Regional Outlook: Southeast Asia 2005-2006 9789812306623

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REGIONAL OUTLOOK Southeast Asia 2005–2006

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

REGIONAL OUTLOOK Southeast Asia 2005–2006 Editorial Committee Chairperson K. Kesavapany Editors Russell H.K. Heng Rahul Sen Production Editor Tan Kim Keow

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Southeast Asia 20~2006

I5ER5

INSTITUTE OF SOUTHEAST ASIAN STUDIES

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REGIONAL OUTLOOK

First published in Singapore in 2005 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Road Singapore 119614 Internet e-mail: [email protected] World Wide Web: http://bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies. © 2005 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. 2005–2006– Annual 1. Asia, Southeastern. DS501 S720 1992 sls91-209988 ISSN 0218-3056 ISBN 981-230-245-X Typeset by International Typesetters Pte. Ltd. Printed in Singapore by Seng Lee Press Pte. Ltd.

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Preface K. Kesavapany

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Introduction Russell H.K. Heng and Rahul Sen

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POLITICAL OUTLOOK The Asian Security Environment

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Maritime Security in Southeast Asia

The ASEAN-10

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Brunei

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Cambodia

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Indonesia

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Susilo Bambang Yudhoyono: A Retired General Turned Politician

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Laos

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Malaysia

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The Anwar Ibrahim Factor in a Post-Mahathir Malaysia

Myanmar

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Philippines

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Singapore

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Thailand

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The Situation in Southern Thailand

Vietnam

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CONTENTS REGIONAL OUTLOOK ECONOMIC OUTLOOK Regional Economic Trends ■

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Southeast Asia in the Global Wave of Outsourcing: Trends, Opportunities, and Challenges

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Energy and ASEAN Economic Integration

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Asian Bond Market Development: A Pace towards Regional Financial Stability

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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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Judiciary Reformation Underpinning Economic Imperatives in Singapore

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Thailand

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Vietnam

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Selected Sources of Data

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The Contributors

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CONTENTS

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. Just as 2003 was difficult for Southeast Asia, the year 2004 has had its share of problems. The external security environment continues to be grave. The festering military conflict in Iraq and its impact on the US presidential election have serious implications for the US fight against international terrorism. The terrorist threat has not receded. Indonesia suffered its third suicide bombing incident. The region has to be sensitized to new forms of terrorist attacks, particularly on the high seas where no one national authority is in charge. Unabated tensions between China and Taiwan continue to point to a possibility of military conflict. The North Korea nuclear programme adds another item to the list of worries. However, on the economic front, the outlook is fairly robust, with a rebound in global economic growth. The region is expected to register a strong GDP growth rate of 6.2 per cent in 2004 according to the Asian Development Bank. However, rising oil prices, the possibility of an economic slowdown in China, terrorism concerns in the region, and the continued sporadic outbreaks of the avian flu are potential risk factors that are likely to affect the short-to-medium-term growth prospects of the region. It is expected that improved business investment and consumer spending will keep the region’s economic growth fairly robust in 2005 and 2006. ASEAN efforts to step up regional economic cooperation as well as strengthen bilateral links with major trading partners — including

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PREFACE REGIONAL OUTLOOK the three major economies of Japan, China, and India — will have regional impact. However, there are concerns with the slow progress of ASEAN economic integration. Regional Outlook: Southeast Asia 2005–2006 was written by a team of scholars from within the Institute and without. I wish to thank them all and also the two editors, Russell H.K. Heng and Rahul Sen. K. Kesavapany Director Institute of Southeast Asian Studies 19 November 2004

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INTRODUCTION

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oth Malaysia’s Prime Minister Datuk Seri Abdullah Ahmad Badawi and the Philippines’ President Gloria Macapagal-Arroyo had their mandate renewed in national elections. Indonesia voted to have a new President, Susilo Bambang Yudhoyono. Singapore’s Prime Minister Goh Chok Tong handed the leadership baton over to Lee Hsien Loong. Myanmar deposed its Prime Minister. Cambodia has a new king. Brunei has reconvened its State Legislative Council after 20 years. All these happened in 2004, which may give an impression that change is in the air. However, the forecast for the region is not to expect anything radical from the new or renewed leadership. In some cases, the rhetoric is not matched by a more sober reality. In others, the need for reforms are dire but the new leader represents only a hope that things will improve somewhat rather than a definite solution to long-entrenched problems. Indeed many problems remain very much unchanged in the region. Terrorism is still the region’s foremost security threat. Indonesia had its third suicide bombing incident in September. A mix of regional separatism and violent forms of Islamic ideology continues to plague the Philippines’ south. A similar problem has escalated in the southern provinces of Thailand. Another pan-region health threat in the form of the avian flu serves as reminder that the disruptive effects of the Severe Acute Respiratory Syndrome (SARS) in 2003 can be repeated any time. As always, here and there are pockets of optimism scattered among the patches of resignation. The conduct of peaceful elections in the Philippines, Malaysia, and Indonesia augurs well for the region’s short-tomedium-term growth prospects. One resilient bright spot is that countries in the region are not at each other’s throat even as they grapple with

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REGIONAL OUTLOOK INTRODUCTION serious domestic problems, thus giving the region an overall environment of peace and harmony. There remains a unity of purpose and will to fight Islamic terrorist groups. There is also a shared perspective on the political and economic challenges facing everybody. ASEAN members understand that a co-ordinated regional effort is needed to address them even though the effort often falls short of the professed intent. Stronger global growth driven by economic rebounds in the United States, Japan, and the European Union, as well as rapid economic expansion in China are fuelling economic recovery in Southeast Asia. The region is expected to register a strong GDP growth rate of 6.2 per cent in 2004 according to the Asian Development Bank, with Singapore, Malaysia, and Vietnam ranked on top in terms of economic performance in 2004. The economic outlook estimates that Singapore’s economy is expected to expand by 8.9 per cent while both Malaysia and Vietnam are projected to grow by 7.5 per cent in 2004. Overall, it is expected that improved business investment and consumer spending will keep the region’s economic growth fairly robust in 2005 and 2006. However, there are many risk factors to watch out for, which could affect the region’s growth prospects in the coming two years. These are rising oil prices, a possible economic slowdown in China, terrorism concerns in the region, and the avian flu with its associated high economic cost. The region is now on course towards greater economic integration with the successful implementation of the ASEAN Free Trade Area (AFTA) by the ASEAN-6. It has also focused its attention on the removal of non-tariff barriers (NTBs) by providing a database on ASEAN NTBs for the first time, through the ASEAN Secretariat. However, there has not been much significant progress on the moves towards an ASEAN Economic Community (AEC) to signal a greater degree of economic integration other than tariff reduction in goods. Concomitantly, ASEAN as a grouping and as individual members continue on their negotiations for bilateral FTAs, whose numbers are ever increasing in the region. In particular, this year has demonstrated a strong signal from a major emerging economic power, that is, India, to strengthen economic cooperation with ASEAN, by agreeing to operationalize

INTRODUCTION CONTENTS the ASEAN-India FTA in 2005 through an “early harvest” scheme (wherein tariff reductions on selected goods traded are expected to be in force). The operation of the Thailand-India FTA, and the possibility of a SingaporeIndia Comprehensive Economic Cooperation Agreement (CECA) by the end of the year reinforces this commitment to strengthen Indo-ASEAN cooperation and augurs well for the region. However, it is important to note that the success of these FTAs would largely depend on the extent to which businesses in both countries are willing to leverage upon these opportunities. Thus, Southeast Asia is pursuing its strategy to strengthen regional economic cooperation, complementing it with stronger bilateral links with the three major Asian economies, namely, Japan, China, and India, whose dynamics are likely to impact on the region. These developments, if backed by strong political will, could ultimately lead to a much stronger and integrated Asia in the long run, and reap potential economic gains for Southeast Asia. However, there are concerns with the slow progress of ASEAN economic integration that need to be quickly addressed in order to strengthen ASEAN’s competitiveness, and to benefit from being an FTA hub. Russell H.K. Heng Rahul Sen Editors 19 November 2004

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THE ASIAN SECURITY ENVIRONMENT

POLITICAL OUTLOOK

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POLITICAL OUTLOOK

THE ASIAN SECURITY ENVIRONMENT

THE ASIAN SECURITY ENVIRONMENT Daljit Singh

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evelopments in the wider international, and in particular Asian, security environment have an important bearing on peace and security in Southeast Asia. This external security environment can be said to have worsened. War and the continued deterioration of the situation in Iraq in 2004 has had significant negative repercussions. It has given a boost to international terrorism as foreign and Iraqi Islamic militants seek to turn the country into a new base for jihad. It has caused divisions between the United States and some of its key European allies, in the process rupturing the grand international anti-terror coalition that came into being in the wake of the 9/11 attacks. The growing insurgency and chaos in Iraq has absorbed much of the quality time of the Bush administration and stretched the US armed forces, especially the army. While this has not adversely affected the balance of power in the Asia-Pacific, where the United States remains the strongest military power, it has a certain conscribing effect on US strategic freedom in the region. A domestic debate is taking place in the United States on Iraq. Although most Americans still appear to support the war, a perception that the war has no end in sight as casualties mount could erode that support. So what will happen in Iraq and with what consequences for international security has become a major new uncertainty. Any US withdrawal which leaves Iraq in chaos and which looks like a US defeat could have important strategic repercussions as well as implications for international jihadist terrorism. The latter remains a significant threat. While Al-Qaeda has suffered

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POLITICAL OUTLOOK from the loss of the Afghan sanctuary and attrition in its leadership ranks, the movement’s dispersal and atomization to various countries has made the threat more decentralized and less detectable. Al-Qaedaassociated and other groups in various parts of the world now operate in relatively independent cells, while sharing a common ideology. Recruitment in associated organizations in the Middle East and North Africa, where thousands of potential terrorists are at large, has increased on account of Iraq. The Chechen conflict, which started as a separatist struggle, has now become almost inseparable from international terrorism. Meanwhile, the prospect of nuclear proliferation is also making the world a more dangerous place. While Libya decided to abandon its programme to produce nuclear weapons, the international community has failed to get North Korea to eliminate or roll back its programme. Iran, following on North Korea’s example, seems determined to acquire nuclear weapons. With the United States bogged down in the Iraqi quagmire, the deterrent presented by the fear of US power has been weakened. The danger of the North Korean regime selling nuclear knowhow or materials to terrorist organizations like Al-Qaeda or to rogue states cannot be entirely discounted. The nexus between terrorism and weapons of mass destruction (WMD) raises nightmarish possibilities, given the fact that terrorist groups are almost certainly keen to lay their hands on WMDs. In this context much more still needs to be done to secure nuclear materials in the world, especially in Russia. In East Asia, the state of the triangular US-China-Japan relationship is crucial to regional stability. The US-China relationship has improved significantly since 9/11, though the increased cooperation cannot mask the underlying strategic competition in the longer term. However the mistrust in the Japan-China political relationship has recently been on the rise, even though their economic links have been growing rapidly. If the deterioration continues into 2005–2006, as it well may, economic relations could also be affected. Further, intensified competition to secure new energy supplies could raise geopolitical tensions between the two countries, in view of the disputed islands and seas in the East China Sea and South China Sea with their gas reserves or potential oil deposits.

THE ASIAN SECURITY ENVIRONMENT The US preoccupation with Iraq and the Middle East, and its need for China’s cooperation on critical issues like nuclear and ballistic missile technology proliferation and the crisis on the Korean peninsula, have given China more strategic latitude to promote its interests in Asia through various diplomatic and economic initiatives. China requires an environment of peace to build up its economic and military strength and its influence in Asia. However, Taiwan is a problem area in US-China relations on which China seems determined not to compromise and is an issue that can potentially lead to a military conflict. The uncertainty and risks have increased since Chen Shui-bian’s victory in the Taiwan presidential election in March 2004. This is because he and his supporters apparently want to move closer to the independence option for Taiwan, perhaps not sufficiently appreciating that China would resort to force to prevent that. They also seem to assume that the Americans will have no choice but to support Taiwan. Any US-China conflict in the Taiwan Straits, which is also likely to draw in the Japanese navy, would have grave repercussions for East Asian security and stability. Meanwhile, North Korea has continued to bedevil the international relations of Northeast Asia. It is not clear if it is truly willing to eliminate its nuclear weapons programme or if the United States will be willing to pay the price it demands for agreeing to do so in a verifiable manner. Among the positive trends in the broader geostrategic environment is the improvement of relations between the two South Asian nucleararmed neighbours, India and Pakistan. Although there has been no breakthrough on the critical Kashmir issue, the dialogue between the two countries is continuing and atmospherics have improved vastly. Pakistan remains committed to the war against international terrorism and seems to be cracking down on its own domestic militant organizations that have had links with Al-Qaeda. Within Southeast Asia itself, the main security concerns will be terrorism associated with radical Islamic groups; and other forms of domestic violence originating from separatist rebellions or ethnic and religious conflicts. Terrorism deserves a brief mention because of the regional character of the main terrorist organization, the Jemaah Islamiyah (JI).

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POLITICAL OUTLOOK MARITIME SECURITY IN SOUTHEAST ASIA

By Michael Richardson

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bout one-third of the world’s trade and half its oil go through the Straits of Malacca and Singapore. Over 50,000 ships a year involved in international trade transit the straits. This is a daily average of 140 and the number is growing. Terrorists could be interested in the inflammable, explosive, toxic, or polluting cargo carried by many of these vessels. This has worried shipping companies, seafarers, and regional governments, including China, Japan, and South Korea that depend on unhindered passage and safe navigation through these shallow and increasingly congested chokepoints for most of their seaborne trade, including their vital oil imports. The frequency of pirate attacks, particularly in Southeast Asian waters, has shown that ships can be boarded and seized by armed raiders, including, potentially, by terrorists who might want to use them as weapons. Southeast Asian terrorist organizations linked to Al-Qaeda, including the Abu Sayaff Group (ASG) based in the southern Philippines and Jemaah Islamiyah (JI) cells in Indonesia, Malaysia, and Singapore, have in recent years attacked shipping or planned to do so. But their capability in maritime-related terrorism appears to have lagged behind that of AlQaeda network planners and operatives in the Middle East and Africa. The JI cell broken up by Singapore authorities in late 2001 had prepared a preliminary plan to attack US warships in or close to Singapore. Malaysian-based terrorists also planned to strike visiting American naval ships. Philippine intelligence sources claim there is evidence the ASG was responsible for the bombing of a large ferry in Manila Bay in February 2004 that left more than 100 people dead or missing. They say the ASG and its agents plan to attack other targets, including shipping. But this would apparently be around the Philippines, not in or close to the Malacca and Singapore Straits. As in other parts of the world, East Asian countries’ reactions to the maritime terrorism threat have varied, depending on countries’ available resources and the priorities of governments and the private sector, including the degree of dependence of national economies on seaborne trade. Singapore, one of the world’s most trade-dependent nations, has been a front-runner in seeking to close openings for maritime-related terrorism. Some international/regional initiatives have been launched to improve maritime security to varying degrees of success. They are: CSI Some 15 million containers make over 230 million journeys through the world’s ports each year. Concern that terrorists could mount a catastrophic attack on the United States by hiding a nuclear weapon in a shipping container, or a radiological bomb using conventional explosives to disperse radioactive poison, prompted the Bush administration to implement the Container Security Initiative (CSI) in 2002. The initiative requires the checking of suspect cargo bound for the United States to be done at foreign ports. Since then, 18 countries, including all the leading East Asian economies except Taiwan, have signed CSI agreements with the United States. China agreed in principle in September 2002 to allow small US Customs and Border Protection teams to operate alongside their Chinese counterparts to check any suspect containers before they are

THE ASIAN SECURITY ENVIRONMENT

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shipped to America. A US inspection team has been stationed in Hong Kong port since May 2003 but the CSI has not yet been implemented in the Chinese mainland ports of Shanghai and Shenzhen. CSI is now operational in over 30 major seaports in Europe, Asia, North America, and Africa, including Singapore. Had major trading partners of the United States refused to participate in the CSI, they would have incurred substantial added costs and schedule disruptions as their cargo containers were delayed for inspection in US ports or even refused entry into the world’s biggest market. The CSI programme checks a relatively small number of cargo containers for possible weapons of mass destruction (WMDs) or dangerous radioactive substances that terrorists might try to place inside. The checking of cargo bound for the United States is based on intelligence profiling that is designed to select only suspect shipments. Checks of containers reaching American ports by sea increased to 5.2 per cent of total arrivals by September 2003, from 2 per cent two years earlier. But worldwide, less than 1 per cent of cargo shipped in containers is screened using X-ray and gamma-ray devices to peer inside because the CSI in its current form is a US-oriented, not a universal, container-checking programme. PSI Alarmed that loopholes in arms control treaties allow countries like North Korea and Iran to import nuclear material for clandestine weapons programmes, the United States and other concerned nations launched the Proliferation Security Initiative (PSI) in May 2003 to detect, deter, and if necessary intercept shipments of WMDs and related materials worldwide. The PSI is being enlarged and made stronger by its members because of growing concern that countries or criminal organizations will pass WMD-related materials to terrorists. The exposure in February 2004 of an extensive and long-running nuclear black market that funnelled weapons technology to Iran, Libya, and North Korea from Pakistan has heightened these fears. There are 15 core members of the PSI, after Russia joined in June. The others are Australia, Britain, Canada, France, Germany, Italy, Japan, the Netherlands, Norway, Poland, Portugal, Spain, Singapore, and the United States. But more than 60 countries have reportedly signalled that they support the aims of the PSI and are ready to take part in interdiction efforts on a case-by-case basis. Japan and Singapore are the only East Asian countries among the 15 core participants in the Proliferation Security Initiative (PSI). Despite its small size, Singapore is a significant maritime player. Its ship registry is the world’s sixth largest, and the biggest in Asia, with a fleet of more than 3,000 vessels totalling some 27 million gross tonnes. Other East Asian countries are reluctant to be openly associated with a USsponsored programme either because they fear it may override national sovereignty and freedom of navigation, or because they do not want to be tagged as a follower of the United States. As convenor of the six-party talks on Korea, China is wary of joining the PSI because

8MARITIME POLITICAL SECURITYOUTLOOK IN SOUTHEAST ASIA (continued)

this would be taken by North Korea as a partisan and provocative move. Pyongyang sees the PSI as a hostile alliance to enforce a blockade to bring North Korea to its knees. China has other concerns about the PSI. It is worried the arrangement could be used as a pretext to seize legal Chinese missile and arms exports. It is also worried that the PSI could infringe on the right of innocent passage for Chinese ships through the territorial waters of a PSI member country, and their right of transit passage through straits used for international shipping, including key Southeast Asian waterways. In Southeast Asia, Malaysia and other countries have shown interest in tightening their export controls over strategically sensitive items to prevent WMD trafficking. If the threat of nuclear proliferation in Asia and the associated trade in WMD-related goods becomes more acute, Southeast Asian countries are likely to become increasingly open in supporting the PSI and its aims. These are in line with ASEAN’s Southeast Asia Nuclear Weapon-Free Zone. ISPS Code Al-Qaeda’s use of civilian planes to strike New York and Washington exposed a whole new degree of vulnerability in the global transport system. New security measures were introduced, initially for aviation but later for other forms of transport as well, including shipping, ports, and cargo containers. Most seaborne trade is carried by at least 46,000 ships calling at over 2,800 ports around the world. Some of those rules are set out in the International Ship and Port Facility Security (ISPS) Code and were applied from July 2004. Passed by the International Maritime Organization (IMO) after the 9/11 attacks, the code makes it mandatory for ships and ports to have security plans, appoint security officers, keep security records, and pass an audit proving they can put the plans into practice. Ships must also install special equipment by the end of 2004 to alert authorities in case of a terrorist attack and enable them to respond. The IMO said on 6 August 2004 that ships and port facilities were approaching complete compliance with the ISPS Code. But in Southeast Asia, there have been reports of significant non-compliance in the Philippines. The Office for Transportation Security in Manila said in August that while 90 per cent of Philippine-registered ships had their security certificates, only 30 per cent of port facilities were compliant. There are also doubts about the degree of security in Indonesian ports and on some Indonesian vessels. Many governments in Asia and elsewhere have been under pressure to allow quick procedures for approving compliance for ships and ports, even if sub-standard, because failure to do so could have resulted in substantial trade losses and damage to their reputation. Operation Malsindo In July 2004, Indonesia, Malaysia, and Singapore started coordinated naval patrols in the Malacca Straits under Operation Malsindo. If sustained, they should help deter both pirate and terrorist attacks. But there is still considerable scope for the Malsindo participants to improve and intensify their patrolling and information-sharing related to the straits.

THE ASIAN SECURITY ENVIRONMENT The suicide bombing outside the Australian Embassy in Jakarta on 9 September 2004 showed that the JI threat remains, especially in Indonesia, its principal base. JI has suffered significant setbacks in recent years: the command structure has been seriously disrupted through arrests, the support network has narrowed, finances seem to be a problem, and there are ideological splits in the organization. However, some dangerous individuals are still at large, for example, Zulkarnain, who is reported to have replaced former operational head Hambali and bomb makers Azahari Husin and Nordin Mohamed Top. The organization has been trying to build a younger network to regenerate its leadership. The splits in the organization and the greater autonomy with which small groups operate potentially increases the dangers of terrorist attacks. There are different terrorist and radical groups, some not members of JI, with numbers probably running into the several hundreds in Indonesia, capable of providing ad hoc logistical support to each other for terrorist operations. Thus terrorism will continue to be a threat in Southeast Asia, especially in Indonesia and the Philippines, in 2005–2006. The Indonesian government has been reluctant to explain the precise nature of the threat to the Indonesian public and to take more pre-emptive action against the networks. Whether, with the elections over, the new Yudhoyono administration will be prepared to move in this direction is left to be seen. In the Philippines, factions of the Moro Islamic Liberation Front (MILF) continue to collaborate with JI including providing some training to JI in their camps in southern Philippines. However, while the international and Asia-Pacific security environment is marked by greater uncertainty, prospects within Southeast Asia on the whole look more promising than a year before. In general elections in Malaysia and Indonesia held in 2004, mainstream Muslims decisively rejected Islamic fundamentalism, notwithstanding the increased anti-Americanism triggered off by the Bush administration’s policies in the Muslim world. In Malaysia the Badawi government is moving the country towards better corporate governance, better law and order, and less corruption. Indonesia is justly proud of its first direct presidential election and there is palpable optimism about the newly

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POLITICAL OUTLOOK elected President Susilo Bambang Yudhoyono, even though Indonesia’s complex problems are not easy to solve. Singapore-Malaysia relations have improved significantly compared with 2003. ASEAN continues to move towards greater economic integration. Among the major countries, only the Philippines and Myanmar face uncertain economic prospects.

THE ASEAN-10

THE ASEAN-10 Hamzah Sulaiman • Verghese Mathews • Anthony L. Smith • Nick J. Freeman • K.S. Nathan • Tin Maung Maung Than • Mely Caballero-Anthony • Ho Khai Leong • John Funston • David Koh

Brunei The marriage of the Crown Prince Al Mutadee Billah to Dayangku Sarah Pengiran Salleh, which is the biggest non-political event of the year, could have an enormous implication for Brunei’s political development. Dubbed as the Asian marriage of the century, it may signal the beginning of an elaborate process of political succession to the monarchical institution of Brunei. If history is to repeat itself, Bruneians may witness the ascension of a new Sultan (the 30th) to the throne in the near future. The current Sultan inherited the throne after a year of his own marriage to the current Queen and he has been ruling the state for the past 36 years. Speculations are widespread that he may want to abdicate and assume the position of a Begawan Sultan. This could also entail a generational change of cabinet ministers. The current line-up of cabinet ministers has been occupying their seats, with minimal changes, since independence in 1984. A change in the Head of State and Head of Government may be a convenient excuse to retire most of the current cabinet ministers who have expended their productive lives. This is also a great opportunity to find and appoint new talents to the cabinet and let them grow with the new 30th Sultan of the kingdom. The next generation of cabinet ministers could come from the current young generation of the royal court and the existing crop of permanent and deputy permanent secretaries.

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BRUNEI Land area:

5,765 sq. km.

Population:

332,884

Capital:

Bandar Seri Begawan

Type of government:

Monarchy

Head of State:

Sultan Haji Hassanal Bolkiah Muizzaddin Waddaulah

Currency used:

Brunei dollar (on par with Singapore dollar)

US$ exchange rate on 19 November 2004:

US$1 = B$1.66

After a ten-year hiatus, the Sultan made a surprising but welcomed announcement on political reform. The Sultan announced, in his 58th birthday royal address, the reconvening of the State Legislative Council in the immediate future thus ending its 20 years of suspension. This has been described as an outstanding gift to Bruneians especially those who crave for participation in state affairs. In September 2004, appointments of the Speaker and the Clerk of State Legislative Council as well as its twenty-one members followed the Sultan’s announcement. The members of the State Legislative Council include the Prime Minister and five cabinet ministers as ex-officio members, five senior civil servants (the Permanent Secretaries in the Prime Minister’s Office, Ministry of Defence, Ministry Foreign Affairs, and Ministry of Finance, and Acting Chairman of the Public Service Commission) as official members, and ten nominated non-governmental officers. This membership of the State Legislative Council followed the Bruneian Constitution with its 1980 revisions. The reintroduction of the State Legislative Council, a momentous event in Brunei’s political history, took place on 25 September 2004. In his opening royal speech, the Sultan hoped that this institution will make him much closer to the people and make the institution of the monarchy

THE ASEAN-10 stronger than before. The Sultan also reminded everybody that this is a cautious step and would be continued with the expansion of the State Legislative Council only if the Council proves to be a constructive and productive forum of discussions and popular participation. Constitutional revisions were the main agenda of this Legislative Council session. Several constitutional amendments were tabled and supported without much debate or question on the very first day of business. As mentioned by the Sultan, the constitutional amendments were made to strengthen the institution of the monarchy. These were reflected in the amendments that consolidate and broaden the executive powers of the Sultan. His powers in making laws pertaining to Islam were also made explicit. A new adat istiadat council was created in the Constitution to advise the Sultan on the matters of adat istiadat or cultural/traditional affairs. A new amendment also strengthened the prime ministership by enabling the office to exercise executive authority. An amendment to increase membership of the State Legislative Council from 21 to 45 seats provided for a combination of elected and nominated members. Thirty or two-thirds of the members will be made up of ex-officio, official, and nominated members; and the remainder will be elected members. The partially elected State Legislative Council could bring back political party politics to Brunei after almost 40 years of absence. The original 1959 Constitution had provisions for elected members of the State Legislative Council. It was then amended after the Bruneian experiment with party politics ended in a bloody rebellion in 1962. Elections, however, may not occur in the immediate future as the modalities such as an electoral system, a State Election Commission, and others have yet to be decided and formed. These may take some time. As promised ten years ago, the Sultan is gradually laying down a more representative and participative political framework for a younger generation of Bruneians who are well educated and have travelled. Pending the setting-up of a formal voting system, elected members of the State Legislative Council may come from the pool of penghulu, ketua kampung (village head), and ketua rumah panjang (longhouse head), who are chosen by their constituents.

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POLITICAL OUTLOOK Overall, the 2004 constitutional amendments were mainly to consolidate and broaden the powers of the executive. At the same time, a partially elected legislative council was formed to enable the public to participate formally in the development of the country. In this way the Sultan hopes that his government will be much closer and responsive to the citizenry. Consequently, the revival of the State Legislative Council will increase the transparency and, to a certain extent, the effectiveness of the government in the future. In their final day of deliberation at the first session of the State Legislative Council, the nominated members raised a number of national issues for discussions and clarifications. These include unemployment, delivery of government services, housing, social security, education, and entrepreneurship. Interesting and lively discussions ensued between the nominated, ex-officio, and official members. This augurs well for future deliberation as the State Legislative Council has been out of practice for the past 20 years. The more interesting question on future deliberations of the State Legislative Council is whether members of the Royal family will participate or not. This remains a significant development to watch as it could have a bearing on how the State Legislative Council will function in the future. Sceptics argue that the presence of royalty could hinder true discussions and debates among the members of State Legislative Council mainly due to protocol and Bruneians’ respects for them. Another issue regards the quality of deliberations. The availability of support services for members of the State Legislative Council is crucial in ensuring that the quality of the deliberations be maintained or even improved. Currently, there is no provision being made to assist the members in performing their functions. These much-needed support services include the availability of research assistants and para-legal staff to Council members. The provision of such services would greatly improve the quality, relevance, and presentation of issues in the proper policy or legal context within the Council. Administratively, the government bureaucracies are also undergoing changes as all ministries are engaged in widespread strategic planning exercises. The Prime Minister’s Office alone will see a number of

THE ASEAN-10 changes in terms of exercising its central and coordinating roles over all the government machineries. The e-government initiatives are also affecting the way governance in Brunei Darussalam is going to be practised in the future. On the security front, Brunei is very fortunate to have escaped from the current problem of religious militancy or terrorism. This problem, which has plagued a number of countries in this region, has yet to gain a foothold in the sultanate. This could be attributed to the vigilance of security forces as well as the success of the moderate religious education being given to Bruneians. In the next few years, Brunei could be undergoing leadership, political, and administrative changes. These changes, if managed prudently, would place the country in a good position to deal with the social and political challenges that it is going to face in this era of globalization and rapid regional integration. Undoubtedly, for Bruneians, interesting times are upon the horizon.

Cambodia The Cambodian government faces several challenges in 2005, not the least of which will be the political polarization of the ruling coalition and an energized opposition at a time of expected slowdown in GDP growth, increasing donor frustration at the pervasive systemic corruption, and the less-than-satisfactory progress in much-needed political, economic, judicial, administrative, and social reforms. The formation of the coalition government in May 2004 comprising the dominant Cambodian People’s Party (CPP) and the royalist Funcinpec Party (FP), after almost eleven months of agonizing negotiations, is an indication of the expected political trend. Shortly after the July 2003 elections, the FP and the opposition Sam Rainsy Party (SRP) formed a loose partnership basically to bargain with the CPP for a share of power and positions far above their joint seat eligibility and to prevent the CPP from playing one party against the other. The partnership was not destined to last, given that historically the two leaders, Prince Norodom Ranariddh and Sam Rainsy had scant

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POLITICAL OUTLOOK

CAMBODIA Land area:

181,040 sq. km.

