Regional Outlook: Southeast Asia 2004-2005 9789812306616

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REGIONAL OUTLOOK Southeast Asia 2004–2005

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Institute of Southeast Asian Studies The Institute of Southeast Asian Studies was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). The Institute is governed by a Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the Chambers of Commerce, and professional and civic organizations. An Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute’s chief academic and administrative officer.

REGIONAL OUTLOOK Southeast Asia 2004–2005 Editorial Committee Chairperson K. Kesavapany Editors Russell Heng Hiang-Khng Denis Hew Production Editors Triena Noeline Ong Rahilah Yusuf

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First published in Singapore in 2004 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Road Singapore 119614 Internet e-mail: [email protected] Website: http://bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies. © 2004 Institute of Southeast Asian Studies, Singapore

The responsibility for facts and opinions expressed in this publication rests exclusively with the contributors and their interpretations do not necessarily reflect the views or the policy of the Institute, or its supporters. ISEAS Library Cataloguing-in-Publication Data Regional outlook: Southeast Asia. 1992–1993– Annual 1. Asia, Southeastern. DS501 S720 1992

sls91-209988

ISSN 0218-3056 ISBN 981-230-205-0 Typeset by Superskill Graphics Pte Ltd. Printed in Singapore by Seng Lee Press Pte Ltd.

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CONTENTS Preface K. Kesavapany Introduction Russell Heng and Denis Hew

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POLITICAL OUTLOOK 2004–2005

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The Asia-Pacific Security Environment

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U.S. Relations with the ASEAN States Post-Iraq War

The ASEAN-10

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Brunei

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Cambodia

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Indonesia

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Indonesia’s 2004 Election: Certainty in Uncertainty

Laos

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Malaysia

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The First Post-Mahathir General Election

Myanmar

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Philippines

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Singapore

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Thailand

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Vietnam

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ECONOMIC OUTLOOK 2004–2005

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Regional Economic Trends

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■ WTO at the Crossroads and the Road Ahead for ASEAN

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■ ASEAN and India: New Phase of an Emerging Economic Relationship

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■ Revisiting the Law and Development Paradigm in ASEAN

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The ASEAN-10

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Brunei

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Cambodia

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Indonesia

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Laos

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Malaysia

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Myanmar

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Philippines

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Singapore

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Thailand

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Privatization in Thailand: Plans Move Ahead

Vietnam

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Selected Sources of Data

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The Contributors

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PREFACE

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egional Outlook was launched in 1992. Designed for the busy executive, professional, diplomat, journalist, and interested observer who face severe time constraints, this annual offers a succinct analysis of political and economic trends in the countries of Southeast Asia and the outlook for the forthcoming two years. The year 2003 was a difficult one for countries in this part of the world. The SARS virus not only took lives but also dramatized how a non-conventional security threat could spread so easily and quickly. One blessing in this crisis was that it helped the countries in the region to work closely together to contain the virus. In contrast, the U.S. war in Iraq was a rather more contentious issue. When it came to finding common ground in ASEAN, there was none. Member states took very different positions, which only served to underscore the deep strategic differences lurking beneath the appearance of a united ASEAN. Terrorism continues to cast a long shadow. Indonesia, not quite recovered from the Bali bomb incident in October 2002, had another major terrorist attack in its capital Jakarta on 5 August 2003. All these resulted in a more complex and uncertain strategic environment. Southeast Asia suffered a set-back on its road to economic recovery in 2003. Regional economies were particularly affected by the Iraq war and the Severe Acute Respiratory Syndrome (SARS) outbreak. Nevertheless, the impact of SARS on the region has turned out to be less damaging than earlier anticipated. The epidemic which broke out in March 2003, was largely contained by July 2003. Although concerns continued to prevail that SARS might re-occur in the near future, the region’s public health sector appeared to be better prepared to deal with the disease. The relatively quick passing of these two major events as well as the economic recovery in the United States and Japan augur well for the region’s economic outlook in 2004 and 2005. Furthermore, at the recent ASEAN Summit in Bali, ASEAN leaders agreed to the establishment of an ASEAN Economic Community (AEC) by 2020. The AEC could provide the means for Southeast Asian economies to revitalize and remain competitive in the face of growing economic challenges. Regional Outlook 2004–2005 was written by a team of scholars from within the Institute and without. We thank Rajenthran Arumugam, Mely Caballero-Anthony, Derek da Cunha, Choy Keen Meng, Nick J. Freeman, John Funston, Russell H.K. Heng, Denis Hew, Ho Khai Leong, David Koh, Lee Hock Guan, Lee Poh Onn, Leo Suryadinata, Mohamad Yusop bin Awang Damit, Sakulrat Montreevat, Mya Than, K.S. Nathan, Martin P.H. Panggabean, Aladdin Rillo, Maghaisvarei Sellakumaran, Rahul Sen, Daljit Singh, Anthony Smith, Carlyle Thayer and Tin Maung Maung Than. I wish to thank Russell H.K. Heng and Denis Hew for editing the volume.

K. Kesavapany Director Institute of Southeast Asian Studies 15 November 2003

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INTRODUCTION

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hree key political features of 2003 will continue to mark the regional climate in 2004. They are the U.S. war in Iraq, the spectre of terrorism and leadership changes in a few ASEAN countries. When the United States asked for support for its war against the Saddam Hussein regime in Iraq, it was evident that ASEAN could not work out a common position on this as there were members who were willing to join the U.S. “coalition of the willing” and others who opposed the U.S. action in no uncertain terms. These differences will continue to be tested as the U.S. action drags on in Iraq. The fortunate thing is it has not disrupted the common will to fight Islamic terrorist groups operating in the region. Terrorism remains the region’s foremost security threat and while it is not acute enough to immobilize any daily routine in the ASEAN countries, it does have serious implications for foreign investors’ confidence in the region. Some progress has been made in the bid to arrest key personnel in terrorist groups and disrupt their operations. However, when a bomb went off in Jakarta in August 2003, less than a year after the October 2002 bombing in Bali, everybody is reminded that the spectre of terrorism is very real and can strike anywhere any time. In May 2003, Cambodia with a minority Islamic community of 700,000 joined the list of ASEAN countries that have to take security action against people with connections to Islamic terrorist organizations. In the midst of these bracing times, three major ASEAN countries — Indonesia, Malaysia and the Philippines — face national elections. In all cases, the incumbents are the favoured candidates to win, thus guaranteeing a measure of continuity. But in two of these three cases — Indonesia and the Philippines — the electoral outcomes are not likely to produce any reliable solution to ineffective governance. The 2003 national election in Cambodia has produced another hung legislature which can only prolong the political disorder of that country. In those parts of Southeast Asia where elections are not an accepted way of political life, regime legitimacy, as with the case of the junta in Myanmar, is extremely problematic. Taken in total, all ASEAN members are grappling with issues of how to handle the challenge of leadership change. The region also suffered a setback on the road to economic recovery in 2003. Economies were particularly affected by the Iraq War and the Severe Acute Respiratory Syndrome (SARS) outbreak. However, the relatively quick passing of these two major events as well as economic recoveries in the United States and Japan augur well for the region’s economic prospects. Economic outlook over the next two years looks optimistic with regional economies poised for a moderate rebound in 2004. At the Ninth ASEAN Summit in Bali, ASEAN leaders have agreed to establish an ASEAN Economic Community (AEC) by 2020. It is envisaged that the AEC will be a single market and production base with free flow of goods, services, investments, capital and skilled labour. Numerous initiatives with clear timelines were unveiled at the Summit to expedite the economic integration process within ASEAN. All these initiatives seem to indicate that ASEAN is committed to ensuring that the AEC project is realized as soon as possible. Deeper integration to realize the AEC is clearly a positive move with potential long-term economic benefits for Southeast Asia. It could provide the means for Southeast Asian economies to revitalize and remain competitive in the face of growing economic challenges.

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Also, an integrated ASEAN market with the size of 500 million people would surely retain the region’s attractiveness as an FDI destination. Southeast Asia seems to be making the right strategic moves in pursuing deeper regional economic integration as well as forging closer economic linkages with the emerging economies of China and India. However, strong political will is absolutely vital to achieve these bold and ambitious goals. Russell H.K. Heng Denis Hew Editors 15 November 2003

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POLITICAL OUTLOOK 2004 –2005

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POLITICAL OUTLOOK THE ASIA-PACIFIC SECURITY ENVIRONMENT By Daljit Singh

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outheast Asia’s external security environment has remained relatively benign. This can be expected to continue into 2004–05. U.S.–China relations will remain mostly steady and peaceful because it is in the interest of both powers at this point of history to strengthen co-operation and manage issues that can cause bilateral tensions and conflict. The most important of these issues, Taiwan, still retains an element of unpredictability, especially in view of the Presidential election in Taiwan in 2004. However, even if the Democratic Progressive Party’s candidate wins the election, the United States can be expected to restrain Taiwan from any subsequent act that could precipitate a crisis with China. Another subject that is likely to feature more prominently between the United States and China in 2004, an American election year, is the trade and currency issue, but it is unlikely to cause any significant damage to the relationship. The apparently growing U.S.– China co-operation will continue to be accompanied by competition for influence in the region, especially in Southeast Asia. China–Japan relations will still be marked by underlying distrust but economic and other forces, like the ASEAN Plus Three — China, Japan and South Korea — regional framework will also be pulling them towards co-operation. The situation on the Korean peninsula remains unstable but the common interest of the major powers to prevent conflict and to keep the peninsula nuclear free augurs well for the future. Particularly encouraging is the co-operation between the United States and China to resolve the nuclear crisis. Yet, the possibility of adverse outcomes to the crisis on the peninsula, including possible proliferation of weapons of mass destruction to terrorist groups, cannot be entirely ruled out, which means a degree of uncertainty and anxiety will remain pending the resolution of the crisis one way or another. Needless to say, the nature of the outcome in Korea could also have implications for Japan’s security policies and for the American security posture in the Western Pacific, subjects of much interest to Southeast Asia. China’s weight in East Asian affairs can be expected to continue to rise. It is the most dynamic economy in the region, growing at 7 per cent per year, and drawing the lion’s share of foreign direct investments (FDI). China has become the largest trading partner and export market for South Korea. It is now also the largest source of imports for Japan and its second largest export market after the United States. Trade between China and Southeast Asia is increasing exponentially. These developments have obvious strategic implications. The seventh summit meeting of the Association of Southeast Asian Nations (ASEAN) in Bali, Indonesia, in October 2003, undertook new initiatives to revitalize Southeast Asian regionalism. Basically the initiatives — the establishment of an ASEAN Economic Community, an ASEAN Security Community, and an ASEAN Social and Cultural Community — seek to bring about faster ASEAN integration, especially in the economic sphere. The need for quicker economic integration is urgent in view of the economic competition from

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China and India, as is the need for more meaningful security co-operation because the non-traditional security threats facing the region can damage its economic prospects by undermining stability. The summit reflected a new seriousness of intent to recover the credibility of the grouping. Still, agreements on paper are one thing, and the world will be closely watching their implementation, given the poor record of ASEAN in recent years to match words with deeds. ASEAN will be working on implementation procedures in 2004. ASEAN finds itself in the flattering position of being courted by the major Asian powers. China has offered a free trade area (by 2010 with the ASEAN-Six and 2015 with the whole of ASEAN) with a strong underlying strategic motivation. India and Japan have also offered closer economic partnership schemes. These embraces of ASEAN will continue. ASEAN will need to have a sound strategic sense and respond to the rapid developments. There seems to be an attempt by ASEAN to balance China’s growing economic and strategic weight in the region with economic and other kinds of partnerships with the major Asian powers, as well as, on the part of certain individual ASEAN members, with economic and security arrangements with the United States. But ASEAN can only play this balancing game effectively if the association itself is more cohesive than it has been in the past. Within Southeast Asia itself, the security problems will continue to be more of the non-traditional type, the foremost being terrorism. There is little or no danger of conventional military conflict between Southeast Asian states, notwithstanding bouts of tension in bilateral relations between Malaysia and Singapore and between Thailand and Myanmar, and conflicting claims among some ASEAN countries in the South China Sea. Nor is there any danger of conventional conflict between any Southeast Asian state and outside powers. Rather the security problems that are likely to continue to beset Southeast Asia in 2004–05 will be terrorism from extremist Islamic groups; domestic violence originating from separatist rebellions and ethnic or religious tensions; and challenges posed by political change. Other problems include drugs, especially in Thailand; and illegal migration of peoples within and from outside the region. Three countries in the region — Philippines, Indonesia and Malaysia — will hold elections in 2004. Terrorism remains an important concern in the region because of the damage terrorist attacks can inflict on investor confidence and the tourism industry. The main terrorist organization in Southeast Asia is the Jemaah Islamiyah (JI), a clandestine organization which is an associate of Al-Qaeda. The JI has been responsible for the Bali bombing in October 2002 and the Marriott Hotel bombing in Jakarta in August 2003 as well as other terrorist acts in Indonesia and the Philippines in recent years. In the past two years the JI networks in Malaysia and Singapore have been disrupted through arrests or flight abroad of key members. However, the JI is said to have a fairly extensive presence in Indonesia and apparently retains the capability to mount new terrorist attacks in the country, notwithstanding the dozens of arrests carried out by the Indonesian authorities in connection with the Bali and Hotel Marriott bombings. The JI’s presence in the southern Philippines and its links with the Muslim separatist organizations there have also been a matter of considerable concern.

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Thus the terrorist threat in Southeast Asia will remain in 2004–05, despite the damage the JI has suffered from security operations mounted against it by governments of the region. It will be difficult to reduce the threat significantly so long as there is no comprehensive crackdown on JI cells and other radical groups in Indonesia and so long as the Moro Islamic Liberation Front and the Abu Sayyaf Group in the Philippines are not prepared to dissociate themselves completely from JI and Al-Qaeda. Lack of effective governmental institutions, poor governance and porous borders are other obstacles to eliminating the threat.

U.S. RELATIONS WITH THE ASEAN STATES POST-IRAQ WAR By Derek da Cunha

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he international campaign against terrorism — terrorism largely carried out by Al-Qaeda and its regional affiliates — was overshadowed during part of 2003 by the U.S.-led war on Iraq (even though the two issues were conflated by the Bush administration). The U.S. decision to go to war against Iraq without an explicit mandate from the United Nations Security Council exposed a major split in the global anti-terror coalition, which Washington had led since the fateful events of September 11, 2001. That split was to be reflected at the regional level among the states of the Association of Southeast Asian Nations (ASEAN). Weapons of mass destruction (WMD) and Saddam Hussein’s seeming determination to continue possessing and developing such weapons were the nub of the Iraq issue. Long-time U.S. ally, the Philippines, unhesitatingly lined up behind the United States as part of a “coalition of the willing” to disarm Iraq. So too did Singapore. At the other end of the spectrum, Indonesia and Malaysia were not merely sceptical about this American venture but were highly suspicious of U.S. motives. Then there was Thailand, which engaged in a balancing act between its public and private stances over the war. Even though a formal ally of the United States, as codified in the Rusk-

Thanat Communique of 1961, Thailand chose not to openly support the U.S. decision to wage war on Iraq. In fact, Bangkok publicly but obliquely expressed its misgivings about the entire venture. Quietly, however, the Thais did attempt to demonstrate their credentials as a U.S. treaty ally through the provision of a measure of logistical support for U.S. forces. That gesture sufficiently placated Washington. On the other hand, other Southeast Asian states had either concluded that this was really not their fight, or felt that to be involved in this fight would only draw the kind of unwanted attention which the war on terror was intended to snuff out. How the ASEAN states stacked up on the Iraq issue has since been a major factor in the way their relations with the United States have evolved. Here, it would be apt to determine why the Philippines and Singapore were so willing to be openly identified with a cause that the majority of UN members had opposed. In the case of the Philippines, the continued insurgency by radical Muslim groups, the Moro Islamic Liberation Front (MILF) and Abu Sayyaf, in the south of the country in Mindanao and their apparent link with AlQaeda, made Manila feel that the war on Iraq would simply be an extension of its own domestic campaign

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Beyond action against terrorist cells, the root causes of radicalism have to be addressed. This requires not only action against religious schools and preachers that espouse radical ideologies but also an active involvement of moderate Muslims in the ideological battle against extremist interpretations of the religion. It is a complex challenge which goes back all the way to the fount of contemporary Islamic radicalism in the Middle East, especially Saudi Arabia. The eventual outcome of the struggle within Islam itself, especially in countries like Saudi Arabia and Iran, will have a profound effect on the fortunes of Islamic radicalism in Southeast Asia, which today still remains a small minority stream among Muslims in the region.

against terrorism. The fact that the United States has since 2002 been directly aiding the Armed Forces of the Philippines (AFP) in operations against the MILF and Abu Sayyaf, and Manila’s own expectations of broader American materiel support for the AFP’s efforts to modernize its arsenal, were also key factors evident here. Furthermore, the administration of President Gloria Macapagal-Arroyo may well have felt the need to throw in its lot with the United States on the Iraq issue in the hope of eventually getting direct American financial assistance so as to keep afloat a Philippine economy experiencing severe economic problems. The Singapore Government stated publicly that it supported the United States in its attack on Iraq simply because the Saddam Hussein regime had for over a decade systematically defied the will of the international community by refusing to actively co-operate with the UN in the process of disarming Iraq of its weapons of mass destruction. Additionally, it is important to note that though Singapore is not a formal ally of the United States, the extremely close defence ties between the two countries which cover a gamut of military activities and which principally benefit Singapore’s national interests, could have prompted Singapore to openly declare itself as part of the U.S.-led “coalition to

disarm Iraq”. There were also potential economic benefits, which the Singapore Government may not have wanted to jeopardize if it took a stance which the Americans might have construed as less than supportive. The most obvious economic benefit was the impending U.S. Congress ratification of a free trade agreement (FTA) between Singapore and the United States. This agreement, which Singapore worked and lobbied hard for over a period of two years, would benefit Singapore disproportionately due to the vast difference in scale between the U.S. and Singapore markets, the former being enormous, the latter minuscule. As it turned out, not long after the formal termination of major hostilities in Iraq, the U.S. Congress did ratify the Singapore–U.S. FTA. Other economic benefits were also to accrue to Singapore as a consequence of its support for the U.S. action in Iraq. Singapore was one of a select number of countries whose major companies were allowed to bid for sub-contracts to re-build Iraq’s shattered infrastructure. More pointedly, in September 2003, the Bush Administration was to allow the Singapore government-linked corporation, S.T. Telemedia Pte. Ltd., to proceed with a takeover of the bankrupt American telecommunications giant, Global Crossing.

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U.S. RELATIONS WITH THE ASEAN STATES POST-IRAQ WAR (continued)

This was despite objections raised by the U.S. Defense Department over security issues related to the transmission of sensitive U.S. military data through Global Crossing’s vast telecommunications network. Singapore is likely to reap further economic rewards from the United States in the near future for its stance on the Iraq issue. Whatever the reasons, Singapore’s declaration of support for Washington may have seemed somewhat startling to a number of observers, not least because it went against the tide of international opinion and more so since it stood in stark contrast to the stance taken by Singapore’s two closest neighbours, Indonesia and Malaysia. Standing out like that carried clear costs and risks for Singapore. The costs were that neighbours already suspicious of Singapore’s motives might well have concluded that the city-state was out-of-step with much of regional sentiment, and that it placed American interests well ahead of those of the region’s. The risks for Singapore were simply that by throwing in its lot with the Americans, Al-Qaeda and its regional affiliate, Jemaah Islamiyah, might be even more determined than ever to carry out a terrorist attack in the citystate. However, those costs and risks — credible that they are — would likely have been fully weighed by the Singapore Government and considered worthwhile taking because of the not insignificant benefits, which would accrue to Singapore. The Philippines and Singapore have therefore been prime beneficiaries of the Iraq war. But what of the other ASEAN states? Shortly after the September 11, 2001 terrorist attacks in the United States, President George Bush made clear that countries in the international community either stood steadfastly with the United States in the fight against global terror, or are against the United States. Though the other ASEAN states, with the exception of Thailand, were not

supportive of the U.S. action in Iraq, they have not been overtly penalized by the Americans. The main reason for this is that these countries, especially Indonesia and Malaysia, have been actively cooperating with the United States in the international anti-terror campaign by rooting-out members of the Al-Qaeda-linked Jemaah Islamiyah, which has a Southeast Asian-wide organizational network. That co-operation has kept the Americans reasonably satisfied, not least because Southeast Asia is widely viewed by Washington as being a second front in the anti-terror war — a view that was underscored by the bombings in the Indonesian resort of Bali on 12 October 2002, which killed some 200 people. Some observers maintain that because Southeast Asia is considered a second front in the global antiterror war, the region has by that fact risen dramatically in strategic importance to Washington. Here, it would be a mistake to confuse the American prosecution of an international campaign against terrorism with that of Southeast Asia’s relative strategic significance to the United States. In short, America’s strategic consciousness of Southeast Asia is, and will likely remain, narrowly focused on the issue of Al-Qaeda-linked terrorism while not generally being interested in the other strategic concerns of the region’s resident states. In other words, American relative neglect of Southeast Asia’s geopolitical dynamics since the end of the Cold War will likely continue to be a feature of U.S. policy towards the ASEAN states in the near term, with concerns about terrorism by extremist Muslim groups being the one major exception to this general condition. Most of the ASEAN states appear to be fairly comfortable with this policy for the time being. A mutual convergence of security outlook therefore exists between them and the United States, and this will likely remain so over the near-to-medium term.

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THE ASEAN-10

THE ASEAN-10 Mohamad Yusop bin Awang Damit • Russell Heng • Anthony L. Smith • Carlyle A. Thayer • K.S. Nathan • Tin Maung Maung Than • Mely Caballero-Anthony • Ho Khai Leong • John Funston • David Koh

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he most important challenge for Brunei in 2003 was resolving land and maritime border problems with its closest neighbour, Malaysia. Both sides tried to play down the issue but a flurry of meetings between the most senior leaders of the two countries attest to its gravity. A June meeting in Penang, Malaysia, between the Sultan and Malaysia’s Prime Minister, Dr Mahathir Mohamad, apparently focused on their competing national claims over oil-rich maritime territory. A visit by Malaysian Deputy Prime Minister Abdullah Ahmad Badawi to Brunei followed in early July. The Sultan went to Kuala Lumpur in August. The maritime issue arises from Brunei offering exploration blocks to oil companies within its 200-km exclusive economic zone (EEZ), which Malaysia disputes, being prepared only to recognize Brunei’s continental shelf in waters up to 200 meters deep. The two countries have overlapping claims on the oil-rich areas at sea, and in early 2003 Malaysia sent its navy to chase away a Brunei-endorsed drilling team led by France’s oil company, Total. Instead, Malaysia offered the area to an American company, Murphy Oil, that had successfully drilled for a substantial amount of oil in the adjacent area outside Brunei’s declared EEZ. Under the protection of the Malaysian navy, Murphy Oil immediately started drilling in the area already allotted by Brunei to Total. Two meetings between the Sultan and Mahathir have produced a temporary truce. Both sides agreed that all activities in the disputed area be halted until a solution was found to the problems. Malaysia has submitted an eight-point memorandum to Brunei. One of the reported options is to have a joint exploration of the area but ownership of the EEZ remains a thorny issue. Brunei, which depends for its future prosperity on oil and natural gas, would not easily give up its right to oil-rich maritime territory. Malaysia is also reported to have offered a “package” whereby it will make concessions on the issue of Limbang district, in exchange for Brunei giving way on overlapping maritime claims. However, for many Bruneians, these two matters should be dealt with separately. They consider the maritime dispute to be a new issue created by Malaysia with its claim on parts of Brunei’s EEZ and naval action to fortify that claim. On the other hand, the Limbang issue goes back all the way to the 1890 annexation by Charles Brooke of what is today considered the Malaysian state of Sarawak. Limbang, which is now in Sarawak’s possession, divides Brunei territory into two. Brunei has consistently argued that Limbang is an integral part of its territories and wants it back. Malaysia regards its ownership of Limbang as nonnegotiable but is prepared to adjust parts of the border demarcating Limbang and Brunei. So far the two sides have engaged in negotiations, trying very hard to keep these problems under control.

Brunei

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In June 2003, Mahathir expressed confidence that the two issues would be solved before his retirement in October. But Brunei did not want to be rushed into accepting any solution that might place it at a disadvantage. Left unresolved, these problems will continue to be an irritant in bilateral relations. Since Brunei decided not to join the Malaysian Federation in 1963, the relationship between the two countries has passed through some difficult times. Both sides were able to normalize their relations only in the 1980s. The mutual personal respect between the Sultan and Mahathir has kept relations between the two countries warm in the last few years. Whether this would continue depends on the post-Mahathir leadership in Kuala Lumpur. For Bruneians so used to the peace and quiet of their country, allegations about attempts to revive the Al-Arqam movement in September 2003 came as a shock. With that announcement, six people were detained under the Internal Security Act. Malaysia-based Al-Arqam was once a powerful Islamic movement, which attracted a large number of followers, some from Brunei. The movement, which is viewed as a deviant sect in Brunei, was banned in 1991. Following a similar ban by the Malaysian authorities, some of AlArqam followers moved to the Malaysian island of Labuan, a forty-minute boat-ride off the Brunei coast. The movement made contact with some Bruneians, which allegedly led to an attempt to revive the movement in Brunei. Al-Arqam is not known to have connections with any terrorist groups or militants that operate regionally and internationally. Given the vigilance of the security apparatus, it is unlikely that the small Bruneian population will rally in significant numbers to the cause of any terrorist group. The swift detention of six suspects and the Sultan’s recent titah (speech) to rid the country of illegal immigrant workers signal the serious intent of the authorities to curb deviant religious belief that may pose a threat to law and order and to prevent the small sultanate from being used as a base for terrorist activities. The signing of the Instrument of Accession of Brunei to the Agreement on Information Exchange and Establishment of Communication Procedure in Bali in October is another indication of Brunei’s commitment to play its role in the fight against terrorism, money laundering, smuggling, piracy and other crimes. In his quest for better governance, the Sultan continued his unannounced visits to various government ministries, departments, schools and villages to see for himself the running of those agencies and the implementation of various policies and projects. Lately those visits have become very frequent which indicates his dissatisfaction with the performance of the bureaucrats. There are times when he would revisit a place after a short interval to check if any improvements had been made to solve existing problems. Many of those visits result from written complaints handed to him by the public. Ordinary Bruneians can channel their grievances about the bureaucracy and public services through village heads and village consultative committees but this procedure has been ineffective and slow in producing results. As a result, many still choose to petition their monarch directly. Full media coverage of all the Sultan’s visits to the various government offices ensures that the related issues of inept governance is given a public airing. Moreover, the Sultan often raised many of the specific problems he encountered during his visits in his titah. This puts another round of pressure on the bureaucrats to improve their performance. In the

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Brunei Land Area:

5,765 sq. km.

Population:

332,884 (estimate from 2001 census)

Capital:

Bandar Seri Begawan

Type of Government:

Monarchical system

Head of State:

His Majesty Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaulah

Currency used:

Brunei dollar

US$ Exchange Rate on 14 November 2003:

US$1 = B$1.73

absence of a democratically elected house of representative, this would be an alternative form of public scrutiny of government policies and their effectiveness. So far this process is producing results that satisfy people, and the Sultan remains popular, which underpins stability in Brunei. Consequently, the pressure for constitutional changes to allow more representations as announced in 1996 has become less critical. So long as there is no provision for election, the two political parties, Parti Perpaduan Kebangsaan Brunei (Brunei National Solidarity Party) and Parti Kesedaran Rakyat (People’s Awareness Party) continue to face a challenging task to convince the people of their relevance. An important event which points to positive development for the future is the return of Prince Jefry to Brunei and his public appearance after an absence of more than five years. Prince Jefry, the youngest brother of the Sultan, left the country after he allegedly diverted state funds to his company, Amedeo, when he was the Finance Minister in the late 1990s. This is a sign that the royal family has patched up its differences and can now concentrate on the sultanate’s economic challenges.

