly (with falling marginal costs k’ and falling average costs k) an initial demand curve (DDo) and the corresponding marginal revenue curve (R’o). Network effects are shown as an outward rotation of the demand curve – it is drawn in such a way that the original demand curve coincides with the new marginal revenue curve. If there is a monopoly there will be an increase of output from qo to q1, while the price is falling modestly. However, if there would be competition – with firms assumed to set prices according to average costs - in the long run there will a large increase in output and a strong fall of prices. If the market considered is a market with production innovations, there naturally will be an initial monopoly position, however, in the diffusion stage – with newcomers entering the market – the competitive solution could be realized. Welfare analysis suggests that the optimum output is q2 characterized by equality of marginal costs and marginal willingness to pay. However, this solution can be realized only if government pays a subsidy. Paying subsidies raises serious problems – in particular if the innovation rate in the industry considered is rather low. Many other sectors also will want subsidies and thus there are considerable risks that economic inefficiencies will occur. If the regulator can force firms to basically consider in price setting long run marginal costs plus an add-on element so that effectively average costs are covered by market prices society will come close to the efficient outcome q2. Alternatively, firms can use two-part tariffs where one element basically is designed to recover fixed costs while the second element is covering marginal costs. The regulator could then focus only on the second pricing element. At the same time the regulator could fix a basket of services for which an RPI-X-factor will apply: Based on the estimated sectoral productivity growth X the relative price of a basket of services has to be reduced continuously: The growth rate of the price basket is expected to fell according to inflation rate (measured by the retail price index RPI) minus the sectoral productivity growth rate. This is basically the approach adopted in the EU and in many other countries. As regards mobile telecommunications government is involved in the allocation of spectrum which is a scarce resource. A critical question is the size of the relevant market and digital international market integration, respectively. If large international markets are relevant one should expect formation of large mobile telecommunication companies which in turn could be facilitated by secondary markets for mobile licenses. Such secondary markets are non-existent due to poor rules set by government in the context of allocation of mobile licences. Moreover, as regards the EU there are distortions of services and capital markets through the divergent ways of allocating spectrum. While auctioning seems to be the appropriate way for efficient allocation, several countries have combined a beauty contest with a modest fee. A critical issue in mobile competition is roaming fees which in some EU countries seem to be higher than long run marginal roaming costs.

Information and Communications Technology, Regulations and Growth

p k' k

45

Z

DD0 DD1

p0 p1 K

I

E1

J

G

H

kp E2

k ´p

X 0

q0

q2

q1 R '0

F

(R ' 1 )

Fig. 2. Network Effects and Natural Monopoly in the Telecommunications Sector

Mobile telecommunications is a leading field of digital innovation dynamics, including development of novel services. As regards substitutability of fixed network communications and mobile telecommunications it is clear that there is only weak substitutability. This holds despite the fact that among young users mobile telecommunications often is the first choice when it comes to getting the first own number. This holds particularly in eastern Europe. However, for certain services – including internet services – fixed network access is much better in terms of speed and certain convenience aspects than mobile access. As regards the use of PCs and the internet, respectively there is a strong NorthSouth division in the world economy as is shown in the subsequent table. As regards relative prices Japan, Korea, Belgium, Hong Kong, Singapore, the US, Canada and the Netherlands, Macao and New Zealand were the 10 cheapest countries in 2003. Finding the US as a high income countries among the top 10 could be explained by cross-subsidization of such services or by powerful network effects or rapid technological progress. It is interesting to note that one of the most costly countries is Saudi-Arabia. One may assume that in this case high pricing is a government strategy to discourage people to use the global internet with its large diversity of views and independent source of information. A particular problem with the digital NorthSouth gap concerns Africa which has the world highest population growth, at the same time it has a high illiteracy ratio (except for South Africa and some other countries). Thus the politically popular perception that a digital world economy is emerging in which global diffusion of knowledge contributes to economic and technological catching-up is partly wishful thinking.

46

Paul J.J. Welfens

Table 2. Internet Prices (broadband) in Selected Countries Nr

Economy

Subscription per month (USD)

Price per 100 kbit/s (USD)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

Japan Korea (Rep. of) Belgium Hong Kong, China Singapore United States Canada Netherlands Macao, China New Zealand Germany Norway Israel Austria Slovenia Italy United Kingdom Luxembourg Sweden Switzerland Australia France Ireland Portugal Cyprus Iceland Lithuania Malta Jordan Denmark China Croatia Estonia Venezuela Hungary Finland Spain Malaysia Argentina Brazil New Caledonia Poland Chile Bahrain