Population:

13.4 million (2003 estimate)

Capital:

Phnom Penh

Type of government:

Parliamentary democracy with constitutional monarchy

Head of State:

King Norodom Sihamoni

Prime Minister:

Hun Sen

Next election:

2007 (Local elections) 2008 (National Assembly)

Currency used:

Riel

US$ exchange rate on 19 November 2004:

US$1 = 3,977.4 riel

regard for each other. Their previous attempts at cooperation invariably ended in mutual unhappiness and finger-pointing. In the event, FP’s ultimately joining CPP for the third time to form a government, despite the partnership, has initiated strident criticism of the coalition partners by the SRP, resulting in several suits and counter-suits in the country’s courts. Much of the inter-party and intra-party politicking will continue well into 2005 — an unfortunate fact of life in Cambodian political culture. The intrigues leading to the delay in forming a government was at the expense of the electorate and the country. Almost one year was wasted which resulted in several urgent laws not being debated and the World Trade Organization accession process being delayed. Likewise, the reform process, in particular in the judicial and the administrative sectors, were stalled. Nevertheless, despite all the brinkmanship and the unnecessary one-upmanship following the elections in July 2003, it had been a generally peaceful period. The caretaker government managed the dayto-day running of the country and fulfilled its regional and international

THE ASEAN-10 obligations. Much of this should be credited to Hun Sen’s political craft. The year will be crucial for all the three major parties and for the coalition government. Intra-party rivalries need to be addressed and accommodations made. Where the CPP is concerned, party unity can no longer be taken for granted. While there had been factionalism in the party for several years now, with Hun Sen leading one faction and party president Chea Sim the other, the differences have hitherto been well contained and managed. However, in the run-up to the formation of the government, when Chea Sim refused to sign a controversial Bill as Acting Head of State, the infighting spilt over to the public domain in an unprecedented breach of party discipline. The general diplomatic consensus then was that Chea Sim gambled and lost that round. In the initial years the two factions were fairly balanced and the Chea Sim faction acted as a check on Hun Sen. However, in the last few years the Hun Sen faction had significantly tipped the balance. Hun Sen’s ability to secure a greater proportion of portfolios in the coalition government triggered the open show of unhappiness by Chea Sim. The spotlight would invariably be on whether the internal CPP adjustment process would reconcile the two factions. If this fails and there is resulting party disunity, it will be at the risk of political stability in the country. Although the CPP has put up a bold front, it was somewhat shaken but can be expected to reach some workable compromise including the grooming of an ultimate successor to Hun Sen — presently the longest-serving head of government in ASEAN. The CPP will remain the dominant political force for some time yet. The FP, on its part, will have to do some serious soul-searching and streamline its party machinery to recover credibility and the electoral ground it has progressively lost since the first elections in 1993 when it polled the largest number of seats. This might well be the FP’s last chance to remain in mainstream politics. It is not without the wherewithal to reverse the political tide but needs to demonstrate the political will. The SRP has its factions as well but is a party driven by a clear mission. It hopes to be the government in the 2008 elections. Whatever the SRP lacked, it made up with sheer determination and the agility of a

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POLITICAL OUTLOOK small party but it suffers from a credibility problem. The party can be expected to be extremely active in opposition and would exploit every weakness in government. It would keep the coalition on its toes — which the country needs but has to be wary of going overboard. Sam Rainsy will continue to project himself as a fearless opposition leader and a friend of the marginalized and the disadvantaged. Meanwhile, the bloated cabinet with over 300 ministers and their deputies will undoubtedly present operational and turf difficulties. Here Hun Sen’s leadership is imperative. He and Ranariddh would have to work out the modality of decision-making and effective implementation in a complex cabinet structure where some ministries are headed by FP candidates with CPP people as their deputies. In their previous coalition effort, the FP complained about not being consulted on major government policies and CPP leaders bypassing FP ministers by dealing directly with the CPP deputies. Such FP grievances would have to be resolved if the coalition is to work this time round. The performance of King Norodom Sihamoni, crowned on 29 October 2004, will be closely watched as will be the role of his father, former King Norodom Sihanouk who abdicated earlier that month. Sihanouk, a committed nationalist, and politically astute, succeeded in having the constitution amended for the Throne Council to choose his preferred candidate as his successor. Sihanouk can be expected to remain a crucial player behind the scenes as adviser to the new King. King Sihamoni will not be as flamboyant as his father and will be more predictable. He started off on the right note with a public assurance that he would neither involve himself in domestic politics nor interfere in the executive, legislative, or judicial branches of government. Having spent most of his life overseas, he is not well known by the ordinary people. One of his preoccupations during the year will be to proactively meet his subjects. Other concerns for the year will include finalizing the Khmer Rouge tribunal process, in particular resolving the funding issue and the choice of judges and prosecutors; accelerating reforms; addressing poverty and hunger in the countryside while managing unemployment and growing trade union assertiveness and expectations in the cities; increasing na-

THE ASEAN-10 tional productivity levels which the World Bank assessed in August 2004 to be 62 per cent and 10 per cent below those in China and Bangladesh, respectively. In foreign policy, Cambodia will continue to be pragmatic and fulfil its regional commitments. Mekong regional cooperation and bilateral relations with Japan and China will continue to have high priority. Technical assistance, cultural cooperation, and political relations with old ally India will be more marked in 2005. Cambodia will, nevertheless, have to seriously address several challenges such as the need to reduce tension and resolve the complex and testy border issues with Vietnam and Thailand; resolve the growing donor fatigue and donor unhappiness at the slow progress in reforms and enforce the numerous laws to comply with WTO requirements. Cambodia had done well in the eleven years since the first UNsponsored elections — arguably better than other post-conflict countries. It has, however, been lacking in several areas, sometimes because of a lack of political will. Some of the challenges in 2005 are daunting but fortunately, there is now a core of younger technocrats who are well educated, competent, and committed to making Cambodia a regional success story. They have the confidence of Hun Sen and the other political leaders in the coalition but need time and political support to implement the reforms. They also have to contend with bureaucratic inertia and a serious slowdown in the economy from the estimated 4.9 per cent in 2004 to the IMF growth forecast of only 1.9 per cent for 2005. They are optimistic and that is a good sign for the long term.

Indonesia The Indonesian electorate made major political changes during the three ballots held in 2004. Susilo Bambang Yudhoyono handsomely won the country’s first presidential election. There are great expectations that Yudhoyono, sometimes known in the Indonesian media as “SBY” or “the thinking general”, will bring reform and prosperity in contrast to the stagnant years of the outgoing Megawati presidency. (See “Susilo Bambang Yudhoyono: A Retired General Turned Politician” on page 23.) While

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POLITICAL OUTLOOK

INDONESIA Land area:

1,919,443 sq. km.

Population:

215 million (2003 estimate)

Capital:

Jakarta

Type of government:

Presidential; based on amended 1945 Constitution

Head of State:

President Susilo Bambang Yudhoyono

Next election:

2009

Currency used:

Rupiah

US$ exchange rate on 19 November 2004:

US$1 = 8,991 rupiah

Yudhoyono clearly is far more interested in the details of governance and policy than former president Megawati, he faces the danger of being hamstrung by a parliament dominated by his political rivals. In the final round run-off of the Indonesian election, Yudhoyono achieved just over 60 per cent of the popular vote, taking all but three of Indonesia’s 32 provinces. The nature of this victory will give the President a certain mandate to govern. However, the strength of his win is offset by the fact that the President’s adopted party, the Democratic Party, obtained only 7.5 per cent in parliamentary elections. This will mean that government decisions will require ad hoc coalitions on each and every issue, making reform painstaking even if Yudhoyono proves to be a vigorous reformer. Even though Yudhoyono’s handpicked vicepresident, Jusuf Kalla, is a former Golkar official, and many Golkar voters appear to have switched to supporting Yudhoyono in the final round, Golkar’s leadership has already established itself as the main opposition to the President. Golkar has attempted to draw the PDI-P (Megawati’s party), former vice-president Hamzah Haz’s PPP, and other parties into a “loyal opposition” pact. The Golkar party has also captured the key position of Speaker in parliament, with the election of Agung

THE ASEAN-10 Laksono. This emerging opposition bloc is likely to be unstable. An electoral pact between these parties to elect Megawati has proved unpopular for all concerned. Although Megawati has been reaffirmed as party leader many of her supporters were disappointed that she linked up with Golkar, the erstwhile political vehicle of former president Soeharto. Golkar too has faced internal divisions, even expelling and censuring senior party members for their support of Yudhoyono. In fact, the tenure of party leader Akbar Tandjung will come under increasing threat from Golkar’s eastern representatives led by Agung Laksono. Although it is a difficult balancing act for Yudhoyono, he is in a position to attract other minor parties and defectors who have a keen sense of self-preservation. The campaign highlighted Megawati’s lack of substance on policy issues. However, the platforms of other candidates, Yudhoyono included, were not necessarily much clearer. Yudhoyono spoke in generalities about his plans, which included ending corruption, stabilizing society, improving rural development, and investing more in education and health. He also promised to revamp laws to make investment easier, to clean up the clumsy regional autonomy laws, and to review fuel subsidies. Subsidies, which consume a large portion of Indonesian domestic expenditure, have proven to be tremendously difficult to reform. Yudhoyono as president will have to struggle to make real headway on this issue given the opposition that is likely to form in parliament and on the streets. Advisers close to Yudhoyono have already signalled to the international markets that the new administration will work with the international community in terms of aid, loans, and restructuring in order to pull Indonesia out of its doldrums. Although Yudhoyono promised the Indonesian people that his cabinet posts would be based on technocratic skill rather than rewards to buy off political allies, the official line-up on 20 October 2004 revealed his first major compromise. A number of professionals do feature in the cabinet. Hassan Wirajuda kept his foreign affairs portfolio. Juwono Sudarsono returned as Minister of Defence, having served as Indonesia’s first civilian in that capacity under the Wahid administration. Admiral (retired) Widodo A.S., a former navy chief of staff took over the position

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POLITICAL OUTLOOK of Coordinating Minister for Political, Legal, and Security Affairs. Control of economic policy fell to the Minister of Finance, Yusuf Anwar, a former Asian Development Bank (ADB) official, and the Coordinating Minister of Economics, Abu Rizal Bakri, chairman of Indonesia’s chamber of commerce. Yudhoyono, who stressed anti-corruption in his inaugural address, impressed commentators by appointing a supreme court judge with a clean reputation as Attorney General — Abdul Rahman Saleh. Other positions have gone to solidify the President’s political position. Members from the other parties — Abdurrahman Wahid’s National Awakening Party (PKB), Hamzah Haz’s United Development Party (PPP), and the Crescent and Star Party (PBB) — are among a handful of appointments made for pure political leverage. According to press reports, political infighting forced Yudhoyono to revise his plans to give economist Sri Mulyani Indrawati a leading portfolio. Apparently the Prosperous Justice Party (PKS) publicly threatened the President not to appoint any “pro-IMF” cabinet ministers and so Sri Mulyani Indrawati who had served as Indonesia’s IMF country leader has to become Chairperson of the National Development Planning Agency instead. Indonesia, under the Megawati administration, made significant headway in the arrest of terrorist suspects, but clearly this has not eliminated the threat. Yudhoyono will continue with Indonesia’s efforts to counter domestic terrorist cells within existing legal provisions. When Yudhoyono served as Megawati’s Coordinating Minister for Politics and Security he was very public in speaking about the nature of the threat — in contrast to the silence of Megawati herself. But the President, despite his greater determination, will face the same pressures that Megawati did on this issue. In particular, Indonesia will be unable to enact hardline anti-terrorism legislation like that of Singapore or Malaysia. Years of Soeharto’s authoritarian rule and a suspicion amongst Muslim parties that the war on terrorism is really a plan to weaken Islam, will make it extremely difficult to go outside the current due process of Indonesian law. Yudhoyono’s record on counter-terrorism will put him in good stead in relation to the United States and Indonesia’s ASEAN neighbours, but the structural problems with Washington — largely over America’s foreign policy in the Middle East — will remain.

THE ASEAN-10

SUSILO BAMBANG YUDHOYONO: A RETIRED GENERAL TURNED POLITICIAN By Leo Suryadinata

S

usilo Bambang Yudhoyono, the newly elected president, was born into a modest family in Pacitan, a small town in East Java in 1949. His father was a low-ranking army officer and his mother, the daughter of a founder of the Tremas Pesantren (Islamic boarding school). However, Yudhoyono was not sent to the pesantren; his 12 years education in his hometown was in a state school. This secular education and the traditional Javanese cultural environment influenced his later development. From his early student days Yudhoyono was a star performer in whatever he did. He was hard-working, intelligent, always a leader, and topped his class. As a student, he was known to have acquired a strong reading habit that remains until today. His joining the military was not a coincidence. In his fifth year in primary school, a visit to Akabri (Indonesian armed forces academy) in Magelang with his classmates left a strong impression on him. This and his father’s profession might have influenced his decision to join Akabri. After graduating from high school, Yudhoyono spent three years at Akabri, graduating in 1973 as the top student in his year. He was then assigned to be the assistant to General Sarwo Edhie Wibowo, then Governor of Akabri (1973–76). Sarwo Eddie was an important military figure in the Soeharto era. In 1976, Yudhoyono married one of his daughters, Kristiani Herrawati, who was then a medical student at the Indonesian Christian University. Partly due to his command of English, Yudhoyono was selected twice for advanced military training at Fort Banning in the United States; once in 1975 and then from 1982 to 1983. He also had shorter training stints in Belgium and Germany. In 1991 he returned to the United States to study at the Webster University in Missouri, where he obtained an MA degree. He was often sent overseas as Indonesia’s representative, and in 1995 he headed the UN team of observers in Bosnia. Yudhoyono’s career in the military had its share of controversy. In July 1996, when a para-military group sacked the headquarters of the opposition party PDIMegawati, Yudhoyono was chief of staff of the Jakarta Military Region. This incident, which resulted in a number of casualties, was a seminal event in Indonesia’s recent political history and was a point of debate during the 2004 presidential election campaign. Yudhoyono was accused of being involved in the incident but he continues to deny it. In 1998 Yudhoyono was appointed as Kasospol (Chief of Social and Political Section) of the Indonesian armed forces. In that capacity, he led a team to

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POLITICAL OUTLOOK SUSILO BAMBANG YUDHOYONO (continued)

reform the armed forces after the fall of Soeharto in May 1998. This was a time of heightened anti-military feelings after years of muffled discontent. Yudhoyono’s exposure to Western ideas may have had an impact here. The concept of Dwi Fungsi or Dual Function, that guaranteed the military’s role in politics during the Soeharto era was modified to one of Peran Abri, which means simply “the military role”. This was an astute piece of middle-way compromise, whereby the military no longer involves itself with day-to-day politics but does not abandon completely Dwi Fungsi either. Nevertheless, the new doctrine also restricts the military role so that it will not dominate politics. The position of Kasospol was later eliminated and replaced by Kaster (Kepala Staf Territorial, which means Chief of the Territorial Staff), to de-emphasize the non-security role of the Indonesian military. Yudhoyono held the position until 1999. Yudhoyono began to emerge as a major figure during the final days of Soeharto’s rule. In the post-Soeharto era, he was first appointed as Mines and Energy Minister during the Gus Dur presidency and a year later, as the chief security minister to replace the sacked General Wiranto. Facing an impeachment by the People’s Consultative Assembly, Gus Dur wanted Yudhoyono to declare the martial law but the latter declined to do so and chose dismissal instead. This incident shows Yudhoyono’s keen sense of what Indonesian politics is about. When Megawati replaced Gus Dur as President, Yudhoyono contested the vacant vice-presidential seat and lost. He was then appointed as the Coordinating Minister of Politics and Security in the Megawati cabinet but soon after that, he got a group of supporters to organize a political party, later known as the Partai Demokrat (PD, or Democrat Party). This was to be his power base during the 2004 election. Yudhoyono did not hold any position in the PD but the party was deliberately established on his birthday, 9 September, to underline its connection with him. His wife, Kristiani, became one of PD’s deputy chairpersons and acted as his eyes and ears in the party. Many PD leaders were professionals and university academics. Yudhoyono’s political ambition brought him into conflict with Megawati. It was reported that Yudhoyono was excluded from her cabinet meetings from 1 March 2004. The exclusion from the cabinet resulted in his resignation and it gained a lot of sympathy votes for Yudhoyono’s PD in the April 2004 parliamentary election. After that electoral round, the PD officially nominated Yudhoyono as its presidential candidate. Yudhoyono went on to select Jusuf Kalla, a Muslim businessman of Bugis origin, as his vice-presidential candidate and formed an alliance with a small Islamic party, the Partai Bulan Bintang (PBB). Jusuf Kalla has an image of being anti-Christian and anti-Chinese. The PBB wants to fight for a state based on the Islamic shariah law. Yudhoyono came under attack for these associations. He was accused of attempting to change Indonesia from the

THE ASEAN-10

conventional secular Pancasila model to an Islamic state. This criticism became louder after Partai Keadilan Sejahtera (PKS, or Indonesian Prosperous Justice Party), an Islamic fundamentalist party, threw its support behind Yudhoyono. Critics in the Islamic camp, however, have accused Yudhoyono of being pro-Christian and anti-Islam. They branded him a Muslim who was not pious and spread rumours that his wife, Kristiani, was a Christian. However, Yudhoyono stresses that he favours pluralism for Indonesia and would introduce a fair and just policy for all ethnic groups. There is also the “military versus civilian” issue. Many people who suffered from the military rule during the Soeharto era are afraid that military rule would return through retired generals like Yudhoyono becoming the country’s president. In response, Yudhoyono’s calls himself a democrat and maintains that a post-Soeharto Indonesia can no longer introduce a military system. During the first round of the presidential election on 5 July 2004, Yudhoyono occupied the number one position with 33.6 per cent of the total votes while the incumbent Megawati had 26.6 per cent. Since no one was able to gain a clear majority of more than 50 per cent of the votes, a second round was conducted on 20 September. Most of the observers believed the competition to be keen and expected a narrow win for the victor. However, Yudhoyono won an impressive final tally of 61.2 per cent against Megawati’s 38.8 per cent. It was clear that Yudhoyono had secured the overwhelming support of voters in this first direct presidential election in the history of Indonesia. Why did Yudhoyono win a landslide victory? One reason was the growing dissatisfaction with the Megawati administration. The people wanted change — not only in the economic arena but also in the social and security fields. Since the presidential election had something to do with personality and images, Yudhoyono was able to impress the voters that he was a better and more capable candidate than Megawati. People had very high expectations of Yudhoyono. Although he has a clear mandate, it is not certain how Yudhoyono would keep his campaign promises to improve the Indonesian economy and security situation and to combat corruption. For one thing, with his party and allies occupying only about 120 out of 550 seats in the parliament, it is certainly not easy for him to pass laws as he wishes. Like all post-Soeharto presidents, the new man at the top will make deals and strike compromises. (See the country report.) To cobble together a working administration, he has taken on partners known for their extreme views on Islam and ethnic minorities, which does not augur well for good and well-reasoned governance, prospects that Yudhoyono’s background promises. For all his intellectual credentials, political savvy, organizational skills, and determination that got him to the top position in Indonesia, Yudhoyono’s toughest challenge may have just begun.

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POLITICAL OUTLOOK Like his predecessors, Yudhoyono will have to face the leading issue of Indonesia’s domestic security and its providers of security. The Indonesian military (TNI) has, in a highly publicized move, had its seats in parliament removed. However, the reach of the TNI is still formidable, particularly with its array of business interests. A recent controversial bill passed through parliament seeks to proscribe (in theory) TNI business interests but says nothing about the army’s territorial command structure that filters throughout the countryside. It also gives the president ultimate authority over the military and its actions, which gives cause to some human rights groups to claim this is too great a temptation for any president, particularly one who is a former general. The President has also been, in the past, a supporter of a negotiated peace process in Aceh. At the very least he appears to understand that Indonesia’s strong-arm military approach has been counter-productive. Yudhoyono, who is as committed to the unity of Indonesia as were his predecessors, will not end the military operation in Aceh. But he can be expected to consider a wider solution to the problem. The President’s electoral victory has created a great deal of optimism in Indonesia and in the international press alike. However, the reality is that Yudhoyono has an Achilles’ heel in the form of a legislature he cannot control. Ultimately, the President will need to cut deals and make compromises — which may well disappoint a number who voted for him. The radical change Indonesia badly needs will be extremely difficult under these circumstances.

Laos Despite Laos’ gradual move towards economic reform since the late 1980s, the ruling Lao People’s Revolutionary Party (LPRP) remains avowedly communist-oriented, and Laos continues to be an avowedly socialist state. Marxism-Leninism remains, officially at least, the guiding ideology of the LPRP. However, it cannot be said that Laos follows a fundamentalist approach to Marxism-Leninism, having gradually shifted away from a more hardline ideological stance since the late 1970s. This partially reflects a degree of pragmatism by the leadership, and an appreciation that, after

THE ASEAN-10 maintaining political stability, its legitimacy depends in part on meeting the people’s economic needs, as is the case in fraternal Vietnam. Although Laos has seen economic reforms over the last 15 years or so, political reform has been kept firmly off the policy agenda. The notion of political pluralism is not entertained by the LPRP, and political parties other than the LPRP are officially banned. Indeed, under the Lao Constitution, the LPRP is recognized in the first chapter as the “leading nucleus” of the political system in Laos. In 2005 the leadership will begin gearing up for the next LPRP Congress, held every five years, and arguably the most important single event in the Lao political calendar. The party congress is due sometime in early 2006. The speeches and documents emanating from this event will broadly define government policy in the five years that follow, and identify the specific individuals that will conduct policy-making. The Congress itself is a highly choreographed affair, with most policy and personnel decisions taken in intense preparatory meetings and jockeying preceding the event itself, all conducted well away from the public. Given the opacity of the LPRP’s internal workings, it remains too early to

LAOS Land area:

236,800 sq. km.

Population:

6 million

Capital:

Vientiane

Type of government:

Socialist republic

Head of State (President):

General Khamtay Siphandone

Party Secretary:

General Khamtay Siphandone

Prime Minister:

Bounyang Vorachit

Next election:

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

Currency used:

Kip

US$ exchange rate on 19 November 2004:

US$1 = 10,835 kip

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POLITICAL OUTLOOK tell what changes to the Politburo and central committee line-up will eventuate. (Currently, eight of the 11-man Politburo are retired or serving military officers.) At present, the most powerful individual in Laos is General Khamtay Siphandone, who simultaneously holds the posts of Chairman of the LPRP Politburo (since 1996) and State President (since 1998). National elections for the National Assembly, which are also closely controlled by the LPRP and its “Lao Front for National Construction”, will then follow, probably in early 2007. Recent years have seen the LPRP seek to bolster its legitimacy in the wake of an increasingly diluted adherence to communist ideology by seeking to generate a greater sense of historical continuity between itself and the fourteenth century kingdom of Lang Xang — widely regarded as the apogee of pre-colonial Laos. A recent and evocative example of this trend occurred in early 2003, when a four-metre high statue to Fa Ngum (widely recognized as the founder of the kingdom of Lang Xang) was formally unveiled at a high-profile ceremony in Vientiane, at which many LPRP leaders, including Khamtay Siphandone, were reportedly in attendance. The ceremony was timed to coincide with the 650th anniversary of the founding of Lang Xang, in 1353. It was reported that several senior LPRP leaders fell to their knees at the ceremony, in veneration of the former king, and the event was marked by a national holiday. The LPRP’s efforts to assert a greater sense of Lao national identity, through such historic figures as Fa Ngum, may also be in reaction to a longrunning concern that the Thai cultural influence has become too strong, particularly with Lao youth. Lacking a monarchy since 1975, the Thai King is a surprisingly popular figure amongst some in Laos. However, the prospect of the LPRP leadership reconciling with the descendents of the last Lao King, Savang Vatthana, who died in prison some time after being arrested in 1977, seems very remote. The only organized opposition to the LPRP operating within Laos is the increasingly impoverished and poorly equipped remnants of the Hmong irregular army that fought in support of the Royal Lao Government prior to its overthrow in late 1975. But their effectiveness as a fighting force has diminished substantially over the last two decades. The actions of the remaining Hmong irregulars tend to resemble ban-

THE ASEAN-10 ditry, rather than politically motivated or carefully planned acts of armed opposition to the current regime. As such they are more of an irritant rather than a genuine threat to the regime. In 2004, there were unconfirmed reports that a large proportion of the Hmong irregulars were surrendering to the military, worn down by attrition and possible offers of an amnesty. Since 2000, Vientiane has also been plagued by sporadic, small-scale bomb attacks, sometimes causing human injury, but usually resulting in just minor damage to property. The identity of the perpetrators of these attacks and their precise motives (other than to presumably prompt some degree of instability) are not clear. Although Laos does not currently face any economic or other sanctions, it does appear to have come under growing external criticism, largely from lobby groups in the United States and European Union, for its poor track record on human rights and religious freedoms. Laos is currently seeking to attain normal trading relations (NTR) status with the United States, which may occur in 1995, after the US presidential election, having already signed a bilateral trade agreement with Washington in late 2003. But despite having the apparent support of both the US ambassador in Vientiane and the White House administration, lobby groups — including elements of the Lao diaspora in the United States — have been effective in blocking congressional approval of NTR status for Laos. In mid-2004, Laos assumed the chairmanship of the Association of Southeast Asian Nations (ASEAN) and hosted the Association’s annual summit in November. Relations with neighbouring Thailand, which have been somewhat erratic in the past (on issues such as immigration, border spats, and the interpretation of historical events), appear to have improved recently, as exemplified by an unprecedented joint cabinet meeting held by the two countries in early 2004. Thailand has also agreed to assist Laos in funding the construction of a short railway line, to run from the Thai railhead at Nong Khai, across the Friendship Bridge to the Lao side of the border, where a small freight terminal will be built. This development, and the liberalization of road haulage services for Lao manufacturers seeking to export their products through Thailand, should be a fillip for the Lao economy.

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POLITICAL OUTLOOK

Malaysia Based on what he has done since he took over from Tun Dr Mahathir Mohammad on 31 October 2003, Malaysia’s fifth Prime Minister, Datuk Seri Abdullah Ahmad Badawi, will basically stay the course on key domestic and foreign policy issues. Over the past year, he tried to tackle, with limited success, the lingering problems of money politics, bureaucratic inefficiency, and corruption. He also sought to stamp his authority on a more moderate interpretation of the Islamic faith. Whether on domestic or international issues, his leadership style is more genial than that of his predecessor, though no less firm. In domestic politics, Abdullah is obviously buoyed by the overwhelming support his United Malays National Organisation (UMNO)-led 14-party Barisan Nasional (BN) coalition received in the 21 March 2004 general election, winning 198 of the 219 parliamentary seats. UMNO clearly benefited from the political indiscretions of the leader of Parti Islam SeMalaysia (PAS), Abdul Hadi Awang, who promised heaven to supporters and God’s punishment for those who voted for the BN. Notwithstanding the outstanding performance at the polls, Abdullah has taken a cautious approach when making cabinet appointments, opting for continuity by retaining the leaders of various BN parties in their old cabinet positions. Caution also marked the prime minister’s anti-corruption drive despite the earnest message that comes with it. Certain ministers tainted by corruption have been retained in the 27 March 2004 cabinet reshuffle. Abdullah will also be constrained when moving on several other fronts such as eradicating money politics in UMNO which comes with a very high political risk, and shaking out the administrative malaise due partly to years of pro-Malay policies that implicitly tolerate below par performance by the bureaucracy. In April, the government announced a Code of Ethics requiring cabinet ministers and elected representatives to disclose their assets, and a National Integrity Plan to combat corruption and promote civic consciousness regarding the environment and public amenities. But these are not expected to go far enough to convince the public that a major operation is under way to cleanse the government machinery.

THE ASEAN-10

MALAYSIA Land area:

330,434 sq. km.

Population:

24 million (2004 estimate)

Capital:

Kuala Lumpur

Type of government:

Federated parliamentary democracy with constitutional monarch

Head of State:

Yang Di-Pertuan Agong Tuanku Syed Sirajuddin Syed Putra Jamalulail

Prime Minister:

Datuk Seri Abdullah Ahmad Badawi

Next election:

By March 2009

Currency used:

Ringgit (RM)

US$ exchange rate on 19 November 2004:

US$1 = RM3.80

At the 55th UMNO General Assembly held in Kuala Lumpur on 23– 25 September 2004, both Abdullah and his deputy, Najib Tun Razak, won uncontested the positions of UMNO president and deputy president, respectively. However, the election of a relative unknown as one of three vice-presidents, namely Mohamed Isa Abdul Samad, raised the spectre of money politics. The election of Mukhriz Mahathir (third son of the former prime minister) to the UMNO Youth Council, and entry of Khairy Jamaluddin (son-in-law of the current prime minister) as deputy to UMNO Youth Chief, Hishamuddin Tun Hussein, suggest both political and ideological continuity at the apex of the party from which Malaysia’s future political leadership is likely to emerge. The defeat of former vicepresident, Muhammad bin Muhammad Taib, and supreme council members who failed to retain their positions, namely: cabinet ministers Shafie Salleh, Kadir Sheikh Fadzir, Azmi Khalid, and Mustapha Mohamed, Pahang Chief Minister Adnan Yaakob, and Johor Baru MP Shahrir Samad might well signify a desire by grassroots leaders from the 3.2 million– strong membership to inject new blood into its highest policy-making

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POLITICAL OUTLOOK body. The elections to the top party positions in the three wings — Wanita, Youth, and Puteri — are not conclusive enough to suggest that Abdullah Badawi, after nearly a year in office as prime minister, is firmly in control of the party hierarchy and machinery. The emphatic call by all three wings of UMNO Youth to revive the New Economic Policy (NEP) to further promote Malay interests appears to contradict Abdullah’s more moderate and inclusive approach of ensuring that all Malaysians, regardless of ethnic origin, should receive fair treatment from the government’s socio-economic and development policies. There is little or no doubt that the 20-year NEP (1970–90) and the National Development Policy (NDP) which replaced it, have brought about visible progress in Malay economic welfare and empowerment vis-à-vis the other communities. UMNO’s renewed strength after the 2004 election gives its peninsulabased key partners in the BN coalition — Malaysian Chinese Association (MCA), the Malaysian Indian Congress (MIC), and Gerakan — less political leverage. Over in Sabah and Sarawak, the BN seems firmly in control through the participation of key allies, Parti Bersatu Sabah (PBS) and Parti Pesaka Bumiputera Bersatu (PBB) in Sarawak. A surprising political development took place in the first year of Abdullah’s premiership. In September 2004, the appeal court overturned the sodomy conviction of the ex-deputy prime minister Anwar Ibrahim leading to his release from prison. The event generated speculations about its impact on Malaysian politics. (See “The Anwar Ibrahim Factor in Post-Mahathir Malaysia” on page 34.) Anwar no longer has the means to make waves like he did but he is still too prominent a figure in the political landscape to be ignored. A unanimous UMNO Supreme Council decision a week before the General Assembly branding him a “traitor” and rejecting his return to the party forewarns of an uphill battle for the former deputy president to re-enter the ruling circle. Abdullah’s strategy of advocating Islam Hadhari (translated as civilizational or progressive Islam) in dealing with the Malay/Muslim political opposition represented by PAS seems to be paying good political and social dividends. Islam Hadhari represents a serious attempt to understand and address the root causes of Islamic discontent and militancy. In its broadest sense, Abdullah’s fourfold strategy of Islamic governance:

THE ASEAN-10 • • • •

advocates an inclusive framework that respects religious tolerance and coexistence in a highly pluralistic society; recognizes secularism to the extent that politics and religion are best kept separate; promotes socio-economic progress in the context of modernization and globalization, and rejects exclusivist or radically oriented Islamic agendas such as establishing an Islamic state, as these tend to spawn rather than eradicate religiously induced violence.