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Cambodia

C

ambodia’s national election in July 2003 had its share of intimidations, murders and charges of vote buying and assorted bullying tactics levied against the ruling Cambodian People’s Party (CPP), but by many accounts, the level of violence and tension was lower than those of preceding elections. This would suggest a more stable political environment for the future, one that is better than many observers would dare hope for. However, as with events in this country, it is prudent not to expect too much. For a start, the polls did not return a working solution to the fractious politics that had beset the country’s legislative body, the National Assembly. As widely expected, CPP won the most seats but its 73 was still nine short of the two-thirds majority that would allow it to form a government in its own right. This two-thirds majority is a peculiarity of Cambodia’s Constitution so written to deny any of the several political factions too big a grip on power. It took up till November 2003 for the CPP and the two other parties — National United Front for an Independent, Neutral, Peaceful and Cooperative Cambodia (FUNCINPEC) and Sam Rainsy Party (SRP) — making up the National Assembly to agree to a tripartite government. CPP strongman, Hun Sen, will get to keep his Prime Minister position, something that FUNCINPEC and SRP had tried hard to deny him. In return for that, there will now be four Deputy Prime Minister positions, two of which will have to be given to FUNCINPEC and the SRP. CPP will get to control 60 per cent of the ministries and the two other parties will share the rest. This is a messy outcome that will complicate already ineffectual governance. Although serving in a tripartite government, FUNCINPEC and the SRP can be expected to use their share of seats in the National Assembly to deny CPP its governing majority as and when the situation suits them. In name there is no opposition; in reality National Assembly session will continue to be fractious. To overcome this impasse, the CPP will have to bribe FUNCINPEC and SRP members to defect or cross the floor. However, there is no doubt that Prime Minister Hun Sen and his CPP remain solidly in charge of Cambodia. Should push comes to shove, strongman Hun Sen has the military wherewithal to put the other political parties in their place, which was what he did when he mounted a coup to wrench power from a FUNCINPEC-led government in 1997. In such an event, Western nations will protest the breach of constitutional procedure but no foreign power is inclined to curb Hun Sen forcibly. Besides, few, if any, are convinced that Cambodia’s opposition politicians can do a better job and therefore deserve to govern. However, even if Hun Sen is strongly ensconced in power, he will have to heed some of the warning signs from the election. Of the twelve electoral wards in the capital, six have returned SRP candidates, giving the party two more seats than the 1998 election. FUNCINPEC has two and the CPP has four. It means that the majority of the better-informed urban population does not care to vote for the CPP. The SRP’s impressive performance is part of an overall trend where it is gaining more electoral support as an opposition party than FUNCINPEC. This will embolden SRP’s leader Sam Rainsy and the CPP can expect more aggressive challenges from him in the immediate future. He is likely to work the ground in his electoral stronghold of Phnom Penh by mobilizing street demonstrations against the Hun Sen regime. Western aid, critical for the country and conditional on the Cambodian Government observing basic standards of democratic procedure, will oblige Hun Sen to

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suffer the boisterous challenges of his critics up to a point. However, expect Hun Sen to give as good as he gets by using the Pagoda Boys — a 4,000-strong band of CPP-supported youths — to organize counter-demonstrations and intimidate those embracing opposing causes. These street confrontations compound what is a generally volatile situation in Phnom Penh. FUNCINPEC and the SRP will have no shortage of issues to heckle the ruling CPP. Cambodia continues to be steeped in corruption, poverty, joblessness, drug abuse and a myriad of other pressing socio-economic problems. But the most expected high profile dispute in 2004 is a constitutional squabble in the National Assembly when the status of the Senate is up for renewal in 2004. The Senate, after its first appointed five-year term, is supposed to be elected from then on but the CPP has already served notice that the country has no money to hold one. The party wants the National Assembly to extend the Senate’s mandate for another term. As it is, the CPP-controlled Senate, functioning as a sort of Upper House, rubber-stamps the laws passed by the National Assembly, which explains why the ruling party is loath to give up this advantage. FUNCINPEC and the SRP will raise a ruckus over this. In 2003, the threat of Islamic terrorism surfaced in Cambodia. In May, the government arrested three foreigners with JI (Jemaah Islamiyah) connections. JI is a clandestine organization in Southeast Asia associated with Al-Qaeda. The government also closed two

Cambodia Land Area:

181,040 sq. km.

Population:

12.5 million (2002 estimate)

Capital:

Phnom Penh

Type of Government:

Parliamentary democracy with constitutional monarch

Head of State:

King Sihanouk

Prime Minister:

Hun Sen

Next Election:

2004 (Senate, but may be aborted for want of money) 2008 (National Assembly)

Currency Used:

Riel

US$ Exchange Rate on 14 November 2003:

US$1 = 3,970.1 riel

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Islamic schools and expelled a community of foreign religious teachers and their dependants. Islam is the religion of the 700,000-strong Cham minority in Cambodia. Like other Southeast Asian Muslim communities, the Chams have traditionally practised a moderate form of Islam but in recent years, a more orthodox version has been imported and funded by Saudi-based organizations. While only a very small percentage of Chams have been swayed by the extremist cause, a weak state like Cambodia is an easy target for penetration by terrorist groups. Another challenging external problem for the Cambodian Government is complex border issues with Thailand and Vietnam. This is not only a matter of long-standing territorial disputes but also the increasing problems of human and goods smuggling across these borders. These relations are also charged with a strong undercurrent of Cambodian distrust and resentment of their two larger neighbours. In January 2003, relations with Thailand plunged to an all-time low when riots broke out in Phnom Penh leading to the sacking of the Thai Embassy. Hun Sen’s culpability in igniting these riots with his imprudent comments remain a murky issue but the situation points to a reality that Cambodia has a political culture that can spin out of control easily. Relations with Vietnam can be just as volatile on the ground. Cambodians harbour a long-standing suspicion of their Vietnamese neighbour and their own ethnic Vietnamese citizens. Leaders of FUNCINPEC and the SRP have a habit of exploiting this simmering public sentiment for self-serving political gains. Violence against the Vietnamese community occurs sporadically and has every possibility of escalating into larger-scale rioting, if not handled carefully. This report begins by advising not to expect too much by way of good and effective governance in Cambodia for the next couple of years. On the other hand, there is also no need to worry too much that everything will come apart and descend into chaos. Hun Sen and his CPP will hold things together and keep the semblance of a functioning state, within which a modicum of economic development can inch forward. For what it is worth, official statistics (for 2002) claims that murders and kidnappings have dropped. But many illegal fire arms remain in circulation. Which is to say the streets are relatively less dangerous.

Indonesia

T

he year 2004 is notable on the Indonesian political calendar, as it will feature parliamentary elections on 5 April, to be followed by two rounds of elections for president and vice-president on 5 July and 20 September (see report “Indonesia’s 2004 Election: Certainty in Uncertainty” in this issue). The current President, Megawati Soekarnoputri, remains favoured to win the presidential contest — despite widespread disappointment with her rule — as no candidate has yet emerged that can appeal to more than a narrow minority of the general population. A greatly expanded war in Aceh has dominated the headlines in Indonesia, but this has not upset Megawati’s chances. In fact, the war may prove popular outside Aceh itself in a nation obsessed with “national unity”. The problem of Islamist terrorism, as perpetrated by Jemaah Islamiyah (JI), has emerged far larger than previous evidence revealed. While many gains have been made in countering

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radical elements — including the mobilization of the moderate mainstream groups in condemning terrorist violence — and JI’s appeal remains extremely limited amongst Indonesia’s Islamic population, JI retains an ability to damage Indonesia’s prospects. On 5 August 2003, a van packed with explosives exploded at Jakarta’s Marriott Hotel. Apparently the pattern of violence, conducted against carefully selected targets, includes the absence of anybody claiming responsibility. Those rounded up for the Marriott explosion will no doubt take the line of those arrested for the Bali blast (12 October 2002) and other acts of terror in insisting that they are not members of JI, that JI does not even exist or that they do not know other suspects despite incontrovertible evidence to the contrary. The violence is intended both to polarize Indonesian society — as evidenced in the 1999 Istiqlal Mosque bombing and the 2000 Christmas Eve church bombings — and then confuse the general public about who is responsible. The JI network has probably lost around 150 operatives due to arrests through Southeast Asia, with the majority of suspects either being arrested in Indonesia, or are of Indonesian origin. While JI cadre may number around 500 members — according to various estimates and educated guesses — there may be thousands of sympathizers. JI operations chief, Hambali, was arrested in Thailand soon after the Marriott blast, but international reactions were less than enthusiastic when an Indonesian courtroom gave JI’s emir (spiritual leader) Abu Bakar Ba’ashyir a four-year sentence that will be challenged on appeal. The vast majority of the 15,000 Muslim boarding schools (pesantren) in Indonesia are not radical, but a handful of schools under the network of Ba’ashyir have acted as recruiting grounds. While the Indonesian Government has delivered a major blow to the JI network in arresting a number of suspects, and the Indonesian population does not generally provide fertile ground for violent ideologies, JI has demonstrated that it can inflict serious damage, not only to life and limb, but also to Indonesia’s reputation and economic health. Thanks in part to the efforts of groups like Nahdlatul Ulama (35 million strong) and Muhammadiyah (30 million) in condemning sectarian violence, terrorist action has failed to provoke a literal clash of civilizations inside Indonesia. Despite horror at the JI violence, sections of the Indonesian population remain sceptical about what the “war on terrorism” means for the Muslim ummah (community), while fear of Soeharto-era abuse of power would make adoption of either Singapore or Malaysia’s Internal Security Act (ISA) set off all sorts of alarm bells. Indonesia’s economic growth for 2003 is expected to be around 3.5 per cent, marking a continuation in steady growth over the last several years, but still falling short of levels needed to service debt and absorb new entrants to the work-force. Foreign investment, already spooked after the 1997 financial crisis, has fallen away yet again due to confusion over regional autonomy, the looming threat of terrorist violence, and nationalist sentiment working against the sale of moribund Indonesian investments to foreign interests. The Megawati government has done very little to reform Indonesia’s economy. For example, it backed down on plans in early 2003 to remove an array of utility and basic commodity subsidies, which consume a good proportion of the national budget and are not targeted to assist the poor. Any effort to reform Indonesia’s economy, even hesitantly, should be expected to flounder. Parliament will hardly endorse measures that provoke major upheaval, especially in an election year.

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Indonesia Land Area:

1,919,443 sq. km.

Population:

215 million (2003 estimate)

Capital:

Jakarta

Type of Government:

Presidential; based on amended 1945 Constitution

Head of State:

President Megawati Soekarnoputri

Next Election:

April 2004 (parliamentary) July and September 2004 (presidential)

Currency Used:

Rupiah

US$ Exchange Rate on 14 November 2003:

US$1 = 8,504.99 rupiah

Megawati’s cabinet has been one of the most stable seen in Indonesia for a number of years. Megawati has kept the same ministerial line-up through thick and thin, and will be extremely reluctant to upset the balance of power in the run-up to her bid for a second term. Yet problems have emerged within her cabinet. The Attorney-General, M.A. Rachman, was found to have collated an unusual amount of undeclared wealth (including a luxury house) in 2002, but he was not relieved of his position. Megawati’s executive also harboured sources of subtle opposition to her rule. Her Vice-President, Hamzah Haz, has courted extremist elements and sought to reduce Megawati’s appeal to orthodox Muslim voters by highlighting her credentials as a secular leader who practices the Islamic faith only in a nominal way. Two ministers combined to embarrass Megawati over the US$197 million purchase of Russianmade Sukhoi aircraft. The Minister for Finance, Boediono, refused to pay the first instalment on the deal, while the Minister for Defence, Matori, claimed he knew nothing of it. The military went to their President’s aid with their commander-in-chief announcing that he knew of, and supported, the contract. “Sukhoigate” blew over after that, with Parliament delivering a mild rebuke. Regional autonomy, despite the massive anomalies that appear to give the same powers to different levels of government, has gone surprisingly well. However, confusion over investment laws persists. Conflicts in Papua, Ambon and Central Sulawesi continue to remain just below boiling point, without any recent instance of large-scale violence. The

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military, however, launched in 2003 a major campaign to destroy the Free Aceh Movement (GAM). The military high command demonstrated little patience for the peace process brokered by the Ministry of Foreign Affairs and the civilian leadership. Megawati gave permission for the military, which built its numbers up to 50,000, to launch a security operation in the province. While the Indonesian military have already made a large dent in GAM numbers and territorial control, the deaths of a number of civilians during the campaign will ensure that the Acehnese continue to be largely distrustful of the military. There were human rights problems during 2003, indicating that Indonesia, while still improved from its authoritarian past, may be backsliding. Critics of the government in some outlying provinces faced harassment and even jail. For example, the imprisonment of Muhammad Nazar, a dissident in Aceh, brought a rebuke from the U.S. State Department. Trials for war crimes in East Timor in 1999 have resulted in a few “fall guy” sentences, but have failed to satisfy the international community. A number of Western countries are openly talking of putting pressure on Indonesia on this issue. With regard to the mass media, the State Minister for Communications and Information, Syamsul Mu’arif, in 2003 accused the press of “overdoing it” with biased information and character assassination. The Indonesian media considered itself put on notice by an administration increasingly frustrated by negative reports. In terms of foreign policy, the relationship with the United States continues to loom large and is marked by a mixture of co-operation and tension, requiring constant management. While at one level there has been a lot of co-operation on reining in terrorist elements, Indonesia and the United States have parted company over the war in Iraq (as they did over Afghanistan) — a war that provoked a massive outcry with the Indonesian public. Radical groups managed to sign up several hundred volunteers to go to Iraq. The U.S. Congress sideswiped the Bush Administration’s attempt to restore military-to-military relations. The Senate Foreign Relations Committee refused to allow progress on this issue following Indonesia’s failure to resolve the deaths of two Americans (and one Indonesian) in Papua during 2002, in which there is suspicion that army elements played a role. Indonesia will continue to look for alternatives to the United States, and the purchase of Russian Sukhoi jet fighters was prompted partly by this. Indonesia continues to face a series of desperate challenges. The country remains cohesive at present, but the presence of an extensive JI network has further shaken confidence in Indonesia’s stability. Megawati’s tenure seems likely to continue into a second term, and it remains to be seen if there will be an improvement on the cautious approach of her first term.

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INDONESIA’S 2004 ELECTION: CERTAINTY IN UNCERTAINTY By Leo Suryadinata

T

he year 2004 will witness Indonesia’s third democratic election (after 1955 and 1999) but the first direct presidential election in Indonesian history. The Indonesian Parliament (DPR or Dewan Perwakilan Rakyat) has completed the debates on the presidential election bill. All laws and regulations, which include the General Election Law, the Law on the various houses of elected representatives, and Presidential Election Law have been passed. The parliamentary election will be held on 5 April 2004 while the presidential election will be conducted in two phases — the first round will be on 5 July 2004, while the second will be on 20 September 2004. The parliamentary election will produce the members of DPR, DPD (Dewan Perwakilan Daerah) and DPRD (Dewan Perwakilan Rakyat Daerah, meaning Regional or Provincial Parliaments). The DPR will consist of 550 members who are elected on party tickets. The DPD, meaning Regional Representatives Council, is a new institution in next year’s election and will comprise up to one-third of DPR members elected in their individual and not party capacity. Unlike those in the past who were nominated and selected either by political parties or the government, the representatives will be elected directly by the voters. This system, when developed, can serve as a senate-type institution in the Indonesian parliamentary system. Both DPR and DPD will constitute the MPR (Majelis Permusyawaratan Rakyat) or the People’s Consultative Assembly. More than 200 political parties registered to take part in the 2004 elections but only 24 parties are qualified to contest, including 6 major and medium parties which took part in the 1999 election: PDI-P (Partai Demokrasi Indonesia-Perjuangan), Partai Golkar, PKB (Partai Kebangkitan Bangsa), PPP (Partai Persatuan

Pembangunan), PAN (Partai Amanat Nasional) and Partai Bulan Bintang. Attention is focused on the two major parties: the PDI-P and Golkar. These two parties, despite being riddled with internal conflicts, still command the resources to win votes. However, having been rocked by various scandals, PDI-P may lose votes to Golkar. The latter, while having its own share of scandals, still has its electoral mechanism intact and the financial wherewithal to support it. Money politics is still quite prevalent in Indonesia and a party with wealth is likely to win more votes during the parliamentary election. It is likely that no party will emerge as a dominant winner. The votes will be divided among the many parties, with Golkar and the PDI-P as the two largest winners. If the above scenario comes about, Islamic parties will not win a majority of the seats, despite the greater emphasis on Islamic practices in the last decade. In 1999 the combined votes of the Islamic parties were only 17 per cent. Even if PKB (National Awakening Party) and PAN (National Mandate Party), which were established by Abdurrahman Wahid of Nahdlatul Ulama and by Dr Amien Rais of Muhammadiyah respectively, were added to the category of “Islamic Parties”, the combined votes at around 37 per cent still fell short of a simple majority. Nahdlatul Ulama and Muhammadiyah are two well-established organizations regarded as representative of moderate mainstream Islam. Nevertheless, Islamic parties will remain on the scene and a force to be reckoned with. The 2004 election also marks the end of the military-nominated seats in the DPR. As all representative institutions consist of elected members, there is no room in them for nominated members from TNI (Indonesian Armed Forces) and Polri (Indonesian Police Force). The military was reluctant

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to accept this decision but its leaders pledged compliance. This implies that the military’s formal involvement in Indonesian politics has come to an end. On the whole, the power of the military has been drastically weakened. However, the military is still influential unofficially. It seems that the military business complex has not been touched in order not to further antagonize the military group. No government can last unless it receives support from the military. Many believe that the 2004 election will be more democratic than the previous one as the nomination process is more open. The president will no longer be appointed by the MPR but elected directly by the people. However, even with new electoral laws, major political parties are still favoured and their candidates stand a better chance getting elected as the president. Major parties also struck deals to protect their interests in the presidential election. Initially, some had proposed various bills meant to block the possible presidential candidates of rival parties. For instance, in a bid aimed at proscribing President Megawati Sukarnoputri of PDI-P, Golkar wanted to make university qualification a necessary condition for a person to become President. In retaliation, PDI-P targeted Golkar’s Chairman, Akhbar Tanjung, by proposing that a person who had a criminal record would not be qualified to contest the presidency. Finally the parliament decided to drop these conditions thus paving the way for both Megawati and Akhbar to enter the contest. The direct presidential election law does not allow an independent candidate to contest the presidency unless he or she is nominated by a political party, which obtained 15 per cent of the DPR seats or 20 per cent of the valid votes for the DPR. Nevertheless, a party that does not meet this condition can combine forces with other parties to nominate their candidates.

Political parties are also allowed to nominate a person who was not originally a party member. This will enable some well-known NGO leaders to contest the seat and broaden the slate of candidates. As of late 2003, a number of presidential hopefuls, apart from Megawati and Akhbar, are General (retired) Susilo Bambang Yudhoyono (Security Coordinating Minister), General (retired) Wiranto (former Security Coordinating Minister), General Agum Gumelar (Minister for Communications), Dr Nurcholish Madjid (prominent Islamic scholar), Sultan Hamengku Buwono X (Sultan of Yogyakarta), Hamzah Haz (Vice-President), Jusuf Kalla (Coorodinating Minister for People’s Welfare), Muzadi (General Chairman of Nahdlatul Ulama), Dr Amien Rais (Speaker of the MPR and leader of PAN) and Surya Paloh (Editor-in-Chief of Media Indonesia). Candidates have to contest in pairs for the president and vice-president positions. It is therefore possible that some of the abovementioned presidential hopefuls may be willing to team up with a stronger candidate and serve as his/her vice-president. The pairing may depend on the results of the parliamentary election. Observers feel that Megawati is still more popular than the others but she is not likely to gain more than 50 per cent of the votes in the first round, a requirement to be the elected president. It is likely that there will be a second round. It is still too early to tell which parties will emerge as the biggest winner but it is certain that there will be no dominant party and that a coalition government is likely, which will be a weak one. It is also difficult to predict who will win the presidential election. None of the extremists are expected to win but the victor emerging from this fractious process is also unlikely to be a strong president. Indonesia is entering an era of uncertainty.

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Laos

I

n 2003 cracks developed in the façade of control built up by the Lao People’s Democratic Republic (LPDR). A series of highway ambushes, public bombings and pin-prick attacks by armed dissidents appeared aimed at destabilizing Laos’ one-party regime. Foreign diplomats also noticed other signs of dissatisfaction expressed by the younger generation in Vientiane. Lao youth appeared more openly critical of government corruption and the failure of their leaders to manage the economy effectively. Younger members of the regime aired similar sentiments but in a more indirect way. They authorized international non-governmental organizations to hold conferences that dealt with such subjects as the rule of law and better governance. The LPDR sought to shore up its declining legitimacy by appealing to the past. On 5 January officials unveiled a statue of the legendary 14th century King Fa Ngum. Fa Ngum ruled over Lan Xang (the kingdom of a million elephants), an expansive empire that stretched from southern China over much of mainland Southeast Asia. The government plans to commemorate other monarchs in the line of succession. This appeal to tradition was in marked contrast to the treatment the ruling Communist Party meted out to the monarchy after they assumed power. In 1977 the Lao King was arrested and exiled to a remote region where he died. In 2003 Lao leaders portrayed themselves as the direct descendants of the monarch who introduced Theravadda Buddhism and unified the Lao people. In another major step to shore up regime legitimacy, in May the Lao National Assembly amended the State Constitution and brought forward legislation, pending since September 2001, permitting municipal elections for the first time in twenty-eight years. Under this scheme pilot elections will be held in four provinces Luang Prabang, Khammuan, Champassak and Savannakhet. If successful, elections will be held throughout Laos. Finishing touches on the draft legislation are expected at the next session of the National Assembly. Elections should follow in six months. The legislation provides an increased measure of financial autonomy for municipal authorities by permitting them to retain a higher portion of taxes. As the year progressed the LPDR became embattled from within and without. Armed rebels mounted a series of attacks on road transportation primarily along route 13 between Vientiane and Luang Prabang. Six major incidents were recorded between February and August resulting in over thirty fatalities. LPDR officials attributed these attacks to bandits but foreign diplomats identified Hmong rebels as the culprits. A U.S. Embassy report on an April incident noted, for example, that a group of 20 to 30 masked attackers fired military weapons from positions in the jungle and that robbery was not a motive. Elsewhere in Laos, in June, a bus was bombed near Thakhek in the south. On 4 August a bomb exploded at Vientiane’s central bus station injuring ten people. Later that month gunmen attacked a bus operating between Xam Nua and Viengxai in northern Laos killing five passengers. This upsurge in attacks attracted the attention of foreign reporters. In April a journalist and a photographer surreptitiously entered Laos to make contact with a group of armed Hmong dissidents hiding in the Xaysomboune Special Zone. Their story and pictures, published by Time Asia, emboldened a French photographer, a Belgian journalist, and an American Hmong pastor to duplicate the feat. They entered Laos in May with four guides.

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Laos Land Area:

236,800 sq. km.

Population:

5.7 million (2002 estimate)

Capital:

Vientiane

Type of Government:

Socialist Republic

Head of State (President):

General Khamtay Siphandone

Party Secretary:

General Khamtay Siphandone

Prime Minister:

Bounnyang Vorachit

Next Election:

2006 (Communist Party Congress) 2007 (National Assembly)

Currency Used:

Kip

US$ Exchange Rate on 14 November 2003:

US$1 = 10,576 kip

Lao security arrested them in Xieng Khouang province on 4 June. Charged with the death of a local milita man, possessing firearms and illicit narcotics and obstructing security officers, the three foreigners were given a pre-emptory trial and sentenced to fifteen years in jail. The arrest and summary trial of the three Westerners, and the brutal treatment accorded their guides, provoked an immediate outcry not only from the diplomatic community but overseas as well. The issue was raised in the European Parliament and before the UN Committee on Elimination of Racial Discrimination. Amnesty International publicized the case. The three foreigners were eventually released, reportedly after France threatened to cancel its aid programme. The international outcry also drew attention to the plight of the Hmong resistance forces. These were estimated at about 3,000 organized into four to six separate groups. As pictures and news stories illustrated, they were a ragtag bunch of poorly armed soldiers and their families living in remote areas. The Hmong were surrounded by the Lao army and antipersonnel minefields. They were subject to periodic attack and reportedly a deliberate policy of starvation. Foreign journalists noted that the Hmong they encountered were forced to forage for food because they could not stay long in any one place. The UN Committee on Elimination of Racial Discrimination issued a resolution in August condemning the LPDR for violating international law by targeting civilians.

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In the midst of these developments, on 12 July the Lao Citizens Movement for Democracy (LCMD) announced that they had initiated a “revolution” to overthrow the “oppressive Communist government” of the LPDR. The LCMD claimed it represented twenty groups consisting of anti-communist freedom fighters, local militia, Lao army defectors and other dissidents. The LCMD further claimed that they had initiated military action in eleven provinces. Lao officials denied any armed uprising had taken place and blamed drug traffickers for the publicized incidents. During the remaining months of 2003, the U.S.-based Fact Finding Committee (FCC), composed of anti-Communist Lao exiles and their American supporters, issued a string of battlefield communiqués. The FCC claimed it had given satellite phones, cameras and video equipment to operatives in Laos to publicize the LCMD’s military offensive. Independent verification of the LCMD’s operational claims is difficult but a Vietnamese military source confirmed that small-scale fighting had broken out in some regions. Thai police reported that an armed group opened fire on a Lao immigration post in Sayabouri province. A brief firefight also occurred with another armed group operating inside Thai territory before it fled into Laos. Lao officials claimed these incidents involved drug traffickers and not armed insurgents. By October it was possible to reach the assessment that there were little signs of a nationwide uprising. FCC communiqués, for example, made very modest claims of success and even indicated reversals suffered by the LCMD forces. Lao-based observers reported little evidence of military activity in supposed battle areas nor was there any sense of public alarm. At most small bands fired upon military guard posts or took pot shots at passing army trucks. A U.S. travel advisory noted that there had been attacks around Sam Neua in Hua Phan province in the north and small-scale attacks by anti-government groups in isolated areas along the southern border with Thailand. The internal security situation in Laos had international repercussions. Party leaders in Vietnam and Laos were drawn closer. During the year they exchanged high-level security and military delegations. It was widely assumed that elements of the Vietnam People’s Army, possibly its special forces, were assisting the Lao army in military operations against the Hmong. There were reports that Vietnamese units were helping the Lao People’s Army in northern Laos but these remained unconfirmed. In sum, whatever the claims of the LCMD and its mouthpiece the FCC, the anticommunist rebels did not demonstrate that they are a credible threat to the Lao regime. For the most part their attacks were militarily inconsequential although they did result in the loss of civilian life. International media attention served to arouse sympathy for the Hmong, not because they were heroic freedom fighters, but because they and their families were in such dire straits. In the immediate future Laos risks severe sanctions by the international donor community if it persists in its current policy of fighting the Hmong rebels with indiscriminate shelling and forced starvation. Laos will not change its policies overnight, but it will gradually succumb to pressures to resolve this issue peacefully. Domestic security should improve as a result.

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The next two years will be an important transitional period for Laos as it prepares for the next national party congress scheduled for 2006. During this period Laos will experience increased pressures to step up the pace of social, political and economic change. Massive transport infrastructure projects now underway or planned will literally open up landlocked Laos. This will facilitate the exploitation of its natural resources including hydropower. Laos will also continue to experience the expansion of telecommunications and Internet computing linkages beyond Vientiane to larger provincial towns. As Laos is drawn more and more into the regional and global economy, it will come under increased pressure to improve the standard of governance through legal and administrative reforms. Laos can draw on the experiences of its closest neighbours in this regard. While older Lao leaders can be expected to turn to Vietnam and China for support, younger officials are increasingly likely to turn to Thailand, the United States and other advanced Western countries for policy advice.

A

t 3.00pm on Friday, 31 October 2003, Malaysia’s fifth Prime Minister, Datuk Seri Abdullah Ahmad Badawi assumed the leadership of the country after Dr Mahathir Mohamad officially handed over the controls to him, his chosen deputy. Mahathir was the longest-serving Prime Minister who held the job for 22 years. Abdullah Badawi has indicated that he will pursue the domestic and international policies of his predecessor, although one could expect some changes in the nuance and style of administration. He will not rock the boat with any radical departures. He would, however, fine-tune certain policies to suit his consensual, compromise-seeking style. Abdullah is known to have strong Islamic credentials — a factor that may put the opposition political party PAS (Parti Islam SeMalaysia) on the defensive in the coming years, including at the forthcoming general election, expected some time in the first quarter of 2004 (see report “The First Post-Mahathir General Election” in this issue). The new Prime Minister is noted for his firm stand on corruption and is likely to adopt measures to contain the negative influences of cronyism and nepotism on governmental performance. In attempting to cleanse the government and economy of unhealthy practices, Abdullah could well run into several roadblocks put up by vested interests closely aligned with the Mahathir administration. Abdullah is likely to effect changes to the Barisan Nasional (BN) leadership. BN is the country’s ruling coalition. Long-serving coalition party leaders such as Lim Keng Yaik of Gerakan and Samy Vellu of the Malaysian Indian Congress (MIC), and Sarawak Chief Minister Abdul Taib Mahmud could well be asked to make way for their deputies to inject new life and fresh approaches into BN electoral machinery. The next general election will see an increase in the number of parliamentary seats from 194 to 219. In the MCA (Malaysian Chinese Association), a senior partner in the BN, leadership change has already

Malaysia

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taken place when the leaders of two rival factions, Ling Liong Sik and Lim Ah Lek, stepped aside and allowed other less controversial figures to lead the party into the next general election. In dealing with the political opposition, Abdullah will be able to deploy his strong Islamic credentials in rebutting accusations by PAS that his party, United Malays National Organization (UMNO), the ruling Malay party that controls the BN, has strayed from the correct teachings of Islam. The new Prime Minister would, like his predecessors, accord full dignity to Islam as the official religion of the country but without the need to politicize religion any further to the advantage of the Islamic political opposition. Abdullah’s mettle would, in a sense, be tested by his ability to deliver at the next general election, which would likely be held in the first quarter of 2004 to coincide with the state election in Sabah — both the East Malaysian states of Sabah and Sarawak were instrumental in garnering the twothirds parliamentary majority for the BN in the 1999 general election. A convincing BN electoral victory would underscore the basic tenets of Mahathirism: multiracial coexistence without threatening Malay political predominance, economic growth based on equity and partnership both internal and external, and a moderate and progressive Islam in contrast to PAS’ conservative and arguably regressive Islam unsuitable to the socio-political and cultural conditions of a pluralistic society of the 21st century. With him still serving a jail sentence on charges of sodomy and corruption, the impact of former Deputy Premier Anwar Ibrahim on Malaysian politics is diminishing. Many senior and founder members have resigned from or left his Parti KeADILan. Basically dependent on PAS support to stay alive, this party has little prospect of garnering substantial support from the Malays, let alone other Malaysians. The latest allegations in the foreign media linking Anwar to sponsorship of terrorist activities through the Washington-based International Institute of Islamic Thought have increased the pressure on him to prove his innocence. However, Anwar’s wife and Parti KeADILan president, Dr Wan Azizah Wan Ismail, has rejected these allegations as totally false and designed to prevent any possible political comeback by her husband in the post-Mahathir era. The possible benefit of this political fallout for Abdullah and the BN is not clear. Another pertinent political question derives from Mahathir’s re-engineering of UMNO in the aftermath of the 1999 general election when a substantial portion of the Malay vote swung in favour of PAS. Whether this effort will be sufficient to win back the lost votes remains to be seen. On the education front, Abdullah Badawi will maintain the government’s decision to gradullay teach science and mathematics in English beginning in 2003. Opposition has come from political parties and groups that have hitherto built their fortunes on vernacular education (Chinese and Tamil, as well as Islamic studies), and on the national education system using Malay as the medium of instruction. The government holds firmly to the view that the decision to teach science and mathematics in English has become absolutely necessary to let Malaysia maintain its competitive edge in a globalized economy. Like his predecessor, the new Prime Minister is aware that the high level of unemployment among Malay Malaysians — mostly with degrees and diplomas in Islamic studies and economically

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Malaysia Land Area:

330,434 sq. km.