24.19 49.23 34.41 38.21 33.18 52.99 32.48 51.55 38.34 40.61 33.93 46.16 20.40 45.20 79.54 73.59 32.59 91.77 44.56 57.84 50.56 51.46 61.69 39.64 58.03 73.66 12.80 53.34 14.06 51.82 30.10 24.26 49.72 42.95 57.36 47.63 29.21 68.90 22.44 71.19 76.15 35.50 106.10 57.46

0.09 0.25 1.15 1.27 2.21 3.53 3.25 3.36 2.56 2.71 4.42 6.56 3.98 5.89 3.88 6.13 6.37 17.92 8.91 11.30 9.87 10.05 12.05 7.74 9.07 14.39 5.00 10.42 2.75 20.24 7.84 9.48 4.86 11.18 22.41 18.61 7.61 13.46 8.77 27.81 14.87 13.87 41.44 22.44

Subscription as % of monthly income 1.11 3.58 1.51 1.71 1.69 1.81 1.39 2.25 2.43 2.43 1.55 1.55 1.27 1.92 5.40 3.49 1.51 2.16 2.13 2.22 2.25 2.36 2.64 2.74 3.86 3.09 1.55 3.77 4.15 2.11 3.70 2.62 10.58 4.02 2.71 2.79 4.23 7.03 3.71 3.89 9.02 4.64 8.01 8.01

100 kbit/s as % of monthly income sb or if s< b”/b(q, T/T*).

(15)

If government is considering foreign direct investment as a means of raising gross domestic product, it will have to influence the savings rate or b”/b. As regards the latter, the government might have to influence the real exchange rate adequately. Indeed, one may assume that not just b is a function of q but that b”/b is a function of the real exchange. Fulfilling (15) is rather likely, especially if b” is close to b so that b”/b is close to unity. However, a country which loses the confidence of foreign investors might face b”/b0). The share of the foreign direct investment in the overall capital stock b thus has a positive impact upon the growth rate. Moreover, one may assume that both the size of the telecommunications network in country I and that of country II have a positive impact upon growth, which we cover through a factor z=: TȥT*ȥ*. Here, we have used a multiplication formula with respect to T and T* (and positive parameters ȥ and ȥ*), since this is a way to express network effects in the use of international telecommunications. It is convenient for us to rewrite z as (T/T*)ȥT*ȥ*’ a= a”+b’b(q) + (T/T*)ȥT*ȥ*’

(16)

Output per capita (or GDP per capita) in the steady state (y#) is given – denoting the Euler number by e’ – by the following equation: e’atAo{{s(r*)[1-b(q,T/T*)ß+b”ß]/[n+ a” ȥ

ȥ*’

(17)

ß/[1-ß]

+b’b(q)+(T/T*) T* +į]}

If one would relax the assumption that T/T* is an exogenous parameter with excess capacity and consider instead that there is specific accumulation of equipment and software in the telecommunications sector, the steady state y# would have been described by a much more complex formula unless the steady state value T/T* is reached sufficiently quickly so that with t approaching infinity we can treat T/T* as a constant. As regards the impact of the relative endowment with telecommunications network capacity T/T*, there is a medium term trade-off in the following sense: x a rise of T/T* reduces the level of the growth path; x an increase of T/T* raises long term growth. From a policy perspective, this implies a potential problem since short-sighted politicians might heavily discount the future growth bonus of an expansion of the telecommunications network so that is seems unlikely that society will adopt the optimum telecommunications policy. Note that adjustment dynamics for the capital stock in efficiency units k’ (k’=K/[AL]) is affected by the expression [n+a”+b’b(q)+(T/T*)ȥT*ȥ*’+į] and [1ß]. The higher both expressions are, the faster the adjustment towards the steady state will be. Hence, part of the benefit of foreign direct investment and a relatively powerful telecommunications network occurs in the form of a faster adjustment towards the steady state value k’# (in the closed economy the growth rate of technological progress is a”). As regards the steady state, we can see from (14) that the higher q is, the lower b is and therefore the lower k’# is as well. From this perspective, the early initial real depreciation occurring in countries opening up suggests that the level of the long term growth path is raised through an exchange rate effect which, however, will fade out in the course of a long term appreciation in the context of the Balassa-Samuelson effect. However, b as well as the telecommunications parameters have a positive long term impact upon per capita GDP since the slope of the lny(t) line is raised by b (see the following figure where b jumps – e.g., in the course of privatization involving foreign investors –

Information and Communications Technology, Regulations and Growth

53

from zero to the new equilibrium value in t1). Depending on s relative to b/b”, this will raise or lower the level of the growth path (see point E versus point C). This does not rule out a long term equilibrium growth gap, namely if a