This is a sensible approach in dealing with Malaysia’s multi-ethnic society and keeping it on track to becoming a modern developed nation by 2020. It puts PAS on the defensive, forcing the Islamist party to review its religious agenda and political strategy that have brought about the severe 2004 electoral defeat. Barisan Alternatif (BA), a loose front made up of several opposition parties, fared very poorly at the March polls. It won a mere 21 seats or less than 10 per cent of the total in the Dewan Rakyat (Lower House). Although the Democratic Action Party (DAP) fared slightly better compared with its 1999 performance (increasing its representation in parliament from 10 to 12), PAS suffered heavily, thereby relieving UMNO of the electoral threat of radical Islam. The party only managed to win seven parliamentary seats in 2004 compared with 27 in 1999. Yet, UMNO would be wary of the fact that the total popular votes for PAS did not fall (15 per cent in 1999 to 15.8 per cent in 2004), proving the point that PAS is down but not out. PAS president, Abdul Hadi Awang, came close to being rebuked by his party at its August 2004 general assembly. The more liberal and progressive elements (young Turks) within PAS blamed its poor electoral performance on the leadership’s obsession with dogma and lack of innovation in dealing with the changing religious and political aspirations of a younger generation of Malaysians. In foreign policy, Abdullah’s more accommodative style led to improved relations with the United States and the West including Australia. On relations with the Islamic World and the Non-Aligned Movement, Malaysia’s chairmanship of both organizations signify willingness to provide leadership as a moderate and progressive Muslim nation that is

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POLITICAL OUTLOOK

THE ANWAR IBRAHIM FACTOR IN A POST-MAHATHIR MALAYSIA By Lee Hock Guan

I

n 1998, Anwar Ibrahim was dismissed as deputy prime minister, expelled from the ruling party United Malays National Organisation (UMNO), harshly treated when he was taken into police custody, and then charged with corruption (abuse of power) and sexual misconduct (sodomy). His controversial trial and conviction tarred the credibility and independence of the Malaysian judiciary and raised resentment against the government then under Prime Minister Mahathir Mohammad. The Anwar saga, for a period of time, cost UMNO dearly. The reformasi movement, initiated by Anwar before his arrest and initially led by both civil society groups and opposition parties, attracted support from a broad spectrum of Malaysians. Opposition parties were galvanized when the Democratic Action Party (DAP) and Parti Islam SeMalaysia (PAS) set aside their differences to form Barisan Alternatif (BA), which included Parti Rakyat Malaysia (PRM) and Parti Keadilan (Keadilan). Keadilan was at the vanguard of the Anwar-initiated reformasi movement to reform Malaysian politics and led by Anwar’s wife Wan Azizah Wan Ismail. Most importantly, the Anwar saga caused a major split in UMNO and alienated a significant segment of the Malay community. Indeed, its impact reached a climax in the November 1999 general election where UMNO suffered its worst losses ever — perhaps even losing the majority of the Malay votes for the first time; the party lost Kelantan and Terengganu to PAS and won Kedah only narrowly. However, by the time of Anwar’s release on 2 September 2004, several important changes had occurred in the political landscape. Whether these changes are favourable for his return to politics in a post-Mahathir Malaysia remains to be seen. The reformasi movement, which was so promising when it started, has for the most part lost steam, especially when it became too identified with, if not hijacked by, BA politicians. Not long after the 1999 general election, the united opposition became mired in disarray; a spat between PAS and the DAP over the former’s advocacy of an “Islamic State” led to the DAP leaving the BA. Ideological and personal differences in the party led to a number of key resignations from Keadilan. Moreover, the “dogmatic” reaction of PAS to the September 11 attack perturbed many moderate Malay Muslims and largely alienated the non-Muslims. Popular support for the BA declined because of its association with PAS. Malay support for UMNO and the government gained momentum when Abdullah Badawi succeeded Mahathir as UMNO President and Prime Minister in October 2003. Abdullah was widely regarded as honest, clean, and a person of high integrity. Also, he used his Islamic credentials to propagate a “new” moderate Islam called Islam Hadhari, which many Malay Muslims found attractive, especially among those who had become disenchanted with the rigid interpretations of Islam by PAS. The 90 per cent mandate that the BN received in the 2004 election has made Abdullah’s position as prime minister and head of UMNO unassailable. Where does this leave Anwar? His outstanding rise from dissident Muslim youth leader to deputy prime minister attests to a formidable combination of strength and political craft: a

THE ASEAN-10

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keen intellect with impressive oratory skills, charisma, and possession of the common touch, drive, and ambition, a tireless capacity for work, and exceptional organizational capabilities. Nevertheless, when he was in power Anwar was also party to the various developments that he was to criticize only after his fall from grace. He had his hands in the following: exacerbating the already tense ethnic relations in 1987, support for the use of the Internal Security Act in Operation Lallang to silence political opponents and dissidents, attack on the judiciary, corrupt practices and cronyism, and pushing the government’s Islamization policies. Given such personal baggage and a major shift in the political climate, would he be able to reinsert himself back into the complex world of Malaysian politics? Any desire on Anwar’s part to participate in party politics has been constricted by a unanimous federal court decision to uphold his abuse of power conviction. That essentially barred him from entering electoral politics until 2008 (electoral laws stipulate that he cannot contest or hold political office for the next five years). He could of course seek a royal pardon but it would involve Prime Minister Abdullah recommending the granting of such a pardon. The five-year ban from holding political offices would reduce his chances of rejoining UMNO in the near future even though he might still have supporters in the party rooting for him. More importantly, other aspirants to the top government and party posts like Najib Razak, Muhyddin Yassin, and Hishamuddin Hussein would have consolidated their positions. External to UMNO, if Anwar manages to rebuild himself into a considerable opposition force that threatens UMNO’s Malay Muslim support base, then there would be a reason to coopt him again (UMNO first co-opted Anwar when he was a popular Muslim youth leader in 1982). Anwar will probably have to go this route if he still harbours any hope of re-joining UMNO. In part, Anwar’s chances of reviving his mass support would depend on how well the Abdullah administration performs. A majority of non-Muslims would probably go with what Abdullah stands for and particularly so if he is successful in addressing the KKN (corruption, cronyism, and nepotism) issue. In addition to countering the more positive agenda put forward by the Abdullah government, Anwar would face the traditional problem encountered by the opposition — limited resources, especially finances and access to the media — to mobilize support for the BA. Anwar is likely to cooperate with civil society groups to raise a shared interest in a number of reformasi issues, for example, human rights, KKN, and judiciary independence. To facilitate his participation in civil society, Anwar has spoken of setting up a think tank to push for reforms. He might revive what is left of the Institute for Policy Research (Institut Kajian Dasar), a Muslim think tank closely affiliated with him and once administered by his close associate Kamaruddin Jaafar, which became defunct after his dismissal. While Anwar would no doubt maintain a presence in the politics of the country, would he be able to return to the higher echelons of power? This is a question that is being pondered over, both within Malaysia and abroad.

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POLITICAL OUTLOOK equally concerned about the plight of the poor in the developing countries. Commitment to ASEAN regionalism, a cardinal pillar of Malaysian foreign policy, will continue. The Abdullah government will strengthen anti-terror cooperation with neighbouring Indonesia, Philippines, Singapore, and Thailand. However, a brief episode in April 2004 strained relations with Bangkok when as many as 112 people were killed in clashes between security forces and Islamic militants who attacked more than a dozen security posts in three southern provinces. Additionally, the 25 October 2004 Tak Bai incident, in which 78 Muslims died from suffocation during military custody following a protest during Ramadan, further aggravated bilateral ties over Thaksin’s treatment of Muslims in southern Thailand. (See “The Situation in Southern Thailand” on page 54.) The inception of joint anti-piracy patrols in the Straits of Malacca by Malaysia, Singapore, and Indonesia since July 2004 would help assuage concerns by Singapore and also the United States that littoral states are not making a sufficient counterterrorism effort. On Malaysia-Singapore relations, issues such as selling of water to Singapore, Malayan Railway land in the island republic, pension funds of Malaysian workers 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 Singapore’s land reclamation on Pulau Tekong will continue to be the focus for discussions. In this regard, a new Singapore Prime Minister, Lee Hsien Loong, has appointed his predecessor Goh Chok Tong as Singapore’s special envoy on bilateral negotiations. Both Goh and Abdullah are known to have good personal rapport.

Myanmar On 17 May 2004, in accordance with the Prime Minister’s announcement in August of the year before, the National Convention (NC) was reconvened after an unexplained eight-year suspension. Its assignment is to provide a detailed draft for a new state constitution. If things proceed according to the military government’s blueprint, the draft constitution will be followed by

THE ASEAN-10 a national referendum to adopt it; holding of “free and fair elections” for a hierarchy (national and regional) of legislative bodies or pyithu huttaw (people’s assemblies); convening of the national assembly; and the building of “a modern, developed and democratic nation” with state leaders elected by the Hluttaw and a “government and other central organs [of state power] formed by the Hluttaw”. Despite earlier indications that it would participate in the proceedings, the National League for Democracy (NLD, the party which won the 1990 election) announced a boycott three days before the NC convened. The NLD said the government did not meet its demands, which were for the NC to start on a clean slate and the release of NLD General Secretary Daw Aung San Suu Kyi and Vice-Chairman U Tin Oo. The Shan National League for Democracy (SNLD, a key NLD ally that won the second largest number of seats in the 1990 election) and the United Nationalities Alliance (UNA, a grouping constituting elected ethnic representatives whose parties were deregistered) also stayed out of the NC. The Shan State Kokang Democratic Party was also absent. Nevertheless, 1,076 out of the 1,088 registered delegates attended the opening session, representing eight officially designated groupings: political parties, elected representatives (from the 1990 general election); major ethnic groups; peasants; workers; intellectuals and intelligentsia; public service personnel (including military); and “other invited” persons (mainly from 23 ceasefire groups). The roster was 55 per cent more than the NC’s last sitting. Ethnic representation, which made up roughly half the delegates, was nearly thrice that in the previous NC. While the government’s supporters hailed the NC as a “historic milestone”, detractors deplored the absence of the NLD and its ethnic allies and called the event a “sham”, pointing to gag orders, restrictive regulations, and topdown “instructions” to guide the process. In his opening speech, the National Convention Convening Committee (NCCC) Chairman, (then) Secretary 2 of the ruling junta, also made it clear that the reconvened NC would continue with the “104 basic principles” laid down in its previous sitting. This is a package rejected by the opposition as undemocratic and heavily biased in favour of the military’s continued dominance. The NC was adjourned on 9 July after all the delegations had tabled

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POLITICAL OUTLOOK

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:

Lt. Gen. Soe Win

Next election:

Currently suspended

Currency used:

Kyat

US$ exchange rate on 19 November 2004:

US$1 = 930 kyat (parallel market rate) US$1 = 6.4 kyat (official rate)

their respective proposals related to the sharing of legislative, executive, and judicial powers. While the authorities said “positive results” were achieved before the recess, opposition sources claimed that a caucus comprising a significant number of ethnic ceasefire groups had called for more transparency in the proceedings and a better deal for them in terms of autonomy and resource allocations. A shadow was cast over the NC when Prime Minister (PM) General Khin Nyunt (third ranked in the junta) abruptly retired, citing “health” reasons, which was followed by revelations from the ruling circle that “insubordination”, corruption, and dereliction of duty were the real reasons. This led many observers to say that the NC and the seven-point road map to “disciplined democracy”, which appeared to be Khin Nyunt’s brainchild, would be compromised. However, both the new PM who was the junta’s Secretary-1 and the newly promoted Secretary-1 (previously Secretary-2), who is also the NCCC Chair had quickly stated that the NC and the road map would continue to serve their purpose. It

THE ASEAN-10 was also announced on 18 November that after a “review of the irregularities” in the procedures of the now defunct National Intelligence Bureau (chaired by the deposed prime minister), “prison terms of 3,937 convicts” (including a prominent student activist) had been “suspended” and that they would be “released from the respective prisons”. Despite the misgivings of many cynical commentators, the NC is likely to occupy centre stage in Myanmar’s politics throughout 2005. In its work of finalizing a constitution, the crucial element is to bring the various ethnic groups on board a difficult consensus-building exercise. In this context, given the departure of their perceived mentor, expect representatives of the ethnic groups to be more careful in bargaining for more concessions (from a far weaker position). In the final analysis, they would most likely toe the government’s line. The junta would still want the NC to finish its work successfully before 2006 when Myanmar assumes the Chair of the Association of Southeast Asian Nations (ASEAN). Given the priority to have the NC complete its work on time, the junta is unlikely to risk releasing Aung San Suu Kyi early so as not to give her an opportunity to rally against the NC. Therefore the UN Secretary General’s renewed attempts to secure her freedom and push for “tripartite dialogue” (involving the military, the NLD, and the ethnic groups) and bring about reconciliation through the UN Special Envoy could not be expected to bear fruit soon. In fact, the junta’s claim that the NC is truly representative of all the stakeholders in Myanmar and that it could not be held hostage to the wishes of “one person” or “one group” could steadily gain ground as the NC progresses without a major hitch. No effort will be spared to make the NC and the rest of the government’s transition blueprint work thereby rendering the UN’s initiative irrelevant. The NLD’s actions, thus far, have been to initiate signature campaigns (to free its leaders), issue demands (to the authorities), seek international support (from the United Nations and democracies of the West), and organize commemorative gatherings. Those cut no ice with the authorities and have little impact on the polity. It is increasingly being marginalized and in danger of being overtaken by events unless it finds ways around the massive constraints to build capacity and rejuvenate its leadership.

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POLITICAL OUTLOOK Armed ethnic opposition by some Shan factions and the five-decades old Kayin insurgency have been petering out and pose no threat to the government’s managed political transition. In the case of the Karen National Union, several rounds of negotiations with the military government (that began in late 2003) were fruitless. The informal ceasefire adopted during a meeting between Karen leader General Saw Bo Mya and PM Khin Nyunt suffered many violations. As the Karen general lies incapacitated by serious health problems, there are indications of an impending split between those wanting to give up armed struggle and endorse the government’s road map and those angling for a more comprehensive political settlement. On the international front, the United States and the European Union remain unconvinced (despite the mass release of prisoners numbering some 9,000 up to the end of November) that Myanmar has progressed in a list of human rights concerns such as forced labour, religious freedom, child soldiers, and narcotics eradication. The continued detention of Aung San Suu Kyi and alleged persecution of the NLD remain a most contentious issue. Western sanctions have been extended, thus denying Myanmar any official development assistance from the United States and other influential Western governments as well as Japan. The European Union’s objection to Myanmar’s participation almost derailed the October 2004 summit of the Asia-Europe Meeting (ASEM) in Hanoi. Although a last-hour compromise that downgraded Myanmar’s representation from head of government to ministerial level saved the day, the European Unit’s refusal to embrace Myanmar will not end with the latter’s induction into the ASEM process. Myanmar’s relationship with major regional powers has never been better and China is expected to stand by Myanmar for the foreseeable future. India has a vested interest in a stable and friendly Myanmar for border security, trade opportunities, and energy security and appears willing to enhance interactions with the junta. The recent discovery of offshore natural gas reserves on the Myanmar side of the Bay of Bengal provides added incentive for India to cooperate with Myanmar authorities and an opportunity for Bangladesh to partake in the proposed project

THE ASEAN-10 to pipe it across its territory. Bangkok’s relations with Yangon are becoming closer and the Thai premier has personally urged more investments and loans for Myanmar. Such regional cooperation and increased exploitation of the country’s natural resources have given the military regime confidence that it could ride out the storm of Western sanctions. Myanmar’s fledgling urban sectors such as manufacturing, banking, and external trading are bearing the brunt of those sanctions but the junta can still counteract those pressures with a relatively productive rural sector that provides ample food security and an informal sector that enables the economy to subsist at a low level of equilibrium. Possessing a very high pain threshold, it is very unlikely that the regime would give in to external pressures in the near future. It may even be counterproductive, as the self-reliance mentality would further be reinforced.

Philippines The year in review saw Gloria Macapagal-Arroyo re-elected for a second six-year term as the country’s 15th president. In a hotly contested election, Arroyo won by a narrow margin of over a million votes, prompting leading presidential contender, Fernando Poe Jr. — a popular movie actor and a favourite candidate — to challenge the electoral results in the country’s Supreme Court. Arroyo ran on the strength of a clear economic and political agenda, and capitalized on her incumbency to project the image of stability and continuity — a much-needed antidote to the country’s ailing economy. Hence, while the challenge to the presidential election results may reverberate for some time, it seems unlikely to threaten the president’s position. President Arroyo took advantage of her new mandate and her party’s strong majority in the lower House of Congress immediately to push ahead with her reform agenda. In her State of Nation Address (SONA) delivered in July, Arroyo stressed her intention to cut the country’s widening budget deficit and to reform the constitution so that the country’s political system can move from one that is a bicameral presidential system to a unicameral parliamentary system. The latter would enable the executive to pass legislative bills without the encumbrance of

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POLITICAL OUTLOOK the present 24-strong Senate that has been perceived as obstructionist, having frustrated the passage of more 90 per cent of legislative bills passed by the Lower House. Since her SONA, Arroyo has gone on the offensive to address the country’s serious economic malaise. Top on her list is tackling the Philippines’ financial deficit, which is currently US$3.54 billion, a figure that had progressively worsened over the years. The deficit has not been helped by the country’s public debt, which has more than doubled since the mid-1997 Asian financial crisis, standing at US$60.3 billion or 130 per cent of the Philippines’ gross domestic product (GDP). In fact, a month after her SONA, Arroyo declared that the country was in the midst of a fiscal crisis and that the people should make sacrifices. While the statement, which was drawn from a report prepared by the country’s top economist at the University of the Philippines, was intended to convey the urgency of imposing strict financial measures, Arroyo’s candour only served to highlight the country’s weak economic position vis-à-vis other countries in the region. The unintended consequences of her statement caused the stock market to fall, and foreign investors to hold off the much-needed investments to the country. Despite the effects of such pronouncements, Arroyo began to introduce several economic measures to resolve the economic problems such as tightening up the lax tax collection regime and imposing stringent austerity measures on public servants. Rambunctious politics continues to undermine the country’s stability. Coming on the heels of Arroyo’s contentious installation as the reelected president, the Philippines had to confront the crisis of a Filipino contract worker kidnapped in Iraq. In July 2004, truck driver Angelo de la Cruz was abducted by a group of Islamic militants who demanded the withdrawal of Filipino troops from Iraq in exchange for his safe release. The abduction and the demand for withdrawal came just a few weeks earlier than the scheduled return of the Filipino troops but Arroyo, under highly emotive public pressure, gave in to the kidnappers’ demands and ordered the early pull-out from Iraq. Had Arroyo rejected the kidnappers’ demand, she would have risked triggering off a cataclysmic backlash from domestic forces that empathized with the plight of Angelo de la

THE ASEAN-10

PHILIPPINES Land area:

300,000 sq. km.

Population:

76,504,877 (2002 official statistic)

Capital:

Manila

Type of government:

Presidential democracy

Head of State:

President Gloria Macapagal-Arroyo

Next election:

May 2010

Currency used:

Peso

US$ exchange rate on 19 November 2004:

US$1 = 56.3 peso

Cruz. Arroyo also faced the risk of endangering her fledgling administration, which at the height of the crisis, was still struggling to consolidate its hold on power after a hotly contested electoral outcome. The plight of the kidnapped Angelo de la Cruz’s highlights a pressing problem that the Arroyo government will have to deal with. According to official figures, there are some 8 million (registered) Filipino contract workers abroad who remit about US$8 billion annually, which keeps the country’s economy afloat. A telling sign of this sorry state of affairs was the hundreds of Filipinos still queuing up to take jobs in the Middle East (possibly ending up in dangerous Iraq) even as the highly emotional kidnapping crisis raged in the country. However, with her hands full staving off so many political and economic challenges, it is unlikely that the Arroyo administration has the resources to concentrate on solving the huge problem of unemployment. The kidnapping crisis also had foreign policy ramifications. Arroyo’s decision to bring back the troops ahead of schedule had been widely criticized, particularly by the United States and Australia, on two counts. First, the withdrawal meant that the Philippines’ reneged on its commitment to the US-led coalition in the war in Iraq and in effect, the war on terrorism. Second, by capitulating to the kidnappers’ demands, the Philip-

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POLITICAL OUTLOOK pines, in the words of Australian Foreign Minister Alexander Downer, had “empowered the kidnappers”. US-Philippine relations are currently being reassessed. Following the withdrawal of Filipino troops from Iraq, the United States had declared that the Philippines, once granted the status of a major non-NATO ally, was no longer part of the US-led coalition against the “war on terror”. The implications of such a development seem ominous but the actual situation remains unclear. Given that the Philippines remains an important front in the fight against terrorism, it is unlikely that Washington will stop supporting the country in battling terrorism. A 1,000-strong US contingent continues to join their Filipino counterparts in an annual joint military training exercise — Balikatan — held in several parts of the country. But the US Congress had reallocated the US$30 million funds for Muslim Mindanao after it got tired of the lack of progress made by the Philippine government in tackling the Muslim insurgency problems. In this regard, the Arroyo administration is under tremendous pressure to show some results from peace talks with the Moro Islamic Liberation Front (MILF). Peace talks between the MILF and the Philippine government actually began in 2001 but had been bogged down by allegations of attacks from both sides. So far, in what appears to be a positive sign of progress, a team of Malaysian peace monitors has been deployed in southern Philippines to monitor the ceasefire agreement, which was put in place in July 2003. If the ceasefire holds out, this could lead to the signing of the long overdue peace accords between the Philippine government and the MILF by the end of 2004 or early 2005. Apart from Malaysian peace monitors, the Philippine government has invited observers from Libya, Bangladesh, Brunei, Bahrain, and Indonesia to form the international peacekeeping team. Similarly, progress in the peace talks with the National Democratic Front (NDF) has not been significant. The NDF is an umbrella organization that represents the leftist groups in the country, including the Communist Party of the Philippines (CPP) and the New People’s Army (NPA), the military arm of the CPP (NDF-CPP-NPA). The latest round of peace talks held in Norway in February 2004 stalled when the NDF-CPPNPA deferred further talks because the United States and European

THE ASEAN-10 countries continue to consider these groups as terrorist organizations. The fate of this peace talk may hang on the ability of the Arroyo administration to persuade the US and other foreign governments to remove these groups from the list of terrorism suspects. Another pressing challenge for the Arroyo government is the reform of the military after the aborted military coup in July 2003. In October 2004, congressional hearings were conducted to probe the case of a Philippine general accused of amassing unexplained wealth during his 2001–2004 tenure as military comptroller. Corruption among some generals is an explosive issue in the 117,000-strong military and was cited as among the many reasons that young army officers attempted a rebellion in the capital’s financial district in 2003. Arroyo has to be seen to be decisive in dealing with corruption in the military. Not least on the burgeoning agenda of the government is the need to reduce the 2.3 per cent population growth rate. The country’s already modest economic growth rate of 4 per cent is unsustainable unless the government can rein in the country’s growing population of 86 million and allocate more funds for education and infrastructure. The two areas have been sorely neglected as the government grapples with a myriad of challenges.

Singapore In August 2004, with the first two-quarters of the economy showing strong signs of recovery, Singapore witnessed a change in Prime Minister, the third in its history since independence in 1965. Lee Hsien Loong, after 20 years in politics and 13 years as Deputy Prime Minister, was finally sworn in as the new premier. His predecessor, Goh Chok Tong, after holding the top position for 14 years, stepped aside and was appointed Senior Minister in the new cabinet and Chairman of the Monetary Authority of Singapore (MAS). Lee Kuan Yew, formerly Senior Minister, now holds the title of Minister Mentor. According to the Government Gazette, he is “charged with the responsibility to act as mentor to ministers, and to advise them on any of the subjects under their charge”. This triumvirate of two ex–prime ministers and the present prime minister generates curiosity as to the

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POLITICAL OUTLOOK balance of power and influence at the top, a situation rather more amorphous than if there is simply one prime minister in charge. The new premier has not been slow in making an impact. An inauguration speech and first National Day Rally speech unleashed a batch of “let’s-slaughter-the-sacred-cow” changes to policies in education, housing, healthcare, social engineering, and economic restructuring. More of such changes will continue to be periodically introduced in the immediate years ahead. Framing the many details is the promise of an “open and inclusive” society where the government wants more debate on policies and appreciates diversity of opinions. However, while the rhetoric signals a generational change and a “new chapter” in leadership, official policy and attitude suggest much more continuity than a complete break from the past. If Singapore politics is understood as primarily the management of conflicts within an organizational context rather than democratic resolutions in the larger framework of political contestation, that old template shows no sign of changing under the new prime minister. Policy ideas and promises seemed fresh and innovative when announced, only to be balanced by a managerialist cost-and-benefit stratagem and dampened by political instincts and old ideological habits later. For instance, singles above 35 were told that they could buy all types of resale government flats, but a new policy was introduced to reduce the “subsidies” given to this group. The new administration aspires to be more “open and inclusive” but opposition members complained that they were excluded from the National Day Rally, which was supposedly a non-partisan event. Since his inauguration, Lee’s visits to public housing estates (popularly considered to be the country’s political heartland) have been occasions to show a softer and friendlier image of himself. He role-played as a cook and participated in the customs of ethnic minorities, activities that would help portray him as a “people’s Prime Minister”. More of these image-enhancing visits by him and other leaders will be expected in the coming months. Although elections do not have to be held till 2007, do not rule out a snap election, particularly if the economy is doing exceptionally well. If Lee is convinced of strong grassroots support for him and his ruling People’s Action Party (PAP), he may want to seek popular

THE ASEAN-10

SINGAPORE Land area:

660 sq. km.

Population:

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

Capital:

Singapore

Type of government:

Parliamentary democracy

Head of State:

President S.R. Nathan

Prime Minister:

Lee Hsien Loong

Next election:

By 2007

Currency used:

Singapore dollar

US$ exchange rate on 19 November 2004:

US$1= S$1.66

endorsement through an early general election. In the last general election, the PAP government under Goh’s premiership received 75 per cent of the votes cast. Given that it is not easy to surpass or match such electoral results, Lee’s challenge in any future election will be to garner a level of voter support that can reasonably be declared as a popular affirmation of his leadership. Lee will also need to look for suitable candidates among the younger ministers (in their forties and fifties) to fill the deputy prime minister positions, currently occupied by people who are older and have been in politics longer than him. Whoever among his cohort eventually picked for the deputy position is highly likely to inherit the mantle of Prime Minister-designate. Lee is not expected to make such an important choice so soon. Apart from this, the new Prime Minister, like his predecessors, will continue to look for new talent to be co-opted into the PAP leadership. Lee’s call for an “open and inclusive” society may likely unleash a new ripple of initiative and energy in civil society. The new Prime Minister has allowed people more freedom to associate when he pro-

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POLITICAL OUTLOOK claimed police permits no longer necessary for indoor meetings. Therefore it will be no surprise if the immediate years ahead see a higher level of social activism in Singapore. This can shape political agenda in Singapore but still within limits that the PAP leadership will permit. These limits will not allow any form of political adventurism that can erode the PAP’s monopoly of power either through the ballot box or street protests. Activist groups seeking to push the envelope will need to pay the price of learning where the limits are drawn by testing them. The merger of television and newspaper assets of Singapore Press Holdings Ltd. (SPH) and MediaCorp, announced in September, after four years of limited government-sanctioned competition, was a major setback for media liberalization and for Singapore’s aim to be a major information and media hub in Asia. Viewers and readers, although assured by the management and political authority that the quality of programmes and news reporting will be upheld, can expect a monopoly of local media control, as it was four years ago. In foreign policies, Singapore under the new Prime Minister will exhibit much continuity in its emphasis on cementing relationships with the United States, the European Union, China, Japan, and ASEAN as reliable allies and trading partners. Increasing attention will also be paid to India and the Middle Eastern countries. As far as Singapore-Malaysia bilateral relations are concerned, it is expected to improve. This is more so in the light of several goodwill visits by Malaysia’s Prime Minister Abdullah Badawi to the republic in early 2004. Badawi’s measured approach to foreign relations would also help in lowering tensions that accumulated during the term of the previous Malaysian Prime Minister. Lee’s return visit to Kuala Lumpur in October 2004 could pave a smoother path for further bilateral negotiations, which will be handled by Senior Minister Goh Chok Tong as the “interlocutor”. The new Prime Minister will also have to weather a low in SinoSingapore relations which came about because he visited Taiwan in July despite warnings from Beijing not to do so. In what was described as a “private and unofficial” trip, Lee met top Taiwan government and opposition officials, in his own words, “to sense the shifts in the tone and texture of Taiwanese society”. He believed that cross-straits situation has

THE ASEAN-10 become the most serious security problem in the Asia-Pacific. Beijing angrily denounced the trip and warned that relations would suffer. The fallout, however, seemed to have slowly subsided towards the end of the year. The focus of the coming years is going to be whether Singapore and China will successfully sign an FTA. Fighting terrorism will continue to be a security priority for Singapore. While the effectiveness of Jemaah Islamiyah, as an organization, has been effectively neutralized in the island-state, the terrorist movement is still active in the region, as witnessed in the September explosions outside the Australian Embassy in Jakarta, Indonesia. Singapore has devised a national strategy to fight terrorism headed by its Deputy Prime Minister and Coordinating Minister for Security and Defence, Tony Tan. A new National Security Coordination Secretariat is to be established in mid-2005.

Thailand Thailand began 2004 on an upbeat note. It had been the region’s most successful economy in 2003, and Prime Minister Dr Thaksin Shinawatra basked in public acclaim. Though critics lamented a decline in democracy, his charismatic, CEO-style leadership had the support of the business community and the poor, who benefited from a range of populist policies including a village fund, 30-baht medical services, educational scholarships, and cheap housing. Thailand’s revered King publicly welcomed the year’s economic gains, and his New Year card featured Thailand as a safe and peaceful country amidst the previous year’s worldwide violence. Unfortunately, circumstances changed quickly. On 4 January 2004 more than 100 Muslim insurgents in the southern province of Narathiwat mounted a raid on a military camp, seizing a large number of arms and killing four soldiers. Violence continued after this in four southern provinces, and included the killing of three Buddhist monks late in the month. Other problems beset the government in January. Most serious was the deadly avian flu, belatedly acknowledged after millions of chicken deaths. Thaksin admitted to “mistakes and human errors” in handling the crisis.

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POLITICAL OUTLOOK Academics focused attention on a huge increase in the listed wealth of Thaksin’s family businesses, from 146 billion baht in 2002 to 425.25 billion baht in 2003. Further interest was sparked by an arbitration board decision to reduce concession fees for iTV, part of the family business empire, by over 17 billion baht, an issue that remained unresolved at year’s end. Finally, a series of articles in the international media in late December and January (Washington Post, Newsweek, and International Herald Tribune) expressed scepticism about economic gains and policies, and criticized Thaksin’s authoritarian rule. These four issues remained problem areas for the rest of the year. The violence in the south escalated tragically on 28 April, when over one hundred insurgents were killed while attacking security posts, or holed up in a mosque. Thereafter, attacks continued almost daily. (See “The Situation in Southern Thailand on page 54.) The government was disconcerted by its inability to stop the violence, which was the main factor behind two cabinet reshuffles in March and October — the latter ushering in Thaksin’s tenth cabinet in four years. The avian flu also defied efforts at closure. Despite the slaughter of millions of birds and initial claims of success it reappeared in July. Human deaths from contaminated chicken occurred early in the year, and in September there was suspected human-to-human transmission. Issues arising from conflict of interests continued to be highlighted in several ways. In March a trusted aide revealed that the King was deeply disturbed by the high levels of corruption, and feared this would ruin the country. The opposition Democrats made ministerial conflict of interest the focus of a hard-hitting parliamentary no-confidence debate in May. A report by the National Human Rights Commission (NHRC) in August accused the administration of promoting vested economic interests. And in the same month, controversial businessman Ekkayuth Anchanbutr alleged that the stock market was manipulated by cabinet ministers. The government also continued to attract criticisms from outside. The US State Department’s February 2004 Human Rights Report on Thailand was particularly critical of the war on drugs, and listed other

THE ASEAN-10

THAILAND Land area:

514,000 sq. km.