Population:

24 million (2003 estimate)

Capital:

Kuala Lumpur

Type of Government:

Federated parliamentary democracy with constitutional monarch

Head of State:

Yang Di-Pertuan Agong Tuanku Syed Sirajuddin Syed Putra Jamalulail

Prime Minister:

Datuk Seri Abdullah Ahmad Badawi

Next Election:

By November 2004

Currency Used

Ringgit (RM)

US$ Exchange Rate on 14 November 2003

US$1 = RM3.79

of little use — has raised official concern over the value of over-emphasizing religious studies in the education system. Besides, religious education is more susceptible to political manipulation by PAS, a party that uses religion to advance its political agenda. In foreign policy, Malaysia under the new leader is expected to maintain the basic contours established during the Mahathir era. Malaysia’s priorities would still be a strong commitment to the Association of Southeast Asian Nations (ASEAN) regional co-operation, and East Asian regionalism through the ASEAN Plus 3 concept envisaging closer and stronger economic linkages between the 10-member ASEAN grouping and China, Japan, and South Korea. Traditional ties with the West — through security and economic cooperation — would be both maintained and advanced, especially with the United States which is Malaysia’s largest trading partner. Relations with the Islamic world can be expected to strengthen following the 10th Summit of the Organization of Islamic Conference (OIC), held in Kuala Lumpur in October 2003. Nevertheless, as Mahathir himself has openly stated in his current role as OIC Chairman, Muslim countries still have plenty of homework to do to empower themselves from within before pointing fingers at the West for their dismal political, social and economic performance. On Malaysia–Singapore relations, much more diplomacy and governmental efforts are required to manage if not resolve a number of critical issues such as selling of water to Singapore, Malayan Railway land in the island republic, pension funds of Malaysian workers

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who had worked in Singapore, a new bridge to replace the causeway linking both countries, the use of Malaysian airspace by Singapore’s airforce, and of late, Singapore’s land reclamation, which has become the subject of international arbitration. The ruling on 9 October 2003 by the Hamburg-based International Tribunal for the Law of the Sea that Singapore can continue its reclamation projects in Tuas and Pulau Tekong was tempered by the obligation of both parties to set up an independent group of experts to monitor the project, and to exchange regular information on the works. On the water issue, Malaysia took exception to Singapore’s publication of the book Water Talks? If Only It Could in July 2003, on the grounds that it does not contribute to the improvement of bilateral relations. For Singapore, however, it was important to state the facts as they were. On the territorial claim over Pedra Branca (Pulau Batu Putih), both sides signed the Special Agreement in Kuala Lumpur on 6 February 2003 to submit the issue for adjudication by the International Court of Justice at the Hague. Regionally, Malaysia’s commitment to ASEAN-level efforts to stamp out international terrorism was demonstrated by police and intelligence co-operation with Thailand in the capture of the most wanted Jemaah Islamiyah (JI) leader, Hambali, in August 2003. On 1 July 2003, the Malaysian Government launched the Southeast Asia Regional Centre for CounterTerrorism (SEARCCT) in Kuala Lumpur, but the United States, which initially proposed the idea, was dropped as a partner apparently to indicate Malaysia’s displeasure over the absence of UN authority for the U.S.-led war in Iraq. On the economic front, the momentum to expand ASEAN’s ties with the rising Asian powers — China and India — was accelerated at the Bali Summit (8 October 2003) when both India and China became the first outside powers to accede to ASEAN’s Treaty of Amity and Co-operation obliging signatories to renounce the use of force and engage in greater political and economic co-operation that can eventuate in an economic as well as security community in Southeast Asia. The emergence of such an ASEAN Community in the future would reflect the success of one of the major pillars of Malaysian foreign policy: strong support of, and commitment to regional co-operation in Southeast Asia through ASEAN.

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THE FIRST POST-MAHATHIR GENERAL ELECTION By Lee Hock Guan

O

n 1 November 2003, the Deputy Prime Minister Abdullah Badawi succeeded veteran leader Mahathir Mohamad as Prime Minister and will lead the BN (Barisan Nasional) coalition in the next general election that must be held by November 2004. To consolidate his position in UMNO (United Malays National Organization), Badawi must ensure that BN wins impressively; alternatively, a less than convincing UMNO performance may weaken his position in his own party. Barring any last minute negative development, Badawi may hold the election shortly after he assumes the premiership. In part, this is to capitalize on the temporary goodwill to the BN — particularly that of the Malays — which the departure of Mahathir and the new Badawi leadership may possibly generate. Indeed, ill feelings against Mahathir may dissipate once he is out of office and be replaced by a wideranging, in the case of his detractors a grudging, admiration for the man and his undeniable contributions to making Malaysia what it is today. Thus, if managed astutely, Mahathir’s departure can be used to win back some of the Malay support UMNO lost in the previous general election of 1999. In the November 1999 general election, while the BN benefited from an unexpectedly solid non-Malay support, PAS (Parti Islam SeMalaysia) won about as many Malay votes as UMNO, with the slight edge going to PAS in Kelantan, Trengganu and Kedah, and to UMNO in Johor, Negeri Sembilan and Malacca. As the Malay vote remains its primary source of legitimacy and power, UMNO has since the 1999 election pursued various strategies to win back Malay endorsement. However, it appears that UMNO is still not confident that it will regain Malay electoral support, especially in the Malay heartland states of Kelantan, Trengganu, Kedah and Perlis.

Similar to the 1999 election, the Badawi-led BN can be assured of winning Sabah and Sarawak in East Malaysia. Winning all the parliament seats in both states is a near certainty, provided all local component parties of BN remain in the coalition in Sarawak. In Sabah, the only significant opposition, the PBS (Parti Bersatu Sabah), rejoined BN earlier in 2003. Although the DAP (Democratic Action Party) continues to have credible support in selected Chinese-dominated constituencies, that support has diminished over the years. In contrast, the BA (Barisan Alternatif) coalition parties, namely PAS, KeADILan (Parti Keadilan Rakyat), and PRM (Parti Raykat Malaysia), still do not have noteworthy support in both the East Malaysian states. Since the 1999 election, the Election Commission has made several changes to the election rules and constituency make-up that have worsened the already uneven playing field in Malaysia. A few changes that will put the under-resourced opposition at a greater disadvantage are: the possibility of increasing the election deposits (from RM5,000 to RM20,000) and raising the ceiling for electoral spending (RM30,000 to RM100,000 for state and RM50,000 to RM200,000 for Parliament). Lively debates may be constrained by rules that make it an offence to promote “feelings of illwill, discontent or hostility” between persons of the same race or class and between different races or classes during the election campaign. Candidates must sign a pledge of good behaviour (Akujanji), the violation of which can lead to disqualification during or after the election. The 2003 re-delineation exercise lends itself to suspicion of benefiting BN, in particular UMNO. In comparison to past re-delineation exercises that were carried out to offset the challenge of the non-Malay vote (meaning the DAP), the 2003 exercise targeted the discordance in the Malay-Muslim vote. Of the 25 new

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THE FIRST POST-MAHATHIR GENERAL ELECTION (continued)

parliamentary seats the largest numbers were allocated to Johor (6), Sabah (5 including Labuan), Selangor (5) and Pahang (3), with none allocated to Kelantan, Trengganu, Kedah and Perlis, the Malay heartland states where PAS’ support remains very strong. To cash in on the reliable non-Malay support for the BN in contrast with the uncertain Malay votes, a discernible delineation pattern appears to be the reduction in the numbers of seats with a huge Malay majority and convert them to mixed seats where Malays make up 55–65 per cent of the voters. Voting along ethnic lines remains the more influential factor in determining electoral outcomes than class-based voting. Accordingly, political parties mostly will continue to campaign along ethnic lines in order to attract ethnic voters. Prior to the 1999 election, the central weakness of the opposition has been its failure to bridge the ethnic divide with PAS winning mainly Malay votes and the DAP, the nonMalay votes. Compared to PAS and DAP, the BN formula seems to be more effective in overcoming racially driven voting behaviour. In the 1999 election, the gathering of opposition parties into the BA (Barisan Alternatif) coalition parties helped to some extent to bridge the ethnic divide despite on the one side, the non-Malay fear of PAS’ Islamization agenda and on the other, the lingering Malay suspicion of the DAP’s record of challenging the principle of a Malaydominated Malaysia with its “Malaysian Malaysia” idea. But because the DAP had left the BA after 11 September 2001, the BA will now become less appealing to non-Malay voters and conversely the DAP to the Malay voters. Voting behaviour at by-elections since 1999 points to a generational pattern with a majority of young Malays voting for the BA and their non-Malay counterparts preferring the BN. With this as hindsight, the Election Commission refusal to allow a new cohort of young voters their right to vote in the 1999 general

election probably saved the BN, especially UMNO, a number of seats. However, the slide in Malay votes against UMNO may have peaked and the most recent by-elections have seen the party picking up a significant percentage of the Malay votes it had lost. While the majority of young Malays continue to vote for the BA, the gap is closing in the BN’s favour. In all certainty the usual ethnic issues like the New Economic Policy (and Malay special rights), meritocracy versus ethnic quotas, the re-introduction of English as the medium of instruction for mathematics and science, and others will crop up during the election. In part, the BN government’s economic development policies and successes and opening up of the socio-cultural space for the Chinese have won the party a slight majority of the Chinese vote since the 1995 general election. In contrast, most Chinese remain sceptical of the sincerity of the PAS-dominated opposition when it comes to respecting different socio-cultural rights and practices. Indeed, the Chinese are fearful of PAS’ intention to establish an “Islamic state”. As for the Indian vote, the BN has successively won a sizeable majority of their support in the last three elections and will probably do as well in the coming election. While Mahathir’s departure will deprive UMNO of its dynamic can-do image, it will also deprive the opposition parties of the face that personifies the inhumane treatment of Anwar Ibrahim, abuse of power, corruption and cronyism. In contrast, Badawi’s consensus-building style, relatively clean track record, and Islamic background would help to soften the negative impact of the three issues: thus on a personal level Badawi will fare much better than Mahathir. Nevertheless, one still should not underestimate the perception of UMNO as a morally suspect and greedy party and the displeasure over the Anwar affair remains widespread, especially among the young Malay voters.

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The politics of Islam is another major issue. How will the latest BN government attempt to control the Islamic religious schools affect the Malay vote? Generally, the positions taken by the BN government after the 911 incident seemed to have gained UMNO a positive response from the Malay community. In contrast, the generalized fears of Islamic extremism and an Islamic State, and the BN government’s enabling individuals and groups that espoused “moderate” interpretations of Islam more access to public space and the mass media may have helped to temper the influence of PAS’ conservative brand of Islam. Moreover, pragmatic considerations such as the employment opportunities and economic development that come with voting for UMNO may offset the desire to vote for PAS’ Islamic state.

In the 1999 election, part of the reason UMNO fared badly in Trengganu and Kedah was because of party factionalization in those states. In Kelantan and Trengganu a new generation of young UMNO leaders has assumed control of the local party machinery. While they are not tainted with charges of corruption and cronyism, the questions are how the local UMNO old guards will work with them, how well they have fostered their relationship with the ground, and so on. In Kedah, however, it appears that the local machinery remains fractured. As it stands, if the election is held shortly after Mahathir’s departure, and barring any last minute surprises, the BN will certainly retain its two third majority and UMNO will likely perform better at least in terms of winning more seats.

W

hen newly-appointed Prime Minister General Khin Nyunt announced a seven-point “road map” on 30 August 2003, he restarted a political process that was suspended when the National Convention adjourned indefinitely in March 1996. The National Convention was mandated to draw up the basic principles of Myanmar’s future “democratic” constitution. The military junta in power known as the State Peace and Development Council (SPDC) had endorsed this body but never announced why it had to be adjourned. General Khin Nyunt, when announcing his road map, blamed the opposition National League for Democracy (NLD), which had walked out of the National Convention in November 1995 in protest against the modus operandi of the latter. The NLD was the party that won over 80 per cent of the seats in the 1990 general election but was not allowed by the junta to assume power. Since that 1996 scuttling of the National Convention, the situation has largely been a political impasse characterized by occasional tensions and several false indications of imminent breakthroughs. A reconciliation process beginning in late 2000 with United Nations’ mediation has moved forward in fits and starts and never progressed beyond the “confidence building” stage. The NLD began to organize tours of the countryside by its world-renowned leader and

Myanmar

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Nobel Peace Prize winner Aung San Suu Kyi soon after her release. These increasingly boisterous tours raised tension between NLD supporters and pro-government forces resulting in a deadly confrontation on the night of 30 May 2003. As a result, the authorities took Aung San Suu Kyi and party leaders accompanying her into protective custody. Many of her supporters were also detained. Despite the SPDC’s statement that Aung San Suu Kyi’s detention was of a “temporary” nature to safeguard her, the international community with the exception of China called for the immediate release of those detained. That incident has drawn even an official comment from ASEAN even though that organization has always insisted on noninterference in the internal affairs of its member states. The joint communiqué of the 36th ASEAN Ministerial Meeting in June 2003 referred specifically to the “incident of 30 May 2003” and “urged Myanmar to resume its efforts of national reconciliation and dialogue among all parties concerned leading to a peaceful transition to democracy”. Many ASEAN members were concerned that Western interest in Aung San Suu Kyi’s well-being would damage ASEAN’s image. They also did not want the “Myanmar issue” to become a “distraction” at the ASEAN summit in Bali in October. Thailand and Indonesia (the current chair of ASEAN) sent special envoys to explain their concerns. Moreover, the United States (which had already prohibited new investments since 1997) imposed further punitive measures on Myanmar that included an imports ban and restrictions on financial transactions through Myanmar state-owned banks while the European Union expanded its visa ban on Myanmar officials. The SPDC seemed oblivious to international criticisms and appeals to release Aung San Suu Kyi, choosing instead to try and rejuvenate the stalled project of managed transition to a “disciplined democracy”. It instituted a major Cabinet shake-up in which the junta’s Secretary-1, General Khin Nyunt was appointed as the Prime Minister, a position previously held by the SPDC Chairman Senior General Than Shwe (who retains his defence portfolio). Khin Nyunt as Prime Minister has raised speculation as to whether it is a “demotion” or “promotion” but in actual fact, he has been assuming the duties of Prime Minister for quite a while and this new appointment merely formalizes an existing arrangement. In his new “road map” that serves as a strategic offensive against critics, Khin Nyunt promises that the government will implement the following: • •

• • • •

Reconvening the National Convention. After the successful conclusion of the National Convention, “a step by step implementation of the process necessary for the emergence of a genuine and disciplined democratic system”. Drafting a new constitution according to the recommendations of the National Convention. A national referendum to adopt the constitution. Holding of “free and fair elections” for a hierarchy (national and regional) of legislative bodies or pyithu huttaw (people’s assemblies) as per the new constitution. Convening of the Hluttaw or National Assembly as per the constitution.

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Myanmar Land Area:

678,675 sq. km.

Population:

52 Million (2003 estimate)

Capital:

Yangon

Type of Government:

Military

Head of State:

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

Prime Minister:

General Khin Nyunt

Next Election:

Currently Suspended

Currency Used:

Kyat

US$ Exchange Rate on 14 November 2003:

•

US$1 = 6.2 kyat US$1 = 890 kyat (parallel market rate)

“Building a modern, developed and democratic nation by the state leaders elected by the Hluttaw” together with the “government and other central organs [of state power] formed by the Hluttaw”.

Detractors have been dismissive of this road map, pointing out that it had no deadline and was a stalling tactic by the junta to deflect criticisms and assuage the concerns of fellow ASEAN members. However, the road map has won some international approval with China and Thailand quickly voicing support. At their October summit in Bali, all the ASEAN leaders accepted Khin Nyunt’s clarification of Myanmar’s political situation and went along with the road map idea. The junta appears to be pushing ahead with its road map with or without the co-operation of the NLD. Mass rallies are organized to support this particular proposal of the Prime Minister. State media provided the publicity. Critics may see these as tactics precipitated by international pressure but they are part of a well thought-out sequence to prepare the military for the long haul in managing Myanmar’s political transition towards a unitary state dominated by the military. A process of military leadership renewal may have gained momentum since the previous major Cabinet reshuffle in November 2001. A subsequent military reshuffle brought all regional commanders who are also SPDC members to Yangon with promotions. The appointment of the Adjutant General

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as SPDC’s Secretary-2 in February 2003 and his elevation to Secretary-1 upon Khin Nyunt becoming Prime Minister on 25 August 2003 together with the appointment of the Quartermaster General to the post of Secretary-2 appear to be part of this process as well. To restart the National Convention, in September 2003 the SPDC reconstituted the National Convention Convening Committee (NCCC) with the junta’s Secretary-2 as its Chair. Given its strategic objective to institutionalize the political role of the military, the junta is unlikely to change the National Convention in ways that will give more weight to the NLD and its allies. In the event that it refuses to rejoin the National Convention on the NCCC’s terms, the NLD risks being left out in the cold. Other legal political parties and cease-fire groups representing ethnic nationalities appear to have no qualms about participating in the National Convention if and when it reconvenes. As such, the road map and the National Convention, in all likelihood, will occupy centre stage in Myanmar’s domestic politics. Whether these moves by the junta can bring about real progress without further tensions and setbacks remain to be seen. On the international front, the Western countries are sceptical of the junta’s road map. Allowing Aung San Suu Kyi to return home in late September 2003, after a successful major surgical operation, has moderated the level of reproach from the West. This and the fact that Aung San Suu Kyi will be convalescing for the next few months will give the junta a respite from the international outrage over her detention. Western sanctions against Myanmar will remain for the time being and will hurt the country’s nascent market–oriented urban sectors such as manufacturing, banking and external trading. Nevertheless, Myanmar has sufficient ballast in its rural agriculture, natural resources and the informal sector to survive the pressure. At the same time, Myanmar’s relations with four immediate neighbours India, Bangladesh, China and Thailand have been at their best in recent years. This and the assistance of ASEAN states will help the junta sit out the Western sanctions. Given that the junta’s high threshold of pain and the country’s self-sufficiency in food, the regime is unlikely to cave in to Western pressures in the near future. The sanctions may even be counter-productive as they reinforce the self-reliance mentality.

Philippines

E

lectioneering for the 2004 presidential race raises concerns about political instability. Recent security trends and a spate of political crises threaten to undermine the modest political and economic gains achieved by two years of the Macapagal-Arroyo administration. In October 2003, President Macapagal-Arroyo did an about-turn on her earlier desire not to seek re-election, thus ending speculation on whether or not she would be a candidate. This set off manoeuvres by many political aspirants. The President’s earlier vow to stay away from the fray and concentrate on pushing ahead with her reform policies in the remaining months of her administration, was born out of frustration over the politicking and vested interests that had been obstructing her efforts

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since she took office in January 2001. This was an unrealistic objective given the nature of Philippine politics. Although three well-known personalities have declared their intentions to run, the presidential race has no obvious front-runner. Macapagal-Arroyo will enjoy an advantage as the incumbent. One contestant is independent senator Noli de Castro who topped the senatorial ballot in the 2001 election and appears to lead the survey poll of possible candidates. Another is the former Education Secretary Raul Roco who resigned in 2002 over disagreements with Macapagal-Arroyo and who came in third in the 1998 presidential election. The third is the controversial former Chief of Police and now opposition senator Panfilo Lacson. Lacson’s participation is uncertain given that in October 2003, the Supreme Court ordered the re-opening of an alleged murder case that implicated him. This controversial case concerns the 1995 alleged murder of eleven members of a criminal gang by officers of the Presidential Anti-Crime Commission, then headed by Lacson. Apart from this, there have been allegations of Lacson’s involvement in money laundering, including the proceeds from drug-trafficking. Prior to this Supreme Court ruling, Lacson has also been making headlines with his allegations about Macapagal-Arroyo’s husband, Mike Arroyo’s corruption and money laundering. The Congress has asked Lacson to provide the evidence. The election is scheduled for May 2004 and the field is still wide open with several other names floated as possible candidates. They include Vice-President Teofisto Guingona and popular film star, Fernando Poe. Pundits claim that the more the number of presidential hopefuls, the better the chances for incumbent Macapagal-Arroyo to win. But, even if she does manage to get a fresh mandate, the outcome is likely to be a repeat of the 1992 election results when Fidel Ramos won by a narrow margin and then had to spend a tremendous amount of time to build coalitions and drum up political support. Nevertheless, a Macapagal-Arroyo victory, even with a slim margin, will still be extremely important for her since the issue of not having a popular mandate had dogged her administration and proven to be a deep wedge in the country’s politics between the pro-Arroyo and pro(ex-president) Estrada forces. Apart from the feelings of renewed uncertainty and heightened vulnerability in this preelection period, other political confrontations continue to rock the country sporadically. For three weeks from mid-October 2003, certain members of the Philippines Congress brought the country to the brink of a constitutional crisis when they initiated impeachment proceedings against the Chief Justice of the Supreme Court, Hilario Davide for alleged malversation of funds. During this crisis, Panfilo Villaruel, former Chief of the country’s Air Transport Office, and his bodyguard took over the control tower of Manila’s international airport citing their frustration with official corruption as one of the reported reasons. The police shot both men dead. Macapagal-Arroyo also has to deal with a restive military. On 26 July 2003, just a day before Macapagal-Arroyo was due to deliver her State of the Union address, around 300 soldiers took over a shopping centre and hotel in the Makati district of Metro Manila and demanded the resignation of the President, the Defence Secretary, Angelo Reyes and the Military Intelligence Chief, Victor Corpus. Apparently the “mutineers” had planned to install a 15-man military junta. While the attempted coup was quelled in less than 48 hours,

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the soldiers made damaging allegations that various insurgent groups in the country’s Muslim south obtained their weapons from corrupt members of the Armed Forces — an allegation that was later repeated by members of the secessionist group, the Moro Islamic Liberation Front (MILF). The soldiers also said that the government had staged the bombings in the southern city of Davao in order to obtain aid from the United States. The allegations, while categorically denied by concerned parties, led to first, the resignation of the Intelligence Chief Victor Corpus, and then of Defence Secretary, Angelo Reyes. Both men were later given other appointments. While Macapagal-Arroyo managed to reassert her authority, the mutineers won some public sympathy revealing the degree of popular dissatisfaction in the country. Persistent rumours of coup attempts remain. Modest success in the country’s aggressive war on terrorism has been marred by some embarrassing incidents such as the escape of one of the most wanted terrorists, Fathur Rohman al-Ghozi, from the high-security police headquarters in Manila. Conspiracy or sheer incompetence could have caused the jailbreak. Even though al-Ghozi was subsequently killed in an apparent shoot-out with the police on 12 October 2003, the incident has fuelled doubts about the country’s ability to address its deteriorating security situation. A Pulse Asia survey in August 2003 found that most Filipinos believe their quality of life has worsened compared with previous years. Hence, other than the immediate task of maintaining peace and order in the country, national economic recovery remains the top concern of the government. In a way, Macapagal-Arroyo’s U-turn on re-election offers a strand of continuity with the current economic reforms that her administration has started. It provides that crucial signal to the business community, particularly foreign investors and creditors that her administration has painstakingly wooed, that the economic and government reforms she started would continue. While the Philippine’s growth remains lower than in many neighbouring countries, it has nevertheless remained steady and expected to hover around 4 per cent. Macapagal-Arroyo highlighted the significance of continuity, claiming that since assuming office in the last two years, she has gained the experience necessary for reforms, citing her administration’s accomplishment in fighting drug and crime syndicates, poverty and highlevel graft, as well as seeking peace with the Muslim secessionist group MILF and the communist rebels from the Communist Party of the Philippines/New People’s Army (CPP/ NPA). In spite of several delays in re-starting negotiations with the MILF, there are positive indications that the stalled talks could start again in the near future. The issue of continuity in policies and economic reforms has also increased the momentum of Congressional efforts to amend the 1987 constitution and adopt a parliamentary form of government. While it is expected that this issue could realistically move only after the May 2004 election, Macapagal-Arroyo has already openly endorsed this proposal given the increasing support for constitutional amendment drummed up by her own party stalwarts among the other members of Congress. If she wins the election and moves fast to consolidate her position, it is highly possible that the Philippines will move from a presidential to parliamentary form of government. Against the barrage of criticisms of her about-turn in politics and the controversial role of the United States in the Philippines, Macapagal-Arroyo continues to have the strong

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support of Washington. In the light of her administration’s support for the war against terrorism, the United States pledged US$100 million in development aid to the Philippines and another US$55 million to boost the country’s military capabilities to fight insurgents. Moreover, after Macapagal-Arroyo’s successful state visit to the United States in May 2003, U.S. President George W. Bush has designated the Philippines as a non-NATO ally. This designation broadens the framework and provides the legal foundation for extending U.S. military and security aid to the country. President Bush’s visit to the country in October 2003

Philippines Land Area:

300,000 sq. km.

Population:

76,504,877 (2002 official statistic)

Capital:

Manila

Type of Government:

Presidential democracy

Head of State:

President Gloria Macapagal-Arroyo

Next Election:

May 2004 (national and local) •

•

•

President, Vice-President and Senators are elected on a nation-wide basis every six years. A senator’s term of office is six years but senate elections are divided into two where once every three years, half the senate seats go to the polls. Elections for members of House of Representatives/Lower house (Congress) and local officials are held every three years. Members of Congress are elected from 208 legislative districts and by sectoral representation chosen nationally. Local officials are elected directly by their local constituencies.

Currency Used:

Peso

US$ Exchange Rate on 14 November 2003:

US$1 = 55.29 peso

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provided, among other things, an added boost to bilateral relations. As a major non-NATO ally, the Philippines will enjoy significant benefits in the area of foreign aid and defence cooperation. It can stockpile U.S. military hardware, participate in defence research and development programmes as well as benefit from the U.S. Government loan guarantee programme that backs up loans issued by private banks to finance arms exports. While the Philippines no doubt benefits from the military assistance extended by Washington, the government would still have to calibrate cautiously this bilateral relationship given the significant resistance against the role of the U.S. troops in fighting insurgents and terrorist groups in the country. To address effectively the country’s decade-long security problems, the government would necessarily have to balance pressures in domestic politics with its external relations with the United States.

Singapore

E

conomic recovery will be the focus in 2004 and its outcome will determine when Prime Minister Goh Chok Tong hands over to his deputy, Lee Hsien Loong. Goh has publicly said it would be wrong of him to leave his position in the middle of a recession. The post-Goh scenario is also fraught with other issues and how they are handled will affect how the public perceives a post-Goh government. Will the new Prime Minister Lee retain his father Lee Kuan Yew as Senior Minister? The senior Lee who turned 80 this year has publicly stated, “I will retire from office when I am no longer able to contribute to the Government.” That means he is unlikely to quit the centre of power as long as his health permits. Another key personnel question is: will Ho Ching, the wife of the designated new Prime Minister, hold on to the post of executive director in Temasek Holdings, the chief investment arm of the government? Lee has said that his wife’s appointment will be for the Temasek’s Chairman and Board of Directors to decide. What position will Lee give to his predecessor Goh is also of political significance. Would Goh, like Lee Kuan Yew, be appointed as Senior Minister and enjoy considerable influence in a successor administration? With the present arrangement already giving an impression that too much power is concentrated in the hands of his family, Lee will have to heed this level of public wariness when he reconfigures his administration as the new Prime Minister. The post-Goh leadership also has to contend with other perception problems. Measured for visionary and strategic thinking, nobody among them has acquired the stature of the older leaders such as Lee Kuan Yew or Goh Keng Swee. Bureaucratic personality and managerial persona seem to be common features leading to a potential risk of group-think. Critics warn that as a group, the new administration will not be capable of anything beyond a cautious and probably uninspired approach to policy-making. Meanwhile, more so than ever before, the economy will test people’s faith in the government, and with that, Goh’s leadership for the remaining years of his term. Early in 2003, a SARS (Severe Acute Respiratory Syndrome) outbreak claimed 33 lives and worsened an economic recession, already aggravated by the post-911 terrorism threat. The tourismrelated sectors such as hotels, taxi business, travel agencies, etc., were the hardest and most directly hit by these crises. Another SARS outbreak remains possible even though the island

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Singapore Land Area:

660 sq. km.