Population:

62.8 million (2002 estimate)

Capital:

Bangkok

Type of government:

Parliamentary democracy with constitutional monarch

Head of State:

King Bhumibol Adulyadej

Prime Minister:

Dr Thaksin Shinawatra

Next election:

By 2005

Currency used:

Baht

US$ exchange rate on 19 November 2004:

US$1 = 40.47 baht

areas of concern, such as the role of the police, the killing of separatists, and freedom of expression. Thaksin branded the United States a “useless friend”, but Amnesty International’s secretary-general supported the State Department’s concerns after a visit in July. At home, similar views were aired in the NHRC report. The “disappearance” of a prominent Muslim lawyer in March, and the assassination of a leading environmental activist in June, both unresolved at year’s end, reinforced public human rights concerns. The government’s handling of issues relating to the media were also controversial throughout the year. Besides the iTV issue mentioned earlier, other government-run television channels attempted to pursue various non-transparent money-enhancing schemes — all seemingly designed to pre-empt instruction from the long-delayed National Telecommunications Commission, which was finally established in August. The government set up committees to investigate these activities, but little had been resolved by the end of the year. The government’s commitment to freedom of expression came under scrutiny as it pressured the removal of critical journalists such as the

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POLITICAL OUTLOOK Bangkok Post editor in February, and Naew Na columnist (former Foreign Minister) Prasong Soonsiri in September. And in June the Thaksin family-owned Shin Corp initiated a libel lawsuit against a young media activist, Supinya Klangnarong, for comments relating to the company’s alleged conflict of interests. Efforts to pursue privatization kept the government on the defensive, particularly in relation to the Electricity Generating Authority of Thailand (EGAT). Thaksin personally met with the workers, and sent other trusted emissaries. But EGAT union leaders remained resolutely opposed to all overtures, and by year’s end little progress had been made. Even the economy was less of an asset than in previous years. Though growth rates dipped only slightly, the economy as a whole still had to wrestle with these complications: the malaise in the deep south; the ailing poultry industry; rising private debts; a flat stock market; soaring oil prices forcing the government to abandon price control for petroleum (except for diesel); and the reappearance of large non-performing loans at the state-run Krung Thai Bank, which invited reminders of the 1997 crisis. In the second half of the year, government critics began to mount sustained opposition. Leading social critic Thirayuth Boonmi predicted a showdown in four years between Thaksin’s business and political empire and the growing movement of independent activists, academics, and middle-class citizens. Several books appeared critical of Thaksin, with contributions by prominent Thais. And public seminars with a similar theme became frequent. At the same time, protest was joined by anti-privatization activists in alliance with a group of businessmen — some with chequered backgrounds — who criticized the government for being too liberal (not withdrawing 11 economic bills passed by the previous government in cooperation with the International Monetary Fund). Environmental activists also railed against a government decision in August to allow the planting of genetically modified crops. Then, as a crucial election for the post of Bangkok governor approached, one of Thaksin’s closest allies, and a former governor himself, Chamlong Srimuang, came out to oppose the candidate supported by

THE ASEAN-10 Thaksin’s Thai Rak Thai (TRT) party. (The TRT did not offer a candidate, but threw full support behind an “independent” who was the frontrunner for most of the campaign.) Indeed, Chamlong went further, expressing regret that he had originally brought Thaksin into politics, and warning that Bangkok would not support any TRT-backed candidate. Bangkok voters did as Chamlong expected, and returned the Democrat candidate by a large margin in the August election. The Democrat’s year had begun inauspiciously when a marble statue of the party’s symbol (the goddess of the earth) broke during transportation in March, and party strongman Sanan Kachornprasart, along with several others, left the party in May — eventually setting up Mahachon, a party that looked to have more in common with the TRT than the Democrats. But the Bangkok win, which followed strong showings in two earlier by-elections, made the Democrats a more credible contender for elections due in early 2005. In September, the Assumption University’s ABAC polling agency found that the TRT’s popularity had dropped from 55.6 per cent in July to 46.3 per cent, while that of the Democrat party rose from 10.3 to 27.9 per cent. Thaksin’s popularity also dropped — from 61.6 per cent in July to 48.1 per cent, the lowest for the year. Still, the TRT remains well ahead of the Democrats, and Thaksin’s charisma is not to be underestimated, particularly outside Bangkok. He reinforced this during the year by visits to all provinces, promising billions of baht in assistance, and in July announcing a 20-billion baht handout to all Thailand’s villages. The TRT also enhanced its dominance by attracting dozens of rival members of parliament into its ranks, and absorbing the Chat Pattana party in August. No foreign policy initiatives matched the previous year’s APEC summit, but Thailand launched a bold bid to make Foreign Minister Surakiat the next UN Secretary General. Otherwise, the government was largely on the defensive against critics opposed to Free Trade Agreement initiatives, a conciliatory policy towards neighbouring Myanmar, and the stationing of over 400 troops in Iraq (brought home in September). In December 2003 Thaksin declared “democracy is not the ultimate goal” — as long as the country could progress and the people were happy,

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POLITICAL OUTLOOK

THE SITUATION IN SOUTHERN THAILAND By Chidchanok Rahimmula

I

n order to understand the recent situation in southern Thailand, we need to look back to when the Malay Kingdom of Pattani was annexed into the Kingdom of Thailand after a long war. The Thai regime was authoritarian and implemented policies that were aimed at consolidating a Thai-dominated nation-state. The Malay Muslims were not allowed to maintain their identities. As a result, some Malay Muslims opposed the policies. This led to a period of brutal repression against Malay Muslims, which sowed the seeds for today’s separatist and terrorist movement. Beginning in the 1980s, the Thai government had redirected its policies towards Malay Muslims in the southern border provinces — Yala, Pattani, Narathiwat, Songkhla, and Satun — of Thailand by accepting their cultural differences and encouraging them to participate in community development projects aimed at improving their quality of life and economic situation. Although such policies have reduced the terrorist activities, in a globalized world the threat continues as ideological warfare conducted over the Internet. The calm led the Commander of the Fourth Army Area to conclude that the local administrators and police could effectively control the situation because the disturbances were staged largely by criminals as well as local interest groups. Against that background of confidence, the Thai cabinet held its meeting in Narathiwat province from 29 to 31 March 2002. Consequently, the two special government offices, namely, the Administrative Center for the Administration of Southern Border Provinces (ACASBP) and the 43rd Civil-Police-Military Joint Quarter (CPM 43) were terminated by an order from the Prime Minister’s Office on 1 May 2002. However, more recently there has been an outbreak of violence in the south, especially in 2004 where the security situation is considered to be the worst ever. The 2004 unrest began with a January raid on an army camp. A total of 413 guns were taken from the 4th Development Battalion in Narathiwat and four soldiers were killed. The unrest escalated on 28 April when soldiers and police killed 106 militants in a bloody uprising. The 106 men attacked ten government targets such as police stations and kiosks in the three provinces of Pattani, Yala, and Songkhla. Most of the attackers were young. According to official figures, more than a hundred knives were used with only four M16 and two HK rifles and a few guns. The longest struggle took place at the historical Kru-Se Mosque in the centre of Pattani. The field commander ordered an attack on the mosque. All

THE ASEAN-10

34 people inside were killed. Another violent clash erupted at a protest in Narathiwat’s Tak Bai district in October where more than 80 people died in uncertain circumstances. For the first nine months of 2004, there were more than 600 incidents of unrest, which caused 250 deaths. This has hurt the economic growth and undermined investor confidence. The government does not have a clear target in its anti-terrorist operations. It just does not know who the culprits are. Since January, the government has had various theories on who or what is behind the unrest. The military first put the blame on Pusaka for the army camp raid. Pusaka is the name of a foundation that supports Islamic education, especially at the pre-school level and promotes Malay Muslim culture but the military believes that it is part of a larger Pattani Islamic Revolutionary movement consisting of young militants. But there is still no evidence to prove that “Pusaka” members were involved in the January raid. In the months after the January raid, the almost-daily killing of police and government officials led the authority in Bangkok to put the blame on criminal gangs, presumably upset with an aggressive government war on drugs last year. The 28 April uprising, in which young militants attacked government targets in the three provinces, changed everything. Analysts believe that those young militants were prepared to die for the cause of jihad. A booklet “The Struggle on Pattani”, written in Yawi (traditional Malay) script, was found in Kru-Se Mosque. It is still unsure if some mastermind incited the youths to attack the government targets by convincing them of their unjust treatment at the hand of the Thai state. It can be said that the 2004 unrest has been caused by the following incidents: The sudden termination of ACASBP and CMP 43 leading to discontinuation of the intelligence network and the revival of the terrorists; the support from foreign terrorist groups leading to the training of youth in the locality; and the sense of injustice arising from cases such as the disappearance of Somchai Neelapijit, the Muslim human rights lawyer. Somchai’s disappearance has led to a call for revenge among Muslims. Events have taught the Thai government a valuable lesson: that violence begats violence in its response to the unrest in the South. That injustice will create hatred among the people towards the authority, which will make them

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THE SITUATION IN SOUTHERN THAILAND (continued)

support the terrorists. The government has reversed its policy by employing peaceful means, which is to accept cultural differences, differences in language, religion, and way of life. In addition, the government will emphasize public participation, and ensure justice for all, including the respect of human rights. By way of external strategies, Malaysia and Thailand have endorsed a programme to develop the southern provinces, which were wrecked by the unrest. Thailand has called on Malaysia to help draw up a development blueprint for its Muslim areas in a bid to try and stem the simmering unrest that erupted in January. The blueprint includes plans for Malaysian vocational training of youths in southern Thailand and building trust between the government and locals in order to fight militancy. The plan underlines efforts by both countries to improve infrastructure, such as transportation links between northern Malaysia and southern Thailand, and the creation of opportunities for cultural exchanges. It also outlines ways the nations can cooperate in relief work in the case of natural disasters, while listing measures to promote cooperation in agriculture, such as in fishing and irrigation. Thailand had also asked Malaysia to arrest a number of suspected separatists taking refuge there but Malaysia asked for more information before action would be taken. The Thai government believes that the nation now needs to have mutual cooperation from every sector: political, economic, and mass media to help improve the situation in the south. It hopes to resolve the crisis by peaceful means. However, the death of more than 70 detainees in military custody during the recent Tak Bai incident has squandered much of any remaining trust and goodwill Thai Muslims may have for the Bangkok government. It will take a great effort to heal the embattled relationship. The situation is likely to get worse before it gets better.

he was not so concerned about the means. He reinforced this in August, arguing that opposition was not necessary for a strong economy, as Singapore proved; moreover the opposition did not need 100 members in the 500-seat parliament (the minimum for a no-confidence motion against ministers) because he would allow no-confidence motions anyway. Most pundits expect a strong win for the TRT in 2005, but not the 400 seats its leaders once hoped for. That would make it the first governing party to serve a full term, the first returned by democratic

THE ASEAN-10 election, and — probably — the first to gain a majority in its own right. But the TRT has now absorbed so many of its rivals that internal factionalism may increase. And beset by intractable problems and growing public criticisms, opposition inside and outside parliament could well strengthen in Thaksin’s second term.

Vietnam Vietnam’s present political leaders have identified the country’s most important goals to be: economic growth, political stability, and rebuilding of the Vietnam Communist Party (VCP). The last goal is not surprising because the entire political leadership and most of the political and governmental elites are key party members. Its presence on the list of priorities, however, reflects an awareness that decadence and corruption within the party could undo first the party, then political stability, and then finally, Vietnam’s economic future. Preparations for the 10th VCP National Congress in 2006 have begun. In keeping with the three goals, the leadership will introduce more reforms to maintain the economic growth momentum; fine-tune political mechanisms, institutions, and processes to promote political stability; and formulate visions and policies more relevant to the first two lines of action. Thus, the existence and relevance of the communist party have been organically linked to national goals. These goals are not impossible to achieve but will take much longer than what most Vietnamese would wish. A peaceful security environment and amiable foreign relations make these efforts easier. Factional infighting at the top is likely to dominate the political scene for the next twelve months or more, until the end of the 2006 party congress. The latest is the allegations hurled at the Military Intelligence Bureau for having falsified evidence to accuse many VCP leaders of either collaborating with the US Central Intelligence Agency or committing other improprieties. These allegations about the abuse of the Military Intelligence Bureau as a political tool against political rivals are supposedly aimed at former president General Le Duc Anh, who is known to be in control of the bureau. There was even a rumour that Anh

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POLITICAL OUTLOOK and the head of the bureau had gone into exile or moved out of Hanoi to avoid the heat. These are manoeuvres that are never publicly reported or denied and it is therefore hard to separate rumours from the truth, but such incidents are typical of pre-congressional intrigue. It looked like the first salvo for the ultimate fight at the 10th Party National Congress, which will choose a new group of leaders. It is early days yet but some broad trends in the leadership succession can be identified. One such trend is generational change via appointment of younger people. Members of the Political Bureau who are close to 70 years old and who have completed at least one term may see their use-by date coming close. Chairman of the National Assembly Mr Nguyen Van An has served two terms. Having been in the running for the General Secretary position twice and lost, An is unlikely to be third time lucky; not when the incumbent Nong Duc Manh is fairly entrenched. State President Tran Duc Luong would also have served more than one term and is likely to retire. Chairman of the Party Commission for Organization and Personnel, Tran Dinh Hoan, began his Political Bureau term in 2001 and he is in a fairly powerful post, which decides the top personnel appointments but excluding Political Bureau appointments. He is in his mid-sixties and he has not reached the unwritten rule that Political Bureau members should retire by 70. However, there is an opinion within the party that he has not done a good job and may be replaced by a stronger personality. Prime Minister Phan Van Khai’s age also schedules him for retirement. The identity of his successor has been a matter of speculation for years. For the most important post in the country, the General Secretary of the VCP, Nong Duc Manh, the incumbent would have seen one term by 2006 and clocked fifteen years in the Political Bureau. He has not reached retirement age and so he is likely to see through another term. Furthermore, his first term as General Secretary has been labelled as “painless”, which means that he has not stepped on many toes and is known to be good at forging consensus and ensuring political stability. Because of this, he is likely to stay on unless he is tired and wants to retire. If four among the big five will retire, that means there will be at least five vacancies in the Politburo, including that left vacant by Public

THE ASEAN-10

VIETNAM Land area:

330,000 sq. km

Population:

82.1 million (2004 estimate)

Capital:

Hanoi

Type of government:

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

Party Secretary:

Nong Duc Manh

Head of State:

President Tran Duc Luong

Prime Minister:

Phan Van Khai

Chairman, National Assembly:

Nguyen Van An

Next election:

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

Currency used:

Dong

US$ exchange rate on 19 November 2004:

US$1 = 15,755 dong

Security Minister Le Minh Huong who passed away in early 2004. By convention, the potential appointees are likely to be cadres already in the upper echelons of the party such as the Central Committee. They would also have held key appointments in party organs or in the government ministries. The communist party’s monopoly of power is based on delivering economic growth and development. But this claim to legitimacy faces two major threats: lack of momentum in growth and official corruption, especially if it is perceived to be too excessive. Both these threats dovetail into a number of current issues and will come under intense scrutiny by the leadership. These issues include: growth of the private sector, changes in the land regime, tax reforms to increase revenue from non-oil receipts and indirect taxes, divestment of enterprises run by government depart-

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POLITICAL OUTLOOK ments (which is not the same as privatization), equitization (some call it privatization) of state enterprises, and the listing of huge state corporations on the stock exchange. Priority social sectors are education, public health, and a Vietnamese identity that can face up to the challenge of globalization. All in all, the Vietnamese government is heading in the right direction on economic reforms but implementation still has to depend on negotiations and compromises among domestic players. Changes will be gradual but significant in its outcome two decades from today. Other issues that will continue to receive much attention are moves towards meritocracy and weeding out corruption and decadence within the bureaucracy. In 2004, the Minister for Agriculture and Rural Development Le Huy Ngo was forced to resign for incompetence, and his two deputy ministers were charged with corruption. Questioning of ministers by the National Assembly has become more pointed and even unfriendly. The major issues are the reform of the education and healthcare sectors as well as the cutting back of waste and corruption in state monopolies such as that in telecommunications. Vietnam’s foreign relations have the following priorities: managing its relations with major powers such as the United States and China; building on its traditional ties with neighbouring Laos and Cambodia; strengthening cooperation with ASEAN and its members to counter pressures from the major powers; and working with regional/international organizations to seek a multilateral basis to peace. Current relations with the United States have hit a rough patch because the State Department puts Vietnam on a list of countries that do not respect religious rights. Otherwise US-Vietnam relations are very healthy and mutually beneficial on many fronts and will remain so in the immediate future. The other major power China is worrying to Vietnam because of its proximity and will always be. A remaining bilateral issue with no solution in sight is their competing claims to the Paracel and Spratly Islands. In managing its relations with these major powers, Vietnam will refrain from identifying them as either friend or foe. As is the practice, the 10th Party National Congress will unveil a new set of guidelines on strategic relations. Teams are sent out to gather views

THE ASEAN-10 from key countries such as the United States, China, and ASEAN, indicating that Vietnam’s leaders realize they must pay attention to how the world is changing, and adapt and adjust accordingly. Vietnam needs to adapt more quickly to some major strategic challenges. The first and most important of these is China with its decadelong record of high growth, and then the regional Southeast Asian economies, which are picking up momentum. To compete effectively and globally, Vietnam needs to join the World Trade Organization (WTO); the country is still deep in the woods regarding bilateral and multilateral negotiations with a number of important countries. Membership in the WTO and fulfilling its commitments to ASEAN Free Trade Area will bring about enormous economic and social changes.

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REGIONAL ECONOMIC TRENDS

ECONOMIC OUTLOOK

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REGIONAL ECONOMIC TRENDS

REGIONAL ECONOMIC TRENDS By Denis Hew

E

conomic recovery in the region is well under way, underpinned by robust growth in the global economy. In 2004, global output is projected to grow by 5 per cent while world trade volume (goods and services) will expand by 8.8 per cent (IMF 2004). Stronger global growth has been driven by economic rebounds in the United States, Japan, and the European Union as well as rapid economic expansion in China. Southeast Asia is expected to register a strong GDP growth rate of 6.2 per cent in 2004 while the whole of East Asia is expected to grow by 7.3 per cent (ADB 2004). Robust growth in regional economies has been underpinned by increased industrial production in major economies (namely, the United States and Japan), sustained demand from China’s booming economy, and an upturn in the information and communication technology (ICT) industry. Merchandise exports are expected to expand by 13.9 per cent in 2004 with many countries projecting double-digit growth rates (ADB 2004). Singapore, Malaysia, and Vietnam are the region’s star performers in terms of economic performance in 2004. Singapore’s economy is expected to expand by 8.9 per cent while both Malaysia and Vietnam are projected to grow 7.5 per cent. Other Southeast Asian countries such as Thailand and Laos are also expected to register healthy GDP growth rates. (See country contributions for more detail on the economic projections.) China continues to receive the lion’s share of the world’s foreign direct investments (FDI) — the country received US$53.5 billion worth of FDI in 2003 (UNCTAD 2004). In the same year, FDI flows to Southeast Asia increased by 27 per cent to US$19 billion. There continued to be

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ECONOMIC OUTLOOK disinvestments in Indonesia although the magnitude was significantly smaller compared with previous years. Private investment has been picking up in Southeast Asia after several years of contraction or lackluster growth. Progress made in reducing non-performing loans, higher-capacity utilization, low interest rates, and improved business confidence have all contributed to the revival in private investment. However, fiscal deficits continue to persist in many Southeast Asian countries while public debt has been on the rise. In particular, relatively high fiscal deficit and public debt have become a serious problem in the Philippines.1 Looking ahead, inflation is expected to stay moderate in the region with monetary policies remaining accommodative over the next two years. Peaceful elections in the Philippines, Malaysia, and Indonesia augur well for the region’s short-to-medium-term growth prospects. The region will grow moderately in 2005 and 2006 as high oil prices will slow down production output in the major industrialized economies.

Risks to Regional Economic Outlook The main risks that could affect the region’s economic outlook over the next two years are as follows: •

•

High sustained oil prices could significantly slow down global economic growth. (Crude oil prices breached the US$55 a barrel mark in October 2004.) According to the IMF, a rise of US$5 a barrel could shave 0.3 per cent from global growth. Although the region is vulnerable to high oil prices, its relatively strong economic fundamentals are likely to provide some buffer against this risk. Over the past few years, China’s booming economy has been an engine of growth not only for Southeast Asia but for the entire global economy. However, China’s economy is beginning to show signs of overheating and the Chinese authorities are attempting to facilitate a soft landing through administrative measures. Nevertheless, there are still concerns that China may face a hard landing (that is, sharp economic slowdown) over the coming year, which would clearly have an impact on the region’s growth prospects.

REGIONAL ECONOMIC TRENDS •

•

The recent bombing near the Australian Embassy in Jakarta in September 2004 underscores the rising threat of terrorism. (Indonesia also had two bombing incidents targeting foreigners in Bali in 2002 and Jakarta in 2003.) Hence, terrorist hotspots across the region would continue to keep the risk of investing in Southeast Asia high. Like the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003, there will undoubtedly be economic costs to the recent outbreak of the H5N1 avian flu (better known as the bird flu) in several Southeast Asian countries. Thailand, which has the most number of human cases, will likely be the most affected economically. Singapore also imposed a temporary ban on fresh chicken and eggs from Malaysia after an outbreak was reported in the northern Malaysian state of Kelantan. If the bird flu is not monitored and effectively contained, it could surely become a long-term problem in the region. In the worst-case scenario, the bird flu could trigger a global pandemic.

Recent Developments in ASEAN At the 10th ASEAN Summit in Vientiane, Laos, on 29 November 2004, Asian leaders have agreed to eliminate tariffs in 11 priority sectors by 2007 for the ASEAN-6 and by 2012 for the CLMV countries (that is, Cambodia, Laos, Myanmar, and Vietnam). This is three years earlier than the original target under the ASEAN Free Trade Area (AFTA).2 The 11 priority sectors are: electronics, e-ASEAN, healthcare, wood-based products, automotives, rubber-based products, textiles and apparels, agro-based products, fisheries, air travel, and tourism. During the Vientiane Summit, ASEAN signed an agreement with China to remove tariffs on goods, paving the way for an ASEAN-China FTA — potentially the world’s largest FTA by 2010 (for the ASEAN-6) and 2015 (for the CLMV countries), ASEAN will also likely begin FTA talks separately with Japan, Korea, Australia, and New Zealand in 2005. Furthermore, negotiations have begun for the ASEAN-India FTA, with Malaysia heading the negotiations, and an early harvest programme covering 105 products is expected to be in place by early 2005.3

67

68

ECONOMIC OUTLOOK

ISEAS ASEAN Community Roundtable The Institute of Southeast Asian Studies (ISEAS) organized an ASEAN Community Roundtable in Singapore in June 2004. This Roundtable provided the opportunity for scholars and experts on ASEAN to “brain-storm” in a more comprehensive and integrated manner, the different ideas and proposals underpinning the process of community building that ASEAN is embarking upon.4 From the Roundtable discussions, the salient issues related to ASEAN economic integration were as follows (ISEAS 2004): •

•

• •

•

•

From the Bali Concord II, it was clearly evident that ASEAN leaders were not prepared to establish supranational institutions to coordinate economic activities in the region. In this light, ASEAN could consider using legally binding agreements to ensure the successful implementation of economic programmes. A single market, in the European context, would imply a common market plus harmonization of all laws, regulations, and taxes. Given the different levels of economic development and income within ASEAN, even the end-goal of a customs union (one integration level below a common market) would be difficult to realize by 2020 (ISEAS 2003). ASEAN countries were not prepared to harmonize tariffs and have a common external tariff policy (as required of a customs union). ASEAN had agreed to a sectoral approach to economic integration — as reflected in the 11 priority sectors identified by the ASEAN HighLevel Task Force (HLTF) on Economic Integration. However, there were concerns with regard to the successful implementation of this project. To create an integrated ASEAN market, hindrances to the movement of goods must be removed. This would, inter alia, involve improved customs coordination and the harmonization of standards and technical regulations. There were no clear guidelines on the “2+X” approach (which was recommended by the HLTF as a means to expedite integration).5 In fact, this approach is not really a regional initiative because it can be

REGIONAL ECONOMIC TRENDS

•

•

undertaken at a bilateral level. This would mean that “X” country might be bound to whatever had already been agreed by the two original countries (Hew and Sen 2004). More participation should be given to professionals (particularly ASEAN-based professionals) in the implementation of the ASEAN Economic Community (AEC). In the ASEAN-ISIS study on the AEC, it was proposed that “regional units”, staffed by independent professionals, be established to manage economic activities in the region (Hew and Soesastro 2003). Despite the promising start, there are some concerns that the AEC project might be losing momentum. Hence, a champion is needed to drive the economic integration process. It was suggested that the ASEAN HLTF on Economic Integration could be this champion.

NOTES 1. In August 2004, Philippines President Macapagal Arroyo drew attention to this problem by declaring that the country was going through a fiscal crisis (Economist Intelligence Unit, September 2004). 2. “ASEAN Accelerates Integration of Priority Sectors”, 29 November 2004 . 3. Nataraj, G. and P. Sahoo. “India-ASEAN FTA: Small Step for a Big Stride in World Trade”, Hindu Business Line, Wednesday, 22 September 2004. . 4. At the 9th ASEAN Summit in October 2003, ASEAN leaders agreed to establish an ASEAN Community by 2020. This community encompasses three components or “pillars”, namely: • ASEAN Security Community (focusing on regional political and security co-operation); • ASEAN Economic Community (focusing on regional economic integration); and • ASEAN Socio-Cultural Community (focusing on regional socio-cultural cooperation). 5. This approach enables two member countries that are ready to integrate certain sectors to go ahead first, with other members joining at a later stage.

69

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ECONOMIC OUTLOOK REFERENCES Asian Development Bank (ADB). Asian Development Outlook 2004 Update. ADB, October 2004. Declaration of the ASEAN Concord II (Bali Concord II), 7 October 2004 . Hew, D. and H. Soesastro. “Realizing the ASEAN Economic Community by 2020: ISEAS and ASEAN-ISIS Approaches”. ASEAN Economic Bulletin 20, no. 3 (December 2003). Hew, D. and R. Sen. “Towards an ASEAN Economic Community: Challenges and Prospects”. ISEAS Working Paper on Economics and Finance no. 1. Singapore: Institute of Southeast Asian Studies, 2004. Institute of Southeast Asian Studies (ISEAS). Concept Paper on the ASEAN Economic Community. Singapore: ISEAS, 26 February 2003. ———. Towards Realizing an ASEAN Community: A Brief Report on the ASEAN Community Roundtable. Singapore: ISEAS, 2004. International Monetary Fund (IMF). World Economic Outlook: The Global Demographic Transition. IMF, September 2004. United Nations Conference on Trade and Development (UNCTAD). World Investment Report 2004: The Shift towards Services. New York: UNCTAD, 2004.

REGIONAL ECONOMIC Real GDP Growth in the ASEAN-5 Countries, 2000–2006F TRENDS 10.0 8.0 6.0 4.0 2.0 0.0

2000

2001

2002

2003

2004E

2005F

2006F

-2.0 -4.0 Indonesia Singapore

Malaysia Thailand

Philippines

SOURCE: Institute of Southeast Asian Studies, Singapore.

Real GDP Growth in Cambodia, Laos, Myanmar, and Vietnam, 2000–2006F

8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2000

2001 Cambodia

2002

2003 Laos

2004E

2005F

Myanmar

SOURCE: Institute of Southeast Asian Studies, Singapore.

2006F Vietnam

71

72

ECONOMIC OUTLOOK ASEAN’s FDI Inflows Compared, 1992–2003 120.00

45.00 40.00

100.00

35.00 30.00

80.00

25.00 60.00

20.00 15.00

40.00

10.00 20.00

5.00 0.00

0.00 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 ASEAN's FDI inflows as a % of developing countries' (LHS) ASEAN's FDI inflows as a % of Asia Pacific's (LHS) ASEAN's FDI inflows as a % of China's (RHS)

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

Fiscal Balance of Central Government in Indonesia, Philippines, Malaysia, and Thailand, 2001–2004E 1.0 0.0

2001

2002

2003

2004E

% of GDP

-1.0 -2.0 -3.0 -4.0 -5.0 -6.0 Indonesia

Malaysia

Philippines

SOURCE: Asian Development Bank.

Thailand

REGIONAL TRENDS Relative Performance of ASEAN-5 Currencies to theECONOMIC US Dollar, 2000–2004 105.0

100.0

95.0

85.0

80.0

75.0

70.0

65.0

Ringgit/US$

Peso/US$

S$/US$

SOURCE: CEIC Database.

Baht/US$

4 l-0 Ju

4

3 l-0

n-0 Ja

Ja

Rupiah/US$

Ju

3 n-0

2 l-0 Ju

2 n-0 Ja

Ju

l-0

1

1 n-0 Ja

0 l-0 Ju

-00

60.0

Ja n

100 = January 2000

90.0

73

Jan

-00

40.0

60.0

y-0

0

Ma

80.0

p-0

0

Se

100.0

y-0

1 Ma

120.0

p-0

1 Se

100 = January 2000

140.0

y-0

2

2

Jan

-02

SOURCE: CEIC Database.

Ma

Jan

-01

160.0

p-0 Se

KLSE Composite Manila PSE Composite

y-0

3 Ma

Jakarta Composite Bangkok SET Singapore SGXST

p-0

3 Se

180.0

y-0

4 Ma

Relative Performance of ASEAN-5 Main Stock Market Indices, 2000–2004

p-0

4 Se

Jan

-03

74 ECONOMIC OUTLOOK

Jan

-04

ECONOMIC SOUTHEAST ASIA INREGIONAL THE GLOBAL WAVE TRENDS OF OUTSOURCING: TRENDS, OPPORTUNITIES, AND CHALLENGES By Rahul Sen and M. Shahidul Islam

75

I

n recent years, the phenomenon of global outsourcing of economic activity to the developing countries by businesses in the developed countries has acquired significant importance for both policy-makers as well as for politicians. Although there is no strict definition, the phenomenon of “Outsourcing” refers to the strategic use of external resources by businesses to perform the economic activities that were erstwhile being handled by its internal staff and resources.1 It thus involves contracts provided by businesses to specialized and efficient service providers, usually located in another country, to perform major functions for the company on a long-term basis. The prime objective behind outsourcing is to reduce global business costs and sustain competitiveness. Global outsourcing has largely evolved into two forms. The first is Information Technology Outsourcing (ITO), which involves the provision of some or all information systems by one or more service providers, and the typical functions outsourced under an ITO includes data conversion, database administration, help desk, content development, application development, systems administration, mainframe, network management, and website development functions. The second phenomenon is that of “Business Process Outsourcing” (BPO) when an organization turns over the management and optimization of a business process to a third party that conducts the activity based on a set of predetermined performance standards. Typical examples of BPO include call centres, HR administration, finance, and accounting functions.2 With globalization and the rapid advancement of information and communication technology (ICT), it is now easier for companies to break up their service functions, and outsource some of these functions to low-cost locations overseas on the basis of geographical diversification either by contracting the job to a third party (offshore outsourcing) or by setting up a subsidiary at an overseas location to undertake the same (which is also termed offshoring). This largely complements the existing phenomenon of production fragmentation, wherein manufacturing activities were also broken down into stages and undertaken in different countries in line with their comparative advantage. Global outsourcing, which was largely initiated by US multinationals and is increasingly being adopted by businesses in developed economies, has led to a massive redistribution of jobs and economic activities around the world. The developing countries in Asia have been an important beneficiary from this, emerging as a major outsourcing destination, because of low-cost considerations. Thus, in the services sector, thousands of jobs have been migrating from the United States, Japan, and some OECD (Organization for

1

http://technologyexecutivesclub.com/artGlobalOutsourcing.htm. The key distinction between ITO and BPO is that ITO usually takes place through subcontracting, which does not involve the parent company to invest abroad, while in the case of BPOs, the service functions might require the parent company to establish its presence in the country where it outsources its business, or enters into a joint venture with a local company in that country, thus involving foreign direct investment (FDI) flows. 2

76 ECONOMIC OUTLOOK SOUTHEAST ASIA IN THE GLOBAL WAVE OF OUTSOURCING (continued) Economic Cooperation and Development) countries to India, China, Singapore, Malaysia, the Philippines, and other developing countries in Asia. Recent trends suggest that US businesses dominate the global share of offshoring (constituting 70 per cent of the market share), followed by Japan and some European economies. According to a study by Cornell University and the University of Massachusetts for the USChina Economic and Security Review Commission, the United States lost more than 400,000 jobs in 2004 to Mexico, China, India, and other Asian nations as multinational corporations (MNCs) restructure operations and shift production abroad.3 A study by Forrester (a leading IT analyst) also found that the number of US jobs offshored will grow from 400,000 in 2003 to approximately 3.3 million by 2015, accounting for some US$136 billion in wages.4 McKinsey Global Institute projects the offshoring market to grow at the rate of 30 to 40 per cent a year for the next five years.5 In fact, the offshore market is still at an early stage, as among the world’s 1,000 largest companies, some 70 per cent have still not outsourced any business process to lower-cost countries.6 This indicates that significant opportunities still exist for developing countries in Asia, including those in ASEAN, to reap the advantages by positioning itself as an attractive outsourcing destination. In this context, this article attempts to analyse the emerging trends in outsourcing of economic activities to Southeast Asia (particularly focusing on Singapore, Malaysia, the Philippines, and Vietnam), and comments on the possible opportunities and challenges for the region to remain an attractive destination for outsourcing. Outsourcing to Southeast Asia: Emerging Trends Although there is no comprehensive source of data on outsourcing by developed countries to developing Asia, anecdotal evidence suggests that besides India, which is the leading destination for BPOs and ITOs in Asia, many Southeast Asian economies, namely, Malaysia, the Philippines, Singapore, and Vietnam are emerging as an outsourcing destination for some Fortune-500 companies. This article therefore concentrates on analysing the outsourcing trends and potential, specifically for these four countries. Philippines The Philippine economy has been grappling with one of the highest unemployment rates in Southeast Asia and has to cope with a huge budget deficit. In spite of this, it is one of the leading centres for ITO in Southeast Asia. As a former US colony, with 300,000 fresh graduates produced per year, Filipinos are more familiar with American culture, business environment, and accent. It ranks second amongst the most popular destinations for offshore outsourcing involving ITO, with an industry estimated to be worth US$1 billion, employing

3

“US to Lose More Than 400,000 Jobs This Year” . 4 “Offshoring — Is It a Win-Win Game?” . 5 “Offshoring: Is It a Win-Win Game?” McKinsey Global Institute 2003 . 6 Press Release, Forrester Research .

REGIONAL ECONOMIC TRENDS

77

about 130,000 people in call centres and back office service centres. The number of agents in Philippine call centres has doubled to about 40,000 over the past year and industry analysts expect that number to double again by the end of 2005.7 A Columbia University survey of 45 US-based companies has observed that the Philippines have been the second-largest recipient of ITO, sharing nearly 30 per cent of the market.8 This is largely due to the high level of IT skill availability in the Philippines at a relatively lower cost than in Singapore. Thus, the immense potential for global outsourcing to the Philippines could be reaped to gainfully employ Filipino graduates. With this industry expected to channel US$800 million this year to the Philippines, outsourcing can evolve as a solution to finance the country’s US$3.5 billion annual budget deficit. Malaysia Malaysia’s IT-savvy infrastructure, large pools of local and foreign graduates, and a multilingual society are favourable factors that have led it to be chosen as an offshoring centre. The country has invested US$10 billion in two high-tech parks — Cyberjaya and Putrajaya — as part of its Multimedia Super Corridor (MSC) project to attract international businesses. The MSC is now being evolved as the region’s leading outsourcing centre. This is so as outsourcing operations have emerged as one of the largest sectors in the MSC, spawning investments of more than one billion ringgit by 49 companies and creating some 8,000 new jobs.9 A global survey by US consultancy firm AT Kearney ranked Malaysia as the third most attractive offshore location in terms of cost and skills, behind India and China. In 2003, banks and transportation companies such as Maybank and Malaysian Airlines (MAS) signed several large ITO deals. Market research firm IDC (International Data Corporation) estimates that outsourcing by Malaysian companies will rise at a compound annual growth rate of 27.2 per cent over the next five years and the ITO market grow to almost US$350 million in 2008.10 However, medium levels of IT skills availability and IT network infrastructure could be an impediment for Malaysia to attract jobs that are outsourced at the high end of the value chain. Singapore Singapore’s comparative advantage on outsourcing is different from other Southeast Asian countries. In terms of wage cost, Singapore is less attractive to outsourcers but costs are not the only determinants. Very few countries are comparable with the city-state’s infrastructure facilities and strong and efficient legal systems, which are important determinants for offshoring service functions, particularly through BPOs. Thus, factors such as a wage rate lower than in the United States, world-class telecommunication infrastructure, efficient logistics, strong

7

“Filipinos Fret as Protectionist Americans Target Outsourcing” . 8 Ibid. 9 “Malaysia Seeks to Become Asia’s Top Outsourcing Centre” . 10 “Outsourcing Picks Up in Malaysia” .

78 ECONOMIC OUTLOOK SOUTHEAST ASIA IN THE GLOBAL WAVE OF OUTSOURCING (continued) legal system, intellectual property rights protection, and a trusted regulatory framework in areas such as finance and telecom, stable government, and a highly skilled workforce of 2 million people, prompt US companies to choose Singapore for high-end sensitive service operations such as data centres as well for other high-skilled service functions, namely, R&D, design services, software development, medical testing or analysis, and technology system designs. Japan is also increasingly outsourcing such high-end activities to Singapore, due to the latter’s well-developed logistic services and state-of-the-art international laboratories. Singapore can now receive and deliver diagnostic samples consignment within 24 hours to Japan.11 Thus, in 2003 approximately 20 per cent of Japanese laboratory tests were outsourced to Singapore. This has led to a tenfold increase in biomedical packages from Japan. This strengthens its position to be a leading hub for biomedical services. Indeed, Singapore is targeting to reap the benefits from outsourcing US$300 million worth of pharmaceutical business, 20 per cent from Japan, amounting to about 20 per cent of the total market size.12 A newly released report by the US Department of Commerce reveals that Singapore has been ranked as the second fastest-growing outsourcing hub (after India) as far as US businesses are concerned. This industry has been growing at an average rate of 21.7 per cent per year, and in 2003 Singapore executed US$800 million of outsourcing business from the United States.13 Invariably, the large presence of US MNCs in Singapore has contributed to shaping the city-state as one of the fastest-growing outsourcing hub in the world, especially for higher-end BPOs. Vietnam In IT outsourcing, Vietnam has a cost advantage over other Southeast Asian countries, in terms of salary of IT professionals. However, inadequate infrastructure and lack of English proficiency have affected its prospects of becoming an attractive destination for IT outsourcing. In spite of this, global IT companies, namely, Anheuser Busch, Bayer, Cisco, IBM, Nortel Networks, and Sony are outsourcing software development projects to Vietnam — either directly or through third-party developers with an onshore presence in the United States and Europe.14 More than 30 software development companies are currently operating in Vietnam. The reasons for this are that developing software in Vietnam is 90 per cent cheaper than in the United States, and between one-third and one-seventh of the cost of developing it in India. Moreover, IT companies in Vietnam retain key staff and keep project teams together for months at a time, thereby maintaining low rates of attrition. This ensures continuity and familiarity between client and contractors, and provides greater business confidence.

11

“Singapore Gains from Japan Outsourcing”, Business Times (Singapore), 13 October 2004. “Singapore Enjoys Biotech Boom as Japan Outsources Biomedical Services”, Channel News Asia, 12 October 2004. 13 “Singapore Holds Its Own as a Choice Spot for US Outsourcing”, Business Times (Singapore), 26 October 2004. 14 Lopatin, Mark, “Outsourcing to Vietnam”. 2001 . 12

REGIONAL ECONOMIC TRENDS

79

However, the low level of IT skill availability and IT network infrastructure is likely to remain a major impediment for Vietnam’s development as an offshore centre for BPOs.

Average IT Programmer’s Salary and Quality of IT Infrastructure in Selected Southeast Asian Countries

Country Singapore Philippines Malaysia Vietnam

Average programmer salary (US$)

IT skill availability

IT and network infrastructure

19,140 7,250 8,130 4,110

High High Medium Low

High Low Medium Low

SOURCE: Ratings by Howard Rubin Meta Group Inc. Average Salary from Neoit Inc. San Ramon, California.

Global Outsourcing Wave: Opportunities and Challenges for Southeast Asia The above suggests that Southeast Asia has a high stake in the global outsourcing wave and needs to position itself favourably to attract offshore activities to its economies. The opportunities in terms of both ITO and BPO are quite significant for ASEAN, with Singapore and the more developed ASEAN countries being better positioned to attract BPO activities. With lower to medium levels of IT skills, lower levels of English proficiency and inadequate IT infrastructure, lesser developed ASEAN members are likely to attract only ITO-related activities, wherein most of the work may take place through subcontracting rather than foreign direct investment (FDI). As observed, outsourcing can create new avenues for employment and incomegeneration, and is also likely to attract a fair amount of FDI, especially if offshoring activities are undertaken by subsidiaries of the parent company. This could in turn generate important growth spillovers, from the service sector to the manufacturing sector, through design and R&D services. However, the challenges for Southeast Asia in sustaining competitiveness in the global outsourcing market are enormous. First, the region needs to significantly invest in human capital as well as knowledge-based infrastructure in order to attract foreign companies to continue to outsource activities. Singapore as a city-state, and to some extent Malaysia, already scores on this aspect, but other ASEAN countries do need to strongly focus on it. Second, the level of English proficiency also needs to be significantly improved if Southeast Asia is to enhance its share of the BPO market, which is currently dominated by India. Third, domestic economic reforms in individual ASEAN countries would be crucial to provide correct signals to foreign businesses that their countries can provide a friendly and hassle-free, lowcost business environment for companies who wish to offshore their businesses here. These concerns need to be addressed as soon as possible if Southeast Asia is to remain competitive in the race for being a global outsourcing destination.

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ECONOMIC OUTLOOK

ENERGY AND ASEAN ECONOMIC INTEGRATION By Andrew Symon

H

igh oil prices in 2004 have focused the attention of policy-makers in Southeast Asia on the region’s increasing dependency on oil imports, mainly from the Middle East, and, as a result, wider energy issues. By 2020, every country in Southeast Asia will be a net oil importer, apart from the tiny petroleum-rich Sultanate of Brunei on Borneo island, according to the Asia-Pacific Energy Research Centre (APERC) in Tokyo, a body under the auspices of APEC. The growing deficit points to the fact that no longer can easy energy resource abundance be assumed as far as Southeast Asia’s long-term economic development is concerned. This has important implications for government policy, not just as at the domestic level, but also in terms of both bilateral relations with neighbours and in the multilateral context of ASEAN. While energy matters are already an aspect of ASEAN endeavour, this should become more important. The pressure to enhance energy flows between countries will help foster economic integration along with efforts to promote merchandise trade, services, and investment flows. In June 2004, ASEAN energy ministers meeting in Manila in the Philippines agreed to a detailed five-year “Plan of Action for Energy Co-operation (2004–2009)”. The plan calls for “sustainable energy development, enhancing the integration of regional energy infrastructure, promoting energy security, creating progressive policies for market reforms and liberalization, as well as addressing environmental concerns”. In the past, the combination of low domestic energy demand and relatively abundant resources meant that countries in Southeast Asia did not need to worry too much about their neighbours. In future, though, as industrialization and urbanization advance, the scale of energy demand will require countries to draw increasingly on energy supply from outside their borders through, for example, international natural gas pipelines and power transmission, and work together to deal with common problems, such as oil import supply vulnerability. APERC projects that energy demand in the region (excluding Cambodia, Laos, and Myanmar) will double from 252 million tonnes of oil equivalent (mtoe) to 525 mtoe between 1999 and 2020. This is three times as great as energy consumption in 1990. Southeast Asia’s growth may not be as spectacular as that of China, where demand is projected to grow from 754 to 1,322 mtoe during this period. Nevertheless, Southeast Asia’s needs are still very large. And even assuming that APERC’s projection is fulfilled, per capita energy consumption in the region will still be less than one-sixth that of North America. Looking beyond 2020, the implications of achieving anywhere near an energy supply level such as North America’s or Western Europe’s in terms of fuel demand, infrastructure, finance, and also, importantly, environmental impact, are truly staggering. Just in the two decades to 2020, APERC estimates Southeast Asia will need investment

REGIONAL ECONOMIC TRENDS

of between US$374 billion and US$485 billion in energy infrastructure. No longer can Southeast Asia be seen simply as an energy-surplus region. Increasingly, the region will need more of its energy resources for its own needs. There will be fewer surpluses for export and, indeed, the region will need to supplement its own supply with more energy imports from without. While the region’s primary energy resources are generous, they are still small compared with those of the Middle East (oil and gas), the Russian Siberia (oil and gas), and Australia (gas and coal). This is already clearly evident in the case of oil. APERC projects an oil deficit of 202 million tonnes (four million barrels per day) for the region as a whole by 2020.1 Historically, Southeast Asia was one of the world’s first great commercial energy producing and exporting regions. By the 1900s, oil was being produced in Sumatra, Borneo, and Burma (Myanmar). Singapore had become a regional oil storage centre. Later, in the 1960s, this role became the building block for the island state’s rise as one of the world’s key oil-refining and trading centres. Apart from oil, in the 1970s Southeast Asia became one of the world’s first exporters of liquefied natural gas (LNG) with plants built in Malaysia, Brunei, and Indonesia, aimed largely at Japan — and largely financed by Japan. Then, in the late 1980s and early 1990s, Indonesia emerged as a major exporter of steam coal. All these energy exports are mostly directed to the industrialized Northeast Asian markets in Japan, South Korea, and Taiwan. More recently, China has become an important importer of Southeast Asian energy. Looking ahead into the new century, the region’s own demand growth will inevitably cap and ultimately reduce export beyond the region. Within the region though, energy trade should grow. There should be increasing intra-regional trade of natural gas (piped and shipped as LNG), coal (from Indonesia, which has most of the region’s reserves) and power to optimize the region’s resources and infrastructure. There is already significant intra-regional trade of oil and oil products. Increasing cross-border energy flows follow from the fact that the region’s primary energy resources — oil, gas, coal, and hydro — are unevenly distributed and, given the level of demand growth over the long term, relatively limited. The larger gas fields (the region’s most abundant fossil fuel), coal deposits, and rivers (for hydro power, especially in the Greater Mekong area) are often far from the main centres of demand. Similarly, there is an uneven distribution of powergeneration capacity and oil-refining capacity.

1

This excludes Cambodia, Laos, and Myanmar — all of which import oil to meet their demand, adding to the regional deficit figure.

81

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ECONOMIC OUTLOOK ENERGY AND ASEAN ECONOMIC INTEGRATION (continued)

The last decade has seen the emergence of the first cross-border gas and power connections. Gas piped from Myanmar provides about 25 per cent of Thailand’s total supply. Two-thirds of Singapore’s power generation is fuelled by gas from Indonesia and Malaysia. Peninsular Malaysia also takes Indonesian piped gas from fields in the Natuna Sea to supplement domestic supply and is planning to take more gas from Indonesian Sumatra. The idea of piping gas from Indonesia’s East Kalimantan to the Philippines is also being put forward. There are powertransmission connections between Malaysia and Singapore and between Thailand and Malaysia. Thailand also imports power from Laos. Energy demand pressures will result in more connections. Proposed, for example, is power supply to Thailand from Myanmar from an array of joint hydro projects on the Salween River, part of which forms the border between the two countries. ASEAN energy ministers have endorsed plans for cross-border gas and power connections across the region in 2002 and 2003, respectively. Separately, but consistent with these ASEAN-wide schemes, the Greater Mekong region countries agreed in 2002 to have various cross-border power links. Power connections between Thailand and Cambodia, and Cambodia and Vietnam, are two already under development. More cross-border gas and power supply could be a first step towards more integrated systems, but this will require agreement over a range of often-sensitive policy, institutional, and regulatory matters. Some examples are pricing and the role of trading mechanisms, and third-party access to infrastructure by producers and buyers. Common, multi-country gas and power markets, as distinct from cross-border supply under long-term contracts to supplement domestic supply systems, are unlikely to appear quickly. Sobering is the experience of Western Europe where, despite the similarity of countries in terms of economic development and policy, common markets where gas and power are sold across borders under short-term trading conditions have only been established very gradually. A much more immediate challenge for policy-makers in much of the region is how to encourage investment in energy, most of which will need to come from the private sector given the level of funds needed. Indonesia is especially desperate with little new investment in power and gas infrastructure since the 1997/ 98 economic and political upheavals. One result of this is excessive reliance on oil for power generation and industrial boilers on Java, Indonesia’s most industrialized and heavily populated island, because little alternative gas supply is available. Another area where energy pressures can promote cooperation is the resolution of the remaining competing claims over oil and gas prospective maritime areas. Joint development approaches where countries agree to draw boxes around contested areas and split production benefits can be an effective approach as agreements between Thailand and Malaysia and between Malaysia and

REGIONAL ECONOMIC TRENDS

Vietnam in the lower Gulf of Thailand show. However, other disagreements remain. Most publicized is the Spratlys dispute in the South China Sea among the bordering Southeast Asian states and China. There are also unresolved offshore claims over very prospective waters between Malaysia and Brunei, between Thailand and Cambodia, and between Timor Leste (East Timor) and Australia. High on the agenda now is the question of whether there should be an ASEAN-wide approach to the problem of oil import supply vulnerability. ASEAN members did, in 1986, make an ASEAN Petroleum Security Agreement in which oil-surplus countries vowed to support oil-deficit countries in the advent of a crisis. This, however, has never been tested, and with the decline in the region’s oil-producing capacity, it is being reassessed. The idea of “strategic” oil storage serving ASEAN members is one proposal. Some argue that there should be reserve oil stockpiles along the lines of the government stockpiles in Japan and South Korea. China and India also embarked on building up storage reserves in 2004. These would provide emergency supply in the case of unforeseen restrictions to oil supply from the Middle East. Possible places to stockpile in Southeast Asia could be Singapore’s Jurong Island, Subic Bay in the Philippines, and Thailand’s Kra Isthmus, where the Thaksin government has resurrected the old proposal for an oil pipeline across the isthmus as an alternative to shipping through the Malacca Straits and Singapore to Northeast Asia. Adding to oil supply concerns is the spectre of terrorist attacks on shipping and facilities. A fear is that shipping might be attacked in the narrow Malacca and Singapore Straits, which provide passage for half of the world’s oil supply destined for Southeast and Northeast Asian markets as well a third of merchandise global trade. Should this occur, oil and other flows could be disrupted, not simply due to physical blockage in the Straits, but also by sharp increases in shipping insurance costs in reaction to the revealed danger. One argument for the Kra pipeline is that it would provide a safer and speedier alternative to shipping around the Straits. This is also put forward as a reason for a mooted SinoMyanmar oil pipeline with China, having to import ever larger volumes of oil, concerned to have alternative import routes. In summary, Southeast Asia’s economic development is demanding new energy policies and programmes at both the domestic and regional level. The region, having to import more energy, especially oil, will be more vulnerable to international factors. Meeting this challenge and optimizing development and consumption of local energy resources in an environmentally acceptable way will force more regional approaches. Meaningful measures though will not be easy to achieve, given the different levels of economic development and different government policies towards the role of the state and the market in the region. However, their success will help realize the goal set by ASEAN leaders in October 2003 to create an “ASEAN Economic Community” by 2020.

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ECONOMIC OUTLOOK

ASIAN BOND MARKET DEVELOPMENT: A PACE TOWARDS REGIONAL FINANCIAL STABILITY By Sakulrat Montreevat

W

ith hindsight, one of the fundamental causes of the 1997 Asian crisis was an over-reliance on short-term external borrowing. When a depreciation in the value of a local currency precipitated a loss in confidence on the part of foreign investors and creditors, short-term external loans were recalled and massive capital flights resulted. Many Asian countries ran short of foreign currency assets, and external debt repayment difficulties mounted. From these developments, we can learn three lessons from the financial crisis. The first lesson is to avoid the “double mismatch” problem, namely, currency and maturity mismatches of borrowers in Asia. The second is to avoid an over-reliance on the banking sector. And the third is to avoid a peg against one or only a few major currencies. One way to decrease an over-reliance on banks is to promote bond market financing. This calls for well-developed bond markets in Asia, and since the 1997 crisis, the development of Asian bond markets has been discussed in various international forums, such as the Asian Cooperation Dialogue (ACD), the Asia-Pacific Economic Cooperation (APEC), the ASEAN+3, and the Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP). Substantive work on the demand and supply sides of the bond market development has also been done.1

Initiatives within the Asian Region The first ACD Ministerial Meeting was held in Thailand in June 2002. The objective of the ACD forum was to discuss Asia-wide cooperation. A framework for Asian bond market development was deliberated at the second ACD Meeting in June 2003. The 18 members of the ACD pledged support for the ACD Asian Bond Fund (ACDF) Initiative and the road map for the development of Asian bond markets. The ACDF Initiative was part of the development of the demand side of Asian bond markets. This involved promoting the pooling of the investor base and the pooling of reserves. A Working Group (WG) on Financial Cooperation was set up to work out a set of feasible guidelines to develop sound Asian bond markets. The 2004 proposal is to set up a US$10 billion, closed-end fund, registered in the form of a unit trust and managed by professional fund managers. The fund aims to invest in sovereign or quasi-sovereign bonds denominated in the local currencies of Asian countries, namely, “Asian bonds”. The Asian bonds will be traded domestically and encouraged to be traded across countries via approved bond exchanges, cleared and settled through existing or new international clearing systems. The function of the ACD is to coordinate with other forums such as the APEC, ASEAN+3, and EMEAP.

1 The demand side of the development involves promoting the pooling of investor base and/or the pooling of reserves, while work on the supply side includes development of infrastructure, reduction of impediments in issuance of bonds in regional and domestic contexts, and the standardization of tax, the legal system, and regulatory accounting.

REGIONAL ECONOMIC TRENDS

After the first ACD Meeting in 2002, initiatives for developing Asian bond markets accelerated. The APEC and ASEAN+3 initiatives are aimed at increasing the supply of viable debt instruments and the development of supporting market infrastructure. In September 2003, the APEC Finance Ministers Meeting supported the APEC Regional Bond Market Development Initiative, particularly in (a) promoting the development of securitization and credit guarantee market in enhancing the efficiency of bond markets; (b) issuing of new products, including long-term, local currency–denominated debt instruments, derivatives, and asset-backed securities; and (c) cooperating to attain domestic and regional conditions which are essential to facilitate cross-border bond market activities. The ASEAN+3 Asian Bond Market Initiative (ABMI) was endorsed at the ASEAN+3 Deputies Meeting in December 2002. Its objective is to develop efficient bond markets in Asia, which would enable the private and public sectors to raise and invest longterm capital without currency and maturity risks. Six WGs were established in 2003: WG on Creating New Securitized Debt Instruments, WG on Credit Guarantee Mechanisms, WG on Foreign Exchange Transactions and Settlement System, WG on Issuance of Bonds Denominated in Local Currencies, WG on Local and Regional Rating Agencies, and a Technical Assistance Coordination Group. In support of the ASEAN+3 WGs, the Asian Development Bank (ADB) has established six WGs internally, through which the ADB has offered to support the development of the bond market through various means, including loans, technical assistance to governments and regulators, and bond issuance in various Asian markets. In June 2003, the EMEAP Group launched the first Asian Bond Fund (ABF), namely, the ABF1. The ABF1 is a reserve-pooling scheme with an investment mandate of investing in Asian bonds and technical aspects of the fund. The ABF1 started off with an initial size of US$1 billion, with the Bank for International Settlements (BIS) appointed as the fund manager. The fund will invest in US dollar–denominated bonds issued by governments and government agencies in the EMEAP economies (other than Japan, Australia, and New Zealand). Since foreign reserves are used for this fund, the riskier bonds are not included in the investment portfolio. In the second phase, the ABF2 will be opened to investors from the private sector. It is expected that the ABF2 would raise investor and issuer interest in Asian bond markets, generating liquidity and broadening participation in the long term. The EMEAP WG on Financial Markets is steering this stage of the development of the ABF. Potential and Challenges of Asian Bond Market Development The development of the Asian bond market becomes a focal point for regional financial cooperation. Regional organizations as well as governments and policy-makers of various countries in Asia recognize the importance of having a well-developed bond market. Before the 1997 crisis, bond markets in Asia were small and illiquid. Since then, local-currency bond markets in Asia have enjoyed rapid growth: they more than doubled

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ECONOMIC OUTLOOK ASIAN BOND MARKET DEVELOPMENT (continued)

in size between 1997 and 2002, totalling US$1.2 trillion by the end of 2002, this being equivalent to about 50 per cent of the region’s GDP.2 This impressive growth can be taken as an indication of the potential for further development of bond markets in Asia. In terms of reserve pooling, the Asian economies hold cumulative foreign reserves of over US$1.4 billion, the majority of which have been invested in bonds denominated in US dollars and in the euro. However, the proportions of international reserves in US dollars held by Singapore, Malaysia, and Thailand have been decreasing in line with the weakening US dollar. Asian bond funds would provide for the diversification of the investments of official reserves; yield enhancement of these reserves, as well as the development of local bond markets. Asian bonds would also provide institutional investors with access to a wider choice of investment-grade bonds with currency diversification and better risk/return profile in the light of a declining US dollar and a yen and a euro that is not too strong.3 Hypothetically, if all the impediments in the bond markets are removed, investment by Asian bond funds (ACDF, ABF1, and ABF2) and investors will lead to greater liquidity, increased issuance, better lending terms for governments and corporations, and greater stability of the Asian financial market. Ito (2004) criticizes that there is little common market infrastructure in the Asian region as the financial markets are fragmented: the trading system is not coordinated; clearing and settlement may take longer as there is no common depository; bankruptcy codes differ from one country to another; standardized credit ratings for regional companies are also not available. Ito suggests that efforts should focus on the infrastructure and legal harmonization. In addition, cooperation among governments in the region is essential to the success of regional bond markets.4 Furthermore, Eichengreen (2004) cautions that massive capital flights might return if bond prices suddenly collapse in the pan-Asian bond market based on cross-border investment. To prevent capital flights, governments in Asia should shift towards more flexible exchange rate regimes, which confront investors in the foreign exchange market with two-way bets; this further opening up of the capital account will mean less crisis risk.5 In conclusion, initiatives on developing Asian bond markets have been ongoing over the past years, and relevant issues are being addressed. It is now time for concrete action. Otherwise, Asia will get hurt again when the US dollar crashes and there is no Asian bond to cushion the blow. 2

Guorong Jiang and Robert MacCauley, “Asian Local Currency Bond Market”, BIS Quarterly Review, June 2004, p. 68. 3 Olarn Chaipravat’s presentation at the seminar on “Developing an Asian Bond Market under Challenges of Globalism”, organized by the Institute of Southeast Asian Studies, Singapore, on 30 September 2004. 4 Takatoshi Ito, “Promoting Asian Basket Currency Bonds”, in Developing Asian Bond Markets, edited by Takatoshi Ito and Yung Chul Park (Australia: Asia Pacific Press, 2004), p. 84. 5 Barry Eichengreen, “The Unintended Consequences of the Asian Bond Fund”, address to the annual meetings of the Asian Development Bank, Jeju Island, South Korea, May 2004, pp. 11–13.

THE ASEAN-10

THE ASEAN-10 M. Shahidul Islam • Mya Than • Arya B. Gaduh • Nick J. Freeman • Lee Poh Onn • Aladdin D. Rillo • Manu Bhaskaran • Sakulrat Montreevat

Brunei Skyrocketing oil prices, upbeat performances in the manufacturing and service sectors, creation of new jobs, and a strong growth in the Southeast Asian region offers a big boost to the Brunei economy. According to the International Finance Corporation (IFC), for every dollar increase in the price of oil, Brunei can expect to see an additional real GDP growth of US$100 million.1 A record oil price hike can thus turn the government budget deficit into a surplus. Against this backdrop, the economy is likely to experience 3 to 5 per cent GDP growth in 2005 and 2006. Traditionally, oil prices have played a crucial role in Brunei’s economy, as the oil sector constitutes half of the country’s GDP and 90 per cent of its exports. Due to a stronger demand from China and a supply disruption in the Middle East, the sultanate’s average weighted oil production increased by 1.2 per cent from 204,803 barrels a day in the first quarter of 2003 to 207,323 barrels a day in the first quarter of 2004. The government is expecting to see a 2 to 3 per cent growth in this sector.2 The non-oil private sector has posted affirmative growth rates owing to a buoyant performance in the non-oil mining, quarrying, and manufacturing sectors, as well as wholesale and retail sectors. The sultanate recorded a budget deficit of BND 31.5 million (US$18.5 million) in the first quarter of 2004. During this period the government’s expenditure of BND 1.43 billion (US$860 million) exceeded its revenue

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ECONOMIC OUTLOOK of BND 1.820 billion.3 However, the government’s fiscal position is expected to turn around from a deficit to a surplus. The government revenue, which, to a large extent is dependent on revenues from the sale of oil and gas, is projected to benefit from the high oil prices. Nevertheless, large government expenditure to support development projects may reduce the surplus.4 The average consumer price index (CPI) for the first quarter of 2004 had increased by 0.7 per cent compared with the previous quarter. This was due to an increase in six major group indices, namely, food and beverages; clothing and footwear; household goods, commercial services, and operation; transport; education; and miscellaneous goods and services. The International Monetary Fund (IMF) has projected that the nation could experience a 1.0 and 1.3 per cent rise in CPI for 2004 and 2005, respectively.5 Brunei has never managed to find sources of growth other than in oil. To reduce its over-dependence on oil, the government has unveiled several projects to diversify the economy. To materialize its long-term goal, the sultanate has begun to look into turning Brunei into a trade and tourism hub and an international financial centre. Policy-makers have adopted several packages to attract new investments, especially in the non-oil sector. One of Brunei’s targets is to attract foreign direct investment (FDI) of US$4.5 billion between 2003 and 2008, which could generate 6,000 new jobs.6 Besides economic and political stability, the government believes that the country has a sustainable supply of oil and gas, which are the key drivers for local as well as foreign investment. The sultanate expects investments in information and communication technologies to be crucial in the development of the non-oil sector. In June 2004, the communication minister revealed plans to develop Brunei as the “most wired” country in Southeast Asia. To cope with the growing demand for e-government and e-commerce, the government has plans to build a cyber park. The Brunei government has unveiled a two-pronged approach to develop an industrial site at Sungei Liang for manufacturing, where it hopes to develop petrochemicals as well as heavy manufacturing industries. In July 2004 the Brunei Economic Development Board (BEDB)

THE ASEAN-10 signed a deal with the Halcrow Group to develop a deep-water port at Pulau Muara Besar. The BEDB believes direct shipment to Brunei will save the economy US$43 million in two years and at the same time create jobs. The board also plans to develop the port as a regional transshipment centre. The development of the entire project will cost US$1.7 billion, of which US$400 million is likely to be disbursed during phase one of the development.7 Brunei is among the newest entrants to offshore financial services. It has launched legislative and regulatory reforms to position the country as an attractive tax-free market for international banks and other financial institutions. Policy-makers believe Brunei has a strong potential to be the regional hub of Islamic banking. The sultanate is also seeking German cooperation in developing Brunei as an eco-tourism centre. With more than half of the total workforce employed by the government, the state is undoubtedly the biggest employer. The private sector currently plays a small role in the economy, but the government expects it to grow steadily as the economy becomes more diversified and more commercial centres emerge and more businesses are generated. To encourage and facilitate job search in the private sector in Brunei, a career resource centre was set up in July. Bandar Seri Begawan has taken steps to accelerate bilateral economic cooperation with the regional powers, namely, China, Japan, and South Korea. A high-technology lens production joint venture between a Bruneian and a South Korean chemical company has begun work on its production facilities. A Japanese company manufacturing mineral water and health products has been conducting a feasibility study on possible investments in the bottling of mineral water and distribution in the country. China and Brunei have encouraged enterprises from both countries to make investments in selected areas. Chinese enterprises will participate in the exploration and development of oil and gas resources in Brunei. Both sides have signed an agreement on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxation on income. Brunei seeks more Chinese engagement in regional economic and strategic cooperation. The policy-makers also believe that the existing

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ECONOMIC OUTLOOK ASEAN+3 mechanisms can further build upon the efforts towards East Asian Economic Integration. The government has welcomed China’s support and participation in the development of Brunei, Indonesia, Malaysia, Philippines–East ASEAN Growth Area (BIMP-EAGA). Thus, wide-ranging structural reforms, soaring oil prices, and a favourable setting in the regional as well as global economy could give a big boost to drive the Brunei economy into 2005 as well as 2006. NOTES 1. 2. 3. 4. 5. 6. 7.