Population:

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

Capital:

Singapore

Type of government:

Parliamentary democracy

Head of State:

President S.R. Nathan

Prime Minister:

Goh Chok Tong

Next Election:

2007

Currency Used:

Singapore Dollar

US$ Exchange Rate on 14 November 2003:

US$1= S$1.73

republic is rather more adept now at handling such a contingency. However, economic problems go deeper than just dealing with the SARS and terrorism threats. First, the government will have to have a strategic vision of Singapore’s economic future that can thrive in a globalized economy. It will also have to reform and/or privatize Singapore’s troubled over-stretched government-linked companies. The nub of the problem is that Singapore has to grow a stronger private sector quickly. To do that, the country needs more entrepreneurs, the dearth of which has been blamed on a political culture that has over the years discouraged risk-taking behaviour. The government will also have to do more for its citizens, not just for the poor but also for members of the middle-class who are feeling the crunch of the recession. The unemployment rate has hit its highest level since independence. Since late 2001, professionals, managers, executives and technicians have formed the largest group of locals retrenched — as high as 40 per cent of those laid off. In a climate marked by concern for security, public perception that “foreign talents” are taking away jobs from Singaporeans poses a difficult problem for the political leadership. The government’s response will be to press on with economic reforms and restructuring while implementing a batch of measures to improve social welfare and distribution of wealth. At the end of the day, Singaporeans are going to have to temper their high economic expectations with the realities of the challenges that lie ahead. For example, a government-appointed Economic Review Committee recommended

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in February 2003 that workers’ CPF (Central Provident Fund) be restored to 40 per cent of salary when the economy recovers, but in October, the government introduced a 3 per cent cut down from 36 per cent to make the economy more competitive. The ongoing reform and restructuring will create additional short-term pain and (hopefully) long-term gains. Selling this package to citizens requires astute political skills. Impending political transition and economic dislocations make for a time of uncertainty in the island republic. Underlying this is an overwhelming message that Singapore must change in many ways. The future will see a series of state measures to foment these changes. For example, an official Remaking Singapore Committee has looked at how to make the country socially and culturally more vibrant. The committee came forth with recommendations that would moderate the stressful education system (e.g., changing the way schools are ranked), promote more leisure (e.g., replacing the five-and-a-half-day civil service working week with a five-day system) and improve gender equality (e.g., removing the quota on women entering the local medical school). The progressive bent in the official effort to remake Singapore dovetails with Prime Minister Goh’s attempt to move governance to the more liberal end of the political spectrum since he took office 13 years ago. In July, the government did announce some social changes, which relax existing rules against bar-top dancing, 24-hour liquor licences, homosexuals in the civil service and licensing of bungee jumping. Politically there has also been some degree of liberalization, albeit not as rapid and extensive as some active citizenry groups would like to see. Critics have charged that these are cosmetic changes aimed at further entrenching the PAP’s rule. If liberalization is meant to be one of Goh’s legacies for Singapore, it has so far had mixed results. In dealing with Singapore’s strategic environment, vigilance against Islamic terrorist groups will remain high. The Singapore Parliament passed a law in mid-2003 that allowed armed air marshals on board Singapore Airlines (SIA) and Silk Air flights in a bid to boost security. In October, Singapore also sent 192 military personnel on a two-month mission to assist U.S.-led forces in rebuilding war-torn Iraq. Singapore’s contribution was minimal as compared to other U.S. allies as it is sensitive to the reactions of the Muslim-dominated neighbourhood in the region. Another key strategic issue requiring the government’s attention is a plan to defuse tension with Malaysia. The supply of Malaysian water at a mutually agreeable price remains unresolved. The Malaysian construction of a bridge to replace their half of the 80-year-old causeway will stand as a monument to the lack of agreement between both countries to build a bridge together. In September 2003 the Malaysian Government went to the Hamburgbased International Tribunal for the Law of the Sea to seek an immediate halt to Singapore’s reclamation works at Pulau Tekong and Tuas on the alleged grounds that such reclamation was encroaching on Malaysian territory and damaging its marine environment. Other points of dispute, including a proposed new bridge and the locations of Malaysia’s customs, immigration and quarantine facilities in Singapore are yet to be resolved. Malaysia had a change of Prime Minister in November 2003 and this may provide an opportunity to restart negotiations on a host of outstanding bilateral issues but it is premature to forecast any quick solutions to these long-standing issues.

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Although Singapore remains a stable place, Prime Minister Goh has a tough job between now and when he hands over to his successor. Basically many of the old tested ways of problem-solving are no longer practical or useful. As much as the government of the day has to be more innovative, Singaporeans also have to learn new ways to adapt to these socioeconomic challenges. A fair share of set-backs and trials and errors is to be expected.

T

he date 14 October 2003 marked the 30th anniversary of the student-led uprising that overthrew military dictatorship — a date widely regarded as the starting point for democratic rule in Thailand. It was an occasion for reflection. Several analysts — academics, drafters of the 1997 democratic constitution, journalists, and 14 October student leaders — warned that too much power was being concentrated in the executive. Most outspoken of the critics was former student leader Thirayuth Boonmee, a Sociology lecturer at Thammasat University. In January he warned the country was at a crossroads, with Prime Minister Dr Thaksin Shinawatra in a position to introduce reform, or bankrupt it economically and socially. In October he declared his worst fears had been realized. Moves to establish a one-party government, backed by populist schemes for the poor, were leading to a totalitarian state. Populism, and consumption-led economic policies, were also pushing the poor into more debt, while “policy corruption” benefited key business groups at the same time as the public was pacified by a crackdown on old-style graft. Other analysts, however, saw government actions as manifesting a new “social contract”, in which protection of élite interests was combined with a much needed attempt to redress the problems of the poor. Whatever the interpretation, 2003 was a year in which Thaksin’s popularity soared to new heights. A major factor behind this was the return of economic confidence. Many problems from the 1997–98 crisis remained, but growth of around 6 per cent was the highest in Southeast Asia. The stock market, propelled by speculative fever and a return of foreign interest, was Asia’s best performer, rising over 70 per cent in the twelve months to the end of October. Cautious observers wondered if another 1997-style bubble had been created. Mega projects, and other large government expenditures, were suddenly back in fashion. Among the list of expenditures contemplated by the government were: upgrading rail services, some B900 billion; a new pipeline to irrigate the whole country, B200 billion; a B100 billion project to build two artificial islands in Phuket Bay; a B40 billion plan to build a 40 kilometre over-the-water southern bypass through a section of the Gulf of Thailand; and a poverty-eradication programme costing B200 billion over six years. In many cases funds were “off budget”, obtained by borrowing from government banks, which critics claimed helped disguise massive debt built up by these initiatives. Populist programmes to eradicate poverty focused particularly on making credit available to the poor, following earlier initiatives with the village fund and a People’s Bank (for loans of

Thailand

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B15,000). The poverty eradication programme promised land to one million landless farmers, which they had no right to resell but could use as collateral for bank loans — as could others whose property holdings did not amount to freehold. And the government also promised other forms of assistance, including better education facilities (a “model” school in every district), one million cheap houses, along with cheap computers and insurance. Thaksin described these initiatives as “social capitalism”, meaning state intervention to promote capitalism. Still, the main focus of populist programmes was in the social area. Here there was a flood of initiatives, including government-run two- and three-digit lotteries (previously operated underground), a ban on illegal firearms and a proposal for a full ban within six years. In a further attempt to reduce the underground economy, government leaders mooted legalizing casinos and decriminalizing prostitution; and the government re-embraced moral reform with enthusiasm, acting particularly against the freewheeling sex industry and sale of alcohol to the young. The government also mounted major campaigns to wipe out mafia-style “dark influences” and eliminate drugs. The former included action against one of the best-known “mafia” figures, colloquially known as Kaman Poh, and senior police “on the take”. Government resolution of such issues was widely welcomed, though some questioned whether the focus was only on figures outside the ruling Thai Rak Thai, and opinion polls showed scepticism that the crackdown would be sustained. There was, however, no doubting the seriousness of the government war against drugs, aimed at eliminating illicit drugs by the King’s birthday on 5 December. Over 2000 people were killed during the first half of the year, though police claimed that apart from a handful killed in self defence all were the victims of criminals protecting their own interests. Civil rights groups questioned this but the campaign was enormously popular with the general public. Thaksin also benefited from an opposition that remained in disarray. The former governing party, the Democrats, went through a bitter contest to replace veteran leader, former Prime Minister Chuan Leekpai. A conservative candidate, Banyat Bantadtan, a respected but dour figure seemingly ill-equipped to challenge the charisma of Thaksin, eventually won. Other institutions that had acted as a restraint on the government in the past also found their influence reduced. The senate, in theory a non-partisan body, provided occasional opposition, but came increasingly under the influence of pro-government members. This group mounted a sustained campaign against the Democrat-linked Speaker Manoonkrit Rupakhachorn, eventually securing his agreement to stand aside in 2004. Others who opposed Thaksin in the past, including journalists, academics and NGOs, came under constant pressure to stop anti-government criticism. Their opposition was reduced, though never completely silenced. Thaksin seized the moment to concentrate powers more firmly in his own hands, and those of the executive. A minor cabinet reshuffle in February rewarded those close to the Prime Minister. Another reshuffle in November carried the process further, and excluded Chat Pattana Party in an apparent move to merge coalition partners in the ruling Thai Rak

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Thailand Land Area:

514,000 sq. km.

Population

60.6 million (2000 census)

Capital:

Bangkok

Type of Government:

Parliamentary democracy with constitutional monarch

Head of State:

King Bhumibol Adulyadej

Prime Minister:

Dr Thaksin Shinawatra

Next Election:

2005

Currency Used:

Baht

US$ Exchange Rate on 14 November 2003:

US$1 = 39.87 baht

Thai. Thaksin intervened in promotions for the police and military, appointing a cousin to head the army. And on two occasions he by-passed Parliament, issuing emergency decrees on telecom conversion arrangements — which provided windfall benefits to existing cell phone companies, including that owned by Thaksin’s family — and anti-terrorism laws. (Parliament can approve or reject such decrees, but not amend them.) Thaksin also implemented a scheme for creating “CEO provincial governors”. The scheme, in essence, took provincial governors away from the Interior Ministry and made them directly responsible to the Prime Minister. Within each province they will have powers equivalent to those of CEOs in the private sector, with direct control over six departments and eight state enterprises. However, government spokespersons never explained how they would be integrated with future democratically elected provincial and local administrations. Thaksin did not, however, get his way on all issues. Though independent institutions such as the Constitution Court, National Counter Corruption Committee and National Advisory Council on Economic and Social Affairs also came under government influence, they still sometimes frustrated its wishes. In August, for instance, the constitution court found Deputy Communications Minister Pichet Satirachawal guilty of a false assets declaration and banned him from politics for five years. Thaksin’s first reaction was to indicate he wanted to amend the law that had sunk Pichet. He has not, however, so far done so. Nor has he moved to amend other inconvenient constitutional provisions, as he was legally able after the constitution’s fifth anniversary in October 2002.

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Thaksin also came under domestic and more importantly international pressure in relation to Islamic terrorists. From late 2002 foreign media reports identified Thailand as a centre of terrorist activity, including as the planning venue for the deadly Bali bombing, and claimed the Al-Qaeda-linked Jemaah Islamiyah (JI) had a presence in the country. Thaksin initially went into denial, describing such reports as “crazy”. But on the eve of travel to the United States he asserted that U.S. intelligence on JI activities in Thailand was correct. Three alleged JI associates were arrested just hours before Thaksin met with President Bush on 10 June. Further arrests followed, including that of Hambali, the most-wanted JI figure in the region on 11 August. While evidence of a substantial JI presence in the country has yet to be presented, Hambali’s capture demonstrated that terrorism could not be taken lightly. However, the government’s response — in particular the broadly-formulated anti-terrorism decree — has created problems of its own, creating suspicion among human rights groups and Thailand’s four million Muslims. On balance, however, terrorism proved a plus for Thaksin. It enabled him to get the United States back on side, after it had reportedly been critical of Thailand’s inaction against terrorists and silence on the war in Iraq. The United States has now emerged as a supporter of Thaksin’s foreign policy — officially designating Thailand a major non-NATO ally in October — and as an added bonus is unlikely to criticise domestic policies in such areas as human rights and governance. Thaksin sought a prominent foreign policy role, particularly in the area of economic issues, pushing on with his Asian Co-operation Dialogue and a range of economic initiatives, and chairing the APEC Summit in October. At home, however, several critics questioned the value of bilateral free trade agreements (FTAs) and denounced his supportive attitude towards Myanmar. Overall, however, with economic growth and strong public support, Thaksin has become increasingly confident. He is looking beyond remaining in power for a full term — never accomplished hitherto — to being returned at the next election with an overwhelming mandate for his Thai Rak Thai to rule in its own right. He plans to stay on for another term, rid Thailand of poverty and other major problems, and pave the way for the TRT to remain in power for 20 years. The future is not likely to be as straightforward as this, particularly if critics’ fears about economic sustainability prove warranted. But Thaksin’s re-election, at least, looks certain.

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V

ietnam expects generally fine political weather with the occasional light shower. The VCP (Vietnamese Communist Party) controls the political system. Economic transformations taking place are laying the foundation for greater stability. People are getting richer with much less poverty than there was a decade ago. Over and above the good economic performance, the VCP’s legitimacy is also complemented by a carefully-paced political reforms programme. Vietnamese are enjoying more personal freedoms, although questioning the right of the VCP to rule and assembling to challenge authority are still forbidden. Vietnam’s leadership will continue to soften its authoritarian ways as the country aspires to be an open economy and society. In foreign relations, a significant expansion of trade with the United States is giving a strong boost to an economy that is increasingly reliant on trade for its growth. Relations with ASEAN neighbours, China, Russia and Europe are progressing smoothly. Human rights continue to be an irritant when dealing with the United States and Europe, but they are never serious enough to have an impact on economic and political ties. At home, human right violations are even less of an issue. Speculation about leadership succession provided much of the political fizz in 2003. The trends are, however, not very clear because, with an opaque selection process, red herrings and rumours about various alliances among political leaders are numerous. Going by past experience, the outcome is likely to be decided only at the eleventh hour. The intense politicking notwithstanding, leadership succession must follow certain scripts, up to a point. However, when people in the running make big mistakes, then all bets are off. In 2003, the Nam Cam scandal is one such instance. The Nam Cam scandal saw mafia elements buy influence all the way to the top of the party, tainting three senior politicians in the subsequent fallout. Two of them were Central Committee members and were publicly investigated. The third is a Politburo member and head of economic policy of the Party, Truong Tan Sang. While Sang escaped the glare of publicity, the scandal essentially rules him out of running for the Prime Minister’s position. For a long time, Sang was rumoured to be the favoured candidate for that position currently held by Phan Van Khai. Another likely successor to Prime Minister Khai is Deputy Prime Minister Nguyen Tan Dung. However, support for Dung and his mixed record of successes remains equivocal. Nguyen Minh Triet, currently Secretary of the powerful Ho Chi Minh City Party branch, has also been mentioned as a possibility for the job. Triet has a few things going for him in this race. His previous position as Party Secretary of Binh Duong Province (where the VietnamSingapore Industrial Park is located) is rated a success story. The incumbent Prime Minister is a Southerner, and Vietnamese political traditions favour another Southerner to take over. Triet is a Southerner. Still, between Triet and Dung (also a Southerner), the latter who is already Deputy Prime Minister has more experience operating at the national level, especially in economic and political affairs, and that commands an advantage. Another Deputy Prime Minister, Vu Khoan, has extensive experience in government, especially in foreign relations. Khoan, however, is too far removed from the apex of politics since he is not even in the Politburo while Triet and Dung are. Khoan is also quite senior in age, at above 60. Furthermore, being a Northerner is a disadvantage in this instance. In a nutshell, the succession ticket to the post of Prime Minister is Dung’s to lose and, if so, it will be to Triet.

Vietnam

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Talk of a change of Prime Minister presupposes the incumbent Khai is about to retire. But the man himself does not seem to be winding down his career. By many indicators, Khai is in a strong position. The economy is humming, economic reforms are still moving forward, and there are no major complaints against him, either about his ability or his personal propriety. But the strongest reason to let Khai keep his job for a while may be the lack of worthy successors since the likely ones are either compromised by scandal or not ready to take over. So it is not impossible that Khai may stay on till the end of the current tenure of the Central Committee, which is in 2006, and retire with President Tran Duc Luong and Party General Secretary Nong Duc Manh. There has been a not too distant precedence in the 1990s, which saw leaders in these three top positions retire at about the same time to make way for new blood. There are, however, some ongoing investigations into a few commercial fraudsters who have business links with family members of Khai. If he can contain or delay likely damages or even neutralize this political threat, his staying on as Prime Minister would be assured, unless he wishes to go on his own accord. Speaking of joint retirement at the top begs the question: is Secretary Nong Duc Manh, who is only half way into his first term, ready to make way for others? In the last three months there has been speculation that Manh wants only to serve out this one term although Party statutes allow two. The rumour mill cites as evidence his building of a country home recently. Also the General Secretary’s position may not be his cup of tea. He was reticent when accepting the job offered to him in April 2001. This most senior position in the Party no longer commands the most power. Changing political dynamics means that leadership is exercised collectively more so than ever, and there are many powerful lobbies to contend with when crafting or implementing a policy. A powerful leader being first among equals in the Politburo is no longer the modus operandi. The last person to try asserting such dominance was Manh’s predecessor Le Kha Phieu who lost his job because of that. For a leader who wants to make a difference quickly, the job can be more frustrating than fulfilling. Nevertheless, Manh should stay on till the end of his term. If the various lobbies and factions within the Central Committee cannot agree on a replacement by that time, Manh may well be persuaded to stay another term. Despite all the talk of candidates vying for top positions, the leadership succession process is well-established. An aspiring national leader has to work his/her way up through the various levels of Party organization and get elected into the Party’s Central Committee and then the Politburo. However, powerful sponsors may make or break a political career. For those who want to reform the system, there should be an understanding not to rock the boat too much and not to be seen to be placing the supremacy of the VCP at risk. Still, there is no shortage of younger leaders who want to buy into this arrangement and remake the country. A Central Committee meeting in October was supposed to discuss personnel issues and perhaps settle some of the aforementioned leadership questions. From many indications, the top leaders are likely to retain their positions for the time being. Other than these leadership issues in the air, less sensational changes related to governance have been taking place. Early in 2003 the VCP introduced regulations for its key organs — Politburo, Central Committee, Secretariat of the Central Committee, and Party Inspectorate — in an attempt to institutionalize what is morally acceptable behaviour for top Party members. This is a positive development because the Central Committee, rather than

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THE ASEAN-10

Vietnam Land area:

330,000 sq. km.

Population:

80 million (2002 estimate)

Capital:

Hanoi

Type of Government:

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

VCP General Secretary:

Nong Duc Manh

Head of State (President):

Tran Duc Luong

Prime Minister:

Phan Van Khai

Chairman, National Assembly: Nguyen Van An Next Election:

By mid-2004 (Local authorities) By April 2006 (Communist Party Congress) By mid-2007 (National Assembly)

Currency used:

Dong

US$ Exchange Rate on 14 November 2003:

US$1 = 15,670 dong

the Politburo made the rules. It signals the recognition that authority must come from the larger Central Committee and not just a handful of old men in the Politburo. Another reform in governance is the move towards greater meritocracy in the selection of mid-ranking and top officials within the bureaucracy. This involves the rotation of people holding senior office in different parts of the government to broaden their experience. Beginning in late 2001 in a low-key fashion, the exercise has seen more than twenty officials rotated. The expected result is more rounded and tested senior public servants. At the same time, in the training of such senior bureaucrats, more emphasis is placed on hands-on knowledge and less on ideology. In early 2003, a top Party official in-charge of personnel issues said that in his view the time has come to appoint capable officials less than 40 years old to run provinces. Vietnamese, who have long suffered the country’s incompetent and corrupt bureaucracy, support these changes but those officials who are more likely to benefit from the status quo then otherwise would resist. Nevertheless, such changes are part of the general direction in reforms set by the VCP. In 2004, we are likely to see more of such reforms in the machinery of governance, to make it younger, more competent, more peopleoriented and business-friendly.

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ECONOMIC OUTLOOK REGIONAL ECONOMIC TRENDS By Denis Hew

S

outheast Asia suffered a setback on its road to economic recovery in 2003. In the first half of 2003, regional economies were particularly affected by the Iraq War and the Severe Acute Respiratory Syndrome (SARS) outbreak. However, the relatively quick passing of these two major events as well as economic recoveries in the United States and Japan augur well for the region’s economic outlook in 2004 and 2005. According to the Asian Development Bank (ADB), the total economic costs of SARS in East and Southeast Asia are estimated at US$60 billion. The services sector, especially tourism and retail industries, were hardest hit. Nevertheless, the impact of SARS on the region has turned out to be less damaging than earlier anticipated. The epidemic, which broke out in March 2003, was generally contained by mid-2003. In fact, tourist arrivals and retail sales in SARS-affected countries such as Singapore and Hong Kong improved significantly by the third quarter of 2003. Although there are some concerns that SARS may re-occur in the near future, it is expected that the region’s public health services would be better prepared to deal with the disease. The economic outlook appears optimistic, with the region poised for a moderate comeback in 2004. The ADB forecasts that Southeast Asia will grow by 3.9 per cent in 2003 and by 4.9 per cent in 2004. In a recent economic report on East Asia, the World Bank highlighted several reasons for being sanguine, which include: • • • •

The global economy is showing signs of recovery, driven by stronger economic growth from the United States and Japan. The world high technology industry is beginning to improve after a three-year slump. The emergence of China as a global industrial powerhouse is boosting trade and revitalizing intra-regional production networks in East Asia. Domestic economic and financial conditions in the region have significantly improved, e.g., private consumption and investment have strengthened, corporate and banking sectors are healthier.

The World Bank also highlighted two possible risks to this nascent global recovery. One is the failure at the recent WTO trade talks in Cancun which could lead to longer-term damage to the international trading system (see box entitled, “WTO at the Crossroads and the Road Ahead for ASEAN”). The other is the slow progress made in institutional and governance reforms in East Asia could adversely affect its global competitiveness. Another major concern is the rising threat of terrorism in Southeast Asia which could divert valuable foreign direct investments (FDIs) to perceived safer regions. At the 2003 ASEAN Summit in Bali, ASEAN leaders have agreed to establish an ASEAN Economic Community (AEC) by 2020. The idea of an AEC was first proposed by Singapore Prime Minister Goh Chok Tong at the 2002 ASEAN Summit in Phnom Penh. The AEC is one

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of three pillars (the other two being the ASEAN Security Community and the ASEAN Sociocultural Community) that make up the ASEAN Community as declared by ASEAN leaders in the Bali Concord II. In line with the ASEAN Vision 2020, it is envisaged that the AEC will be a single market and production base with free flow of goods, services, investments, capital and skilled labour. Out of these three pillars, it is perhaps the AEC that has the greatest chance of being fully realized by 2020. This is because ASEAN has already put in place the building blocks towards achieving an integrated ASEAN market. This would include economic integration initiatives such as the ASEAN Free Trade Agreement (AFTA), ASEAN Framework Agreement on Services (AFAS) and the ASEAN Investment Area (AIA). Looked at holistically, the formation of an AEC could be seen as a logical step up the economic integration ladder. The High Level Task Force (HLTF) on Economic Integration has unveiled numerous initiatives with clear timelines (many within the next two years) to expedite the economic integration process to realize the AEC. These initiatives — which include the fast-track integration of priority sectors and creating a more effective dispute settlement mechanism — are clearly very ambitious. Besides the “ASEAN-X” formula, ASEAN could also use the “2+X” approach where two member countries that are ready to integrate certain sectors can go ahead first. In fact, the latter approach would particularly benefit Thailand and Singapore as both countries are keen to integrate their economies before 2020. All these initiatives do seem to indicate that ASEAN is committed to getting the AEC project off the ground as soon as possible. Also, many of these initiatives were formulated with the business community in mind. For example, faster customs clearance and the harmonization of product standards and technical regulations are clearly aimed at reducing the transaction cost of doing business in the region to make it attractive to multinational corporations as well as domestic enterprises that want to become regional players. Why form such an economic community? In this increasingly competitive environment, there are deep concerns that Southeast Asia will be overtaken by the emerging market economies of China and India. In particular, there is a growing perception that foreign direct investment (FDI) inflows are being diverted away from Southeast Asia towards China. China is now the largest recipient of FDI in the developing world — the country received US$53 billion in FDI inflows in 2002 compared to Southeast Asia’s US$14 billion (UNCTAD 2003). The AEC project is clearly a positive move with potential long-term economic benefits for Southeast Asia. It could provide the means for Southeast Asian economies to revitalize and remain competitive in the face of growing economic challenges. Surely, an integrated ASEAN market with a sizeable market of over 500 million people would retain the region’s attractiveness as an FDI destination. In February 2003, the Institute of Southeast Asian Studies (ISEAS) prepared a concept paper on the AEC. Many of the recommendations in the ISEAS paper were taken into account by the HLTF which came out with the plan of action for the AEC. However, the ISEAS paper argued that the end-goal of an AEC by 2020 would not be a customs union à la the European Economic Community of the 1950s. Basically, a customs union is a group of countries where trade barriers among member countries are removed and a common external tariff policy is established with non-member countries. It is one integration level

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above an FTA where tariffs are harmonized among member countries, but they are allowed to have different tariffs with non-members. Given the different degrees of openness and stages of economic development among ASEAN countries, forming a customs union would be extremely difficult to achieve by the given deadline. Instead, it would be more realistic to envisage the AEC as an “FTA-plus” arrangement that covers a zero-tariff ASEAN free trade area and some elements of a common market (viz. free movement of capital and skilled labour). The ISEAS paper envisage the AEC to have the following characteristics: • • • • • • •

Free movement of goods, services, investments and capital. This would include achieving a zero-tariff free trade area and the elimination of all non-tariff barriers. An attractive regional production platform that would be a magnet for FDI. Free movement of skilled labour and creative talent. Free movement of tourists from all ASEAN countries. Harmonization of customs procedures and minimization of customs requirements. Harmonization of standards that are consistent with international standards. A well-developed institutional and legal infrastructure to facilitate the economic integration of ASEAN.

Although, a “two-speed” ASEAN may now seem inevitable particularly with the “ASEAN+2” approach, it is important to ensure that the less developed ASEAN member countries namely Cambodia, Laos, Myanmar and Vietnam (CLMV) are not left too far behind. Otherwise, this could have serious implications on ASEAN’s cohesiveness. The ASEAN-China FTA was given a kick-start at the ASEAN–China Summit in October 2003 when ASEAN and Chinese Economic Ministers agreed to implement a three-year “early harvest” programme starting from 1 January 2004. This would allow early tariff reductions on selected agricultural and manufactured goods before the actual FTA is implemented in 2010 for the ASEAN-6 (i.e., Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) and 2015 for the CLMV countries. ASEAN and India also signed a Framework Agreement for a Comprehensive Economic Co-operation (CEC) at the ASEAN–India Summit in October 2003 that would pave the way for an FTA by 2016 (See box entitled, “ASEAN and India: New Phase of an Emerging Economic Relationship”.) ASEAN seems to be making the right strategic moves in pursuing deeper regional economic integration as well as forging closer economic linkages with the emerging economies of China and India. Furthermore, the AEC could eventually be integrated with the economies of China, Japan and South Korea to form a greater East Asian Economic Community in the longer term. However, for the time being, strong political will would be absolutely vital to realize the AEC. The big question would therefore be ASEAN’s readiness to take the crucial decisions in the long march ahead.

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References Asian Development Outlook 2003 Update. Asian Development Bank, 2003. “Declaration of ASEAN Concord II (Bali Concord II)”, 7 October 2003. . East Asia Update, East Asia and Pacific Region. The World Bank, October 2003. Institute of Southeast Asian Studies (ISEAS). “ISEAS Concept Paper on the ASEAN Economic Community”. Mimeographed. Singapore: ISEAS, 2003. Recommendations of the High Level Task Force on ASEAN Economic Integration, 7 October 2003. . UNCTAD. World Investment Report 2003. “FDI Policies for Development: National and International Perspectives”, United Nations Conference on Trade and Development (UNCTAD), 2003.

Real GDP Growth in the ASEAN-5 Countries, 1997–2004F

15.0 10.0

% change

5.0 0.0 1997

1998

1999

2000

2001

2002

2003E

2004F

-5.0 -10.0 -15.0 Indonesia

Malaysia

Singapore

Thailand

Philippines

SOURCE: Asian Development Bank; Economist Intelligence Unit (EIU); and World Bank.

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Real GDP Growth in Cambodia, Laos, Myanmar and Vietnam, 1997–2004F 12.0 10.0

% change

8.0 6.0 4.0 2.0 0.0 1997

1998

1999

Cambodia

2000

2001

Laos

2002E

2003E

Myanmar

2004F Vietnam

SOURCE: CEIC Data; Economist Intelligence Unit (EIU); author’s estimates.

Relative Performance of ASEAN-5 Currencies to the U.S. Dollar, 1997–2003 120.0

100 = January 1997

100.0 80.0 60.0 40.0 20.0

Rupiah/US$

Ringgit/US$

S$/US$

Baht/US$

Sep-03

May-03

Jan-03

Sep-02

May-02

Jan-02

Sep-01

May-01

Jan-01

Sep-00

May-00

Jan-00

Sep-99

May-99

Jan-99

Sep-98

May-98

Jan-98

Sep-97

Jan-97

May-97

0.0

Peso/US$

SOURCE: CEIC Data.

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Relative Performance of ASEAN-5 Main Stock Market Indices, 1997–2003

140.0

100 = January 1997

120.0 100.0 80.0 60.0 40.0 20.0

Jakarta Composite Manila PSE Composite Bangkok SET

3 l-0 Ju

2 Ja n03

Ju l-0

1 Ja n02

l-0 Ju

Ju l-9 9 Ja n00 Ju l-0 0 Ja n01

l-9 8 Ja n99

Ju

7 Ja n98

Ju l-9

Ja n97

0.0

KLSE Composite S'pore ST 55

SOURCE: CEIC Data.

Southeast Asia’s FDI Inflows Compared, 1992–2002

120

9 8

100

7

80

Southeast Asia's FDI Inflows % of China's (LHS)

6 5

60

4

40

3 2

20

1

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

0

1992

0

Southeast Asia's FDI Inflows % of Developing Countries (LHS) Southeast Asia's FDI Inflows % of World Total (RHS)

SOURCE: United Nations Conference on Trade and Development (UNCTAD).

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WTO AT THE CROSSROADS AND THE ROAD AHEAD FOR ASEAN By Maghaisvarei Sellakumaran

I

n November 2001, the Doha Round was launched with much fanfare, and it was hailed as a “development round”, promising real progress for the poorer nations. The Doha agenda was an ambitious one, aiming to cut barriers in highly protected economic sectors such as agriculture and services, and to write rules on new issues such as competition policy and foreign investment. The deadline for concluding the round was 1 January 2005. Two years have passed since the Ministerial Meeting in Qatar, and not much progress has been achieved by the WTO members. The fragility of the current multilateral trading system was revealed with the failure of the WTO talks at Cancun recently. The failure did not come as a complete shock because several of the issues which were supposed to have been dealt with at an early stage — such as agricultural subsidies and industrial tariffs — missed their deadlines and they had snowballed into Cancun. There was a glimmer of hope that the stalled talks could be revived when a landmark agreement was reached in August 2003 allowing the poor countries to import cheaper, generic drugs to fight deadly diseases such as Aids and malaria. Unfortunately, that hope was shortlived, as the talks crumbled at Cancun when the rich and the poor countries could not agree on 2 key areas — agriculture and the “Singapore Issues”.1 While the Cancun meetings were viewed as an interim stocktaking for negotiations, its failure has raised questions about the effectiveness of WTO and the multilateral trading system.

Some analysts speculate that global trade reforms may be entering a period of stagnation, particularly as the European Union (EU) prepares to accommodate new members from Eastern Europe, and the United States prepares for presidential elections in 2004. Experts also warn that the failure at Cancun could lead to a proliferation of free trade agreements (FTAs). The United States is expected to move ahead on FTAs with individual nations or regions. It is currently working on a Free Trade Area of the Americas (FTAA), and a number of bilateral deals. The EU is pursuing its own regional deals, and so is Asia. Does the Cancun debacle mean that the WTO is no longer relevant as the momentum shifts towards FTAs? How should the ASEAN countries move forward with the trade liberalization process? Future of WTO At this stage, the WTO has an even greater role to play, given the vulnerability of the global trading system. First of all, the move towards bilateralism might lead to the marginalization of the poorer and weaker countries. In bilateral trade deals, power politics will rule, and the weaker countries will not have much bargaining power to negotiate and make fair deals. They will be forced to make heavy concessions in order to secure the deals with the richer countries. In addition, some of the thorny issues such as agriculture might not be addressed in the agreements. For instance, Brazil which has one of the biggest and most productive agricultural sectors in the world has tried to include

1

At the 1996 WTO Ministerial Conference in Singapore, four issues were examined, i.e., competition, investment, trade facilitation and transparency in government procurement. These issues became collectively known as the “Singapore Issues”.

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the issue of agricultural subsidies in the negotiations on the FTAA, but this has been rejected by the United States. Therefore, the WTO, which operates on a onecountry one-vote system, should seek to strengthen the rule-based global trading system, so that the poorer and weaker nations have a more level playing field in the multilateral setting. The World Bank reports that a successful Doha Round could boost global income by US$290 billion to US$520 billion a year, and lift an additional 144 million people out of poverty by 2015, and most of these benefits would accrue to the poor nations. Secondly, the rise of FTAs raises the popular debate about whether they are building blocks or stumbling blocks to multilateralism. This is still a moot issue. However, economist C. Shiells2 concludes that whether a regional trade agreement facilitates or impedes global free trade “depends upon its structure and design — including whether procedures for joining the arrangement are liberal, whether it satisfies WTO rules, and whether it is accompanied by some degree of liberalization”. Going by this interpretation, if the agreements are committed to open regionalism, then it is possible to regard them as complementary to multilateralism. This is where WTO needs to play an important role. While the WTO has made provisions for the formation of regional agreements under Article XXIV of GATT, it must tighten its policies and remain vigilant to ensure that the FTAs are not inward-looking and do not lead to a fragmentation of the global economy. To be effective, however, the WTO needs to undertake several reforms. For instance, it must transform its negotiating procedures in order to better

2

reflect the positions of all the WTO members — no more Green Rooms and Mini-Ministerials excluding the developing nations. The WTO also needs to work towards making the agreements clear and concise with specific deadlines — no more obscure agreements that are subject to multiple interpretations and disputes. Road Ahead for ASEAN With Cambodia having successfully gained entry into the WTO in September 2003, it should benefit from the new access to the global market. A successful Doha Round, particularly a reduction in trade barriers in agriculture would be important for the poorer ASEAN countries given that agriculture is the main source of income for over 90% of poor households in Cambodia, over 75% of Indonesia’s poor households, and around 70% of poor households in Thailand and the Philippines. The ASEAN countries should remain committed to multilateralism which will lead to greater net benefits. However, with the danger that global reforms may be stagnating, it has become necessary for ASEAN to pursue a multi-pronged approach to trade liberalization. ASEAN should continue to accelerate its pace of liberalization in trade through its various arrangements — the ASEAN Free Trade Area (AFTA), ASEAN Investment Area (AIA) and ASEAN Framework Agreement on Services (AFAS). With a combined market size of over 500 million, a larger regional market would contribute to economies of scale and attract foreign investment into the region. Stronger regional co-operation would also strengthen ASEAN’s negotiating power in other fora, especially since it is

C. Shiells, “Regional trade blocs: Trade Creating or Diverting?”, Finance and Development 32, no. 1 (1995): 30–32.

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WTO AT THE CROSSROADS AND THE ROAD AHEAD FOR ASEAN (continued)

currently at the centre of a whole series of proposed preferential trade arrangements with countries such as China, Japan, India and South Korea. Such agreements could yield substantial benefits for ASEAN. For instance, the ASEAN–China FTA proposes to remove barriers to trade and investment within the next ten years. Through the “early harvest” scheme, the ASEAN nations have a “first mover” advantage, as it allows the countries earlier access to the Chinese market than other WTO members. The ASEAN countries should however not simply focus on traditional market-access issues, but also on new issues such as trade co-operation and facilitation measures. Such deals would be considered as “WTOplus” agreements, moving ahead of the current developments in the WTO. This applies to the bilateral deals as well. Presently, some of the ASEAN countries such as Thailand and Singapore are actively working on bilateral agreements with countries outside the region. These deals should focus on new areas that would yield greater benefits. For instance, in the “new age” agreement between Singapore and Japan, the two countries went beyond tariff reductions, and focused on new areas such as e-commerce and customs automatization. The non-discriminatory nature of the customs automatization measure will benefit all the trading partners as it saves time and reduces processing costs. In the process of working on their FTAs, the ASEAN countries must ensure that the agreements do not become stumbling blocks to multilateralism. A large number of preferential trading arrangements can give rise to a host of technical problems including mismatches in the phasing of tariff reductions under

overlapping arrangements and implementation of different rules of origin under separate FTAs. It is crucial that the agreements are carefully designed, so that they do not increase the costs of doing business in the region. In order to successfully move ahead with these FTAs, the ASEAN nations must show strong political will and commitment to strengthen their regional cooperation, and hasten the trade liberalization process. This is even more important as the leaders have agreed in the recent ASEAN Summit to form an ASEAN Economic Community (AEC) by 2020. The AEC will create a single market and production base with free flow of goods, services, investments, capital and skilled labour. Conclusion The failure of the talks at Cancun illustrates the vulnerability of the current global trading system. It is, nevertheless, vital to ensure that with the proliferation of FTAs, the WTO does not fade into irrelevance. It is important to make the Doha Round successful, since a multilateral trade liberalization framework is vastly superior and greater economic gains can be achieved. Much however depends on the level of compromise that both the rich and the poor countries are willing to make. One thing that is quite certain is that the deadline of 1 January 2005 for the completion of the Doha Round will be missed. Thus, it seems likely that trade liberalization at the multilateral level will progress slowly. For the ASEAN countries, while they seek to establish FTAs at the regional and bilateral levels, they must ensure that these FTAs act as building blocks that promote multilateralism.

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ASEAN AND INDIA: NEW PHASE OF AN EMERGING ECONOMIC RELATIONSHIP By Rahul Sen

A

SEAN’s engagement with India has seen some important milestones for deepening economic and political relations ever since the end of the Cold War and India’s determined pursual of a Look East Policy since 1991.1 It began with its interaction as a sectoral dialogue partner of ASEAN in 1992 on areas such as trade, investment, tourism and science and technology. Mutual interest for a wider engagement led India to be invited as a full dialogue partner of ASEAN during the Fifth ASEAN Summit in Bangkok in December 1995. The importance of India for Asia’s regional security prompted ASEAN also to invite India to be a member of the ASEAN Regional Forum (ARF) in July 1996. However, the most important milestone was achieved with the hosting of the first ASEAN– India summit in Phnom Penh, Cambodia in November 2002, which came as a result of strong signals of economic co-operation from India provided by a series of bilateral visits by Indian leaders to existing as well as smaller and newer members of ASEAN. These visits highlighted the need for both parties to bilaterally engage in summit level interactions for a deeper and greater understanding of the opportunities and challenges faced by them, and find ways for effective co-operation to create synergies for mutual benefits. India–ASEAN relations thus progressed from sectoral dialogue partnership to annual summit level meeting in a relatively short period. There is now a greater awareness of the complementary nature of their economies, although more progress is needed in broadening and deepening this awareness. India’s economic relations with individual ASEAN members are now much more broad-based than a

decade ago. India has already signed a framework agreement for creation of a free trade agreement (FTA) with Thailand that includes an early harvest programme. It is also engaged in negotiations to form a Comprehensive Economic Co-operation Agreement (CECA) with Singapore. In addition, sub-regional cooperation between India and some of the ASEAN members such as Vietnam, Thailand, Myanmar and Laos has also accelerated. The efforts and commitment by India to intensify its economic relations with ASEAN are evident with a Framework Agreement on Comprehensive Economic Co-operation between ASEAN and India being signed by the Indian Prime Minister during the Second ASEAN–India Summit in Bali in October 2003. This follows up on the recommendations of the AFTA– India linkages Task Force which had recommended the setting up of a Regional Trade and Investment Area between ASEAN and India, with much scope for comprehensive economic co-operation, beyond tariff reduction. Co-operation between ASEAN and India is expected to encompass a strategic and political partnership, thus going well beyond a traditional FTA agreement. This article analyses the new emerging economic relationship between ASEAN and India in the context of the recently concluded Framework Agreement on Comprehensive Economic Co-operation between ASEAN and India signed during the Second ASEAN– India Summit in Bali in October 2003. The agreement is to be fully operationalized by early next decade. There are several factors that have contributed to the positive dynamics of increasing economic and

1

This policy was formulated by India’s Ministry of External Affairs as a major policy initiative to increase its political and economic engagement with the existing six members of ASEAN, which has since been adjusted to include the four new members of ASEAN.

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political relations between India and the ASEAN member countries during the previous decade. These include: •

•

•

the end of the Cold War and disintegration of the Soviet Union which led to a change in the political and security environment in Asia during the beginning of the nineties, rapid pace of globalization and associated technological changes that was accompanied by economic reforms in India in 1991, that has since increased India’s willingness and capacity to engage with ASEAN, and the financial and economic crisis in ASEAN countries in 1997–98, thus reducing the medium-term growth prospects of member economies and requiring them to diversify their economic partners beyond the region and East Asia, stronger institutional foundations that have increased the level and interest of participation of both India and ASEAN in various multilateral and sub-regional fora, viz. the ARF, the G-15 group of developing countries,2 IOR-ARC (Indian Ocean Rim Association for Regional Co-operation), Mekong-Ganga Co-operation (MGC) and the BIMSTEC (Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Co-operation), besides interaction of individual ASEAN member countries with India that have been strengthened through mutual visits by heads of state (Asher, Sen, and Srivastava 2003).

Since the crisis in East Asia in 1997–98, India has on the average been growing at a faster rate than ASEAN. In particular during the 1996–2000 period, while the Indian economy grew at annual rate of nearly 6 per

cent, ASEAN-5 economies grew at an average annual rate of 0.7 per cent while ASEAN as a group grew at 1.4 per cent. This, along with sharp currency depreciation in currencies of ASEAN economies in 1997, has resulted in considerable narrowing of the GDP gap (valued at market exchange rates) between India and ASEAN. The bilateral trade and investment linkages between ASEAN and India have now grown significantly. Thus, two-way trade between them was worth US$12.1 billion in 2002 (accounting for about 2 per cent of ASEAN’s total trade) compared to about US$3.5 billion when India embarked on its Look East Policy in 1991. India is acutely aware that the existing volume of trade is relatively low, and needs to be increased. It is therefore pursuing a policy of speedy alignment of its tariff levels with the ASEAN countries. Its FTAs with individual ASEAN countries, before concluding FTAs with the grouping, are likely to help in this process. Currently India’s average tariff rate is about 29 per cent compared to an average of 10–12 per cent for ASEAN, but India has already committed itself to progressively reduce its tariff levels further to be comparable with that of ASEAN within a time span of about 3–5 years (Kumar 2002). In the area of bilateral trade, pharmaceuticals, metal scrap, leather goods, textile machinery components and gems and jewellery hold potential for future expansion. The above figures do not include trade in service transactions whose importance has been growing for the economies of both India and ASEAN (Asher, Sen, and Srivastava 2003; Sarma and Mehta 2002). Indian companies have also been increasingly targeting ASEAN countries for trade and investment,

2

The G-15 is a group of 17 developing countries comprised of Algeria, Argentina, Brazil, Chile, Egypt, India, Indonesia, Jamaica, Kenya, Nigeria, Malaysia, Mexico, Peru, Senegal, Sri Lanka, Venezuela and Zimbabwe. Indonesia and Malaysia are the two key ASEAN countries with membership in this grouping.

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although currently Indian companies contribute only about 0.2 per cent of FDI in the region. However, this reflects past averages. At the margin, India’s share in ASEAN’s FDI is increasing. In sharp contrast to the past, India’s FDI outflows are now driven by pull factors of host countries, instead of push factors from India. This is indicated by the fact that over the past three years or so, over 150 firms from India located in Singapore, contributing to its employment. These arise from substantial complementarities that exist between India and ASEAN in factor endowments, economic structure, skills and capabilities. It is noted that since most FDI inflows into India are directed towards the services sector, it is not a direct competitor of ASEAN with respect to seeking of FDI in labour-intensive manufacturing industries. The experience and competencies of Malaysia and Singapore in infrastructure development complement India’s needs for physical infrastructure, particularly in the area of roads, industrial parks, and housing estates. Malaysia’s recent abrupt cancellation of the agreement to award the railroad contract to India (and China jointly) could put a dampener on this co-operation. India is in a position to co-operate with ASEAN in substantially lowering costs of essential drugs, including HIV-AIDS, as well as co-operating in food and energy security. Indian tourists are increasingly becoming important markets for tourism in several ASEAN countries, and their professional and technical manpower are making positive contributions to sustaining competitiveness of ASEAN countries. Professionals from ASEAN countries, viz. Singapore and Malaysia, are playing a similar role in the Indian economy. Thus, apart from merchandise trade, there is much scope for expansion of investment co-operation in science and technology, tourism and manpower. Thus, ASEAN and India could significantly co-operate in the area of trade, investment and human resource development.

It is in this context that the recently signed framework agreement on Comprehensive Economic Co-operation between India and ASEAN assumes importance. The agreement provides for an early harvest programme that specifies the areas for collaboration and a common list of items for preferential tariff concessions at the initial stage. According to this Framework Agreement, the deadline for negotiations for FTA in goods would be between January 2004 and 30 June 2005 and for services and investments between 2005 and 2007. Both countries have agreed to start tariff reductions under the FTA by 1 January 2006. It is envisaged that formal tariffs will be essentially eliminated for all ASEAN countries except for the Philippines by 2011, with the CLMV countries (i.e., Cambodia, Laos, Myanmar and Vietnam) reciprocally eliminating tariffs for India with effect from 2016. India has also agreed to extend unilateral tariff concessions to the CLMV countries on 111 items to extend special and differential treatment to the newer ASEAN members, based on their levels of development. India and the Philippines have agreed to eliminate tariffs for each other on a reciprocal basis by 2016. A trade negotiating committee (TNC) has been set up, that will begin the framing of rules of origin, the modalities for tariff reduction and the FTA in January 2004. Further, the agreement also aims to broaden and intensify joint efforts at economic co-operation between ASEAN and India in the Mekong Basin, by promoting the Mekong-Ganga Co-operation (MGC) programme that spans many of the newer ASEAN member countries. The enhancing and building up of transport links that span India, Myanmar, Thailand, Cambodia and Vietnam is one of the major goals of this programme. One of the major visions of this programme is to establish a Delhi–Hanoi road and railway link in the near future.

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ASEAN AND INDIA: NEW PHASE OF AN EMERGING ECONOMIC RELATIONSHIP (continued)

This agreement thus marks a new phase of emerging and strengthening of economic relations between ASEAN and India. Once established, it is expected to link India more closely with the Southeast Asian economies. The aim is to increase bilateral trade between ASEAN and India to US$15 billion by 2005, and to US$30 billion by 2007. Future Prospects The range of existing complementarities between ASEAN and India and the extent of its currently unutilized potential, as observed above, indicates that the future prospects for economic co-operation between ASEAN and India do appear quite bright, with a distinct focus on both qualitative as well as quantitative expansion in their bilateral economic relations. The groundwork for such an expansion is now complete with the establishment of the Framework Agreement on Comprehensive Economic Co-operation. ASEAN is aware of the dangers involved in relying on China alone as an engine of growth. Additional engines of growth, involving the United States, Japan, South Korea and India could indeed lessen risks for ASEAN. As India’s vision of becoming a developed nation by 2020 continues to be translated into domestic reform initiatives and leads to a greater integration with the world economy, the opportunities for ASEAN and other economic partners for mutually beneficial economic co-operation is likely to expand. Over the past few years, many collaborative initiatives have been launched between ASEAN and India, and strong institutional mechanisms for economic co-operation have been put in place. The two sides are also drawing up a road map called “Vision 2020” which is expected to be adopted at the Third ASEAN–India Summit in Laos in 2004 (Gaur 2003). They have also agreed to undertake common efforts to help fight international terrorism and transnational crime, particularly the

trafficking of drugs, weapons and humans. The road ahead for ASEAN and India in expanding their economic relations thus goes just beyond economic needs. However, a vital element in fructifying and sustaining the dynamics of this emerging economic relationship would be to develop trust and confidence in each other and operationalize this agreement. It is thus essential that the media and élites on both sides make every effort to address the current information and perception gaps and demonstrate recognition of mutual benefits by balanced and analytically sound discussion of the relevant issues involved not only in the area of economic relations, but also in other areas. It is only in this way that the potential for transforming the above complementarities into concrete economic co-operation would be actually realized, providing mutual benefits for both parties, thus becoming a vital element in their strategies to meet the challenges of globalization and finding new growth niches. India– ASEAN co-operation is thus an indispensable element of the larger vision involving development of an Asian Economic Community which will also involve Japan, China and South Korea. References Asher, M.G., R. Sen and S. Srivastava. “ASEAN–India: Emerging Economic Opportunities”. In Beyond the Rhetoric: The Economics of India’s Look-East Policy, edited by Frederic Grare and Amitabh Mattoo, pp. 45–79. New Delhi: Manohar Publications, 2003. Gaur, S. “ASEAN–India ties entering a new phase”. Business Times, Singapore, 8 October 2003. Kumar, N. “Towards an Asian Economic Community: The Relevance of India”. Research and Information System for Non-Aligned and other Developing countries (RIS) Discussion Paper 34. New Delhi, 2002. Sarma, A. and P.K. Mehta. Exploring Indo-ASEAN Economic Partnership in Globalizing World. New Delhi: Bookwell, 2002.

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REVISITING THE LAW AND DEVELOPMENT PARADIGM IN ASEAN By Rajenthran Arumugam

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he last two decades has witnessed a renewed interest in the role of the law in the development paradigm. Pointedly in the context of ASEAN it became more apparent in the aftermath of the Asian financial crisis of 1997–98. Furthermore, there are other contributing factors which include globalization, internationalization of trade and investment activity and the pervasive influence of multilateral organizations such as the World Trade Organization (WTO), World Bank and the International Monetary Fund (IMF). Theoretical framework aside, there is no credible empirical evidence to prove the nexus between the law and development paradigm. Arguably ASEAN countries like Indonesia and Thailand enjoyed considerable economic growth in the 1980s to mid-1990s without the augmentation of systematic laws. Critics argue that these countries’ societal fabric is premised on the notion of “patron and client” relationship. Today, it is highly questionable if such a doctrine would create sustainable, let alone fair and equitable development. Conversely, available anecdotal evidence suggests that if law is judiciously aligned for political, economic and social needs, it would engender overall sustainable development in a nation. In this regard, it is pertinent that the body of laws is enacted in a transparent manner and more importantly, readily enforceable in the law courts. Law and Political Development Seemingly there is a perception that some ASEAN governments are autocratic — that to a greater or lesser degree credible laws are not encapsulated as “checks and balances” on politicians’ powers. Indeed, such a scenario was to some extent prevalent in Indonesia and Thailand. Incidentally the Asian financial crisis prompted monumental changes to the political set-up of these countries. Henceforth, meaningful laws

have been promulgated and relevant institutions put in place with a view to democratizing and decentralizing the polity. Furthermore, both the countries have redrawn their respective Constitutions — which now more than ever before demarcates clearly the powers and limitations of both politicians and the various organs of the government. This is a laudable accomplishment. The crux of the political legal reformation squarely hinged on creating an accountable and transparent government. Of course, it remains to be seen whether the new laws and institutions would generate the desired results. However, the CLMV countries (i.e., Cambodia, Laos, Myanmar and Vietnam) with their strong socialist background have not quite succeeded in utilizing law for political development. On the contrary, laws have been used, to some degree, to empower and reward political appointments. Perhaps with the ongoing global and regional democratization process this stance may reverse. In sum, from a political standpoint, the law should strive to attain a clean and credible government. That said, the politics of law making in this aspect is itself intrinsically intriguing. Law and Economic Development In essence, economic laws create certainty and predictability in business transactions both domestic and international. Economic laws encompass contract law, company law, security law, land law, labour law and intellectual property rights law. In most parts the correlation between law and economic development is a visible feature in the context of Southeast Asia, particularly since the post-colonial period. Indeed, countries like Thailand, the Philippines and the CLMV countries have been constantly cited for over-regulating their economies. Today, however, there is a fresh impetus in Southeast Asian countries to

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REVISITING THE LAW AND DEVELOPMENT PARADIGM IN ASEAN (continued)

promulgate responsive and market friendly laws. In this respect, the Thai Government has enacted an array of economic laws, which takes pain to identify business parties’ rights, obligations and legal remedies. Similarly, Indonesia has also revamped several of its economic laws although in a rather haphazard manner. Still, it is felt that more should be done to modernize the land law, employment law and the civil code. Generally Singapore and Malaysia have managed to keep their economic laws in tandem with global trend. In all fairness, the CLMV countries have made significant progress in promulgating economic laws but are still in need of legal technical assistance from multilateral organizations. It would not be fair to expect rapid changes in these countries as it takes time to permeate market-friendly laws in a socialist set-up. That said, they may draw on the lessons and experiences of other more developed countries in ASEAN. Overall, Southeast Asian countries at varying levels have taken concerted steps to enhance their economic laws. Notably, intellectual property rights law has been aligned with the Agreement on Trade-Related Intellectual Property Rights under the WTO, particular in the ASEAN-5 countries (i.e., Indonesia, Malaysia, the Philippines, Singapore and Thailand). Competition law and privatization law are now generally accepted as creating the necessary framework for an economic level playing field. In addition, there is an acute wariness to enhance the financial laws and observation of good corporate governance. Some critics questioned the veracity of the IMF’s powers to insist on substantial economic law reforms particularly in Indonesia and Thailand during the Asian financial crisis. Law and Social Development Once again, there is a prevailing perception that human rights are not adequately protected and enforced via

law in Southeast Asia. Although there is some element of truth in this, it should not be generalized or overdramatized. Significant attempts have been made to protect human rights in Indonesia and Thailand. To this effect, laws have been enacted to facilitate universal adult suffrage, freedom of mass media and growth of civil society. However, several jurists argue that more should be done to improve human rights conditions in the CLMV countries. Given time and space together with international pressure it is conceivable that the situation will improve. The more pressing needs in these states are unmistakenably alleviation of poverty, a sound education system and development of public infrastructures, particularly healthcare services. In light of the ongoing security concern posed by recent terrorist attacks, Southeast Asian countries have in general stepped up their security and criminal laws and deepened regional co-operation. This is unquestionably a step in the right direction. Institutional Efficiency Suffice it to say, the efficacy of laws can only be fully realized in the presence of efficient and credible institutions such as the bureaucracy, police force and most importantly, the judiciary. Apart from Singapore, which has been consistently highly rated over the years for possessing excellent institutional efficiency by international research agencies, institutional infrastructures in other ASEAN countries are not entirely satisfactory. Anecdotal evidence suggests that the problem is further compounded by tacit illicit activities such as corruption, collusion and nepotism. However, on a broader spectrum there is a clear understanding amongst the ASEAN governments that coherent reformatory works is very much needed. Such works are already progressing in Thailand and Indonesia. Given the huge expenses involved, human sentiments and political sensitivity, institutional

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reformatory works invariably takes time to bear tangible results. Challenges Undoubtedly law and development paradigm thinking has gained a stronger impetus in policy circles of the ASEAN. Furthermore, the notion of “rule of law” has acquired a universal appeal in the last two decades and by all accounts will strongly continue to do so in the 21st century. In this respect, what are the challenges facing ASEAN? First, in the rapidly globalized world, legislative changes have to be accommodated promptly and decisively. In this sense, law, particularly economic laws, must be constantly remodified along international norms. Invariably, failure to do so would result in erosion of economic comparative and competitive advantage — thus leading to heavy economic loss. Second, enactment of laws should be undertaken in a pragmatic and realistic manner. Simply adopting available model laws, particularly from developed countries may not necessarily bring about the contemplated results and in fact, can be counterproductive. In essence, to a large extent, laws

of a nation are inextricably bound to its cultural affinity. Broadly speaking, the cultural affinity in Southeast Asia is obligation-based as opposed to rights-based in most developed countries. Hence in the law-making process it is crucial to strike a balance between what is economically desired and attainable and culturally accepted. Third, a proactive and dynamic stance towards the enforcement of laws is verily wanting in ASEAN. As mentioned earlier, apart from reforming the existing institutional infrastructures there is also the need to put in place a viable alternate dispute resolution mechanism, encompassing arbitration, mediation and conciliation. This is a very essential requirement in modern international business practice whereby increasingly greater efforts are put into keeping economic transaction costs to the minimum. Fourth, harmonization of economic laws and deepening of legal co-operation within ASEAN would facilitate greater credibility and investor confidence to the region as well as economies of scale. In addition, an independent and professional ASEAN dispute settlement mechanism devoid of politics would certainly have an endearing effect.

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ECONOMIC OUTLOOK THE ASEAN-10 Lee Poh Onn • Mya Than • Martin P.H. Panggabean • Nick J. Freeman • Denis Hew • Aladdin D. Rillo • Choy Keen Meng • Sakulrat Montreevat

Brunei

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hings are looking brighter for Brunei in 2004 and 2005. Many internal as well as external dynamics offer promising prospects that, if fully realised, could mean that Brunei would be one step closer to achieving a truly diversified and growing economy in the coming years. In mid-January 2003, Brunei unveiled an ambitious five-year plan of US$4.5 billion (B$7.8 billion) aimed at diversifying its oil-dependent economy and attracting new foreign investments. Such a plan is expected to bear fruit in the shorter term but will only come into full play by 2008. The above plan is also expected to create 6,000 new jobs for Bruneians; if fulfilled, this should be a welcome relief for alleviating the current state of unemployment in the economy and dependence on public sector employment. The government sector employs about 75 per cent of Brunei’s workforce and, officially, Brunei’s unemployment stands at around 5 per cent, although the real figure has often been considered to be higher. A global mega port hub for container handling at Pulau Muara Besar and a 500megawatt power plant in Sungai Liang are also among some of the projects that have been proposed by the Brunei Economic Development Board (BEDB), with feasibility studies expected to be completed by end 2003. However, it is important to note that Brunei’s lack of experience in the shipping industry, strong port competition from Malaysia and Singapore, and the development of a neighbouring smelter in Sarawak, Malaysia, are factors that may work against reaping the full growth potential of these ventures. The BEDB has also proposed a strategy of developing downstream and manufacturing industries, notably petrochemicals, halal food, and tourism. In spite of the global economic downturn through most of 2002, Brunei received a significantly higher flow of foreign direct investment: US$1.04 billion as opposed to US$526 million in 2001. Brunei is also expected to receive around the same amount for 2003, and a slightly higher amount in 2004 if the world economy picks up. Barring severe competition from the Sarawakian smelting plant, the recent agreement by Alcoa and the BEDB to launch a Memorandum of Understanding (MOU) to examine the feasibility of establishing a smelting plant in the country is another positive that is in line with Brunei’s intention to diversify its economy. Alcoa is U.S.-based and one of the world’s largest aluminium producers and is considering constructing a US$1.5 billion aluminium smelter in Brunei. The feasibility study is expected to be completed in two years’ time and will be carried out in two phases. The BEDB has also signed a MOU with ACI Corporation Ltd to establish a billion-dollar tyre recycling plant over the next five years. Such a venture is expected to generate 1,220 jobs for Bruneians.