“Economic Monitor”, Far Eastern Economic Review, 12 August 2004. Economist Intelligence Unit, EIU Country Report — Brunei, August 2004. Brunei Economic Bulletin 3, no. 1 (2004). Ibid. “Brunei Darussalam and the IMF” . “Economic Monitor”, Far Eastern Economic Review, 12 August 2004. Economist Intelligence Unit, EIU Country Report — Brunei, September 2004.

Cambodia Cambodia’s economic performance in 2003 was dragged down by the political deadlock in the country, along with red tape, rampant corruption, and weak rule of law. Both the IMF and the ADB indicated that Cambodia’s GDP growth slowed down in 2003 compared with 2002. Although a general election was held in Cambodia in July 2003, the country’s failure to form a coalition government until 15 July 2004 created a political deadlock, which made it impossible to introduce the necessary reforms in order to implement growth policies and ratify its membership in the WTO. The major weakness in the economic structure is that the economy is not broad-based but depends on two sectors — garments and tourism. In 2003, tourism was dampened by the SARS outbreak and the terrorist bomb blasts in Bali. In addition, anti-Thai riots damaged not only tourism but also Thai-Cambodia bilateral trade relations and discouraged investment inflow into Cambodia. In fact, Cambodia’s economic growth slowed down gradually from 1999 up to 2004. According to the IMF, Cambodia’s GDP growth rate of 5.0 per cent in 2003, boosted by high growth in agriculture and the garments and

THE ASEAN-10 textiles sector, decreased to 4.3 per cent in 2004. The ADB is more optimistic, however. Its estimate of the growth rate is 5.4 per cent. Again in 2004, robust export of garments, the engine of the country’s economic growth, and earnings from tourism would spur a moderate growth in 2004. If properly utilized, the annual development assistance from donor countries, which accounts for about 50 per cent of the country’s budget would also help in its economic growth. Also, the narrowing of the budget deficit (from 6.1 per cent in 2003 to 5.8 per cent of GDP due to stronger revenue mobilization efforts) and an increase in export growth (from 14.4 to 17.0 per cent) would also contribute to a moderate growth. On the other hand, as the money supply increased from 14.9 per cent in 2003 to 16.1 per cent in 2004, the inflation rate too increased from 1.2 per cent in 2003 to 2.9 per cent in 2004, with interest rates remaining positive. Although the budget deficit in 2004 would narrow down to 6.1 per cent due to stronger revenue mobilization effort, the current account balance as a percentage of GDP would increase to 4.3 per cent partly because of increasing trade deficits. The exchange rate of the local currency is estimated to increase slightly, from 3,973 riel to 4,000 riel per US dollar. Overall, the Regional Outlook estimates that growth in Cambodia’s economy is moderate, at 4.5 per cent in 2005/2006, due mainly to favourable performance in garment exports, tourism, and construction. This moderate economic performance of the country can be attributed to institutional reforms designed to improve public administration and public sector financial management in improving revenue mobilization efforts. However, despite these efforts to improve economic performance, the country’s social indicators are among the world’s lowest: the incidence of poverty is still high given that 45 per cent (an increase from the previous year’s 36 per cent) of the population is living below the poverty line. The forecast for economic performance in 2005 and 2006, according to the ADB, seems to be optimistic although the IMF’s picture is less rosy. The optimistic scenarios painted by the ADB are based on Cambodia’s political, economic, and institutional factors. The political deadlock,

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ECONOMIC OUTLOOK which took place more than year ago, has been resolved after the formation of a coalition government in July 2004. From the economic perspective, a relatively robust agricultural growth is expected due to a forecast of higher global rice prices, which will increase rural incomes and hence domestic demand. Tourism and the trade sector are also likely to boost the economy due to improving security and the country’s efforts to better integrate with neighbouring countries. In addition, the government’s commitment to improving budget allocation and stronger revenue mobilization efforts will narrow the budget deficit and attract more foreign direct investment (FDI). If reform measures as required by the WTO are implemented in time, the country’s economic performance is likely to improve. Accession to the WTO will enable garment exports to bounce back when the United States ends its quota system at the end of 2005. On the other hand, the expected benefits of WTO membership may not be gained soon as the infrastructure, telecommunications, and extensive legislative changes need to be improved first to facilitate better access to other markets. The export of garments, which contributes fourfifths of the country’s total official exports of US$1.44 billion per year, is likely to be constrained by stronger competition from China, India, and Vietnam and the fact that the advantage it enjoys of garment exports to the United States and the European Union will last only until 2005, after which the elimination of preferential garment export quotas granted by the United States takes effect. Moreover, according to the World Bank report on Cambodia (12 August 2004), rampant corruption has paralysed private business and is hampering economic growth. The World Bank’s survey of 800 firms across the country indicates that four-fifths of them acknowledged the necessity of bribing in order to get business done. The report also points out the country’s bribe-ridden investment climate due to weak rule of law, high official and unofficial costs, delays, uncertainty, and discretion — “a critical problem for a country that must rely on exports for growth”. The World Bank also recommends a list of sweeping reforms to stimulate growth, including the elimination of overlapping and obsolete agency

THE ASEAN-10

Cambodia: Selected Economic Indicators, 2001–2006F 2001

2002

2003

2004a

2005F

2006F

5.4 5.7 6.3

5.2 5.5 5.5

5 5.1 4.8

4.3 5.4 5.4

1.9 5.4 5.5

7.0 b n.a. n.a.

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

5.5 12.9

4 17.7

4.5 19

5 11.7

3.5 8.4 c

5.5 n.a.

— Services sector growth (%change) (ADB)

4.2

4.5

4.2

4.6

7.3c

n.a.

— Agriculture sector growth (% change) (ADB)

2.2

–2.7

9.8

2.4

4.1c

n.a.

Exports (US$ million)

1,374

1,766

1,917

2,263

2,000

n.a.

Imports (US$ million)

1,600

2,311

2,469

3,160

2,350

n.a.

Trade balance (US$ million)

–226

–545

–552

–987

–350

n.a.

Current account balance (%GDP) (ADB)

–2.3

–1.6

–3.9

–4.3

–5.6

n.a.

0.3

3.3

1.2

2.9

3.3

n.a.

Foreign exchange reserves (US$ million) (EIU)

586.3

775.6

815.3

n.a.

n.a.

n.a.

Foreign direct investment (actual US$ million)

142.1

139.1

132.3

n.a.

n.a.

n.a.

20.4

31.1

14.9

16.1

23.2

20

3,916

3,912

3,973

4,000

4,100

4,150

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

Inflation CPI average (% change) (ADB)

M2 growth (% change) (ADB) Exchange rate (average) (ADB)

NOTE: Data given for 2005F and 2006F are forecast figures. a Cambodia Development Research Institute, 2003. b Government of Cambodia. c Country Presentation for Cambodia, Third United Nations Conference on the Least Developed Countries, 2001. SOURCES: Cambodian Development Research Institute, 2003; Asian Development Bank (ADB), Asian Development Outlook 2003; ADB, Key Indicators 2003; Economist Intelligence Unit, EIU Country Report — Cambodia, August 2003 and August 2004.

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ECONOMIC OUTLOOK roles and shifting them from a culture of control to a culture of facilitation. Moreover, FDI in Cambodia has continued to decline in recent years, according to the consulting firm Sciaroni & Associates. Based on the above facts, the IMF forecasts a 4.3 per cent growth for 2004 and 1.9 per cent for 2005. Unless the reform measures required by the WTO membership in addition to those recommended by the World Bank and the IMF are implemented and the promise of Prime Minister Hun Sen to make essential reforms to improve business climate materialize, the growth of Cambodia’s economy in the medium-term perspective may not be favourable. Taking into account the positive as well as negative factors prevailing in the country, the Regional Outlook forecasts Cambodia’s economy to grow at a rate of 3.5 per cent and 5.5 per cent in 2005 and 2006, respectively.

Indonesia Defying doubts of its ability to maintain policy discipline without the IMF, the Megawati administration held its own, skilfully maintaining macroeconomic stability throughout the first nine months of 2004. Despite domestic political uncertainties and a string of external shocks, inflation was kept under control, interest rates were falling, and the currency maintained stability against unanticipated shocks. Economic growth, however, remained modest. Real GDP grew by 4.7 per cent in the first semester of 2004, driven mainly by private consumption, which contributed more than two-thirds of that growth. Meanwhile, continued uncertainties from a prolonged election period weakened investment performance. Though still the second largest contributor to growth, contributing around a third of total growth, Indonesia’s investment performance was unimpressive: investment-to-GDP ratio was at a modest 18 per cent, far below the pre-crisis level of around 30 per cent. Weak investment performance created a bottleneck to further growth. It has limited Indonesia’s ability to take advantage of a recovering world economy by constraining its export capacity. Exports of goods and services grew weakly in the first half of 2004 by a mere 2.0 per cent,

THE ASEAN-10 despite the robust growth of Indonesia’s main trading partners — the United States, Japan, and Singapore. The ADB estimated that the growth of Indonesia’s goods exports would be the lowest in Southeast Asia in 2004. This inability to ride the waves of the world recovery was a missed opportunity, especially with Indonesia’s conducive macroeconomic environment. Annual inflation in September 2004 was at 6.3 per cent, only marginally higher than in the previous year. Interest rates declined steadily, with real rates declining more rapidly than nominal rates. The nominal one-month benchmark interest rate (SBI) fell by 92 basis points (bps) in the first nine months of 2004; in real terms, it was a decline of 213 bps. However, considering Indonesia’s recent graduation from the IMF programme and three rounds of elections, the level of domestic uncertainties was rather high at the start of 2004. With the success of each successive round of elections, the level of uncertainties declined, and market confidence grew stronger. Immediately after the smooth and peaceful parliamentary election in April, for instance, the gap between lending and deposit rates — an indicator of the risk premium to domestic lending — narrowed rapidly. The growth of credits for investment and working capital picked up as a result. The clearest example of this growing confidence was the market reactions to the September bombing in Jakarta. On 9 September 2004, just eleven days before the final round of the presidential election, a high-powered bomb exploded near the Australian Embassy. The market was unimpressed: though both the Jakarta stock market index and the rupiah weakened right after the explosion, they quickly recovered within days. In fact, the stock market continued to be bullish afterwards, in anticipation of (and responding to) a successful final round presidential election. By early October, the stock market reached a record high. In October 2004, the Election Commission declared Susilo Bambang Yudhoyono the new president. With a new president and a fresh administration, would we expect major breakthroughs and accelerated growth in 2005? It is too early to tell whether this new administration can deliver

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ECONOMIC OUTLOOK major breakthroughs. The new administration inherited a stable macroeconomic environment on which to nurture growth, and a competent and independent monetary authority to help maintain that stability. This new administration will not sacrifice stability for growth; as such, we shall see the kind of careful macroeconomic management displayed in the past few years is expected to continue in 2005. On the monetary side, the monetary authority, Bank Indonesia (BI), has repeatedly stated its commitment to maintain stable (and low) medium-term inflation through the inflation-targeting mechanism. Declining domestic uncertainties have encouraged the loosening of monetary policy in the first half of 2004; nevertheless, there are lingering external risks ahead: unpredictable and high oil prices, the extent of the Fed’s “measured” interest rate hikes, a return of global inflations, and, to a lesser extent, the slowdown in China’s growth. As such, we expect BI to maintain its tight bias to anticipate these risks in 2005. On the fiscal side, a tight fiscal condition will limit the government’s capability to provide a fiscal stimulus to the economy. From the 2005 draft budget, we see that expenditure will increase by 5.3 per cent compared with that in 2004, but most will have been allocated to routine expenditures — such as personnel expenditures — and to regional governments. With the little that will be left, the central government will still have to cover two major items: debt servicing and subsidies. Debt servicing will take up 65 trillion rupiah (US$7.2 billion) from a 394.8 trillion rupiah (US$43.9 billion) budget, or 16.2 per cent of total expenditure. Assuming a low oil price of US$24 per barrel, domestic subsidies — which included, but are not limited to, fuel subsidies — are projected to take up 33.6 trillion rupiah, or 8.5 per cent of total expenditure. A higher average oil price, as is likely, will inflate subsidies even further. In 2004, the government had to spend 63 trillion rupiah (US$7.0 billion) instead of 14.5 trillion rupiah (US$1.6 billion) budgeted early in the year on fuel subsidies. On paper, one way to escape the fiscal constraints is by phasing out the fuel subsidies. However, in practice, removing fuel subsidies is a Herculean task: a previous attempt in early 2003 met with massive rallies, and the government was forced to partially retract the policy.

THE ASEAN-10 There is hope, however, that the strong mandate of the directly elected new president may allow him to pull it off. Another alternative would be for the government to seek additional external financing, either from issuing more bonds or relying on foreign donors. With the already high level of outstanding bonds, it is unclear whether the market will be willing to absorb new issues in 2005. Meanwhile, the government will need to work very hard — both in handling the domestic repercussions as well as the international negotiations — to obtain additional foreign financing. However, to boost growth, fiscal stimulus might not matter as much as investments. Investments will be of key importance to growth in 2005 for at least two reasons. First, as mentioned above, there are indications of constraints in Indonesia’s export capacity due to the minimal investments of the past six years. Global demand, despite a slight decline, is still expected to be strong in 2005 and Indonesia needs to take advantage of this. As such, an immediate expansion of capacity will be imperative for Indonesia’s export performance. Second, a rising China has forced Indonesia to adjust the structure of its economy; new investments are needed to speed up this adjustment. To attract investments, the new administration will have to speed up its micro-regulatory reforms. Of the 713 firms surveyed for the World Development Report 2005, 48 per cent cited policy uncertainty and 42 per cent cited corruption as major constraints to investment in Indonesia. Discussions in various circles suggest that uncertainties about taxation and labour policies, as well as implementations of the decentralization law continue to be the main concerns of the private sector. The newly elected cabinet offers hope that micro-regulatory reforms can be pushed forward. The new president managed to avoid pressures to fill key economic posts with political appointees; instead, we see these posts filled by competent professionals and economists who tend to see eye to eye. Internally, coordination on economic policies will improve in the coming years. The challenge will be to fend off external pressures, as opposition politicians and more nationalistic economists in the parliament have been voicing concerns that the economic ministers are “too liberal”.

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Indonesia: Selected Economic Indicators, 2000–2006F 2000

2001

2002

2003

2004E

2005F

2006F

4.9%

3.8%

4.3%

4.5%

4.8%

5.4%

5.8%

Exports of goods (US$ million)

61,880

55,983

57,006

61,023

63,159

65,559

68,640

Imports of goods (US$ million)

33,429

30,714

31,304

32,390

33,686

35,202

36,715

Trade balance (US$ million)

28,451

25,269

25,702

28,633

29,473

30,357

31,925

Inflation/CPI average (% change)

3.66

11.50

11.88

6.68

6.12

5.70

5.50

Total debt (% of GDP)

43.33

81.19

61.73

55.08

51.36

46.77

42.28

Three-month average interest rate (% per annum)

12.31

16.41

15.25

10.17

7.41

6.90

6.60

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

9,623

10,497

8,975

8,447

9,010

8,900

8,650

GDP growth (% change)*

NOTE: Data given for 2004E are estimates; data for 2005F and 2006F are forecast figures. * Except for the year 2000, real GDP growth rates use 2000 as the revised base year. SOURCES: Central Board of Statistics; CEIC Database; author’s estimates.

Given the urgency of these domestic challenges, the government can only put very little attention on the regional agenda. Hence, at least in the short run, it will keep its stance on regional cooperation, namely, maintaining a passive support of the regional economic arrangements and processes in ASEAN. At the time of writing, the government has yet to state formally its positions on regional and bilateral trade arrangements. However, the new Minister of Trade, Dr Mari E. Pangestu, is an internationally renowned trade economist supportive of outward orientation. (The newly elected administration split up what was previously

THE ASEAN-10 known as the Ministry of Trade and Industry into two ministries.) Hence, we expect to see a more open trade regime in Indonesia in the next five years. With solid macroeconomic fundamentals and a more mature market which is increasingly less sensitive to political shocks (both negative and positive), we expect the investment climate to improve in 2005. Indeed, there are signs of this already: the robust growth of domestic investments (usually to be followed by foreign investments) and imports of raw materials (signalling robust industrial production in the months ahead) in the second quarter of 2004. In light of this, we expect the economy to grow by 5.3 to 5.6 per cent in 2005.

Laos The Lao People’s Democratic Republic (Lao PDR) is a less-developed country, with approximately a third of its population living below the food poverty line. The average annual per capita income is around US$310 on a gross national income (GNI) basis, or US$1,575 on a purchasing power parity (PPP) basis. More than 75 per cent of the population earns less than US$2 per day. The country is sparsely populated, with an average density of just 25 people per square kilometre, and only 20 per cent of Lao citizens reside in urban areas. The average life expectancy is no more than 55 years. International donor activity currently accounts for around 7 per cent of GDP, almost 40 per cent of total public expenditure, and over 60 per cent of the country’s capital budget. As measured on a per capita basis, Lao PDR receives one of the highest levels of donor assistance in the whole of Asia. 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 (LPRP) 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 under way in neighbouring Vietnam. This transition process in Lao PDR has been a very gradual one, and prone to occasional bouts of stalling.

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ECONOMIC OUTLOOK Factors behind the slow pace of economic reform in Lao PDR are multiple and complex, but include: a cautious approach taken by policymakers, particularly towards economic reform measures that may potentially have unwelcome socio-political consequences; resistance from various stakeholders that anticipate losing current privileges as a result of economic reform measures; and a general lack of urgency displayed by the government in economic policy matters. With few exceptions, the fruits of this economic transition are mostly evident in the handful of lowland towns that huddle along the eastern bank of the Mekong river, proximate to neighbouring Thailand. The widening economic divide between these towns and other parts of Lao PDR is, unfortunately, broadly congruent with ethnic differences amongst the Lao population. The Lao Loum tend to populate the more prosperous lowland areas along the Mekong, 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 efforts to try and bridge this economic divide, its gradual appearance has been an inevitable consequence of economic transition, with the urban locales better able to harness the new economic and business 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 the new economic policies. Consequently, inhabitants find it difficult to advance beyond the subsistence level that tends to dominate these regions. The government aims for Lao PDR to graduate from its less-developed country status by 2020, but this will be an uphill task. The overall health of the small economy and the even smaller business sector remains fragile. In particular, Lao PDR imports a substantial proportion of its demand for manufactured items, and so any weakness in the local currency can rapidly translate into significant consumer price inflation. This was particularly evident during the Asian financial crisis, when the local currency went into virtual freefall and the urban Lao were faced with hyperinflation. An additional challenge that continues to confront the Lao economy is the legacy of unrelenting US bombing over large parts of the country

THE ASEAN-10 before 1975. Unexploded ordnance (UXO) is still evident in 13 of Lao PDR’s 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. A potentially important development to monitor in the coming years wil be the government’s decentralization drive, which is granting greater budgetary and policy-making autonomy to local governments. The uninspiring (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”. All provinces have also been given approval by Vientiane to license foreign investment projects valued at below US$1 million, and provide investment incentives for firms with capital below 10 billion kip (around US$950,000). (Vientiane, Savannakhet, Champassak, and Luang Prabang may license up to US$2 million and 20 billion kip, respectively.) Some provinces, particularly in the south, are reported to have seized on these reform measures with considerable vigour, although it should be noted that a previous attempt at decentralization in the late 1980s ended in failure. Vientiane’s decision to permit greater decentralization is driven in part by pragmatism, turning a de facto situation into something more de jure. In general, transport and communications within Lao PDR are fairly rudimentary, and some provinces are quite remote from the capital. Yet all but two of the country’s provinces have a border with at least one of its five neighbouring countries. As a result, the local economies of some provinces are surprisingly independent from the centre, and the gravitational pull of border trade finds them interacting more with proximate provinces in neighbouring countries. In this context, a degree of economic and administrative decentralization is arguably appropriate, although doubt surrounds the capacity of some provincial authorities to sensibly manage and balance local public finances, particularly bearing in mind that even the national government’s track record with the national budget is mixed. Looking ahead, the business sectors which might be expected to offer the greatest prospects for the Lao economy include: mining, hydro-

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ECONOMIC OUTLOOK power, various hospitality and tourism-related services (particularly in the burgeoning field of eco-tourism), and some garments and handicrafts in which Lao PDR has particular competitive advantages. Much has been expected of hydropower, with a number of dam projects being given formal approval to proceed, although the number of tangible hydropower projects created has been disappointingly few. The biggest of these proposed power projects, the mighty US$1.2 billion Nam Theun II power plant, has faced numerous delays and false starts, with expectations raised and then dashed with remarkable 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. At the time of writing, the project developers were seeking to raise the necessary funding to commence the project in 2005, although the World Bank had not decided whether to provide the political risk guarantees needed to attract sufficient commercial bank lending. With the local private sector still under-resourced in many ways, the need for foreign investment capital and expertise remains very evident. However, occasional reports in the international press have made the attractions of Lao PDR as a destination for foreign capital less than wholly appealing. Such incidents have included: minor bombing incidents in the capital; sporadic ambushes on the highway that links Vientiane with Luang Prabang; and the arrest of foreign business people for alleged cases of business fraud or stealing. With such a small domestic economy, both in terms of population and national income, 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 Lao PDR being a landlocked country. Lao PDR is seeking to establish normal trading relations with the United States, but has come up against resistance in Washington, DC, from lobby groups opposed to Vientiane’s alleged abuse of human rights and religious freedom. There is presently some heightened expectation that foreign investment activity in the Lao mining industry, which until recently was meagre, is poised to increase substantially. This follows the apparent

THE ASEAN-10

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Laos: Selected Economic Indicators, 1999–2006F 2000

2001

2002

2003

2004E

2005F

2006F

GDP growth (% change)

5.8

5.8

5.9

5.8

6.7

6.9

7.4

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

8.5

10.1

10.3

11.3

12.5

13.0

15.0

4.9

5.7

5.7

7.4

6.5

6.5

6.5

4.9

3.8

4.0

2.2

4.0

4.0

4.0

Exports (US$ million)

330

320

300

370

420

520

550

Imports (US$ million)

535

510

470

500

600

710

680

Trade balance (US$ million)

–205

–190

–170

–130

–180

–190

–130

Current account balance (% of GDP)

–7.1

–4.6

–2.3

–2.5

–2.2

–1.9

–1.1

Inflation/CPI average (% change)

27.1

7.7

10.7

15.5

12.5

12.0

12.0

M2 money supply growth (% change)

45.9

20.1

27.0

19.2

28.0

25.0

—

Fiscal balance (% of GDP)

–6.0

–7.6

–8.3

–7.8

–5.4

–5.3

—

Total debt outstanding (US$ million)

2,502.1

2,494.9

2,664.5

—

—

—

—

Long-term debt (US$ million)

2,452.6

2,455.9

2,620.2

—

—

—

—

Debt service ratio (% of exports)

5.7

7.2

8.3

6.8

-—

—

—

Foreign exchange reserves (US$ million)

138.9

127.5

185.5

189.5

220.0

250.0

—

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

8,218

9,490

10,680

10,467

11,000

11,200

11,300

NOTE: Data given for 2004E are estimates; data for 2005F and 2006F are forecast figures. SOURCES: Asian Development Bank; author’s estimates.

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ECONOMIC OUTLOOK initial success of a foreign-owned gold and copper mine at Sepon, in Savannakhet province. The deposit was initially discovered by Rio Tinto, but is now wholly owned by Oxiana Limited, of Australia. Given the small scale of the Lao economy, just one or two major mining or hydropower projects of this kind can have a fairly substantial and positive impact on the Lao economy as a whole. The forecast figures for GDP growth in 2005 and 2006 provided in the table are based on an assumption that output from the Oxiana mine will increase as it enters full production, and that at least one or two mining or hydropower projects will commence construction in the next two years.

Malaysia Malaysia’s growth rates in 2005 and 2006 look set to settle at a lower pace after the brisker rates achieved in 2003 and 2004. Its real GDP grew by 5.3 per cent in 2003, and by an estimated 7.4 per cent in 2004. 2004 was indeed a good year for Malaysia. Growth in 2005 and 2006 looks set to moderate at a slower but still acceptable pace, affected by both internal and external factors. Overall, positive internal and external factors outweigh the negative ones to ensure that the outlook during the next two years would remain favourable. First, the internal dynamics. In terms of fiscal policy, the government announced in June 2004 that it would increase development spending by another RM10 billion (US$2.6 billion). In the coming 18 months, this will be raised in the development budget under the Eighth Malaysian Plan for 2001–2005 from RM160 billion to RM170 billion (US$42 billion to US$44.7 billion). This ensures that all high-priority projects would continue to be implemented. Such funds will, however, not go to the previous “mega projects”, but towards developing Malaysia’s poorest state, Terengganu, which the United Malays National Organisation (UMNO) gained from Parti Islam SeMalaysia (PAS), in the March 2004 election. Government spending in 2005 will moderate but will still grow at an acceptable rate. The overturning of Mr Anwar’s sodomy charge bodes well for Malaysia’s legal court system as it signals the re-emergence of an inde-

THE ASEAN-10 pendent Malaysian judiciary system. The crucial role of an independent judiciary in turn creates a climate of predictability and security for foreign investors and outsiders alike. The government’s drive towards eradicating corruption has met with widespread public approval, with the government indicating that it is now aiming towards improving Malaysia’s ranking in the corruption index published by Transparency International. The government also intends to reduce the budget deficit to RM17.7 billion (US$4.66 billion) or 3.8 per cent of GDP in 2005. Compare this with the 4.5 per cent of GDP in 2004 and 5.3 per cent in 2003). The government is also allowing full foreign ownership in futures broking and venture capital firms which would in turn make Malaysia more visible to international investors. This again will bode well for the inflow of foreign capital into the country, making the Malaysian market more liquid. It will also allow five top global fund managers and five major foreign brokers to operate in the country, in line with the Capital Market Master Plan to liberalize the stockbroking industry and allow for great foreign equity participation. In addition, Malaysia also intends to abolish the limit on the number for foreign dealer representatives in the country. In addition, the government announced in May 2004 that it was also reorganizing Khazanah, its state investment arm to make it more independent, transparent, and fiscally responsible. There is now a more conscious effort to staff Khazanah with finance professionals; note the appointment of Aznam Mokhtar, the former director and head of research at Salomon Smith Barney and Union Bank of Switzerland, as Khazanah’s chief executive officer. In July 2004, the government unveiled new details of its policy towards the government-linked companies (GLCs). In general, the main intention of the government is now to change the culture and mindset of the GLCs with the aim of improving financial performance within three years. Such measures should serve to boost business and consumer confidence, promote efficiency, and lower business costs. Previous rentseeking activities have tended to limit productive capacity and increase the cost of capital. The industry and services sectors are expected to remain as the leading growth pillars during the period of forecast. Both sectors are

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ECONOMIC OUTLOOK expected to record moderate if not spectacular growth during the forecast period. This is being supported by the still strong but declining rates of growth in exports and the continuing strong domestic demand. The strong growth of tourism in 2004 (70.4 per cent for the first seven months of 2004), a result of the ongoing recovery from the Severe Acute Respiratory Syndrome (SARS) episode in 2003, looks set to create new records in 2004. Although such high rates may not be achieved again in 2005 and 2006, the present spurt in tourism will have positive repercussions and multiplier effects on the expansion of tourism services during the period of forecast. In addition, the Multimedia Super Corridor will be ushered into its second phase of development (2004–10) where it will be rolled out to Bayan Lepas, Penang, and Kedah. Malaysia’s aim to become more prominent in Islamic banking is also noteworthy. Currently, this sector accounts for 10 per cent of the Malaysian financial system, and this has been forecast to grow to 20 per cent by 2010. Malaysia is aiming to become the leading regional Islamic banking hub for corporate banking, commercial banking, corporate finance, and risk management in the coming years. The Malaysian carmaker, Proton Holdings Berhad, is in talks with Volkswagen AG which may result in a strategic partnership that would benefit both companies. For Volkswagen, this would represent an opportunity for it to break into the Southeast Asian market. For Proton, a global partner would help the carmaker wean itself off tariff protection. The agricultural sector, which is the third pillar of Malaysia’s economic growth, will also receive new funds. A RM300 million (US$78.9 million) fund will be established as seed capital for the commercialization of this sector, another RM1.5 billion (US$0.4 billion) will be allocated for agricultural projects benefiting smallholders, and tax incentives will be given for the commercialization of agricultural activities. Malaysia has been experiencing robust growth in its electronics and electrical goods exports in 2004, boosted by a strong external demand as well as stronger domestic demand. However, this is not expected to be sustained during the forecast period. The growth will perhaps moderate into a lower growth band as external demand from the United States is expected to taper off in the next two years. Malaysia’s dependence on

THE ASEAN-10 electronic exports (60 per cent of total exports) nevertheless makes it vulnerable to swings in the global economy. Increasing competition from China adds to that vulnerability. As part of its strategy to raise competitiveness in its economy, Malaysia intends to introduce a goods-and-services tax (GST) in January 2007. Datuk Seri Abdullah said that the GST will boost government revenues as well as lower corporate and individual income taxes. The plan to introduce GST in 2007 may, however, create extra cost-inflationary pressures in 2006 and subsequently erode real growth rates if not managed properly. The new warmth of relationship between Malaysia and Singapore also bodes well for the country. Prime Ministers Abdullah Badawi and Lee Hsien Loong recently signed a new double taxation agreement meant to boost trade and investment between the countries. Not only has the third-country development fund (amounting to RM10 billion, co-funded equally between Malaysia and Singapore) been agreed upon, but the Malaysia-Singapore Business Council has also been revived. The MalaysiaSingapore Third-Country Business Development Fund (MSBF) launched in July 2004, enables joint missions of companies from both countries to venture into third countries. There is also the planned cross-trading alliance of shares between the Singapore Exchange and Bursa Malaysia by the end of 2005. In addition, the Malaysian government’s investment arm Khazanah Nasional recently sold 5 per cent of Telekom Malaysia to Temasek Holdings, the Singapore government’s investment arm. This gesture not only indicates the strong goodwill that has been growing between the countries in recent months but also a stronger spirit of cooperation that will serve to boost the economies of both countries in the years ahead. Next, the external dynamics. Malaysia’s major export markets in 2003 include the United States (18 per cent), Singapore (16.4 per cent), the European Union (12.6 per cent), Japan (10.9 per cent), and China (6.4 per cent), while its major import partners are Japan (17.4 per cent), the United States (15.2 per cent), Singapore (12.0 per cent), the European Union (11.8 per cent), and China (8.4 per cent). Overall, export markets are expected to grow in 2005 and 2006 although at a slower pace because