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Alcatel, a leading French conglomerate and the world’s largest telecom infrastructure provider, set up office in Brunei in September 2003, teaming with Brunei’s DataStream Technology Sdn Bhd to roll out the first General Packet Radio Services (GPRS), and Evolved Data for GSM Evolution (EDGE) in the country as part of Brunei’s efforts to upgrade its existing mobile phone infrastructure. Brunei is considering to sign free trade agreements (FTAs), covering trade, services, and investment, with the United States and Japan — two of its largest trading partners. Brunei has already signed a Trade and Investment Agreement (TIFA) with the United States in November 2002, and contains a provision that this may be a preamble to an FTA when both countries are ready for such an agreement. In 2002, Brunei’s exports to the United States and Japan were B$378.8 million and B$1.72 billion, while imports were B$522.3 million and B$382.2 million respectively. Brunei continues to be a haven of security by adopting a moderate Islamic stance and has received praise from the United States for its efforts. For example, the authorities acted swiftly to curb extremist religious cult activities in September 2003, by detaining twenty people (locals and Malaysians) believed to be linked to the Al-Ma’unah (Brotherhood on Inner Power) Malaysian group. Externally, both the United States and Japan have shown signs of recovery that would certainly bode well for Brunei and ASEAN’s growth prospects in 2004–05. Barring, of course, any external shock like a major terrorist act, and a sustained oil hike, which would thwart growth in these economies, the growth potential looks rosy. Oil prices have had an overall dampening effect on the world economy in 2003. Prices have not dropped to US$25 per barrel as anticipated but instead have hovered close to US$30 per barrel throughout 2003 (Business Week Online, 6 August 2003; Business Times (Singapore), 19 August 2003). For 2004, prices have however been forecasted to fall to US$27 per barrel when more oil fields in Iraq become operational again. However, OPEC’s (Organization of the Petroleum Exporting Countries) surprise move to cut oil quota by 900,000 barrels in November 2003 will serve as a dampener for oil-dependent economies like Japan and the United States. High oil prices in 2002 and 2003 have, however, allowed Brunei to build up its foreign currency reserves which were drained during the financial crisis in 1997. Brunei’s oil and gas reserves are expected to last only until 2018 and 2033 respectively, barring the discovery of new oil and gas fields. Currently, this sector accounts for more than 90 per cent of the country’s exports, and 70 per cent of its GDP. Although higher oil prices may work to Brunei’s advantage in the short run, the longer term growth prospects of Brunei would be negatively impacted, as oil-dependent countries in the region and around the world will be affected by the oil price hike. Brunei’s economic health is dependent on Japan, ASEAN, South Korea and the United States — four of the major destination markets for its exports. Taking the above factors into account, real GDP growth rate is estimated to be in the range of 4 to 5 per cent in 2004, and 5 to 6 per cent in 2005, increasing from the 3 to 4 per

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cent range estimated by the Economist Intelligence Unit (EIU) for 2003. Many of the above internal and external dynamics bode well for the Bruneian economy not only in the shorter term but more so in the medium and longer term. Future economic planning would nevertheless have to be tempered with caution and sound economic policy-making, as the Bruneian Government would have to carefully deliberate on the kind of development that it wants the country to achieve when oil and gas reserves run out. The question is not just about how to create opportunities for economic growth and development, but rather which sectors in the economy should be playing this pivotal role in the coming years.

Cambodia

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he economic performance of Cambodia in 2002 was affected by lower agricultural output during the year — the agriculture sector contributes about 40 per cent of the country’s GDP. Unfavourable weather (floods as well as drought), low soil quality in some areas, unclear land ownership policy, insufficient irrigation, and high transaction costs have caused the agricultural sector growth rate to significantly fall to 0.9 per cent in 2002 compared to 3.4 per cent in 2001. According to the Asian Development Bank (ADB), real GDP growth rate decreased to 4.5 per cent in 2002 from 6.3 per cent the previous year. The industrial sector growth rate also slowed down to 11.8 per cent in 2002 from 15.5 per cent in 2001. However, the services sector grew from 2.9 per cent to 3.9 per cent over the same period due to the tourism sector. However, the Government of Cambodia is optimistic about the country’s economic growth prospects. According to official sources, the Cambodian economy is estimated to grow at 7 per cent in 2003. Meanwhile, other sources such as Cambodia Development Resource Institute (CDRI), ADB and the Economist Intelligence Unit (EIU) are also sanguine about the country’s economic outlook although their GDP estimates are not as high as the government’s. All three sources expect the economy to grow by 5 per cent in 2003. The reason for the fairly strong economic growth forecasts can be attributed to the continued recovery in the world economy, particularly in East Asia. Exports are expected to grow about 7 per cent in 2003 mainly due to the garment industry (which grew by 23 per cent in 2002 against the 13 per cent in 2001). Eighty per cent of garment exports were directed to the United States (Far Eastern Economic Review, 25 September 2003). At the same time, the tourism sector will grow strongly as the region recovers from the SARS outbreak. Another reason for an optimistic outlook for Cambodia’s economic performance in 2003 might be the “IMF’s issuance of a broadly positive bill of for the economy in February which suggests that the government still have some room for manoeuvre” (EIU, Country Report, May 2003, p. 11). In addition, the consultative group of bilateral and multilateral donors for Cambodia pledged a higher level of aid four months later in June 2002.

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Cambodia: Selected Economic Indicators, 1999–2005F

GDP growth (% change)

(CDRI) (ADB) (EIU) Regional Outlook Industry sector growth (% change) (ADB) Services sector growth (% change) (ADB) Agriculture sector growth (% change) (ADB) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Current account balance (% of GDP) Inflation CPI average (% change) Foreign exchange reserves (US$ million) Foreign direct investment (US$ million) M2 growth (% change) Exchange rate (Riel/US$1)

1999

2000

2001

2002

2003E

2004F

2005F

7.8 6.9 6.9 7.0 13.2 7.1 0 886 –1,239 –155 –6.9 0 324 n.a. 17.3 3,814

5.6 7.7 7.7 5.8 34.6 5.8 –0.3 1,264 1,628 –364 –7.6 0.5 502 n.a. 26.9 3,859

5.4 6.3 6.3 5.5 15.5 2.9 3.4 1,376 1,725 –350 –6.3 –0.5 587 113 20.4 3,924

5.2 4.5 5.0 4.0 11.8 3.9 0.9 1,500* 1,850* –350 –8.1 3.0 776 n.a. 22.0 3,950

5.0 5.0 5.0–6.0 5.0 11.7 4.1 1.8 1,700 2,100 –400 –8.9 3.5 n.a. n.a. 20.0 3,980

7.0^ 5.5 5.0–6.0 6.0 11.7 4.6 2.4 1,900 2,300 –400 –9.3 4.0 n.a. n.a. 18.0 4,000

7.0^ n.a. n.a. 6.2 8.4@ 7.3@ 4.1@ 2,000 2,350 –350 n.a. n.a. n.a. n.a. n.a. 4,100

^ Government of Cambodia @ Country Presentation for Cambodia, Third United Nations Conference on the Least Developed Countries, 2001 * estimates SOURCE: Asian Development Bank (ADB), Cambodian Development Research Institute (CDRI); ADB, Asian Development Outlook 2003; ADB, Key Indicators 2003; EIU, Country Report, August 2003.

Also on the positive side is the news that Cambodia joined the World Trade Organization (WTO) in September 2003. However, the expected benefits of WTO membership will not materialize soon as the country needs to improve infrastructure, telecommunications and extensive legislative changes in order to facilitate better access to the country’s markets. On the other hand, political developments in the country such as the inability to form a new Cabinet after the July 2003 general election and the anti-Thailand riots in January 2003 constrain domestic as well as foreign investments and tourism. Tourism also declined in the first half of 2003 due to SARS and the terrorist attack in Bali. Meanwhile the inflation rate is expected to grow from 3 per cent in 2002 to 3.5 per cent in 2003. The exchange rate of the local currency riel has slightly depreciated and may weaken further due to political uncertainty, the widening trade deficit and low level foreign investments. On balance, the economic growth in 2003 is forecast at 5 per cent against the government’s expectation of 7 per cent. However, it should be noted that the overall

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growth has not been broad-based as it depends largely on the exports of garments and the tourism sector. All sources forecasting the economic performance of Cambodia for 2004 and 2005 (including the government) agree on one point, i.e., real GDP growth over the next two years will be better than previous years. The economy will grow by 6 per cent and 6.2 per cent in 2004 and 2005 respectively. The government forecasts an average annual growth rate of 7 per cent for the same period. There are good reasons for the optimistic economic outlook. According to the ADB, all three economic sectors are expected to grow except the industrial sector of which the growth rate would slightly decrease from 11.8 per cent in 2002 to 11.7 per cent yearly for 2003 and 2004 — partly due to a slight decline in production from garments factories. The agriculture sector will grow 1.8 per cent and 2.4 per cent respectively for 2003 and 2004 because of a rise in prices of many agricultural commodities. The services sector is forecast to grow 4.1 per cent and 4.6 per cent respectively for the same period due to better outlook for the tourism sector. This trend of economic growth is expected to continue in 2005. As mentioned above, IMF has given a positive bill of economic health to Cambodia and donor countries pledged a higher level of aid in 2002. This will boost Cambodia’s economy for another two more years. Another factor contributing to the favourable economic outlook lies in external trade. Judging by China’s experience since joining the WTO in 2001, Cambodia’s accession into WTO in late 2003 would likely boost the morale of both exporters and importers. Moreover, despite the strong competition in garments exports from China and Vietnam, demand for Cambodian-made garments from the United States would grow in 2004. This is because another major competitor, Myanmar, has been left out in the cold due to the import ban imposed by the United States (starting from 28 August 2003). However, this advantage for Cambodia will last only until 2005 when the elimination of garment quotas under the WTO takes effect. In addition, according to official sources, government expenditure on social sectors and rural development will increase while expenditure on military and defence is projected to decline. Overall budget deficit (unlike in Myanmar’s case where budget deficit is financed by printing more money) will continue to be financed by foreign bank borrowings (mostly concessional) and grants from multilateral and bilateral sources. The inflation rate is steadily rising (EIU expects inflation to rise to double-digit growth rates) and the riel is expected to weaken as a result of the trade deficit and the low level of foreign investments. Nevertheless, the economic prospects for Cambodia over the next two years looks favourable.

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D

espite adverse external and internal conditions, Indonesia’s economy managed quite well in 2003. On the external side, a sluggish world economy mostly affected Indonesia’s export performance in 2002 and 2003. On the other hand, a weak global economy, U.S. dollar weakness and low international interest rates were translated into a strengthening of the Indonesian rupiah through capital inflows. Also, through lower inflation, it also led to a reduction in key short-term interest rate (SBI) in 2003. Domestically, internal conditions did not provide much help to the Indonesian economy. Consumer’s expenditure, with 65–70 per cent share of GDP, remained the major driver of the economy in 2003. Investment expenditure, another major driver, was still at a historically low ratio of 16–17 per cent of GDP. This, of course, did not compare well against the above 30 per cent ratio in the pre-crisis era. To compound matters, the FDI data shows a continuation of net outflow of capital (due to competition from China), while local banks were still not able to turn their low loan-to-deposit ratio into active lending activities. With a mild aggregate demand, expected to reach 3.8 per cent in 2003, there was no clear danger of production overcapacity. Coupled with a strengthening of the rupiah, and weak commodity price of imported foodstuffs, Indonesia is expected to post a historical low inflation rate of 6.2 per cent in 2003. In turn, such a low inflation rate spurs the central bank to further reduce the SBI rate to 8.5 per cent (as of October 2003), which is another historical low. The Jakarta stock market has also performed quite well, increasing by 45 per cent from January 2003 to September 2003. Despite this, the Jakarta bourse managed to rank only twelfth in the world’s market ranking, only because many Latin American markets (notably Brazil, Venezuela, and Argentina) gained by around 100 per cent in 2003. But is Indonesia out of the woods yet? There are reasons to be even more optimistic in 2004, despite external and internal uncertainties. With regards to the big macroeconomic variables of growth and inflation, it is crucial to see how the rupiah is likely to evolve in the future. There appears to be more possibilities for a depreciation of the rupiah in 2004. This could be caused by at least two factors. First, there is currently a sense of rupiah overvaluation when regional comparisons are made. During late 2003, the rupiah’s Purchasing Power Parity Index (PPP) had — for the first time since the crisis — become stronger than the Thai baht and the Philippine peso. Second, the world economy in 2004 will likely experience a fragile recovery, where economic activities will pick up only in the latter part of 2004. A sign of recovery in the developed economies will be preceded by recovery in capital market indices and an outflow from many emerging markets, including Indonesia. This capital outflow will put further pressure on the Indonesian rupiah to depreciate. There is actually another reason for the rupiah to depreciate. That is, it was commonly asserted that political waves in Indonesia were usually correlated with the rupiah’s weakening. It is already widely known that there will be two types of election in 2004. The first election, scheduled for April 2004, is to elect members of the House of Representatives. The second election, scheduled for August 2004, is to choose Indonesia’s president. Conventional wisdom based on past experience would put heavy weighting on these events. However,

Indonesia

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given that most of the Reformasi’s euphoria has dissipated and Indonesians are becoming more politically mature in the new democratic settings, less emphasis should be given to some political factors when analysing the rupiah’s movements. Given the scenario of a weakening rupiah (or at most a flat rupiah scenario), our analysis projects an inflation rate to increase to 8 per cent in 2004. Inflation could increase in 2005 if the weakening rupiah is not accompanied by tighter monetary control. Specifically, interest rates could rise as early as January 2004 (if not sooner). It is expected that the key SBI rate will average 9.5–10 per cent in 2004. On the GDP side, real GDP is expected to grow by 4.1 per cent and 4.6 per cent in 2004 and 2005 respectively. It is expected that the main driver to growth will come from two main sources. The first source, as mentioned earlier, will be an increase in external demand in line with global recovery. The second driver to growth is higher investment expenditure. The GDP growth forecast for 2004 still assumes conservatively that investment activities will plod along until a definitive picture of the political landscape can be seen (resulting from the 2004 elections). Invariably, faster economic growth is expected in 2005.

Indonesia: Selected Economic Indicators, 2000–2005F

GDP growth (% change) Export (US$ billion) Import (US$ billion) Trade balance (US$ billion) Inflation (% change) Time Deposit (3-month, % pa, ave.) Total Debt (% of GDP) Foreign Reserves (US$ billion) Average exchange rate (Rupiah/US$1)

2000

2001

2002

2003E

2004F

2005F

4.0

3.3

3.7

3.7

4.1

4.6

61.7 32.9 29.9

56.3 30.9 25.4

57 31.3 25.7

60.4 37.2 23.2

64.2 40.1 24.1

69.1 43.6 25.5

9.3

12.6

10.0

6.2

8.0

7.2

12.5

15.5

15.5

10.8

9.3

9.9

90

91.5

74.8

57.9

52.9

50.1

29.4

28.0

32.0

34.1

32.5

32.8

8,422

10,261

9,527

8,553

8,613

8,921

SOURCES: Bank of Indonesia; Central Bureau of Statistics (BPS); author’s estimates.

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Under these broad macroeconomic settings, there are several other issues that merit a closer look. The first, and arguably a very important issue, is the budget situation. In October 2003, the government announced that Indonesia’s five-year IMF programme has ended. However, unlike Thailand’s and South Korea’s IMF programmes which ended earlier with full repayment of their debt to the IMF, Indonesia will enter the Post-Programme Monitoring (PPM) under IMF auspices. There are at least two reasons for this. First, Indonesia has not accumulated enough reserves to repay its commitment without endangering other sovereign obligations. The second reason, noted by some observers, is because there are elements among the Indonesian economist élites that want to maintain some sort of macroeconomic discipline by remaining under the IMF umbrella. Nonetheless, it seems dissatisfaction with the IMF, built up over the years, has reached the grass-root level, becoming a difficult issue for political élites to ignore. While a PPM can be perceived as a shrewd balancing act, a complete exit from the IMF programme (like Thailand and South Korea) remains a target. Indeed, a major economic goal of the incoming government to be inaugurated in 2004 will be to speed up the repayment of the IMF debt. This target, of course, may exert big pressure on the state’s budget. However, two important steps have been taken. First, the Indonesian Government has earlier managed to change the maturity profile of its domestic public debt. The change entails changing the mountainprofile (peaking in 2004–2005 and ending in 2009) into a more flat profile that will end in 2019. This, of course, would substantially alleviate budgetary pressures. Secondly, the Indonesian government budget for 2004 showcases its commitment to debt reduction. In the 2004 budget draft, the government plans to repay most of the maturing debts with less reliance on issuance of new bonds. In 2004, the government plans to pay US$1.7 billion of foreign debt and only issue US$0.5 billion new rupiah instruments. In all, the debt reduction scheme should reduce one of the clouds hanging above Indonesia’s economic landscape (with a direct implication on exchange rate, interest rate, and budget). Some of the benefits of lower debt can be expected in the lowering of country’s risk premium, which is expected to boost investment sentiments on Indonesia. With regard to the investment issue that continues to cloud Indonesia’s economic landscape, the latest balance of payments data show a continued outflow of FDI, counterbalanced by portfolio and financial inflows. Given the improved management of debt, improving political situation post-2004 elections, lower country risk, improved banking conditions, the missing element in Indonesia’s medium-term investment prospects is the new law on investments. This new law is being drafted and is reaching its final stage. A peek into the draft indicates that it has the potential to be one of the most liberal economic laws ever seen in Indonesia. Nevertheless, there are doubts whether such a law can pass easily in the run-up to the upcoming election where the spirit of one-upmanship among political parties can prevail. Alternatively, can the new law remain in its unadulterated form without a huge public outcry of “selling the nation to the West”? Election year sentiments are difficult to avoid. Nevertheless, Indonesia’s economic outlook looks quite promising if one pays closer attention to the basics.

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Laos

T

he Lao People’s Democratic Republic (Lao PDR) is a less developed country, with approximately a third of its population living below the poverty line. The average annual per capita income is around US$330. More than 75 per cent of the population earns less than US$2 per day. Since the late 1980s, the country has been undergoing a gradual process of economic transition, away from the central planning methods adopted after the overthrow of the Royal Lao Government by the Lao People’s Revolutionary Party in late 1975, and towards a more market-oriented economy. This transition process has been dubbed the “New Economic Mechanism” by some observers, and broadly parallels the doi moi economic reform and business liberalization process currently underway in neighbouring Vietnam. The economic transition process in Laos has been a very gradual one, and prone to occasional stalling. With a few exceptions, the fruits of this economic transition are generally less evident in those regions of the country beyond the handful of major towns that huddle along the eastern bank of the Mekong River. This has been unfortunate, as the widening economic divide between locations is broadly congruent with ethnic differences. The Lao Loum tend to populate the more prosperous lowland areas along the Mekong River, and account for about half the total population; whilst the Lao Theung and Lao Sung (which includes the Hmong) tend to populate the less prosperous upland areas. Despite some limited efforts to try and bridge this economic divide, its gradual appearance has been an inevitable consequence of economic transition, with the urban locals much better able to harness the new opportunities that have arisen. In contrast, the thinly populated and underresourced provinces to the east and north of the country generally lack sufficient infrastructure and other resources needed to leverage new economic policies into tangible business opportunities. In particular, transaction costs tend to be high in some rural provinces, and it therefore becomes difficult for local markets to develop. Consequently, inhabitants find it difficult to advance beyond the subsistence level that tends to dominate these regions. The government aims for Laos to graduate from its less developed country status by 2020, but this will be an uphill task. A recent bout of currency depreciation as recently as mid-2002 has illustrated the overall health of the small economy and even smaller business sector remains fragile. Since the Asian financial crisis, the Lao currency, the kip, has dropped in value from roughly 1,000 to 10,000 to the U.S. dollar — a rate of descent unequalled anywhere else in Southeast Asia, including Indonesia. Since Laos imports a substantial proportion of its demand for manufactured items, such a marked devaluation caused significant domestic inflation, and the real incomes of government employees and other urban workers contracted markedly as a direct result. The distress felt by the urban community helped revive economic reform momentum around 2000, although the international donor community remains frustrated at the overall pace of economic transition in Laos, which often appears half-hearted. This is worrisome, as the donor community provides significant funding to Laos in the form of grants and soft loans. Factors behind the slow pace of economic reform in Laos are multiple and complex, but include: a cautious approach taken by policy-makers, particularly towards economic reform measures that might possibly contain unwanted socio-political consequences; resistance

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from various stakeholders that would not benefit from certain economic reform measures; and a general lack of urgency displayed by the government. The fragility of the Lao economy is also apparent in the banking sector, which in the next few years will see a phased restructuring and recapitalization of the country’s three stateowned commercial banks (SOCBs), which together account for around 65 per cent of total banking assets. All three SOCBs have been consistently loss-making, have non-performing loan levels in excess of 70 per cent of total loans, register negative capital adequacy, and are therefore effectively insolvent. Two of these SOCBs — Lao May Bank and Lane Xang Bank — are being merged into a single entity. The third, Banque pour le Commerce Exterieur Lao (BCEL), Laos’ single largest bank by far, will also undergo radical restructuring. It is expected that these banks will be recapitalized in stages, as and when they meet specific targets, under a points-based performance measurement system. A similar exercise is also underway for the state-owned Agricultural Promotion Bank. Laos was successful in divesting most of its state firms in the first half of the 1990s. However, a rump of about thirty or so “strategic” state firms currently remains — and will remain — in the public sector. It has been government-directed bank lending to these

Laos: Selected Economic Indicators, 1999–2005F 1999

2000

2001

2002

2003E

2004F

2005F

6.8 8.0 4.9 8.2

5.9 8.5 5.3 4.9

5.7 9.7 6.0 3.8

5.8 9.8 5.8 4.0

6.0 10.2 5.5 4.2

6.5 10.5 6.8 4.3

6.0 10.2 5.5 4.2

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

302 554 –253 –5.2

330 535 –205 -0.5

310 523 –213 –4.5

321 514 –193 1.0

330 536 –206 –

340 569 –229 –

360 550 –190 –

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

134 14.9

27.1 15.4

7.8 16.3

10.6 –

8.0 –

9.0 –

– –

Budget deficit (as % of GDP)

–2.5

–2.5

–4.5

–

–

–

–

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

2,527 2,471 7.7

2,502 2,453 7.9

2,495 2,456 9.0

– – –

– – –

– – –

– – –

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

106 7,108

127 7,846

134 8,871

191 10,069

– 10,700

– 11,100

– 11,250

GDP growth (% change) industry sector growth (% change) services sector growth (% change) agriculture sector growth (% change)

SOURCES: Asian Development Bank, and author’s estimates.

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strategic state firms that account for 80 per cent of the high non-performing loan levels in the SOCBs. Some of the remaining state enterprises are simply badly managed and — like many borrowers in Laos — display a disappointing disregard for the obligations of repaying credit. Some other state enterprises are obliged by the government to charge heavily subsidized rates for the utilities and services — such as water, electricity and domestic flights — that they provide. This is beginning to change, however, with the government gradually revising prices upwards to nearer market levels. And where essential services and utilities are to remain subsidized by the government, the underwriting of these subsidies is shifting over to the state coffers, rather than indirectly through the commercial banking sector. A potentially important development to monitor in the coming years will be the government’s decentralization drive, which is granting greater budgetary and policy-making autonomy to local government. The dull (but accurate) slogan for this decentralization process is: “making the province the strategic unit, the district the budget planning unit, and the village the implementing unit”. Some provinces, particularly in the south, are reported to have seized on this reform measure with considerable vigour. A previous attempt at decentralization in the late 1980s ended in failure. Vientiane’s decision to permit greater decentralization may be driven in part by turning a de facto situation into something more de jure. In general, communications within Laos are fairly rudimentary, and some provinces remain quite remote from the capital (all but two of the country’s provinces have a border with at least one of Laos’ five neighbouring countries). As a result, the local economies of some provinces are surprisingly independent from the centre, and the gravitational pull of trade finds them interacting more with proximate provinces in neighbouring countries. In this context, a degree of economic and administrative decentralization might be appropriate, although doubt surrounds the capacity of some provincial authorities to sensibly manage and balance local public finances. Even the national government’s track record with national public finances is poor. Laos’ economic problems are often perceived to be those of a transitional economy. However, the leadership’s attempt to create a socialist economic system in the latter part of the 1970s was a relatively brief and fairly half-hearted affair, following on from two decades of civil war. By no stretch of the imagination was Laos ever perceived as a shining economic star in the universe of socialist bloc countries. Subsequent attempts at economic reform have also displayed a degree of ambivalence at times. Looking ahead, the business sectors which might be expected to offer the greatest prospects for the Lao economy include various hospitality and tourism-related services (particularly ecotourism), some garments and handicrafts in which Laos has particular competitive advantages, various types of mining, and hydropower. Much has been expected of the latter, with a number of dam projects given approval to proceed, although the creation of tangible hydropower projects has been disappointingly few in number. The biggest of these proposed power projects, the US$1.2 billion Nam Theun II power plant, has faced numerous delays and false starts, with expectations raised and then dashed with maddening repetition. Should the project eventually go ahead, this single dam would be a major fillip for the national economy, arising from both its initial construction and the foreign exchange earnings it will attain from sales to Thailand.

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With the local private sector still under-resourced in many ways, the need for foreign investment remains very evident. However, occasional reports in the international press have made the attractions of Laos as a destination for foreign capital less than wholly appealing. Such incidents have included: bombings in the capital; sporadic ambushes on the highway that links Vientiane with Luang Prabang (in which foreigners have been killed); and the arrest of foreign business people for alleged cases of business fraud or stealing. And with such a small domestic economy, both in population terms and national income terms, there is little attraction for foreign firms wishing to serve the local market. This leaves foreign investment activity largely focused on projects that are oriented towards production for export, despite Laos being a landlocked country. An additional challenge that continues to confront the Lao economy is the legacy of unrelenting U.S. bombing over large parts of the country before 1975. Unexploded ordnance (UXO) is still evident in 13 of Laos’ 18 provinces, and contaminates up to half of the country’s total land area. In addition to its continued toll on civilians, the presence of UXO constrains agricultural activity in large parts of the country, and inhibits food security for many Lao. Vientiane boldly aims to rid the country of all opium production — which was estimated to total 180 metric tones in 2002, putting Laos third in the global rankings, behind Afghanistan and Myanmar — and swidden (sometimes referred to as “slash-and-burn”) agricultural methods by 2005.

M

alaysia’s economy made a strong recovery in 2002, growing by 4.1 per cent compared to 0.3 per cent in 2001. The country’s economic recovery was expected to continue in 2003, despite the Iraq War and the Severe Acute Respiratory Syndrome (SARS) outbreak in the region. Although there were some adverse effects from the SARS epidemic in the services sector (especially retail trade and tourismrelated industries), the overall impact on the Malaysian economy has been relatively minimal. This was mainly due to the country’s diversified economic structure. For example, the manufacturing, agriculture and mining sectors were hardly affected by the epidemic, registering higher growth rates in the second quarter of 2003 compared to the previous quarter. The Malaysian economy is estimated to grow by 4.7 per cent in 2003. Economic growth in 2003 will be fairly broad-based. On the supply-side, the stronger growth in the manufacturing, agriculture and mining sectors will compensate for the lower growth in the services sector. Given the improved global economic environment, the manufacturing sector (which rebounded by 4 per cent in 2002) will grow by 6.9 per cent in 2003. Notwithstanding SARS, the services sector is expected to recover in the third quarter of 2003 and grow by 3.9 per cent for the full year. Meanwhile, increased production of liquefied natural gas (LNG) from a new plant in Bintulu and the discovery of oil in the deep waters off the Sabah coast would give the mining sector an added boost over the next few years.

Malaysia

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On the demand side, domestic demand is expected to strengthen in 2003 as business and consumer confidence improves. Private consumption has been found to be quite resilient and will expand by 5 per cent in 2003. This was mainly due to higher disposable incomes arising from a 2 per cent cut in the national pension scheme (i.e., the Employees Provident Fund), half-month bonus to civil servants and positive wealth effects from the domestic stock market. Private investment is also expected to turn around after two consecutive years of contraction. Exports growth will be lower in 2003 compared to the previous year reflecting the soft global demand for electrical and electronic (E&E) products. Exports of E&E products account for about 70 per cent of total merchandise exports. Nevertheless, primary commodity exports such as rubber, palm oil, crude petroleum and LNG are expected to show strong pace in 2003. Merchandise exports and imports are projected to grow at 5.1 and 2.4 per cent respectively in 2003. External trade should improve in 2004 as the external economic environment becomes more favourable. Fiscal policy remains expansionary. In May 2003, a RM7.3 billion fiscal stimulus package (known as the “Package of New Strategies”) was launched to counter short-term cyclical shocks arising from the Iraq War and SARS. In order to contain the country’s fiscal deficit, only 23 per cent came from the budgetary allocation with the balance sourced from the domestic banking system. Furthermore, unlike past stimulus packages, this one also has a medium and long-term strategic objective of enhancing the country’s competitiveness. This package consists of numerous measures that are based on four main strategies: (i) promoting private sector investment; (ii) strengthening the nation’s competitiveness; (iii) developing new sources of growth; and (iv) enhancing effectiveness of the delivery system. To improve the accessibility of small and medium-sized enterprise (SMEs) to loans, the government has introduced micro credit schemes under the Package of New Strategies. The micro credit schemes features a low 4 per cent interest rate, waiver on collaterals, loan approvals based on securitization of cash flows and repayments based on cash flow projections. The Malaysian Government has been trying to support SMEs as a means to generate domestic-based economic growth and reduce its dependence on FDIs. Budget 2004 which was unveiled in September 2003 had no major surprises. Like the earlier Package of New Strategies, budget measures were more focused on enhancing economic resilience over the medium term. The government estimates a fiscal deficit of 5.4 per cent of GDP in 2003 and a smaller deficit of 3.3 per cent of GDP in 2004. Consistent with the government’s efforts in fiscal consolidation, an anticipated corporate tax cut did not materialize. Monetary policy will continue to be accommodative to support domestic economic activity. Inflation has been kept in check and interest rates remain low. Malaysia’s central bank, Bank Negara Malaysia (BNM) reduced its intervention rate by 50 basis points to 4.5 per cent on 31 May 2003 (the first revision since September 2001) to stimulate private investment and consumption. The reduction was intended to reinforce the fiscal stimulus package that was implemented in May 2003. Net international reserves of BNM stands at US$43.9 billion as at 14 November 2003, which is adequate to finance 7 months of imports and equivalent of 4.7 times short-term

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external debt. Malaysia’s exchange rate peg to the U.S. dollar is unlikely to be scrapped over the next two years unless there is a severe exchange rate misalignment with regional currencies. Malaysia’s currency has been a beneficiary of the greenback’s recent weakness against major currencies as it enhances the country’s export competitiveness. The domestic banking system has proven to be resilient with risk-weighted capital adequacy ratio of 13.3 per cent (as at October 2003). Non-performing loans (NPLs) of the banking system stands at 8.8 per cent of total outstanding loans (3 months classification) as of October 2003. In order to prepare the domestic banking sector for more competition, BNM’s extensive bank merger exercise has resulted in the consolidation of all domestic financial institutions into 10 banking groups. Another round of mergers would be likely over the next few years but it would be more market-driven. Malaysia’s national asset management company, Danaharta, has acquired about 44 per cent of NPLs from the banking system. Danaharta is currently in the second phase of its operations, i.e., to manage the NPLs in its portfolio (of which 42 per cent were acquired from banks and the balance from defunct Sime Bank Berhad Group and Bank Bumiputra Malaysia Berhad Group). The asset management company has identified recovery strategies for all NPLs in its portfolio and expects a recovery rate of 58 per cent on total assets worth

Malaysia: Selected Economic Indicators, 1999–2005F 1999

2000

2001

2002

2003E

2004F

2005F

6.1 11.7 4.5 0.5 6.9

8.5 18.3 6.7 2.6 0.3

0.3 –5.8 5.8 –0.9 –0.8

4.1 4.0 4.1 3.0 3.7

4.7 6.9 3.9 3.9 4.6

5.5 7.5 5.2 3.5 3.5

5.8 7.2 5.8 3.8 4.1

84,097 61,452 22,644

98,430 77,602 20,827

87,981 69,598 18,383

93,383 75,248 18,135

98,145 77,054 21,092

106,488 84,759 21,729

112,664 91,879 20,785

2.8

1.6

1.4

1.8

1.3

1.7

1.8

52.9 30.9

46.4 29.9

49.3 30.8

48.9 34.6

48.2 44.0

45.9 –

42.7 –

Three month interest rate (% per annum) FDI inflows (US$ billion)

4.1 3.9

3.2 3.8

3.1 0.6

2.9 1.8

2.9 1.5

3.0 2.0

3.2 2.5

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

3.80

3.80

3.80

3.80

3.80

3.80

3.80

GDP growth (% change) industry sector growth (% change) services sector growth (% change) agriculture sector growth (% change) mining sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation/CPI average (% change) Total external debt (% of GDP) Net international reserves (US$ billion)

SOURCES: Bank Negara Malaysia, Ministry of Finance Malaysia, Department of Statistics Malaysia; Economic Intelligence Unit (EIU); author’s estimates

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RM52.3 billion before it closes down its operation in 2005. As of June 2003, it had received 73 per cent or RM22.1 billion of total expected recovery in the form of cash and non-cash assets. The Corporate Debt Restructuring Committee (CDRC) ceased operations on 15 August 2002. During the lifespan of the Committee, it had resolved 48 cases worth RM52.6 billion or 65 per cent of all cases under its control. It is worth noting that the activities of Danaharta and CDRC have contributed in the significant reduction of NPLs in the banking system, enabling the Malaysian economy to recover faster than most Southeast Asian countries from the Asian financial crisis of 1997–98. In the Mid-Term Review of the Eighth Malaysian Plan 2001–2005 (released in October 2003), macroeconomic policies will focus on strengthening economic fundamentals and resilience as well as enhancing global competitiveness. The country will continue with its dual-track strategy of stimulating domestic demand and developing domestic sources of economic growth, alongside promoting FDI. Macroeconomic strategies that will be pursued in the next two years are as follows: • • • • • • •

Increasing competitiveness through productivity enhancement, raising the quality of the workforce and greater application of knowledge. Strengthening resilience through sound economic fundamentals and strong financial and corporate sectors. Stimulating private domestic investment as well as attracting quality FDI to boost growth and raise the productive capacity of the economy. Promoting new sources of growth in the manufacturing and services sector. Revitalizing the agricultural sector to increase productivity and economic returns. Pursuing sound macroeconomic management with fiscal prudence. Improving the delivery system of the government to create a pro-business environment.

At the end of October 2003, Dr Mahathir Mohamad stepped down as Prime Minister to be replaced by Abdullah Ahmad Badawi, until then the country’s Deputy Prime Minister. There appears to be a smooth transition of power. The new leader is not expected to make any dramatic changes to existing economic strategies. In his maiden speech to the Parliament as Malaysia’s fifth Prime Minister, he stressed the need for Malaysia to enhance research and development in new sources of economic growth such as information and communications technology (ICT), biotechnology, science and modern agriculture (3 November 2003, ). Economic outlook for Malaysia looks bright over the next two years. Real GDP growth rates for 2004 and 2005 are forecast at 5.5 per cent and 5.8 per cent respectively. Expected economic recoveries in the United States and Japan should give the country’s exports a much needed lift in 2004. This is reinforced by an anticipated upswing in the global ICT industry that should boost Malaysia’s electrical and electronic exports. However, longer term growth prospects are more uncertain as Malaysia faces intense competition from emerging markets such as China and India as an FDI destination.

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F

or the financial year (FY) 2002/03 ending on 31March, the military government of Myanmar against tradition did not publish the economic performance of the past year — this included GDP figures and the government budget for the financial year. However, the newly appointed Prime Minister General Khin Nyunt did mention the GDP growth rates of past and present years, in his inaugural speech on 31 August 2003. In his speech, the GDP growth rate was forecast at 11.1 per cent for 2002/03. Given the economic situation in the country, most analysts consider this figure overestimated. Even last year’s Regional Outlook estimate of 5.6 per cent for 2002/03 looks optimistic and the EIU has downgraded its estimate from 5.2 per cent to 2.9 per cent. In fact, the economy started to slow down in 2001 and the declining trend is still continuing. There are several reasons for the declining trend. External trade rose in 2002/03 due to gas exports to Thailand through the Yadana gas field and garment exports to the United States. For the financial year 2002/03 (April 2002 to end-February 2003), total exports rose 26.4 per cent to Kyat18,603.6 million compared to Kyats14,712.3 million in the previous financial year. The impressive export performance was mainly due to gas and garments exports, and fish and fishery products to several countries. The export of natural gas accounted for about 30 per cent of total exports and the value of gas exports increased about 90 per cent on a year-on-year basis. On the other hand, imports decreased 22.7 per cent from 18,103.2 million kyat to 14,000.8 million kyat during the same period. This sharp decline in imports is attributable to supply-side constraints and various restrictive trade and foreign exchange regulations. Hence, this has resulted in a trade surplus for the first time in several years. Consequently, this has improved the current account and foreign reserves which stood at US$541.5 million in the first quarter of 2003. Furthermore, government tax revenue increased substantially in 2002/03 by 56 per cent, mainly due to an increase in income and profit taxes. Moreover, tourist arrivals increased by 9.5 per cent in 2002/03 on a year-on-year basis. This is by default as the Bali bomb blast and the SARS outbreak led tourists to alternative tourist destinations in Southeast Asia. In August 2002, the only foreign investment approved was from Malaysia (US$44.0 million in the oil and gas sector) compared to US$19 million in 2001/02 and US$217.7 million in 2000/01 (Central Statistical Organization or CSO, February 2003). However, there were several events that had negative effects on Myanmar’s economy in 2002/03. First, there was severe flooding in August and December 2003 that seriously damaged paddy and other crops (the agricultural sector accounts for more than 40 per cent of the country’s GDP). It resulted in the price hikes of agricultural products and a decline in rice exports from 0.803 million tons over the period April 2001 to February 2002 to 0.693 million tons in in the same period the year before (CSO, February 2003). The decline in production of fertilizers of 26.3 per cent in 2002 from the previous year would have also affected the production in the agricultural sector. In mid-September 2003, it was reported that “(s)oaring rice prices in Burma have put the staple out of reach of millions of poor citizen” (AFP, 16 September 2002). However, it seems to have been caused by psychological (i.e., hoarding of rice due to distrust of government media in not reporting floods and drought) and distributional problems since rice production actually increased from 20,967

Myanmar

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thousand tons in 2001/02 to 21,569 thousand tons in 2002/03 (Key Indicators of Developing Asian and Pacific Countries, ADB, 2003). At the same time, imports of capital and immediate consumer goods such as crude oil, machinery, edible oils, cement and pharmaceuticals, among others, fell drastically. According to official sources, the price hike in rice, a sharp decline of imports, and an increase in money supply (44 per cent) in order to cover the budget deficit of around 5 per cent, increased the inflation rate to 34.5 per cent in 2001/2002. In fact, analysts in Yangon estimated the inflation rate at more than 50 per cent. Meanwhile, real interest rates remained highly negative, as nominal interest rates have remained unchanged at 15 per cent for several years. The manufacturing sector was hit by shortages of power supply and imports of raw materials and intermediate goods. This was compounded by restrictions in withdrawal of money from the banks in February 2003 due to the banking crisis in the country. Moreover, the steep depreciation of the local currency in the first quarter of 2003, i.e., 1,050 kyat per US$1 against the official rate of 6.2 kyat added to the woes of the economy. Nevertheless, the positive impacts of these events will outweigh the negative ones resulting in the economy growing moderately at 4.5 per cent in 2002/03.

Myanmar: Selected Economic Indicators, 1998/9 – 2004/5F

GDP growth (% change) (Official) (ADB) (EIU) Regional Outlook Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation CPI average (% change) External debt (US$ billion) Foreign exchange reserves (US$ million) Foreign direct investment (US$ million) M2 growth (% change) Exchange rate (Kyat/US$1: Official) Exchange rate (Kyat/US$1: Market)

1998/9

1999/0

2000/1

2001/2

5.8 5.8 4.8 5.1 6.1 7.0 4.5 1,065 2,451 1,386 51.5 5.6 315 54 36.5 6.1 334

10.9 10.9 10.9 5.8 13.7 8.8 10.5 1,473 2,550 –1,806 15.7 6.0 266 58 27.2 6.3 420

13.9 6.2 6.2 5.5 20.6 13.2 9.5 2,117 3,054 –1,465 –1.7 6.0 223 218 42.4 6.7 630

13.6 11.3 5.4 5.0 14.7 9.0 3.4 2,782 2,684 98 34.5 5.7 411 19 43.9 6.9 710

2002/3 11.1 n.a. 5.2 4.5 14.7 9.0 3.5 2,900 2,200 700 57.1 6.1 n.a. 87* n.a. 6.9 900

2003/4F

2004/5F

10.7 n.a. 2.5 3.2 14.7 9.0 4.2 3,100 2,400 600 52.8 6.0 n.a. n.a. n.a. 6.9 1,300

10.7 n.a. 1.5 3.0 14.7 14.7 4.7 2,500 2,100 400 44.4 5.8 n.a. n.a. n.a. 7.0 1,350

* from April 2002 to February 2003 NOTE: Data from IMF, ADB and EIU are for the calendar year, e.g. 1998/99 is for calendar year 1998. SOURCES: Ministry of National Planning and Economic Development, May 2001; Asian Development Outlook; IMF, Country Report No. 01/18 (January 2001); EIU, Country Report (August 2003), IMF Direction of Trade Statistics, Government Programme of Action for 2001–2010, CSO, Selected Monthly Indicators (February 2003).

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The year 2003 was a momentous year for Myanmar in political and economic terms, as it was full of political and economic events which had serious implications on the economic performance for the year and may well do so for the next one or two years. In the political arena, it was widely reported in May 2003 that detractors attacked supporters of opposition leader Daw Aung San Suu Kyi — but this has been ignored by the military government. According to the government media, the clash between the two groups in upper Myanmar resulted in the opposition leader being put under “protective custody” by the government on 30 May 2003. This led to a huge outcry by the international community resulting in strong economic sanctions imposed by the United States, Canada and the EU. Japan has postponed its Official Development Assistance (ODA) and Australia withheld its human rights training courses. These actions will affect the economic performance of Myanmar by creating political uncertainty. U.S. economic sanctions on Myanmar were effectively imposed from 28 August 2003. Even before this date, importers and exporters started to feel the pinch in the sense that all U.S. banks and some Singaporean banks have not allowed the opening of letters of credit (LCs) to Myanmar businessmen. Since the sanctions include the ban on imports, the Myanmar garments industry which is worth US$365 million in exports will be adversely affected. About 300 textiles and garment factories will be closed down, and about 100,000 factory workers (the majority of them are women) will lose their jobs. So far at least 62 garment factories have been closed in Yangon and 60,000 women are being thrown out of jobs (FEER, October 2003). Furthermore, the sanctions will also hurt the banking, trading and manufacturing sectors. As a consequence, exports and foreign investment will be affected and this, in turn, will cause foreign exchange constraints on Myanmar. Even foreign embassies in Yangon have encountered problems in withdrawing U.S. dollars from domestic banks. Moreover, a banking crisis broke out in early February 2003, sparked by the collapse of several non-banking financial companies and the sacking of the Finance Minister. This caused the panic withdrawals of deposits from registered private banks. In order to stop these withdrawals, the Central Bank of Myanmar, instead of supporting the private banks, imposed a ceiling on withdrawals at 100,000 kyat (equivalent to US$100 at the market rate) and later reduced it further to 50,000 kyat. Bank cheque and ATM transactions of the private banks were also banned. This caused havoc and construction firms and garment companies/ factories could not pay salaries to their staff and workers. To make the situation worse, borrowers of loans were asked to pay back 50 per cent of their loans immediately. This created a speculative bubble — “gold prices here are above world level, and property prices per square metre are not far off Tokyo or New York” (Nation, 7 April 2003). Even at the time of this report, the banking crisis still lingers on. However, there appears to be a blessing in disguise arising from the shortage of local currency due to the banking crisis, i.e., the value of local currency has risen and the prices of some commodities have decreased. But these so called “blessings” are only temporary “kneejerk” reactions. Furthermore, even though power output grew slightly last year, there is still a shortage of power supply despite the substantial increase in gas exports to Thailand. As imports

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contracted, essential inputs such as machinery, raw materials and intermediate goods for the industrial sector restricted industrial production. The capital injection of 25 million kyat by the Central Bank of Myanmar (CBM) to the private banks as well as the need to fill the gap of the budget deficit (about 5 per cent of GDP) will force the CBM to print more money and this in turn will raise the inflation rate. Currently, the rate of growth of money supply (M2) is 34.2 per cent Furthermore, the trend shows that FDI has slowed down in 2003, and it will likely decline further in the near future since many foreign firms are withdrawing from Myanmar due to political uncertainty, economic sanctions and the import ban imposed on foreign firms. Meanwhile, inefficient state-owned enterprises also continue to be a major financial drain with the stalling of the long-promised privatization programme (EIU, Country Report, August 2003). Despite all these negative signs, the government announced in May 2003 its decision to scrap a forty-year-old paddy procurement policy. This means that farmers and private businessmen could export freely from this year’s harvest so that market forces could take over. This could also create an incentive for farmers to produce more. However, the announcement is confusing and measures are still evolving. Hence, it is too early to say whether farmers will benefit out of this measure. In conclusion, the short-term economic outlook is not encouraging due to international sanctions and stalled economic reforms (which started in the late 1980s). For 2003/04 and 2004/05, the GDP is expected to slow down to 3.2 per cent and 3 per cent respectively.

Philippines

P

hilippine macroeconomic conditions are likely to remain favourable in 2004, but growth is expected to be subdued. Real GDP is projected to be up slightly at 4.2 per cent from an estimated growth of 4.1 per cent in 2003. While the economy is seen to grow based on momentum, the fundamental weaknesses of the country’s fiscal and banking sectors will prevent the economy from treading a higher growth path. Economic developments, particularly in the first half, will also be influenced by political events. Investors are most likely to be sidelined by their expectations of the outcome of the presidential election in May, and as such the slow-down in investment flows (especially in manufacturing) to support domestic demand will cause the economy to register lacklustre growth in the first half of 2004. It is also possible that the foreign exchange and financial markets will come under pressure should the political events turn more adverse than expected, thus adding volatility to peso and stock prices. Although the Philippines will benefit from the rebound in global demand starting from mid-2004, the prospects of an export-led growth are not completely reassuring given the tentative recovery in the United States, continued weakness in Japan and Europe and mild recovery in global trade. While

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geopolitical risks have somehow receded since last year, they are far from being eliminated and any heightened increase in geopolitical uncertainty will tend to cloud the country’s near-term outlook. Despite these concerns, the real sector has some momentum to sustain growth in domestic output. Personal consumption expenditures will increase by 4.5 per cent from 4.1 per cent a year ago, reflecting the positive impact of low inflation and interest rates. Although rising unemployment (12.7 per cent as of end July 2003) may pose serious risk to consumption growth, this will be offset by steady remittances from overseas workers. The improvement in rural incomes as a result of better harvests this year will also help boost personal consumption. After contracting by 2.1 per cent last year, public consumption is expected to pick up again at 4.2 per cent, as the government implements its priority programmes in promoting micro-, small- and medium-enterprises, intensifying housing development and building infrastructure to decongest the greater Metro Manila area. However, the expansion in government spending is seen to be moderated by the need to keep the budget deficit under control. Since the Asian financial crisis in 1997, investment demand has remained sluggish despite stable consumer and business confidence. Fixed capital investment has been contracting by an average rate of 3.2 per cent annually since 1998, and judging from low foreign direct investment (FDI) approvals generated last year (around US$869 million), the investment outlook this year will continue to be less encouraging. One major problem seems to be the decline in the country’s competitiveness to attract FDIs. Labour cost in the Philippines (as measured by minimum wage rate in U.S. dollars per day) is relatively higher at US$5.23 compared to other Asian countries such as Vietnam (US$0.92), China (US$0.31– US$1.28), Indonesia (US$1.57) and Thailand (US$3.18–US$4.02). The Philippines has also one of the highest power rates in the region. For example, electricity rate (in U.S. dollars per month) for business use in Manila amounts to US$51,146 compared to other ASEAN capitals such as Jakarta (US$25,360), Kuala Lumpur (US$34,000), Bangkok (US$30,120) and Singapore (US$45,080). With intense competition for FDIs regionally and globally, the Philippines cannot rely on liberalization measures alone to increase investments in the country. Recently the government has stepped up efforts to attract FDIs (e.g., designating the former Clark Airbase as an airline passenger and logistics hub and introducing greater competition in the power sector through the implementation of the Wholesale Electricity Spot Market mechanism), but it is obvious that more radical measures are needed to address the country’s weak investment (and low savings rate) and declining competitiveness. On the supply side, services (particularly telecommunications and financial services) will continue to be a major stimulus for growth, expanding by 5.7 per cent from an estimated 5.5 per cent in 2003. Services now account for almost 50 per cent of domestic output and employ more than half of the country’s labour force — and the rapid increase in information and communication technologies (ICT) investments in recent years shows the huge growth potential of services sector. Industry is expected to expand at 4.6 per cent from 3.9 per cent in 2003, but its growth will continue to be undermined by low capacity utilization rate (currently below 80 per cent) in manufacturing. Agriculture will recover from the drought

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experienced last year. The recovery in agricultural output will also be boosted by renewed efforts to improve the competitiveness of agriculture with the expected passing into law by Congress of the Farmland as Collateral Bill and increased investments in agriculture (including the expanded use of high yielding seeds for rice and corn). While these are good measures, a key challenge is to develop indigenous industries that can create jobs and enhance growth in incomes of rural economy. As mentioned, rising global economic activity and trade in 2004 (the IMF projected global output and trade to grow by 4.1 per cent and 5.5 per cent, respectively) will help underpin growth in the Philippine economy. However, the nascent recovery in the global electronics market will enable the country’s exports to grow modestly, while imports will also increase to reflect the pick-up in export industries. This will result in a trade deficit, albeit lower, at US$840 million compared to US$1.1 billion in 2003. Reflecting the trade deficit, the current account surplus is seen to narrow slightly to US$1.8 billion from US$1.9 billion a year ago. Despite the improvement in global financing conditions, capital inflows in the Philippines are not expected to rise significantly due to weak investor sentiment, which is owed in part to political uncertainty (particularly in the run-up to the presidential election in May) and some concerns on public sector finances. By year-end, the official foreign exchange reserves are projected to increase slightly to US$17 billion as the peso consolidates at P54 against the U.S. dollar. With the pace and robustness of global recovery still unclear, and given the fragility of domestic demand, overall macroeconomic policies will continue to be expansionary. Monetary policy will remain accommodative as the rate of growth in domestic liquidity (M3) eases further to almost 10 per cent due to increase in overseas income remittances and steady growth in deposits. This will also allow domestic interest rates to be low (with the benchmark 91-day Treasury Bill rate averaging 7.5 per cent), aided by benign domestic inflation rates (averaging 4.5 per cent) and the generally low interest rates in major central banks around the world. No changes in policy rates are expected this year; both overnight borrowing and lending rates are seen to remain at their current levels at 7 per cent and 9.25 per cent, respectively, unchanged since March 2002. Notwithstanding this stable monetary environment, authorities need also to maintain favourable financial conditions to avoid sudden reversal in sentiment that will undermine the stability of financial markets. While the enactment of the Special Purpose Vehicle Act to ensure proper valuation of nonperforming assets is encouraging, financial sector reforms must continue to be pursued, including the strengthening of bank capital and anti-money laundering legislation. Although this year’s budget deficit is projected to be lower (4.3 per cent of GDP compared to an estimated 4.6 per cent in 2003), the medium-term fiscal outlook is still uncertain. Unless the government decisively strengthens its revenue effort and implements fundamental tax policy measures, investor sentiment will continue to be weighed down by their growing concerns about public sector finances. In its August 2003 post-monitoring discussion with the Philippines, the IMF called on the Philippines to implement higher taxes on cigarettes and alcohol, higher oil excises and value-added tax rates to rationalize fiscal incentives. The IMF also expressed concern over the slow process of privatizing the major

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Philippines: Selected Economic Indicators, 1999–2005F 1999

2000

2001

2002

2003E

2004F

2005F

3.4 6.6 0.9 4.0

4.4 3.4 4.9 4.4

4.5 4.7 4.8 4.3

4.4 3.3 3.7 5.4

4.1 3.0 3.9 5.5

4.2 3.5 4.6 5.7

4.7 4.5 5.1 6.3

35,037 30,723 4,314

38,078 31,387 6,691

32,150 33,057 –907

35,207 35,427 –220

34,870 35,970 –1,100

38,007 38,847 –840

42,940 41,954 986

6.7

4.3

6.1

3.1

2.9

4.5

5.5

External debt (% of GDP) Foreign reserves (US$ billion)

70.7 15.0

78.7 15.0

73.3 15.6

71.1 16.2

75.0 16.5

74.5 17.0

71.0 17.5

Interest rate (% change)* M3 growth (% change)

10.2 19.3

9.9 4.6

9.7 6.8

5.5 9.5

6.5 10.0

7.5 9.9

8.0 8.9

40.31

50.00

51.40

53.10

54.25

54.00

52.50

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

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

* 91-day T-bill rate SOURCES: Country websites; Economist Intelligence Unit (EIU); author’s estimates.

transmission assets of the National Power Corporation and the need for prudent foreign borrowing policies to ensure medium-term fiscal sustainability. Obviously the country faces the hard option of overhauling the tax system to balance the budget by 2009 and to address the structural deterioration in the fiscal sector that has led to overcrowding of investment over the years. Beyond macroeconomic policies, the government needs to address remaining vulnerabilities, particularly the need to resolve non-performing loan (NPL) problems and facilitate loan workouts and corporate restructuring that is crucial to stimulate private sector activity. Unfortunately current efforts are still not enough. The NPL ratio of the commercial banking system is still high at 14.9 per cent while non-performing assets remain substantial at P439 billion (data as of end-August 2003). Meanwhile, advancing the reform agenda should remain a top priority especially this election year 2004, where the risk of reforms being passed over in favour of other political interests can be high.

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Singapore

T

he Singapore economy registered a growth rate of 2.2 per cent in 2002, thereby regaining the ground lost during the previous year when it contracted by 2.4 per cent — the worst recession on record. In the first three months of 2003, gross domestic product (GDP) growth was a paltry 1.6 per cent. By historical standards, this performance would have put Singapore in a “growth recession”, or a cyclical phase of slow growth relative to trend output. In stark contrast to the robust rebound during the two years following the Asian financial crisis of 1997–98 when growth averaged 8 per cent, the path to economic recovery this time has been derailed by a seemingly unending sequence of external shocks that included terrorist attacks, the U.S.–Iraq War and the recent outbreak of Severe Acute Respiratory Syndrome (SARS). As a small and open economy surviving in an uncertain world, Singapore was exceptionally vulnerable to these events. The most devastating shock to have buffeted the economy was SARS. Like the Asian crisis before it, the disease spread rapidly throughout the region by contagion. In Singapore, the tourism and transportation sectors bore the brunt of the widespread fear engendered by the epidemic as visitor arrivals fell by 62 per cent in the second quarter of 2003 from a year ago, and the average hotel occupancy rate plunged to 42 per cent. The economic damage inflicted by SARS was also comparable to the financial crisis, which lopped off about 1 percentage point from Singapore’s output in 1998. Official estimates show that roughly half of the 3.8 per cent shrinkage in second quarter GDP could be attributed to badly hit services industries such as hotels, restaurants, and air travel. This finding nevertheless suggests that growth would have been anaemic in the first half of the year even if the viral outbreak had not occurred. Indeed, industrial output in the second quarter was 7.1 per cent lower than it had been during the same period a year earlier, after growing by 5.8 per cent in the previous three months, despite the fact that the SARS crisis did not seem to have disrupted regional supply chains. Anecdotal evidence from local business surveys points instead to the deleterious effects of the Iraq War on consumer and investor psychology as the most probable cause of the manufacturing sector’s dismal showing. In any event, a moderation in external demand dented Singapore’s production and shipments abroad of electronic and biomedical goods. With overseas visitors responding to officially sponsored programmes to woo tourists back to Singapore after the SARS outbreak was contained in June 2003, it appears that the economic impact of the epidemic was largely confined to the months of April and May. As a result, the equity market has rebounded smartly from its nadir in March, helping the financial services sector to post growth of 6.8 per cent and 5.7 per cent in the second and third quarters of 2003 respectively, after contracting for more than a year. There are further reasons to believe that the economy will perform better in the second half of 2003 and early 2004. Forward-looking indicators of the global electronics cycle — to which Singapore’s business cycle is intimately tied — have risen more convincingly than at any time since the information technology (IT) bubble burst in 2000. The U.S. economy has exhibited renewed vigour after going through a soft patch at the beginning of the year, and this should spur growth in Singapore’s key trading partners and revive domestic economic activity. Even so, a sustainable recovery depends critically on companies in the industrialized countries

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investing again in machinery and computers. If this spending materializes, the Singapore economy could still grow by about 1 per cent in 2003. Having contributed negatively to GDP growth in the first nine months of 2003, domestic demand is likely to stay sluggish in the near term before strengthening somewhat in 2004. Private consumption would be depressed by rising joblessness, as witnessed by an unemployment rate of 5.9 per cent in September 2003, as well as the effective wage cuts resulting from reductions in Central Provident Fund (CPF) pension scheme contributions, notwithstanding the promulgation of a modest off-budget package aimed at cushioning their impact in August 2003. The package included, inter alia, additional relief measures for businesses affected by SARS but its centrepiece was the front-loading of S$600 million worth of government spending on small infrastructure projects such as the upgrading of roads and schools. Given huge import leakages and small multiplier effects, however, the increase in public investment expenditure is expected to provide only a mild fiscal stimulus to the economy while it will do little to halt the structural slump in the construction industry that followed the building boom of the 1990s. The anticipated upturn will thus be driven by an expansion of exports. Non-oil domestic exports in particular are projected to increase by close to 15 per cent in 2003 and 8 per cent in 2004. Although the very high import content of Singapore’s manufactured exports means

Singapore: Selected Economic Indicators, 1999–2005F 1999

2000

2001

2002

2003E

2004F

2005F

6.4 13.0 –9.0 5.6

9.4 15.1 –1.8 7.7

–2.4 –11.5 –3.2 2.0

2.2 8.3 –10.8 1.5

1.0 2.8 –9.5 2.0

4.5 6.4 –5.3 4.9

4.0 4.5 0.0 4.3

142,912 128,511 15,185

168,965 154,506 13,281

153,300 136,563 16,138

158,074 137,122 18,704

180,106 151,552 25,076

204,092 179,366 21,207

218,378 191,563 23,296

0.0 2.9

1.3 2.7

1.0 4.4

–0.4 4.2

0.5 5.6

1.0 4.5

1.5 3.9

Foreign exchange reserves (US$ billion)

77.2

80.4

75.8

82.3

94.0

99.5

105.5

Three month interbank rate (% per annum)

2.12

2.57

2.00

0.95

0.88

1.30

1.85

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

1.67

1.73

1.85

1.74

1.72

1.70

1.70

GDP growth (% change) Manufacturing sector growth (% change) Construction sector growth (% change) Services sector growth (% change) Exports of goods and services (US$ million) Imports of goods and services (US$ million) Current account balance (US$ million) Inflation/CPI average (% change) Unemployment rate at year-end (%)

SOURCES: Ministry of Trade and Industry, Economic Survey of Singapore; Monetary Authority of Singapore, Annual Report 2002/2003; and Econometric Studies Unit, National University of Singapore.