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ECONOMIC OUTLOOK of the less rosy conditions of Malaysia’s major trading partners, particularly the United States and the European Union, although this will to a certain extent be buffered by Japan’s growth during the forecast period. In July 2004, Malaysia also signalled that it is preparing for talks on a Free Trade Agreement (FTA) with Australia, subsequently broadened to a regional FTA between ASEAN, Australia, and New Zealand. Other regional FTAs Malaysia is participating include the ASEAN-India, ASEANChina, ASEAN-Japan, and the Trans Regional EU ASEAN Trade Initiative. Malaysia is also in the process of negotiating a bilateral FTA with Japan, and a Trade and Investment Framework Agreement (TIFA) with the United States. Under the priority sectors to be liberalized in the proposed formation of the ASEAN Economic Community in 2020 (free flow of investment, trade, and labour), Malaysia will coordinate the rubber and wood-based products, and the textile and apparel sectors. In addition, three factors must be looked at when forecasting Malaysia’s economic growth in 2005 and 2006: the price of oil, the Chinese slowdown, and rising interest rates in the United States. All these external factors, which are beyond Malaysia’s control, are likely to have significant impacts on Malaysia’s export capabilities which in turn would impact negatively on Malaysia’s economic growth. Higher crude oil prices may in the short term benefit Malaysia, with 20 per cent of the country’s revenue coming from oil taxes and royalties and dividends from Petronas. However, cost inflation may set in, making Malaysian exports more expensive. The longer-term growth prospects of Malaysia would also be negatively impacted, as oil-dependent countries in the region and around the world will be affected by the oil price hike. Crude oil prices passed the US$55 a barrel mark in October 2004 and Malaysia’s exports are dependent on the health of the oil-dependent US, Singapore, EU, Japanese, and, recently, the Chinese economies — five of its major destination markets. It is important to note that Malaysia has nevertheless also been experiencing export buoyancy to some its non-traditional or smaller markets such as Russia, Eastern Europe, China and Hong Kong, India, Korea, Thailand, Indonesia, Australia, and New Zealand, with China already becoming a major market. These markets could possibly develop

THE ASEAN-10

Malaysia: Selected Economic Indicators, 2000–2006F 2000

2001

2002

2003

2004E

2005F

2006F

8.9

0.3

4.1

5.3

7.5

6.0

5.5

— Industry sector growth (real, % change)

13.6

–3.8

4.1

7.2

7.8

5.5

6.0

— Services sector growth (real, % change)

6.0

6.2

6.4

4.3

7.8

6.0

4.0

— Agriculture sector growth (% change)

6.1

–0.6

2.6

5.7

3.0

1.0

1.5

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

98.4

88.0

93.4

105.0

123.5

133.0

140.1

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

–77.6

–69.6

–75.2

–79.3

–99.3

–112.2

–122.4

20.8

18.4

18.1

25.7

24.2

20.8

17.7

Inflation/CPI average (% change)

1.5

1.4

1.8

1.1

1.3

1.9

2.1

Gross external debt (% of GDP)

46.5

50.7

51.2

49.0

46.2

44.8

44.1

Total external debt (US$ billion)

41.9

44.6

48.6

50.5

53.4

55.1

57.7

1.8

0.3

1.3

1.1

1.5

1.8

1.8

GDP growth (real, % change)

Trade balance (US$ million)

Net FDI inflows (US$ billion) M2 growth (% change)

9.9

2.5

3.1

9.3

13.3

6.5

7.4

Exchange rate at year-end (ringgit/US$)

3.8

3.8

3.8

3.8

3.8

3.8

3.8

NOTE: Data given for 2004E are estimates; data for 2005F and 2006F are forecast figures. SOURCES: Economist Intelligence Unit; Bank Negara Malaysia, Ministry of Finance; author’s estimates.

into more significant trading partners in the years to come. On the whole, the current account balance is expected to be in positive territory in the forecast period of 2005 and 2006 due to moderateto-strong demand from Malaysia’s trading partners. A positive current

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ECONOMIC OUTLOOK account would also continue to fuel domestic liquidity and boost the growth of money supply, thus maintaining the expansionary effects in the economy. Net FDI is expected to increase as a result of reforms undertaken on GLCs and capital markets, with positive business sentiments fuelling this growth. Taking the above factors into account, the real GDP growth in Malaysia is estimated to be in the range of 6 per cent in 2005, and 5.5 per cent in 2006. Many of the internal and external factors bode well for the Malaysian economy, not only in the shorter term but also in the mediumto-longer term.

Myanmar Myanmar’s economic performance in fiscal year 2003/2004, according to official estimates, seems to be bullish — with the growth rate at 10.1 per cent. This means its GDP growth is in the double-digit range, though much slower than the 13.7 per cent growth achieved in 2001/2002. The reasons for this are that the industrial sector, including mining, energy, construction, and manufacturing, is growing at the rate of 22.6 per cent. The country’s oil output of 12,000 barrels per day, which has tripled in the past ten years, more or less meets its domestic demand, according to the official report. In fact, in 2003 Myanmar exported US$655 million worth of natural gas exports mainly to Thailand, and imported US$200 million worth of diesel oil from Malaysia during the fiscal year 2003/ 2004. Moreover, FDI (approved) increased from US$49.2 million in 2002/ 2003 to US$95.3 million in 2003/2004. In addition, compared with 2002/ 2003, when Myanmar reported trade deficits, there was a trade surplus in 2003/2004, mainly due to a drastic reduction of imports from US$2.95 billion to US$1.90 billion during the period. At the same time, foreign exchange reserves increased from US$481 million to US$562 million. However, many professionals and international financial agencies are sceptical of official GDP figures and many believe the country’s actual growth rates to be much lower than those that appear in official reports. This is because several negative factors have affected the economy: import sanctions imposed by the United States, shortage of power sup-

THE ASEAN-10 ply, weak domestic demand, government’s reluctance to continue with economic reform measures, and the government’s backtracking of new reform measures. During the fiscal year 2003/2004, exports declined by 9.2 per cent compared with the previous year due to the US sanctions on Myanmar’s export of garments and textile products (which generated about US$400 million previous year). At the same time imports declined drastically to 55.2 per cent because of the government’s fear of running a trade deficit, as had happened in 2000/2001 and 2002/2003 at the expense of some essential imports. In April 2003, the government scrapped its 30-year-old rice procurement policy, which entitles the state to purchase 10 to 12 per cent of the farmers’ output at a price set by the government, which is much lower than the market price. At the same time, farmers were allowed to trade rice at the market price. However, at the time of harvest, in January 2004, the government banned the private sector from exporting rice, which resulted in a decline in rice price, and this in turn significantly reduced the rice farmers’ income. In early 2003, the severe banking crisis that led to a loss of confidence in the banking system and subsequent limits on cash withdrawal along with the recall of loans further deteriorated domestic demand. This in turn affected industries in the private sector. The economy’s problems were compounded by severe power shortages. Another weak area of the economy was the fiscal deficit, which average between 4 and 5 per cent of GDP during the last five years although revenue is increasing gradually. According to the ADB, more than 60 per cent of the overall deficit was caused by the deficits of stateowned enterprises. The next visible economic woe in 2003/2004 was the presence of an all-time-high inflation although the consumer price index decreased from 58.1 per cent in 2002/2003 to 24.9 per cent in 2003/2004. This high inflation also led to a further weakening of the local currency in the parallel market. In 2003/2004, the kyat was traded at 980 kyat per US dollar — about 150 times the official exchange rate of 6.6 kyat per US dollar. Last but not least, the dominant agricultural sector’s performance during the period was disappointing — a growth rate of 2 per cent due to the lack of inputs such as fertilizers and diesel oil.

111

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ECONOMIC OUTLOOK The London-based Economist Intelligence Unit (EIU) estimates the GDP in 2003 at –1.0 per cent, a negative growth rate which seems to be quite low whereas according to the ADB, “other indicators suggest that it [the GDP growth rate] was well below potential”. The IMF estimates GDP growth rate for the calendar year 2003 at 5.1 per cent while the Regional Outlook estimates it for the fiscal year 2003/2004 at between 3 and 4 per cent. Overall, for the year 2003/2004, the economy registered less than moderate growth of between 3 and 4 per cent. In order to assess the economic outlook for 2004/2005 and 2005/ 2006, it is important to outline the positive as well as negative factors influencing the performance of Myanmar’s economy. As far as the positive factors are concerned, the government’s recent report states that FDI expanded by 94 per cent in 2003 (from US$49.2 million in 2002 to US$95.3 million in 2003) despite economic sanctions imposed by the West and led by the United States. Further, Myanmar will increase its total oil production from the current 12,000 barrels per day to 20,000 barrels by the end of 2004. In 2004/2005, the government is scheduled to import US$250 million worth of fuel, compared with US$200 million worth of imports, mainly from Malaysia. As in this year, about US$600 worth of gas exports to Thailand will continue in the coming years, according to contract terms. The banking sector recovered slightly although customers’ confidence is yet to return. Very recently, Korea, India, Thailand, and China are investing in exploration and development of offshore gas fields in the Bay of Bengal areas. Between 2003 and 2004, Myanmar clinched a US$200 million preferential loan from China and another US$100 million from Thailand. China has signed 21 economic and technical assistance agreements with Myanmar and similar agreements were signed with Thailand recently. India has agreed to provide US$56 million to renovate the railway system in Myanmar. In addition, cross-border trade between Myanmar with China, India, and Thailand are increasing since the US-imposed economic sanctions. As in 2003/2004, tourist arrivals are expected to grow in the coming years as the country’s active participation in regional and subregional cooperation arrangements with its

THE ASEAN-10 neighbours is likely to boost trade and tourism. Notably, Myanmar is a signatory to the Bay of Bengal Initiative for Multi-Sectorial Technical and Economic Cooperation (BIMSTEC) FTA, which includes Thailand from among the ASEAN members and India, Sri Lanka, and Bangladesh from among members of the South Asian Association for Regional Cooperation (SAARC). The negotiations, initiated in January 2004, covers a broad range of cooperation, including trade and investment, transport and communications, tourism, energy, and human resource development. Notably, the draft framework agreement for BIMSTEC FTA proposes phased tariff reductions on goods in a two-track manner. Thus, goods on the first track will undergo tariff reduction for Myanmar from 2006, and be eliminated by 2011, while remaining goods on the normal track of liberalization will undergo phased tariff reduction over 2010–17. On the other hand, there exists certain negative factors that could adversely affect Myanmar’s economic outlook for 2005/2006. First, this year’s flooding in the rice-growing areas has affected rice production and it will create spiral inflation in the coming years and the interest rate will remain as negative. Inflation will stay high and the local currency will plummet further. The problem of energy and power shortages, which is affecting the industrial sector, is likely to continue in the medium-term perspective. There will be a shortage of key inputs (for example, fertilizers, fuels) and a decline in imports partly due to trade restrictions and shortage of foreign exchange. Although the Control of Money Laundering Law was introduced in 2002, it is yet to be fully implemented. More recently, in June 2004, the government introduced massive tax and duty hikes on some imported goods and customs duty is calculated using an exchange rate of 450 kyat per US dollar against the recent rate of 200 kyat per US dollar without giving prior notice or reasons. To make things worse, the United States and the European Union renewed their economic sanctions for another year along with Canada. This is not surprising, considering the fact that in terms of the economic freedom index, Myanmar is one of the lowest-ranking five countries among 129 countries, according to the “Economic Freedom of the World: 2004” report by the Cato Institute.

113

2,117 3,054 –1,465 –1.7 6 223 217.7 42.4 6.4 630

13.7 6.2 6.2 13.7 5.5 23 13.2 9.5 2,782 2,684 98 34.5 5.7 411 19 43.9 6.7 710

10.5 5.4 11.3 10.5 5 21.8 15.7 8.1

2001/ 2002

2,627 2,951 –324 58.1 5.9a 481 49.2 34.6 6.6 900

10 5.3 10 5.5 4.5 37.2 8.4 2.9

2002/ 2003

2,400 1,900 500 24.9 6.0 a 562 95.3 0.2 6.1 950

10.1c –1 10.1 5.1 3.2 22.6 9.0 d 2.0 a–2.0 a

2003/ 2004 6 1.1 n.a. 3.7 4.5 14.7d 9.0 d

2,100 a 2,100 a 0 47.0 b 5.6a n.a. n.a. n.a. 6.7 1,300

2,500 a 2,100 a 400 43.0 b 5.9a n.a. n.a. n.a. 6.5 1,000

2005/ 2006F

6 –0.9 n.a. 4.3 3 14.7d 9.0 d 1.8 a

2004/ 2005F

NOTE: Data from International Monetary Fund, Asian Development Bank, and Economic Intelligence Unit are for calendar year ending December. Data given for 2004/2005F and 2005/2006F are forecast figures. a Economist Intelligence Unit, EIU Country Report — Myanmar, August 2004 and May 2004. b International Monetary Fund, World Development Outlook 2004. c Government’s Third Five-Year Plan. d Government’s Programme of Action for 2001–10. SOURCES: Ministry of National Planning and Economic Development; Central Statistical Organization (CSO), Yangon.

Exports (US$ million) (CSO) Imports (US$ million) (CSO) Trade balance (US$ million) Inflation CPI average (% change) (CSO) External debt (US$ billion) a Foreign exchange reserves (US$ million) a Foreign direct investment (US$ million) M2 growth (% change) a Exchange rate (official) (kyat/US$) (average) Exchange rate (market) (kyat/US$) (average)

GDP growth (% change) — Official — Economist Intelligence Unit — Asian Development Bank — International Monetary Fund — Regional Outlook — Manufacturing sector growth (CSO) — Services sector growth (CSO) — Agriculture sector growth (CSO)

2000/ 2001

Myanmar: Selected Economic Indicators, 2000/2001–2005/2006F

114 ECONOMIC OUTLOOK

THE ASEAN-10 Overall, assessing the positive and negative factors to forecast the economic outlook for the medium-term perspective, it seems that negative factors do outweigh the positive ones. Thus, based on the above assessment, the Regional Outlook’s estimates of Myanmar‘s GDP growth rates for 2004/2005 and 2005/2006 are thus 3.0 per cent and 4.5 per cent, respectively. At the end of the day, without political and economic reforms, the longer-term perspective of Myanmar’s economy is likely to remain bleak.

Philippines The economic outlook for 2005 depends crucially on the pace of implementation of authorities’ fiscal reform programme. Last year, the authorities began the arduous task of formulating a substantive package of reforms, including the eight tax measures that are expected to generate an additional revenue of about 80 billion peso (1.5 per cent of GDP) a year. These measures include an increase in the excise tax on petroleum indexation to inflation of the excise tax on cigarettes and alcoholic products, rationalization of fiscal incentives, a tax amnesty, a performance-based lateral attrition for government agencies, an increase in the value-added tax rate, imposition of franchise tax on telecommunication companies, and a shift from net to gross income taxation. If properly implemented, these fiscal adjustments will help improve the economy’s growth prospects and reduce the high level of public debt that has led to overcrowding of investments over the last few years. The government has long recognized the need for strong fiscal and structural reforms to sustain growth. However, this year the financial markets and investors will be particularly looking for early evidence of implementation. If the authorities can deliver at least part of the above measures, this will help shore up investor confidence on the government’s ability to restore fiscal policy to a sustainable path. If reforms proceed haltingly, there is risk of a sovereign rating downgrade from credit rating agencies early this year, which would lead to a wider budget gap and higher public debt — and possibly a further deterioration in near-term outlook.

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ECONOMIC OUTLOOK With weak fundamentals, the Philippine economy also remains vulnerable to exogenous factors, notably rising oil prices and measured increases in global interest rates. After peaking at US$50 per barrel in the last quarter of 2004, oil prices have remained volatile, due mainly to supply-side concerns in several oil-exporting countries. For highly indebted oil importers such as the Philippines, the continued rise in oil prices will be a concern, given their negative impact on output. Despite these concerns, real GDP is expected to grow at 4.6 per cent this year. While this is lower than last year’s growth (estimated at 5.4 per cent), it is still above the average output growth of 4 per cent over the last ten years (1994–2003). Private consumption will continue to underpin the expansion in domestic demand, aided by improvement in rural incomes and stable flows of overseas remittances. However, with labour market conditions still weak (unemployment rate at 11.7 per cent and underemployment rate at 18.7 per cent), a moderation in private consumption growth to 4.9 per cent is likely. To keep the budget deficit under control, public consumption is seen to further contract this year to 2.2 per cent. Most of the spending cuts will be mainly on government expenditures for running the bureaucracy, as the government prepares the groundwork for the rationalization of the operations of the executive branch, including reduction in staff size, abolition of agencies, and devolution of activities to local governments, under the proposed Public Sector Strengthening Institutional Bill. Investor sentiment will further weigh down on investment demand. In its World Development Report 2005, which drew on surveys of more than 30,000 firms in 53 developing countries, the World Bank has noted that the ratio of investment to GDP was lower in the Philippines than Indonesia, Malaysia, and Thailand from 1990 to 2003. For example, FDI approvals in the Philippines have been declining from 7.9 per cent of GDP in 2000 to 0.5 per cent of GDP in 2003. Last year (data as of end July), investment approvals amounted to 145 billion peso (2.4 per cent of GDP), but it is most likely that not all projects approved will be realized this year as investors await for concrete outcomes of reforms announced in 2004. The government has targeted the share of investment to 25–28 per cent of GDP for the next five years (2005–10), from 16.3 per cent in

THE ASEAN-10 2004, but it seems that more radical measures are needed to address the country’s weak investment (and low savings) rate. Key among these will be a reduction in the cost of doing business in the country and cost of dispute resolution (currently among the highest in the world, according to the World Bank), as well as implementation of credible reforms, particularly fiscal measures and financial restructuring. On the supply side, buoyed by the continued strong growth in the telecom sector and other services such as ICT-related services, call centres and business-outsourcing services, the services sector is expected to sustain its growth at 5.9 per cent. It is projected that the number of call-centre seats in the country will double this year to a total of 80,000, with new projects and other expansions by US-based firms such as Pacific Hub, Cyber City Teleservices, and IntelliRisk Management already in the pipeline. Industrial output will also grow, albeit slowly, at 4.1 per cent. Rising oil prices as well as the high cost of financing will cause the manufacturing sector to slow, while limited spending on infrastructure will also dampen industrial expansion. Meanwhile, after surging to 5 per cent growth last year, agricultural output is seen to ease this year to 3.9 per cent. This is because of the expected increase in prices of petroleum-based fertilizers (projected to rise by more than 129 per cent from 2004 prices, according to the Philippine Department of Agriculture) and the inability to buy high-yielding hybrid seeds due to tight government budget, which will cut rice production (17 per cent of agricultural output) significantly this year. As mentioned, reducing external vulnerabilities will pose a serious challenge to the economy this year, given rising world oil prices and global adjustments in interest rates. Although the uncertainty in world oil prices will cause consumer prices to rise (by 5.2 per cent on average), inflationary pressures will be well contained by prompt responses from the monetary authorities. Moreover, the central bank stands ready to intervene should the second-round effects of supply shocks on prices turn more adverse than expected. The real challenge, however, is how to deal with deterioration in external financing conditions brought about by higher global interest rates. The economy is in a precarious situation given its large stock of foreign debt (72.1 per cent of GDP) and small

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ECONOMIC OUTLOOK foreign reserves (expected at US$16.2 billion). Thus, it is critical that the implementation of key reforms remain on track in order to avoid sudden shifts in investor sentiment that may increase the risk arising from the country’s huge external requirements, and to prevent the peso from depreciating further against the US dollar (expected to settle at 57 peso per US dollar by the end of the year). Despite these adverse external developments, the Philippines will continue to benefit from the upturn in global demand (projected to grow by 4.3 per cent; data from the IMF) and global trade (7.2 per cent). Exports will remain robust although the extent of pick-up this year will be tempered by a possible inventory overhang/excess capacity (as a result of over-investment) in global electronics markets. With imports also rising, reflecting mainly higher oil prices, the country’s trade deficit is seen to further widen to US$1.4 billion. However, the continued strength in current account surplus (2 per cent of GDP), underpinned by higher receipts from travel and communication and increased operations of call centres, should enable the country to post a small balance of payments surplus this year (US$700 million), despite a slowdown in foreign direct investments. Looking forward, the key to sustaining the growth momentum this year rests squarely on the overall policy environment. Monetary policy is still expected to adopt as “measured” a policy as its US counterpart, raising interest rates to keep the inflation and currency in check. Facilitating corporate and banking restructuring is also critical, given that non-performing loans (16.5 per cent as at the end of March 2004) and non-performing assets (26.9 per cent) still remain high despite efforts to reduce them. In this case, complementary measures to the Special Purpose Asset Vehicles Act should be implemented, such as the quick enactment of the Corporate Recovery Bill and the Securitization Bill. But again ensuring fiscal sustainability will be a key issue. Given the seemingly intractable dynamics of public debt and deficit in the Philippines, it appears that more robust revenue strategy is needed than what is currently being proposed by the government. In particular, the fiscal position of the non-financial public sector (especially the corporations

THE ASEAN-10

Philippines: Selected Economic Indicators, 2000–2006F 2000

2001

2002

2003

2004E

2005F

2006F

4.4 3.4 4.9 4.4

4.5 4.7 4.8 4.3

3.1 3.8 0.1 5.1

4.7 3.8 3.8 5.8

5.4 5.0 4.6 6.1

4.6 3.9 4.1 5.9

5.2 4.6 4.8 6.2

Exports (US$ million)

38,078

32,150

35,208

35,751

38,600

40,500

42,850

Imports (US$ million)

34,490

33,057

35,427

37,450

39,847

41,954

43,346

Trade balance (US$ million)

3,588

–907

–219

–1,699

–1,247

–1,454

–496

Inflation (CPI; average)

4.3

6.1

3.1

3.1

5.2

5.5

4.9

External debt (% GDP)

78.7

73.3

72.2

74.2

74.5

73.1

72.0

Reserves (US$ billion)

15.0

15.6

16.2

16.8

16.5

16.2

17.0

Budget deficit (% GDP)

–4.1

–4.0

–5.4

–4.6

–4.2

–3.9

–3.6

Interest rate (%; average)*

9.9

9.7

5.5

5.9

7.3

8.0

8.3

GDP growth (%) — Agriculture — Industry — Services

M3 growth (%) Exchange rate at year-end (peso/ US$1)

4.6

6.8

9.5

3.3

4.1

4.7

4.5

50.00

51.40

53.10

55.57

56.65

57.00

57.25

NOTE: Data given for 2004E are estimates; data for 2005F and 2006F are forecast figures. * 91-day T-bill rate. SOURCES: Country websites; Economist Intelligence Unit; author’s estimates.

owned and controlled by the government), which has been the primary culprit for the huge public sector debt (104 per cent of GDP), should be addressed with prompt and corrective measures. It is also important that the new administration decisively pursues the reform agenda with credible outcomes and broader political support and consensus.

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Singapore As one of the most open economies in the world, Singapore’s prospects in 2005–2006 hinge largely on the global economy. Since the portents for global growth suggest at least a moderate deceleration, Singapore’s economy is likely to witness a slower growth than in 2004–2005. However, several factors suggest that its economy will be more resilient to this coming global deceleration compared with the previous slowdown in 2000–2001. The key concern for Singapore’s growth prospects in 2005 is the emerging signs of a deceleration in global activity, as indicated by the slowing seen in global lead indicators such as that of the Organization for Economic Cooperation and Development (OECD). The combination of higher oil prices, tightening monetary policies, and slowing consumer spending in advanced economies especially the United States are probably acting to slow global demand for Singapore’s exports. Since exports represent about 144 per cent of Singapore’s nominal GDP, this suggests that the global demand for Singapore’s manufactured products will slow, hurting manufacturing output and the support services such as sea and air cargo that depend on it. More critically, Singapore’s exports are heavily weighted towards electronics, which comprise about 53 per cent of total exports. There are signs that the strong recovery in corporate demand for electronics components is beginning to slow, with indicators such as US new orders for computers and related equipment portending a deceleration. Economic growth in Singapore in 2005 is therefore expected to slow down before recovering in 2006 in line with a global recovery. There are several factors that are likely to provide Singapore with greater resilience to this global slowdown in 2005 and lay the foundations for a strong recovery in 2006: First, there are encouraging signs of a new investment cycle in the region, reversing the sharp fall in the investment-to-GDP ratio in Indonesia, Thailand, and Malaysia since the Asian financial crisis broke in 1997. Imports of capital goods have risen in these countries, with capacity utilization rates reaching their highest levels since the crisis. If these trends persist, Singapore will be a major beneficiary since it will be its

4.0 1.74

–0.8

0.81

82.3

128,373 109,824 18,549 –0.4

2.2 7.8 1.4

2002

1.70

5.9

0.75

96.3

Not applicable

157,808 128,489 29,319 0.6

0.8 2.8 1.0

2003

NOTE: Data given for 2004E are estimates; data for 2005F and 2006F are forecast figures. SOURCES: Forecasts by Centennial Group; historic data from CEIC Database.

1.85

–1.8 1.73

M3 growth (% change)

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

75.8

124,444 109,676 14,768 1.0

–2.4 –11.6 2.4

1.31

80.4

139,858 127,560 12,298 1.3

9.4 15.1 8.6

2001

2.8

3-month S$ SIBOR (% per annum)

Foreign exchange reserves (US$ billion)

Gross external debt (% of GDP)

Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation/CPI average (% change)

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

2000

Singapore: Selected Economic Indicators, 2000–2006F

1.71

6.7

1.3

97.0

185,636 151,796 33,840 1.7

8.9 13.1 8.2

2004E

1.65

–0.5

1.3

103.5

194,917.9 148,759.8 46,158 1.5

4.6 3.5 5.4

2005F

1.63

7.9

1.0

108

218,308 174,049 44,259 1.1

6.4 7.3 6.2

2006F

THE ASEAN-10 121

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ECONOMIC OUTLOOK

JUDICIARY REFORMATION UNDERPINNING ECONOMIC IMPERATIVES IN SINGAPORE By Rajenthran Arumugam

T

he Judiciary, amongst the three organs of a state, is unmistakeably an important public institution — essentially being the prime custodian of “Rule of Law”. In general, an efficient and independent judiciary reins in political impunity, augments economic development, and maintains social cohesion. Several of ASEAN countries’ legal systems have been inherited from erstwhile colonial influences. Regrettably, today, there is a prevalent perception, particularly, in the developed countries that save Singapore, the judiciaries in the region are weak, inefficient, and to a lesser or greater degree politicized. These criticisms became more acute during the onset of the Asian financial crisis in 1997. In all fairness, since then, the ongoing process of democratization in the region has also engendered legal reforms, particularly in Indonesia, Thailand, and the Philippines. It remains to be seen if the reforms will appease both the domestic and international community. Starkly, however, the Singapore judiciary has outshone internationally since the mid-1990s. How did this come about? Since assuming office as the Chief Justice in 1990, Yong Pung How has initiated and provided leadership for a myriad of ground-breaking reforms in the judiciary. Looking back in the early 1990s the courts in Singapore was burdened with a hefty backlog of cases, both civil and criminal. Possibly, to some extent the adage: “Delayed Justice Is Denied Justice” did then apply to Singapore court users. Nevertheless, through a combination of strategies that included effective case management, vast usage of alternate dispute resolution means and technology, the backlog of cases have since been disposed of. Today, Singapore’s judiciary is internationally acclaimed for just, economical, and speedy disposal of lawsuits. The World Competitiveness Yearbook 2004 survey on the “legal framework” and “Justice” shows Singapore ranked first and tenth, respectively, amongst 60 countries. In similar manner, in 2004 the Political and Economic Risk Consultancy (PERC) ranked Singapore’s judicial system the best amongst the 12 Asian countries. In addition, the World Bank, the International Monetary Fund, as well as many visiting foreign dignitaries, including judges have consistently commended the Singapore legal system. Economic Imperatives Suffice it to say, other things being equal, a well-managed market-economy

THE ASEAN-10

induces optimal resource allocation. To this effect, laws governing personal property and contractual principles, amongst others, bring about economic allocative efficiency. Thus, without the efficacy of broad commercial laws that enshrine legal rights and obligations of all market players, market forces per se will not bring forth the desired economic objectives. Indeed, several studies plausibly argue that in the absence of responsive commercial laws in a market economy, eventually negative externalities and market failure will set in. Accordingly, commercial laws induce a respectable degree of certainty and predictability in business dealings. Next, to actualize the efficacy of commercial laws the existence of a competent and independent judiciary that is able to dispense justice in a fair, economical, and speedy manner is highly imperative. To put it another way, apart from the laws, the scope and mechanism to implement and enforce the commercial laws, decisively, is integral to strategic business practice. From an economic standpoint, a judiciary that is fraught with excessive delays, high costs, corruption, and politicization increases economic transaction costs and legal risks for business entities. Arguably, these concerns have now become more profound in light of rapid internationalization of trade and investment. Indeed, since the revival of market economy in the 1990s in the face of collapse of the socialist bloc and emergence of economicdriven China, the law and development paradigm thinking has received fresh impetus. In the main, all ASEAN countries have promulgated some form of commercial laws. The question is: Are they responsive and business-friendly? Laws that are prescriptive as opposed to permissible tend not to be good economic allocator. More importantly, the legal institutions of several ASEAN countries are not entirely satisfactory. First, countries like Indonesia, Thailand, and the Philippines have courts beleaguered by huge backlogs of cases and relative high legal costs. Courts in the CLMV countries (Cambodia, Laos, Myanmar, and Vietnam) remain shoddy, let alone have laws and regulations that are cumbersome and interspersed with loopholes. Second, the competence and integrity of several ASEAN countries bench as well as the practising bar have often been called into question. Third, anecdotal evidence suggests that there is a lack of political will in some ASEAN countries to empower and bestow independence to the judiciaries; hence, to some degree transparency and

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JUDICIARY REFORMATION UNDERPINNING ECONOMIC IMPERATIVES IN SINGAPORE (continued)

accountability in their judicial processes are verily wanting. There is a pressing need to undertake cogent and meaningful judicial reformatory works in the region — fundamentally the challenge is to attain and sustain a just, economical, and speedy legal system. Progressive and Responsive Modus Operandi From the very beginning, Singapore’s judiciary reformation in the 1990s has been squarely underpinned on pragmatism and structured methodology. In the 1980s, in part due to vast unchecked procedural flexibility and in part due to counsel indolence, it was not uncommon to see lawsuits taking six to seven years to be heard. But since the 1990s to the present, the focus of the judiciary has been to resolutely emphasize on a proactive case and trial management ethos that underscores fair, cost-effective, and speedy disposal of lawsuits. Consequently, the necessary institutional set-ups and procedural norms have been established. To the end, first, the ambit of power and function of the High Court and the Subordinate Courts have been rationalized. Second, all lawsuits continue to be meticulously tracked down and monitored till disposal. Third, in the absence of a valid reason, a strict policy of reluctance to vacate or change trial dates, once allotted, is observed. Fourth, through vociferous usage of PreTrial Conferences (PTCs), every lawsuit is prepared for an uninhibited open trial via narrowing down of the issues and the law in question and more importantly, exploring the possibility of an amicable settlement between all parties concerned. Indeed, judges and judicial officers tend to take PTCs seriously — an issuance of an “unless order” means that if judicial directions are not adhered to by the litigants, the related lawsuit (civil) can be dismissed. Overall, the PTCs have yielded much success in steering a pending lawsuit forward as well as to prevent dilatory tactics. Similarly, effective trial management has been achieved by more emphasis on written submission as opposed to oral submission during court hearings, restrictions on the right to appeal and imposition of court fees. Not surprisingly, at present lawsuits are disposed of by either a settlement or trial at a fairly short space of time that typically ranges from a few months to a year. The judiciary has consistently taken great pains to explain that the judicial proactive stance is not intended to deter the public from, or deprive them of, access to justice; on the contrary, it is to facilitate the due process of law for the earnest in an economical and prompt manner and correspondingly rid inconsiderate court users. From an

THE ASEAN-10

economic perspective, this will as a matter of fact heighten business confidence in Singapore. This also explains Singapore’s ability to attract foreign direct investment with relative ease. Of course, the clean and effective government and bureaucracy is partly the reason. Also, the no-nonsense criminal jurisdiction keeps crime rate at a low level. Alternate Dispute Resolution (ADR) mechanism principally in the form of conciliation, mediation, and arbitration has gained wide international recognition since the 1980s. The Singapore judiciary formally introduced the ADR mechanism in the 1990s, both within and outside the judicial process — a multi-door courthouse approach. Statistically, a high portion of lawsuits in Singapore is settled through the court-initiated mediation services free-of-charge. Similarly, the Singapore International Arbitration Centre (SIAC) provides administered arbitration services for both domestic and international commercial disputes. Furthermore, Singapore is a signatory to the 1958 United Nations Convention of the Recognition and Enforcement of Foreign Arbitral Awards and the UNCITRAL Arbitration Rules. Several advantages can be accrued from the utilization of SIAC-administered arbitration. First, it is economical and prompt. Second, confidentiality of arbitration proceedings is fully protected by law. Third, all concerned parties have high latitude in the control and course of the arbitration process. Fourth, the formal courts do not unnecessarily interfere in the conduct of the arbitration. Fifth, and most importantly, arbitration is inherently less confrontational and acrimonious as compared with a formal trial and therefore facilitates business comity, which is good for long-term economic development. By all accounts, Singapore has been extremely successful in putting in place a credible ADR mechanism; in fact, the arbitration environment here is frequently equated to that of New York and London. Similarly, most ASEAN countries at varying degree have introduced the ADR mechanism, but in most part due to institutional and human capacity failures are as yet to reap optimal returns. The hallmark of judicial reformation in Singapore is arguably the infusion of technology in the administration of justice. The Electronic Filing System (EFS) under the aegis of LawNet, a strategic national information network, has introduced revolutionary ways of electronically filing, serving, and examination of a myriad of court documents and more importantly, e-judicial hearings, both in open trials and chambers. In others words, through the installation of necessary hardware and software technological equipment in the courts and law firms, judicial processes are now conducted without the need for voluminous amount of

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ECONOMIC OUTLOOK

JUDICIARY REFORMATION UNDERPINNING ECONOMIC IMPERATIVES IN SINGAPORE (continued)

paper and, if feasible, physical appearance of counsel and witnesses. In sum, information technology has taken the Singapore’s judiciary to another level of concept and functionality, albeit the essence of traditional jurisprudence remains strongly intact. Concluding Remarks Suffice it to say, today, both the public and the business community have strong confidence in the Singapore judiciary, let alone the international community — its laudable attributes include competency, dynamism, independence, transparency, and accountability. Independent surveys attest to this. The efficacy of the rule of law has been explicitly brought to the people and the business community, which translates to sustainable economic development and social cohesion in the country. Judicial reform is an ongoing process and ASEAN countries could benefit by exchanging ideas and methodology. Gleaned from the Singapore experience some plausible policy suggestions include: •

•

• • •

•

•

At the outset, a strong political will to implement judicial reform is extremely important and is the deciding factor in concretizing the underlying reform objectives. Judges per se should actively pave the way and provide the leadership for a judicial reformation agenda that ranges from the immediate to long-term concerns. Judicial reform should be on a consultative and consensual basis, particularly with practising bar and court users. Judicial reform should adopt a structured pattern with necessary institutional support and regulation changes. An incremental approach to judicial reform is prudent and a systematic auditing of new changes or modifications to validate stated objectives and corresponding results would be instructive. The public and the business community should be informed of the reform features in a timely and suitable manner (pamphlets, mass media, and the Internet). All aspects of judicial reform should be scrupulously well thought out — hence, erratic changes to legal procedural rules and norms should be clearly avoided.

THE ASEAN-10 port that helps to transport much of the rising wave of capital goods imports. Moreover, the growth in capital spending in the region will be followed by rising capital raising needs which should bring some benefits to Singapore’s financial centre. Other regional hub services such as the import-export trade will also benefit. As these hinterland economies continue to grow, there should also be other increasing spillovers for Singapore such as more tourists from within the region. These forces have been given additional impetus as a result of political developments in the region. Singapore saw a new prime minister in the person of Lee Hsien Loong take over. While the major thrusts of economic policy will not change, given that the new prime minister was a major architect of economic policy in his previous position as deputy prime minister, hopes have been raised of an increased willingness to consider changes in economic direction, such as the introduction of a casino in Singapore. Singapore’s political relations with Malaysia, the most vital component of its regional hinterland, have improved dramatically following the accession of Abdullah Ahmad Badawi as Malaysia’s prime minister. This has led to growing co-operation between the two countries, encouraging businesses on both sides to once again step up cross-border activities. Similarly, the election of a new president in Indonesia is likely to improve investor confidence and so boost trade and capital flows between Singapore and Indonesia. In addition, Singapore is going beyond the immediate hinterland of its regional hub services. Rapid growth in India’s southern states and Singapore’s historical and cultural ties to the region are enabling Singapore to act as a regional centre that services southern India’s growth in addition to its traditional Southeast Asian hinterland. The Singapore-US Free Trade Agreement also came into force in 2004. While the immediate benefits in terms of increased trade flows may not be substantial, the resulting increased attractiveness of Singapore as a location for US companies will enhance its status as a regional hub. A second reason for greater resilience is that the overhang of constraints on growth that resulted from the bursting of the property bubble in 1997 is finally beginning to diminish. There are incipient signs that the property sector has bottomed out, with government data indicating that

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ECONOMIC OUTLOOK residential property prices rose tepidly in the second and third quarters of 2004. A key factor in 2005 and 2006 will be how this helps the construction sector. This sector accounts for about 5 per cent of GDP and has been contracting steadily for almost seven years. In the first quarter of 2004, construction activities rose for the first time since the Asian crisis but the second quarter saw a small decline. As property prices steady and as economic growth continues, it is believed that the demand for new commercial and residential construction will improve, allowing construction to contribute positively to economic growth in 2005 and 2006. Singapore’s policy-makers and companies have responded to the difficulties of the past few years by adjusting policies and restructuring — the economy is now likely to reap the benefits of these adjustment responses and enjoy more growth as a result. First, the government has introduced a host of deregulation measures that constrained businesses and so created new opportunities for growth. Sectors such as the media, telecommunications, and financial services are seeing new growth as a result. For example, regulators have eased the restrictions on the establishment of hedge funds, substantially enhancing Singapore’s attractiveness as a place to set up new hedge funds. The Financial Times (12 August 2004) reported that 12 hedge funds were set up in Singapore since beginning of 2004 compared with only eight in Hong Kong. This was a sharp reversal of the situation in 2002 when only five were started in Singapore and 20 in Hong Kong. The report noted that Singapore scored over Hong Kong in several areas such as lifestyle for the family-oriented, costs of rental and staff, and a supportive regulatory environment. The government has also been pursuing new areas of growth in the life sciences and pharmaceuticals. Expansion in these areas will continue to support growth in 2005–2006. Singapore companies have been forced by intensifying competition to re-engineer themselves. There are some encouraging signs that this corporate restructuring is now resulting in new niches where Singapore competitively exploits opportunities for growth. Such new niches include sectors as diverse as computer animation and specialized highquality printing — these add to existing niches of competitiveness which are enjoying a new burst of growth after corporate restructuring such as offshore oil rigs and ship repair.

THE ASEAN-10 This largely positive scenario could be derailed if the external environment, to which Singapore is sensitive, turns out to be much worse than anticipated: if the US dollar adjusts down sharply or if China has a hard landing, for instance. Political shocks such as a sharp escalation of tensions between China and Taiwan or another political crisis in Indonesia would undermine investor and business confidence and so undermine Singapore’s growth.

Thailand The Thai economy continues to expand, driven by investment and exports. Inflationary pressures remain strong due to rising capacity utilization, a tightening labour market, and high domestic oil price levels. To maintain economic stability, the focus has shifted towards a tightening monetary policy. On fiscal policy, the government is targeting for a balanced budget in FY 2005 for the first time since the 1997 crisis. Inflationary pressures could rise and become a risk factor to the country’s economic stability. Capacity utilization in the manufacturing sector remained high — around 75 per cent in 2004, up from 66.3 per cent in 2003 and 59.3 per cent in 2002. The employment situation has improved, especially in the non-agricultural sector. A downward trend in the unemployment rate, which is approaching the lowest level in 20 years, indicates a tightening labour market. This will exert pressure on wages while rising incomes will lead to a demand-side pressure. Despite softening global oil prices, domestic oil prices are expected to remain high due to large losses faced by the Oil Fund of Thailand as a result of the government’s oil price freeze, particularly on diesel, in 2004. Both headline and core inflations have shown clear signs of acceleration since July 2004. Headline inflation rose 2.5 per cent for the first eight months of 2004, with core inflation up 0.3 per cent over the same period. The Bank of Thailand (BOT) began to raise interest rates in August 2004. It continues with the tightening monetary policy to keep core inflation within its target range of 0 to 3.5 per cent. Interest rates are expected to increase gradually over the years 2005–2006 to maintain economic stability.

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ECONOMIC OUTLOOK In mid-2004, the BOT had cautioned about the potential financial imbalances in the household and real estate sectors, which may dampen the country’s economic stability in the near term. Household debt was found to have increased at an accelerating rate since 2002. With an upward trend of interest rates, this has given rise to a concern over the debt burden of the household sector. In the real estate sector, the value of land transactions dramatically increased, especially in 2004. Housing credits grew substantially with an expansion of permitted construction areas. In addition, credit extension to developers continued to increase. In response to this, the BOT has tended to tighten regulations on consumer credit and to raise its benchmark interest rate further to reduce the risk of rising household debt and a rapid expansion of the real estate sector. On fiscal policy, the government is aiming for a balanced budget in FY 2005 based on the assumption of real growth of 7.5 per cent and a 2.5 per cent inflation. Total budget expenditure is set at 1,200 billion baht (US$30 billion), which is 3.1 per cent higher than for FY 2004, while capital expenditure is estimated at 302.3 billion baht (US$7.6 billion) — an increase of 3.3 per cent over FY 2004. In terms of budget allocation, the Ministry of Education has been assigned the largest share (17 per cent) of the total, followed by the Ministry of Finance and the Ministry of Interior, each receiving around 12 per cent of the total. There was criticism that the assumption of 7.5 per cent in real growth was unlikely to be met and so a balanced budget would not be reached in FY 2005. Heavy off-budget liabilities have also given rise to a concern over the health of public finance. At the end of 2003, the government had announced that it was spending 600 billion to 700 billion baht (US$15.0 billion to US$17.5 billion) on large-scale infrastructure and mega projects over the following five to six years. These include a new city project in Nakhon Nayok, projects on extended transport system in Bangkok and its vicinity, and new regional centre projects. With the target of a balanced budget, 77.3 billion baht (US$1.9 billion) was allocated to the infrastructure projects, and 10 billion to 15 billion baht (US$250 million to US$375 million) to the mega projects in FY 2005. In addition, 20 billion baht (US$500 million) has been allocated to a

THE ASEAN-10 new SML — small, medium, and large — village management programme. A small village (up to 500 people) would receive 200,000 baht (US$5,000); a medium-sized village (between 500 and 1,000 people) would get 250,000 baht (US$6,250); and a large village (of more than 1,000 people) would receive 300,000 baht (US$7,500). The government believes that the budget expenditure would help tackle the problems of each village. Meanwhile, there is an ongoing National Village and Community Fund aimed at creating economic activities and generating income for individuals. On trade policy, Thailand had accelerated its move to reach a comprehensive free trade agreement (FTA) with Australia. The ThailandAustralia FTA was signed in July 2004 and is scheduled to commence in January 2005. The FTA will substantially reduce tariffs on automotive parts, garments, and textiles. Australian tariffs on car parts, currently set at 10–15 per cent, will be eliminated by the year 2010. The tariffs on garments, which is currently set as high as 25 per cent, will be halved to 12.5 per cent. On the Thai side, more than half of the 5,000 tariffs will be reduced as soon as the Thailand-Australia FTA takes effect. Negotiations on collaboration in the financial sector between the two countries are scheduled to begin in the next few years. A Thailand-US FTA negotiation was launched in June 2004 and it is expected to conclude in mid-2006. According to a study by the Thailand Development Research Institute (TDRI), the FTA would generate a growth of 1.34 per cent in Thailand’s GDP. Agricultural products, processed foods, textiles, and automobiles are likely to benefit from the FTA. The United States is the first country with which Thailand has agreed to open talks on financial services. So far, the talks have remained under a framework underlined in Thailand’s Financial Sector Master Plan. In August 2004, India and Thailand signed a protocol to implement an early harvest scheme (EHS) under an FTA framework agreement. Under the EHS, tariffs will be reduced by 50 per cent on 82 items in the first year, and by 75 per cent in the second year. Both countries aim to establish a duty-free regime on all these items (consisting mainly of electronic components and auto-parts) from 1 September 2006. The second phase of the FTA would begin from then onwards and the two countries would have a free-trade regime by 2010.

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ECONOMIC OUTLOOK Concomitantly, Thailand is also engaged in negotiations under the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) FTA, which includes Thailand and Myanmar from among the ASEAN members and India, Sri Lanka, and Bangladesh from among the South Asian Association for Regional Co-operation (SAARC) members. Nepal and Bhutan have also joined the BIMSTEC grouping this year, but are not yet a party to the FTA. The FTA negotiations for this agreement had been initiated in February 2004. The BIMSTEC FTA is a part of the Look West Policy aimed at linking the nations of South and Southeast Asia. The negotiations cover a broad range of cooperation, including trade and investment, transport and communications, tourism, energy, and human resource development. The draft framework agreement for BIMSTEC FTA proposes a fast track of liberalization between 2006 and 2011 and a normal track between 2007 and 2017. This cooperation complements the Thai-US FTA, as the BIMSTEC FTA will expand the market for US goods and services. Overall, the government has propelled all the three engines of growth — consumption, investment, and exports. Growth of private consumption is expected to slow down in pace, owing to high levels of domestic commodity prices, a build-up of household debt, and rising household debt burden. To sustain the private consumption, the government maintains a 7 per cent value-added tax (VAT) rate over FY 2005. The VAT rate could be raised to the promised return of 10 per cent in the near term if the government faces fiscal constraints. Private investment is expected to expand continuously over the years 2005–2006. The government’s policy on credit extension to small- and medium-sized enterprises (SMEs) is still a positive factor supporting private investment. With high levels of capacity utilization, automobiles, electrical appliances, electronics, and steel industries will speed up their investments. A survey by the United Nations Conference on Trade and Development (UNCTAD) indicated that Thailand was viewed as the third most attractive destination for FDI in Asia. It is expected that FDI will continue to flow into Thailand due to an upward global business cycle and a trade expansion. In the stock market, the government

40.16

3.7 44.48

4.2

7.00–7.50

43.00

2.6

6.50–7.00

38.9

48.8

0.68

66,092 63,353 2,739

5.4 6.9 4.5 3.0

2002

41.53

4.9

5.50–5.75

42.1

40.3

1.82

78,105 74,346 3,759

6.7 9.3 4.2 6.9

2003

NOTE: Data given for 2004E are estimates; data for 2005F and 2006F are forecast figures. SOURCES: Bank of Thailand; CEIC Database; Economist Intelligence Unit; author’s estimates.

Exchange rate, average (baht/US$1)

M2 growth (% change)

7.50–8.25

Prime lending rate (% per annum)

33.0

65.1

66.7 32.7

Gross external debt (% of GDP)

1.57

63,070 60,576 2,494

2.1 1.7 2.3 3.5

2001

1.60

67,889 62,423 5,466

4.8 5.3 3.7 7.2

International reserves (US$ billion)

Headline Inflation (%)

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

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

2000

Thailand: Selected Economic Indicators, 2000–2006F

40.60

8.4

5.75–6.00

43.9

36.0

2.65

96,460 95,163 1,297

6.1 7.8 6.9 –5.0

2004E

40.90

7.6

6.25–6.50

42.1

34.0

2.30

107,070 108,010 –940

5.8 6.5 6.0 1.2

2005F

40.80

7.1

6.50–7.00

42.6

32.8

1.80

122,060 123,131 –1,071

5.7 6.4 5.7 2.2

2006F

THE ASEAN-10 133

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ECONOMIC OUTLOOK provides corporate and income-tax incentives to boost new investments. The value of Thailand’s exports is expected to expand at a slow pace over the years 2005–2006, owing to a slowdown in the growth of key trading partners (the United States, Japan, and China). Meanwhile, import growth continues to rise, especially in imports of capital goods and raw materials, in tandem with the investment expansion. Import value is forecast to outpace that of exports in 2005. On the services account, tourism revenue remains high: arrivals from East and South Asia comprised a solid majority of 64 per cent of total arrivals in the first half of 2004. The impact of unrest in the South on tourism and related industries was moderate. Nevertheless, the BOT predicted that if the unrest in the South is prolonged, the confidence of foreign tourists and the overall tourism industry would be affected. The income deficit is expected to narrow over the years 2005–2006 in line with a reduction in external interest payments. Overall, the current-account surplus is expected to decline over the years 2005–2006. Despite some capital inflow, the baht will remain weak in 2005–2006 in line with the contracting current-account surplus and repayment of the government’s external debt. On the production front, agricultural output has expanded only slightly, owing to a prolonged drought and the re-emergence of the avian flu on the poultry industry in the second half of 2004. But the prices of major commodities have remained high. Manufacturing output is expected to expand steadily in 2005–2006. However, high oil price levels are expected to push up production costs and reduce the profitability of manufacturers. This will lead to a loss of competitiveness in the textile industry, for example. The automotive sector will remain strong with the introduction of new models of vehicles. Production in the construction sector has increased in line with growth in the property sector and the government’s construction of Suvannabhumi International Airport and other infrastructure projects. In the financial sector, commercial banks and listed finance companies show a healthier performance. Consumer lending and credit extension to SMEs have been buoyant due to the government’s quasi-fiscal credit policy. The new international banking capital accord, Basel Ac-

THE ASEAN-10 cord, will take effect in 2006. Banks will be required to set aside capital equal to 150 per cent of their non-performing loans (NPLs) after collateral is deducted, compared with the current 100 per cent coverage. NPLs in the banking system are expected to decline in 2005 owing to a continued recovery in the corporate sector but to increase slightly in 2006 due to the new Basel Accord. Under the Financial Sector Master Plan, bank consolidation will proceed at a faster pace while competition increases in the financial sector. So far, only two foreign banks, United Overseas Bank and DBS Bank, have increased their role in the Thai banking business. Overall, the Thai economy is expected to grow at 5.0 to 6.0 per cent over the years 2005–2006. If domestic interest rates increase significantly, heavy household debt burden will become a major concern. Consumption therefore may no longer be an engine of growth on the demand side. On the supply side, bank lending may become sluggish and can no longer be an engine of growth if prices in the property sector take a downturn and interest rates rise.

Vietnam The economy of Vietnam can be broadly characterized as that of a developing country undergoing gradual economic transition from a centrally planned to a largely market-oriented economy. The first seeds of this economic transition process began in 1979, and were concretized under the banner of doi moi (renovation) in 1986. Apart from a brief spell during the mid-1990s, the direction of — and degree of momentum behind — Vietnam’s economic reform trajectory has been fairly constant and consistent. It has been rewarded with strong GDP growth, averaging almost 6 per cent per annum over the last six years. Lacking much of a private sector before the late 1990s, and burdened by a largely inefficient state-owned enterprise sector, the attraction of foreign investment capital and expertise has been a key component of Vietnam’s economic reform and development programme. However, recent years have seen the primary focus of the economic reform process shift towards domestic business liberalization efforts, and developing a

135

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ECONOMIC OUTLOOK more robust local corporate (and banking) sector. An epochal milestone in that process was the Enterprise Law, passed in early 2000, which has markedly improved the business environment for non-state firms. In particular, it has made it much easier for private firms to register their formation and commence operations. As a direct result, the number of private companies formally registering under the Enterprise Law has risen tremendously, although the precise figures for new company formations tend to vary quite considerably, depending on the method used. 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. Having signed a bilateral trade agreement with the United States a few years ago, the Vietnam government has now focused its attention on gaining accession to the World Trade Organization (WTO). Judging from progress made in recent accession negotiations, it seems quite likely that Vietnam will gain entry into the WTO shortly before or during 2006. WTO entry is essential if Vietnam is to maintain its admirable track record in export growth, and for Vietnamese firms to compete effectively with their peers in China, Cambodia (which gained entry in 2004), and the region, for major overseas markets. This has been underlined by the introduction of the Agreement on Textiles and Clothing in January 2005, which sees an end to all quota restrictions (but not tariffs) for textile and garments produced by WTO members. For Vietnam and other non-members of the WTO, their garments and textile exports will remain subject to both quotas and tariffs. As part of its commitments for WTO entry, Vietnam will be expected to further open up the domestic market for foreign investors, across most business sectors, and provide a broadly equitable legal regime for all businesses, regardless of their ownership profile. This in turn will necessitate changes to various existing laws and implementing regulations. One potentially important revision currently being discussed, and likely to be enacted in 2006, is a new Unified Enterprise Law, governing the practices of all businesses, whether they are private, state-owned, or foreign-invested. This new business law will probably be enacted in tandem with a new investment protection and promotion law, also spanning both domestic and foreign-owned businesses.

THE ASEAN-10 Running at around 10 per cent in 2004, inflation has come to the fore in 2004 as perhaps the most immediate macroeconomic issue of concern. Initially triggered by the impact of both avian flu on various food prices and higher global oil prices (Vietnam currently must import all of its refined oil product needs, from petroleum to plastics), it does appear as if rising consumer prices have become more systemic. Recent utility price increases and a hike in state sector wages will also have played a part. One knock-on effect has been an increase in interest rates offered by banks, so as to prevent their customers facing negative real interest on their deposits. The concomitant rise in interest rates for bank loans will have a cooling effect on the economy. Looking ahead, sustaining Vietnam’s economic growth 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 kinds of special protection and privileges it enjoyed in the past, and which WTO compliance will no longer permit. It also entails more effective prevention of the kinds of bad corporate governance practices that have undermined the performance of some state enterprises, as evidenced by the scandals at PetroVietnam and Seaprodex that came to light during 2004. Strengthening the local banking sector is also imperative, in order to more effectively provide the capital needed to fund corporate sector development. There has been some consolidation amongst the private commercial banks, but more is required, and the state-owned commercial banks need to do more to get their loan portfolios into better shape. Both private and state-owned banks alike are seeking to increase their equity capital base, and a number have been aggressively seeking to enact share issues. The year 2005 is likely to see one or two private banks list on the stock market for the first time, following the recent release by the State Bank of Vietnam of guiding regulations. The mighty, stateowned Vietcombank also seems poised to enact its first major share sale, probably in 2005. Another crucial factor in Vietnam’s immediate economic prospects is the extent to which the burgeoning private sector is able to leverage recent and impending changes to the business environment. At present,

137

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ECONOMIC OUTLOOK a number of factors serve to constrain the burgeoning private sector in Vietnam, including difficulty in accessing sufficient sources of skills and human resources, financing (both equity and debt), and land. Some progress on the latter may be derived from a new Land Law, which became effective in mid-2004, although much will depend on the Law’s implementing regulations, which had not been issued at the time of writing. The lack of adequate skills and human resources is potentially a bigger structural problem that Vietnam faces, and which is in urgent need of addressing if it is not to hold back the country’s wider economic potential. Although most Vietnamese tend to place a commendably high premium on education and training in general, there is a paucity of people equipped with the vocational “hard” and “soft” skills (such as business strategy and planning, human resource management, marketing and branding, supply chain management, accounting, production planning and management, customer relations management) needed to help drive the corporate sector forward. Indeed, the lack of sufficiently skilled people may be exacerbating the inflation problem, at least in part, as firms compete to attract skilled workers through higher wages. Looking ahead, local companies will need to compete on an equal footing with foreign competitors, for both export markets and their own domestic market, as the ASEAN Free Trade Area (AFTA), the conditions attached to WTO entry, and other commitments take effect. It remains unclear whether enough local companies have the capacity to meet the challenge posed by this increasingly competitive business environment, although recent evidence would suggest there is some 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, rapidly growing exports of sea products, pepper, garments, footwear, furniture, and handicrafts all suggest that Vietnam’s capabilities in scaling up production in 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

3,540 15,084

13,242 11,429 10.6

–3.0

–0.4 25.5

15,029 16,218 –1,189 1.5

5.8 9.7 4.4 2.3

2001

3,815 15,403

13,100 12,181 8.3

–3.8

3.8 17.6

16,706 19,745 –3,039 –2.8

6.4 8.9 6.0 3.0

2002

4,661 15,646

14,100 — 8.3

–4.8

4.0 21.0

20,176 25,227 –5,051 –5.8

7.1 9.6 6.8 3.1

2003

NOTE: Data given for 2004E are estimates; data for 2005F and 2006F are forecast figures. SOURCES: Asian Development Bank; author’s estimates.

2,831 14,514

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

–2.4

Fiscal balance (% of GDP) 11,915 11,581 10.5

–1.7 39.0

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

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

14,483 15,637 –1,154 1.6

6.1 9.6 4.5 4.0

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

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

2000

Vietnam: Selected Economic Indicators, 1999–2006F

— 15,800

— — 7.5

–4.6

10.0 16.4

26,660 29,550 –2,890 –5.7

7.5 9.8 7.4 3.3

2004E

— 16,000

— — 7.3

–4.2

5.0 14.7

30,660 35,460 –4,800 –5.7

7.0 9.0 7.0 3.0

2005F

— 16,200

— — 7.0

–4.0

5.0 15.0

38,000 42,555 –4,555 –5.0

7.0 9.0 7.0 3.0

2006F

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ECONOMIC OUTLOOK resistance from specific domestic lobby groups in markets such as the United States, controversially accusing Vietnam of “dumping” items like catfish and shrimps. However, it would be wrong to assume that the future rise of Vietnam’s corporate sector will be relatively plain sailing. The degree of success displayed by some foreign-invested firms focusing on the domestic market in Vietnam is testament to the fact that local firms still have a lot to learn. In addition to the paucity of skills, capital, land, and other resources cited earlier, most Vietnamese companies have yet to develop beyond the level of household or small and medium-sized enterprises (SMEs). While the acceleration in new company registrations since 2000 is undoubtedly a good sign, the next challenge will be turning this into a more robust and sustainable community of larger corporates that have the economies and synergies of scale that will allow them to compete on the international stage. If this can be achieved, then Vietnamese firms will be able to hoist the economy to the next level of development, 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 define a business liberalization road map for the country. With many of these commitments time-bound, the pace of economic reform is also expected to be fairly steady, if not as rapid as some might wish. At the time of writing, Vietnam’s long-term sovereign rating from both Standard & Poor’s and Fitch was BB– with a stable outlook, and B1 from Moody’s with a positive outlook.

THE CONTRIBUTORS

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 Times (Singapore) Business Day (Thailand) Cambodian Daily, Weekly Review (Cambodia) CEIC Database Country Reports (Economist Intelligence Unit) 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) The Economist Utusan Malaysia (Malaysia) Vientiane Times (Laos) Vietnam Investment Review (Vietnam) Vietnam News (Vietnam)

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THE CONTRIBUTORS

THE CONTRIBUTORS

Political Outlook Mely Caballero-Anthony is Assistant Professor at the Institute of Defence and Strategic Studies, Singapore. She contributed the country section on the Philippines. Nick J. Freeman is an Associate Senior Fellow of the Institute of Southeast Asian Studies. He contributed the country section on Laos. John Funston is Associate Director, National Thai Studies Centre, Australian National University. He contributed the country section on Thailand. Hamzah Sulaiman is Head of Department of Public Policy and Administration at Universiti Brunei Darussalam. He contributed the country section on Brunei. Ho Khai Leong is a 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 “The Anwar Ibrahim Factor in a Post-Mahathir Malaysia”. Verghese Mathews is a Visiting Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Cambodia. K.S. Nathan is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Chidchanok Rahimmula is a Lecturer at the Prince of Songkla University, Thailand. She contributed the section “The Situation in Southern Thailand”. Michael Richardson is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “Maritime Security in Southeast Asia”.

THE CONTRIBUTORS Daljit Singh is a Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the overview section “The Asian Security Environment”. Anthony L. Smith is an Associate Research Professor at the Asia-Pacific Center for Security Studies, Hawaii, and an Associate Fellow at the Institute of Southeast Asian Studies, Singapore. He contributed the country section on Indonesia. Leo Suryadinata is a Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “Susilo Bambang Yudhoyono: A Retired General Turned Politician”. Tin Maung Maung Than is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Myanmar.

Economic Outlook Rajenthran Arumugam is a Visiting Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “Judiciary Reformation Underpinning Economic Imperatives in Singapore”. Manu Bhaskaran is Partner and Head, Economic Research, Centennial Group, Singapore. He contributed the country section on Singapore. Nick J. Freeman is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Laos and Vietnam. Arya B. Gaduh is an Economist at the Centre for Strategic and International Studies (CSIS), Jakarta, Indonesia. He contributed the country section on Indonesia. Denis Hew is a Fellow at the Institute of Southeast Asian Studies. He contributed the section “Regional Economic Trends”. M. Shahidul Islam is a Research Associate at the Institute of Southeast Asian Studies. He contributed the country section on Brunei and cocontributed the section “Southeast Asia in the Global Wave of Outsourcing: Trends, Opportunities, and Challenges”. Lee Poh Onn is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia.

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THE CONTRIBUTORS Sakulrat Montreevat is a Fellow at the Institute of Southeast Asian Studies. She contributed the country section on Thailand and the section “Asian Bond Market Development: A Pace towards Regional Financial Stability”. Mya Than is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Cambodia and Myanmar. Aladdin D. Rillo is a Senior Economist (Finance and Macroeconomic Surveillance Unit) at the ASEAN Secretariat, Jakarta, Indonesia. He contributed the country section on the Philippines. Rahul Sen is a Fellow at the Institute of Southeast Asian Studies. He cocontributed the section “Southeast Asia in the Global Wave of Outsourcing: Trends, Opportunities, and Challenges”. Andrew Symon is a Visiting Research Fellow at the Institute of Southeast Asian Studies in Singapore. He contributed the section “Energy and ASEAN Economic Integration”.

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