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that the pace of import growth cannot lag too far behind export growth, both merchandise and services imports have been restrained by weak domestic absorption. Reflecting this, the current account surplus for 2003 is set to widen to US$25 billion, or 27 per cent of GDP, making it the largest surplus to be recorded since the balance on the current account first turned positive in the mid-1980s. Monetary policy in Singapore has been kept on an even keel from the time the economy went into a recession in 2001. But in a move that amounted to a de facto easing of this policy stance, the Monetary Authority of Singapore (MAS) announced in July 2003 that it would allow the Singapore dollar to fluctuate around a lower target value of the trade-weighted exchange rate. The local unit had actually depreciated against the major currencies during the first half of 2003 due to poor market sentiment, though the MAS also intervened to stem its incipient rise in the face of burgeoning current account surpluses. The central bank’s actions boosted official foreign reserves to US$92.5 billion by October 2003 — equivalent to 9 months of imports — and pushed the domestic three-month interbank rate down to a low of 0.63 per cent in June, in tandem with declining world interest rates. In spite of a weaker currency, the deflationary pressures generated by SARS and excess capacity in the economy should cap inflation for the next two years at 1–1.5 per cent. Without a doubt, the most important policy milestone of 2003 was the government’s decision to reduce the employer’s share of statutory CPF contributions by three points to 13 per cent, with deeper cuts planned for older workers. The reduction in contribution rates that took effect in October was accompanied by a proposal to lower the salary ceiling that limits the income level subject to the levy to S$4,500 in two years’ time. Unlike the two earlier precedents in 1985 and 1999 when similar, albeit bigger, cuts were made and gradually restored, the CPF rate will henceforth vary counter-cyclically with economic conditions — going up in good years and coming down in bad times. From a longer-term perspective, the reforms introduce greater flexibility into wages, the dominant component of Singapore’s cost structure. The sweeping changes are also a crucial element of the government’s two-pronged strategy to secure Singapore’s economic future: on the one hand, move rapidly into high value-added activities and on the other, enhance international competitiveness by lowering business costs. As far as the first thrust of the strategy is concerned, Singapore remains an attractive destination for foreign direct investment (FDI), as evidenced by manufacturing investment commitments of S$5.6 billion in the first nine months of 2003. An overt objective of the latest measures, which came on the heels of a cut in the corporate tax rate to 22 per cent starting from 2003, is to retain existing jobs in the economy and create new employment in the long run. However, they are unlikely to reverse the global tide of multinationals outsourcing their manufacturing operations to cheaper locations such as China and India, and the concomitant migration of white-collar jobs from the developed to the developing world. Nonetheless, the CPF retuning does partially address the long-held perception that Singapore is an expensive place in which to do business and has been estimated to yield an immediate saving to companies of S$1.3 billion a year in wage bills. The changes will certainly benefit the relatively more labour and skill-intensive services sectors where Singapore’s comparative advantage increasingly

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lies and which the government has identified as promising growth niches, viz., the education, healthcare, finance, logistics and creative industries. Coupled with a softer exchange rate, the CPF cuts will put the city-state on an improved footing to meet the emerging competition in these areas from neighbouring Malaysia and Thailand, especially if they were to be supplemented by further reductions in rentals and government charges. Looking ahead, Singapore is poised to return to its medium-term potential growth trajectory. Provided that global demand for its goods and services remains buoyant and no adverse shocks cloud the horizon, real GDP growth in 2004 and 2005 can be expected to fall within the 3 to 5 per cent range prescribed by the Economic Review Committee (ERC), a task force set up in December 2001 to map out new strategies for the economy. And, as envisaged by the ERC recommendations released in early 2003, the twin growth engines of manufacturing and services will continue to power the next stage of Singapore’s economic development.

T

he dual track policy has put the country on a track of strong economic growth since 2002.* Fiscal and monetary policies remain expansionary to support the robust growth of domestic demand. Policy focus has shifted away from consumption stimulus to investment promotion. These policies, however, have raised concerns of turning Thailand into a bubble economy. The government targeted an increase in budget expenditure to 1,028 billion baht, up 2.8 per cent, in FY 2003/04. Of the total expenditure, 21.5 per cent is allocated to government investment, 75.2 per cent to current expenditures, and the remaining 3.3 per cent to finance debt-servicing requirement. Budget deficit was estimated to decline 42.9 per cent to 99.9 billion baht because of a 12.5 per cent increase in forecast revenue. These are based on the expectation of GDP growth of 5.5–6 per cent and inflation rate of 2 per cent. The government will be able to provide more economic stimulus through government programmes and investment projects due to the improved efficiency in tax collection and falling debtservice costs. The ratio of public-debt-to-GDP fell below 50 per cent in 2003. Fiscal burden, however, remains at a high level. The Fiscal Policy Research Institute estimated that accumulative

Thailand

* Thailand’s dual track policy refers to the duality approach of export and domestic sectors to bring economic growth with stability. On the domestic sector, the government focuses on strengthening the grass-roots, the small and medium-sized enterprises, and the large-scale domestic industries. Meanwhile, on the external side, the government aims to create linkages and strategically enhance the country’s competitiveness in the international arena.

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fiscal burden from all the government programmes would increase from 54.6 billion baht in 2002 to 192.2 billion baht in 2004, and 230.4 billion baht in 2005. The government plans to continue reducing public debt and contingent liabilities. Since the stock market condition improves, initial public offerings of a number of state-owned enterprises are taking shape (see box entitled, “Privatization in Thailand: Plans Move Ahead”). In addition, debt-servicing costs have fallen as a result of full payment of the International Monetary Fund (IMF) loan in 2003. A fiscal crisis is unlikely within the near term as long as a trajectory of solid economic growth is maintained. On monetary policies, the Bank of Thailand lowered the benchmark 14-day repurchase rate by 50 basis points, to 1.25 per cent in June 2003. In justifying the cut, the BOT cited a need to reduce volatile short-term capital inflow and the risk of core inflation to below the target range of 0–3.5 per cent. Short-term interest rates are set with the objective of keeping core inflation within the target range over 2004–05. Core inflation is expected to rise modestly in 2004 due to the steady increase in housing demand, excess capacity utilization, and tariff reductions within the framework of ASEAN Free Trade Area (AFTA) and bilateral free trade agreements (FTAs). Domestic demand remains strong particularly in private consumption. This is attributed to rising commodity prices, government programmes (designed specifically to boost rural incomes and demand in the property sector), low interest rate, and consumer credit expansion. To sustain consumption growth, the government maintains a 7 per cent valueadded tax rate over 2004–05. Private investment is likely to begin in exportable sectors such as electronics, automobiles, automobile parts and motorcycles. Exports and governmentdriven investment measures (e.g., low-income housing loan projects, loans for SMEs, and Vayupak mutual funds) are main determinants of the country’s investment growth. New and moderate investment, therefore, are likely to emerge in 2004. The growth of domestic demand is expected to continue in 2004 and 2005. On the production side, agriculture output has registered a moderate growth, owing to strong commodity prices and favourable weather conditions. In the non-agricultural sector, the industries that expanded were food and beverages, electronic and electrical products, vehicles and equipment, hotel and restaurants, and financial intermediation. Capacity utilization increased significantly to above 70 per cent for electrical and electronic parts and transportation equipments. Manufacturing and services sectors are expected to grow in 2004 and 2005, driven by robust growth of domestic and global demand. In “Thailand National Visions of Strategies”, the government has given attention to upgrading national competitiveness over the medium term. The main objectives are: (a) to achieve GDP growth in the agricultural sector at an average rate of 2 per cent per annum and the manufacturing sector at 4.5 per cent; (b) to retain Thailand’s role as a major world food producer by increasing its market share of agricultural products, and becoming a leading processing base for premium agricultural products; and (c) to increase foreign tourist income by an average rate of 7–8 per cent per annum, and increase domestic tourism by at least 3 per cent per annum.

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In 2003, a budget of 1.4 billion baht was allocated to develop strategies and implement measures to improve the country’s competitiveness. The government identified the following niche products and services as the initial targets. They are processed food, furniture, rubber products, vehicles and parts, fashion, health and education services, tourism and software design. New investment strategies have been formulated and implemented. These include low-income housing projects, fiscal-credit expansion, and Vayupak mutual funds. In 2003, total outstanding loans of state-owned financial institutions for the government programmes amounted to 28.4 billion baht, or 20 per cent of total private credit extension over the 2001– 03 period. There are concerns that a substantial and prolonged expansion in asset and credit demand could possibly lead to a boom and bust outcome. On the external front, an uptrend in exports has continued due to the global economic recovery, strong international agricultural prices, and tariff reductions under the AFTA framework and bilateral FTAs. Import demand has also been growing strongly, boosted by consumer confidence and export orders. Exports and imports are expected to grow strongly in 2004 and 2005. The trade surplus is still expected to rise due to the lower base level of imports. On the income account, continued reduction of foreign debts with lower international interest rates will result in lower interest payment obligations. But this will be offset by profit

Thailand: Selected Economic Indicators, 1999–2005F 1999

2000

2001

2002

2003E

2004F

2005F

4.4 9.6 0.4 2.3

4.6 5.2 3.7 6.4

1.9 1.6 2.0 3.3

5.3 7.5 4.1 0.5

6.0 8.9 3.7 3.4

6.4 8.6 4.5 4.5

6.1 7.8 4.8 3.7

56,801 47,529 9,272

67,889 62,423 5,466

63,190 60,665 2,525

66,799 63,363 3,436

73,145 69,382 3,762

80,167 76,113 4,054

87,462 83,191 4,271

Headline inflation (%)

0.30

1.60

1.57

0.68

1.80

1.95

1.90

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

77.5 34.8

64.9 32.7

58.5 33.0

47.0 38.9

41.5 40.3

37.1 41.5

35.6 41.0

GDP growth (% change) industry sector growth (% change) services sector growth (% change) agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million)

Prime lending rate (% per annum) Exchange rate, average (Baht/US$1)

8.25–8.50 7.50–8.25 7.00–7.50 6.50–7.00 5.50–5.75 5.75–6.00 6.00–6.25 37.84

40.16

44.48

44.48

41.53

40.0

40.0

SOURCES: Bank of Thailand; CEIC Database; Economic Intelligence Unit; and author’s estimates.

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and dividend remittances from profitable Thai firms. The current account will remain in surplus as a result of the rising trade surplus and a recovery in tourism revenues. Despite some expected capital outflow, the baht will be supported by the solid currentaccount surplus and a high level of foreign exchange reserves. The baht is therefore expected to remain stable in 2004 and 2005. To promote trade and investment, Thailand has made progress in establishing bilateral trade talks and economic relationships with its trading partners. The country has already signed its first FTA with Bahrain. The agreement came into effect under the Thai–Bahrain Framework Agreement on Closer Economic Partnership. Both countries are expected to bring about zero-per cent tariff reduction on 626 products by 2005. The timeframe for the remaining 5,000 products is still being negotiated. Bilateral talks with China were concluded in June 2003. The FTA with China commenced in October 2003 (which is more of a preferential trading agreement at this stage) covered an elimination of tariffs on 188 vegetables and fruits. The agreement is expected to pave the way for eliminating trade barriers in more sectors, leading to a comprehensive FTA with China in the near term. A framework agreement for establishing an FTA between Thailand and India was signed in October 2003. Both countries agreed to impose a zero-tariff rate of all trading items and remove non-tariff barriers by 2010. Under an early harvest scheme, tariff reduction or elimination of 84 products will commence in March 2004 and be completed by 2006. Negotiations on the agreements of trade in services and investments will start in January 2004 and are expected to be concluded by January 2006. Thailand and Australia have started to negotiate a package of 5,000 products under the Closer Economic Relations and Free Trade Agreement (CER-FTA). The negotiations seem to take longer to conclude. At the last round of talks, the countries could not reach an agreement on which tariffs to be removed. There is also a stalemate over rule-of-origin formulations, sanitary standards for fruits and meats and on further liberalization in investment and services. However, Thailand hopes to conclude bilateral talks with Australia in 2003. Negotiations with Japan are also underway for a proposed Closer Economic Partnership. Japan, however, has been slow to respond because of objections to tariff cuts on some agricultural items. To be eligible for an FTA with the United States, Thailand signed a Trade and Investment Framework Agreement (TIFA) in October 2002. The two countries expect to start negotiations for an FTA in early 2004. The FTA with the United States is going to be more complicated than Thailand’s FTA with other partners. This is partly because Thailand and the United States are currently bound by the 1966 Treaty of Amity, which has effectively given both Thai and U.S. businesses most favoured nation (MFN) status. In addition, the comprehensive FTA with the United States would cover not only tariff reduction of all trading items but also improvement in domestic laws and regulations.

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A framework agreement for closer economic co-operation and a cultural agreement between Peru and Thailand were signed in October 2003. Under the agreement, bilateral trade negotiations between the countries are expected to begin in 2004 and conclude by 2005. Both countries plan to establish an FTA by 2015. Besides the potential FTA partners, Thailand initiated trade talks with Canada, Taiwan, and New Zealand. These are still in the form of proposal or feasibility studies. In Southeast Asia, Thailand has made progress in fostering a closer economic relationship with Singapore. The Singapore-Thailand Enhanced Economic Relationship (STEER) aims at consolidating and intensifying co-operation in the areas of automotive electronics, food and agriculture, aviation, and trade and investment promotion. The inaugural meeting in August 2003 also discussed the possible expansion of the coverage of products under the Integrated Sourcing Initiative (ISI) of the U.S.–Singapore Free Trade Agreement. STEER could set an example of bilateral economic co-operation for the rest of ASEAN. Thailand has positioned itself towards a high-growth economy. The government has propelled all the three engines of growth — consumption, investment and exports — to sustain the country’s strong growth. However, the attempts to boost private investment through the housing project and fiscal credit extension have raised concerns of new nonperforming loans in state-owned financial institutions as well as turning the country into a bubble economy. Based on the current fiscal burden, public debt could be destabilized if the government reverses the process of fiscal consolidation.

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PRIVATIZATION IN THAILAND: PLANS MOVE AHEAD By Sakulrat Montreevat

T

he privatization of state-owned enterprises (SOEs) in Thailand has been underway for almost 50 years. In 1932, one hundred SOEs were initially established to provide necessary goods and services to the Thai people. They were also set up with the aim of achieving a balanced economic and social structure that would raise the living standards of the Thai people. Privatization efforts reduced the number of SOEs to 84 enterprises in 2003, of which 61 are owned and regulated by the Ministry of Finance (MOF); two are independent SOEs; three are financial institutions under the control of the MOF; and 18 are subsidiaries or separate legal entities. The role of the private sector in SOEs has increased through the National Economic and Social Development Plans (NESDPs) with programme objectives varying according to prevailing economic conditions. The first NESDP (1961–66) was launched with the purpose of encouraging private participation in SOE operations. The second NESDP (1967–71) set policies that kept SOEs from competing with private enterprises in industries that the latter were more efficient. In the third NESDP (1972–76), the government limited its investment in some SOEs due to the oil crises (that Thailand was facing), high inflation and low economic growth. In the fourth and fifth NESDP (1977–86), the government still supported private sector participation in SOEs due to the large investments needed to maintain operations. In the sixth NESDP (1987–91), the National Economic and Social Development Board (NESDB) issued a master guideline for increasing the role of the private sector in all SOEs. Improving the efficiency of SOEs was the aim of the seventh NESDP (1992–96). An explicit SOE reform has been implemented since the eighth NESDP (1997–2001). The State Enterprise Policy Commisssion (SEPC) was established in 1998 to

oversee the privatization and the reform process of SOEs. Several methods of privatization have been explored by the government to improve the efficiency of commercially oriented SOEs. In the past, privatization methods have been in the forms of joint venture, leasing, concession, public share offering, and strategic sale. Privatization through public share offering is currently the preferred choice. Privatization through strategic sales and concession contracts are also used but each is on a case-by-case basis. The decision to use the public share offering method is based on the need to commercialize SOEs, market conditions, regulatory issues and change in the SOEs’ status to corporate entities through the Corporatization Act. However, the privatization structure for each enterprise is developed on a caseby-case basis. Decision to proceed with public listings is based on commercial readiness and capital market conditions. Since 1997, there have been a number of listings on the Stock Exchange of Thailand (SET). These include PTT Exploration and Production in 1997, Petroleum Authority of Thailand (PTT) and Internet Thailand in 2001, Bank Thai and Krung Thai Credit Card in 2002. As for the Electricity Generating Company, a combination of public offering and strategic sale were employed in 1998. Recent completed corporatization exercises include TOT Corporation and Airports of Thailand in 2002, CAT Telecom and Thailand POST in 2003. By 2004, it is expected that privatization transactions through public listing will be implemented for Krung Thai Bank, Airports of Thailand, and Thai Airways. Preparations are also underway for a number of privatization transactions including TOT Corporation, CAT Telecom, Metropolitan Waterworks Authority, Electricity Generating Authority, Metropolitan

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PUBLIC DEBT MANAGEMENT IN THAILAND (continued)

Electricity Authority, Provincial Waterworks Authority and Provincial Electricity Authority. The timing for each of these transactions will depend on when specific commercial, corporate and regulatory issues are resolved. In general, each privatization structure includes domestic and foreign tranches on a 60:40 basis, i.e., 60 per cent targeted to domestic investors and 40 per cent to international institutions. Even though foreign ownership is limited to 30 per cent, this can be changed at shareholder meetings if necessary. For example, the Electricity Generating Company raised its foreign ownership limit to 40 per cent in 1998. Due to recent public offerings, the government’s shareholdings decreased to 49 per cent for Internet Thailand, PTT, Bank Thai and Krung Thai Card. It is expected that the government will hold less than 50 per cent of TOT Corporation and 70 per cent of Thai Airways and Airports of Thailand by 2004. The State Enterprise Policy Office, Ministry of Finance estimated that stock market capitalization would increase from 102.0 billion baht (US$2.37 billion) in 2001 to 535.9 billion baht (US$12.45 billion) in 2004. This will also help strengthen the country’s capital market. In

addition, corporate governance of the enterprises will be improved as more SOEs are listed in the stock exchange. Furthermore, the government has considered a strategic sale as a possible option to promote competition of CAT Telecom. Meanwhile, concession contract is still applied to some SOEs in water and railway sectors in order to retain the assets in government hands. Privatization has become one of the core programmes in Thailand’s economic recovery. The objectives are to increase competition, foreign investment, and attract capital investment for infrastructure and technology improvement. Due to improving market condition and profitability of SOEs, it is expected that the number of privatization transactions will steadily increase. However, challenges arising from uncertainty in the world economy, management, employment and government concerns over foreign shareholding still remains to be resolved. In particular, unions continue to strictly oppose any forms of privatization. All of these issues need to be handled in an appropriate manner in order to expedite privatization in Thailand.

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Vietnam

T

he economy of Vietnam can be broadly characterized as that of a developing country undergoing economic transition, away from a centrally planned to a more market-oriented economy. The first seeds of this economic transition process began in 1979, and were concretized under the banner of doi moi (renovation) in 1986. Apart from a brief spell during the mid-1990s, the momentum of economic reform has been fairly constant, although some observers have suggested that the overall pace of economic transition has been slow. Such comments aside, the extent of economic reform that Vietnam has undergone since the mid-1980s has been quite considerable and commendable. Recent years have seen the primary focus of the economic reform process shift towards business liberalization efforts, and developing a more robust domestic corporate and banking sector. A critical milestone in that process was the epochal Enterprise Law, passed in early 2000, which has helped markedly improve the business environment for non-state firms. The number of private companies registering under the Enterprise Law has literally exploded, encouraged by fiscal incentives. These domestic reforms have been enacted in tandem with an attempt by the government to more fully integrate the Vietnamese economy with the global economy. Foreign investment inflow and export figures would suggest that this process is going fairly well, particularly given the unsupportive global economic backdrop. Having recently signed a bilateral trade agreement with the United States, the Vietnam Government is now focusing its attention on gaining accession to the World Trade Organization (WTO), ideally by 2005. The Vietnamese economy has been growing fairly consistently over the last decade by over 5 per cent, and this is expected to persist. Real GDP growth for 2003 is estimated at 6.9 per cent, with the southern business hub of Ho Chi Minh City and the economically vibrant provinces that surround it (such as Dong Nai, Binh Duong and Long An) probably growing at closer to 10 per cent per annum. At the time of writing, industrial production growth was almost 16 per cent up year-on-year, foreign direct investment inflow pledges are up 8 per cent year-on-year, and export earnings are up 28 per cent year-on-year. Official figures suggest that, despite having such a vigorous economy, inflation is low, at below 2 per cent, although this figure fails to take account of steep rises in the price of urban property in recent years — arguably the asset class of choice for the more affluent Vietnamese savers. Bank loan growth has also been on the high side of late, which may pose problems in the future if the overall quality of bank loan portfolios is poor, and credit has been overly secured with inflated property as collateral. Another area of possible future concern has been the widening trade deficit, which was around US$4 billion in 1993, on exports of about US$20 billion and imports of roughly US$24 billion. The export target for 2004 is US$22.6 billion. Exports destined for the U.S. market in particular have increased substantially since the signing of a bilateral trade agreement between Hanoi and Washington. Looking ahead, sustaining economic growth in Vietnam will be dependent on a number of factors. These include ongoing, but sometimes painfully slow, efforts to transform the state enterprise sector into a more efficient and competitive engine of production, without the special protection and privileges it has enjoyed in the past. Strengthening the local banking sector is also imperative, in order to more effectively provide most of the capital

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needed to fund corporate sector development. There has been some consolidation amongst the private banks, but more is required. The state-owned commercial banks also need to do more to get their loan portfolios into better shape. There is also a need to deepen the capital markets in Vietnam, to generate more long-term funding sources — for the corporate sector and government alike — which complement the more short-term credit that banks tend to provide. This includes moves to further develop the market for equity and fixed income securities, as well as establishing more financial institutions that can actively participate in these markets. The performance of Vietnam’s stock market (opened in mid-2000) in particular has been disappointing in recent years. At the time of writing, just 21 companies are listed on the new bourse, of which 20 are former state enterprises, and just one has conducted an initial public offering on the market itself. It is hardly surprising, therefore, that the stock market index has been in gradual decline since mid-2001. With an economy growing so rapidly, the thirst for investment funding is substantial, and 2002 saw a number of fairly large domestic bond issues enacted both by the national government, and the Ho Chi Minh City authority. There were also a number of bond issues

Vietnam: Selected Economic Indicators, 1999–2005F 1999

2000

2001

2002

2003E

2004F

2005F

4.7 7.6 2.1 5.2

6.1 9.6 4.5 4.0

5.8 9.7 4.4 2.3

6.4 8.9 6.0 3.0

6.9 9.6 6.5 2.9

7.1 9.8 6.7 3.0

7.0 9.7 6.5 3.0

11,541 11,742 –201 4.1

14,483 15,637 –1,154 3.5

15,027 16,162 –1,135 2.1

16,706 19,733 –3,027 –0.7

19,960 24,335 –4,375 –2.2

24,000 27,000 –3,000 –

– – – –

1,412

1,298

1,300

1,200

–

–

–

0.1 39.3

–0.6 56.2

0.8 25.5

4.0 19.9

5.0 19.4

5.0 –

– –

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

23,260 20,529 9.9

12,835 11,594 7.5

12,578 11,428 6.7

– – –

– – –

– – –

– – –

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

2,947 13,944

2,831 14,168

3,540 15,050

3,815 15,200

4,000 15,600

– 15,850

– 16,200

GDP growth (% change) industry sector growth (% change) services sector growth (% change) agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Current account balance (% of GDP) Foreign direct investment (US$ million) Inflation/CPI average (% change) M2 money supply growth (% change)

*In late 2000, US$10.5 billion of Russian debt was written down to US$1.7 billion. SOURCES: Asian Development Bank; International Monetary Fund; UNCTAD; and author’s estimates.

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by state-linked companies, denominated in the local currency. These bond issues will become more frequent in the coming years, and the likelihood of Vietnam’s first international Eurobond issue, denominated in U.S. dollars, has been publicly mooted by the government. Vietnam’s Ministry of Finance hopes to raise over US$450 million from local and overseas bond issues in 2004. With global interest rates so low at present, the temptation to enact an international bond issue is strong, although Hanoi will be careful to consider the reactions of international donors that might begin to question the utility of providing grants and soft loans to a country that is seemingly able to tap the international capital markets for at least some of its funding needs. At the time of writing, Vietnam’s long-term sovereign rating from Fitch was BB– and B1 from Moody’s, both with a positive outlook. Another crucial factor in Vietnam’s immediate economic prospects is the extent to which the burgeoning private sector is able to take advantage of impending changes to their business environment. The importance attached to the domestic private sector has increased since global foreign direct investment flows have contracted, and the state enterprise sector continues to underperform. As a direct and cumulative result of commitments already made under the ASEAN Free Trade Area (AFTA), the bilateral trade agreement with the United States, conditions attached to loan programmes with multilateral agencies, and ongoing negotiations to enter WTO, Vietnam’s domestic market is going to be exposed to far greater foreign penetration, particularly in the service sector. As a consequence, local private companies will need to compete on an equal footing with foreign competitors, for both export markets and their own domestic market. The jury is out on whether enough local companies have sufficient capacity, or can rapidly build up sufficient capacity, to meet the challenge posed by this increasingly competitive business environment. Recent evidence would suggest there is room for cautious optimism on this front. Vietnam rapidly went from being a net importer of rice to the world’s third largest exporter. A similar feat was achieved with coffee exports, inadvertently contributing to a global glut in coffee beans and a marked decline in global coffee prices. More recently, growing exports of sea products, garments, footwear, furniture and handicrafts also suggest that Vietnam’s capabilities in scaling up production in those export commodities and manufactured goods in which it has some degree of competitive advantage are substantial. Indeed, Vietnam has been so successful that it has started to encounter resistance from specific domestic lobby groups in markets like the United States, dubiously accusing Vietnam of “dumping” items like catfish. But it would be wrong to assume that the rise of Vietnam’s corporate sector will be relatively plain sailing. Local companies often tend to lack the kind of “soft skills” — such as business strategy and planning, human resource management, marketing and branding, supply chain management, accounting, production planning and management, quality adherence, customer relations management — needed to develop into more robust and internationally competitive businesses. The degree of success displayed by some foreigninvested firms focusing on the domestic market in Vietnam is testament to the extent to which local firms still have a lot to learn in this field. But if these skills gaps can be overcome, then Vietnamese firms seem well positioned to plug into the growing number of international production networks and export markets that could help hoist the economy to the next level,

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and provide employment for the roughly one million young people joining Vietnam’s labour force each year. In conclusion, the economic reform process in Vietnam is expected to continue, as commitments made by the government to various international donor agencies, regional associations and international organizations effectively delineate a business liberalization road map for the country. With some of these commitments time-bound, the pace of economic reform is also expected to be fairly steady, if not rapid. Maintaining economic reform momentum is also necessary if the government is to achieve its target of 7 per cent annual GDP growth for the next decade.

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SELECTED SOURCES OF DATA Asian Development Outlook (Asian Development Bank) Asian Wall Street Journal Bangkok Post (Thailand) Borneo Bulletin (Brunei) Brunei Darussalam Statistical Yearbook (Brunei) Business Day (Thailand) Business Times (Singapore) Cambodian Daily, Weekly Review (Cambodia) Economist Economist Intelligence Unit, Country Reports The Edge (Malaysia) Far Eastern Economic Review Jakarta Post (Indonesia) Manila Bulletin (Philippines) The Nation (Thailand) New Light of Myanmar (Myanmar) New Straits Times (Malaysia) News Express (Brunei) Newsbreak Magazine (Philippines) Nhan Dan (Vietnam) Philippine Daily Enquirer (Philippines) Philippine Star (Philippines) Phnom Penh Post (Cambodia) The Star (Malaysia) Straits Times (Singapore) Tempo (Indonesia) Utusan Malaysia (Malaysia) Vientiane Times (Laos) Vietnam Investment Review (Vietnam) Vietnam News (Vietnam)

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THE CONTRIBUTORS Political Outlook 2004–2005 Mely Caballero-Anthony is Associate Professor at the Institute of Defence and Strategic Studies, Singapore. She contributed the country section on the Philippines. Derek da Cunha is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the section on U.S. Relations with ASEAN States Post-Iraq War. John Funston is Associate Director, National Thai Studies Centre, Australian National University. He contributed the country section on Thailand. Russell Heng Hiang Khng is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Cambodia. Ho Khai Leong is a Visiting Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Singapore. David Koh is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Vietnam. Lee Hock Guan is a Fellow at the Institute of Southeast Asian Studies. He contributed the section on First Post-Mahathir General Election. Leo Suryadinata is a Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section on Indonesia’s 2004 Election: Certainty in Uncertainty. Mohamad Yusop bin Awang Damit is Dean of Postgraduate Studies and Research, Universiti Brunei Darussalam. He contributed the country section on Brunei. K.S. Nathan is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Daljit Singh is a Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the overview section on the Asia-Pacific security environment. Anthony L. Smith is a Senior Research Fellow at the Asia Pacific Center for Security Studies, Hawai’i, and Associate Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Indonesia. Carlyle A. Thayer is Professor of Politics in the School of Humanities and Social Sciences at the Australian Defence Force Academy in Canberra. He contributed the country section on Laos. Tin Maung Maung Than is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Myanmar.

Economic Outlook 2004–2005 Rajenthran Arumugam is a Visiting Research Fellow at the Institute of Southeast Asian Studies. He contributed the section on Revisiting the Law and Development Paradigm in ASEAN. Choy Keen Meng is a Visiting Fellow at the Econometric Studies Unit, Department of Economics, National University of Singapore. He contributed the country section on Singapore.

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Nick J. Freeman is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Laos and Vietnam. Denis Hew is a Fellow at the Institute of Southeast Asian Studies. He contributed the section on Regional Economic Trends, and the country section on Malaysia. Lee Poh Onn is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Brunei. Sakulrat Montreevat is a Fellow at the Institute of Southeast Asian Studies. She contributed the section on Privatization in Thailand: Plans Move Ahead, and the country section on Thailand. Mya Than is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Cambodia and Myanmar. Martin P.H. Panggabean is an Associate Senior Fellow at the Institute of Southeast Asian Studies, and Assistant to the Board of Directors, Bank Mandiri, Jakarta, Indonesia. He contributed the country section on Indonesia. Aladdin D. Rillo is an Economist (Finance & Surveillance) at the ASEAN Secretariat, Jakarta, Indonesia. He contributed the country section on the Philippines. Maghaisvarei Sellakumaran is a Research Associate at the Institute of Southeast Asian Studies. She contributed the section on WTO at the Crossroads and the Road Ahead for ASEAN. Rahul Sen is a Fellow at the Institute of Southeast Asian Studies. He contributed the section on ASEAN and India: New Phase of an Emerging Economic Relationship.

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