Regional Outlook: Southeast Asia 2012-2013 9789814379816

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Regional Outlook

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued almost 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

REGIONAL OUTLOOK Southeast Asia 2012–2013 Editorial Committee Chairperson K. Kesavapany Editors Michael J. Montesano Lee Poh Onn Production Editor Stephen Logan

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Regional Outlook SOUTHEAST ASIA 2012–2013

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First published in Singapore in 2012 by ISEAS Publishing Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Road Singapore 119614 E-mail: [email protected] Website: http://bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies.

© 2012 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions expressed in this publication rests exclusively with the contributors and their interpretations do not necessarily reflect the views or the policy of the Institute, or its supporters. ISEAS Library Cataloguing-in-Publication Data Regional outlook: Southeast Asia. 1992–1993– Annual 1. Economic forecasting—Southeast Asia—Periodicals. 2. Southeast Asia—Politics and government—Periodicals. 3. Southeast Asia—Economic conditions—Periodicals. DS501 S720 1992 ISSN 0218-3056 ISBN: 978-981-4379-80-9 (soft cover) ISBN: 981-981-4379-81-6 (E-book PDF) Typeset by International Typesetters Pte Ltd Printed in Singapore by Seng Lee Press Pte Ltd

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CONTENTS

Preface K. Kesavapany

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Introduction Michael J. Montesano and Lee Poh Onn

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POLITICAL OUTLOOK Southeast Asia’s Security and Political Outlook

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Current Sino-ASEAN Relations in Review

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China-Southeast Asia Relations: Purpose versus Disunity?

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Crunch Time for Asia-Pacific Multilateralism

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The United States and Southeast Asia: Electoral Distractions Ahead? 26 Civil Society Engagement in ASEAN

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The ASEAN-10

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Brunei Darussalam

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Cambodia

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Indonesia

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Laos

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Malaysia

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Myanmar

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Philippines

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Singapore

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CONTENTS Thailand

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Vietnam

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ECONOMIC OUTLOOK Regional Economic Outlook

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2012: A Reversal of Food Crises?

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Thailand as Global Automotive Hub: Impacts and Prospects after the Floods of 2011

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Myanmar: Facing the Future

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The Islamic Bond Market in Malaysia

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The ASEAN-10

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Brunei Darussalam

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Cambodia

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Indonesia

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Laos

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Malaysia

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Myanmar

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Philippines

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Singapore

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Thailand

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Vietnam

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The Contributors

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PREFACE

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wenty-one years ago, the Institute of Southeast Asian Studies inaugrated a topical, forward-looking annual publication intended to benefit businesspeople, diplomats, security specialists, professionals, journalists, and others with a stake in understanding regional developments. That publication has long since earned the admiration and trust of readers both in the region and outside Southeast Asia. They have come to rely on its well-informed and timely analysis of the near-term developments and trends likely to have the greatest impact on their work. The latest edition of Regional Outlook: Southeast Asia builds on this strong tradition. Its contents underscore ISEAS’ commitment to offering stakeholders in regional affairs access to the thinking of leading specialists in the fields of politics, security, and economics, as those stakeholders seek to anticipate events in the year ahead. The present volume scrutinizes the political and economic outlooks for each of the ten ASEAN member states in order to help readers foresee both the opportunities that these states will enjoy and the challenges that they will confront during 2012. It also offers a range of specially commissioned thematic articles. These articles address topics such as the relevance of “the Arab Spring” to Southeast Asia, America’s effort to re-focus its attention on the region, imminent challenges to Southeast Asia’s multilateralist regional architecture, and the breadth and depth of the development of civil society in the various Southeast Asian countries. Particularly worthy of mention are two articles on the range of issues and dynamics that define the important relationship between Southeast Asia and China. And additional thematic articles treat likely trends in food prices and supplies in the region during 2012, Thailand’s prospects for remaining a global automotive hub, the

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PREFACE economic implications of Myanmar’s ongoing process of reform, and Malaysia’s Islamic bond market. In turning to near-term trends on the political front in each of the ten members of ASEAN, contributions on the Philippines and Indonesia detail these large democracies’ need to surmount persistent obstacles to the consolidation of their political orders. Other essays forecast the fine-tuning of the well-established domestic political orders of Laos, Cambodia, Vietnam, and Brunei. An essay on Singapore reflects on the changed political atmosphere born of the general elections of 2011, and one on Malaysia looks ahead to the likelihood of elections there in 2012. Regarding Thailand and Myanmar, respectively, one contribution dwells on apparently interminable political crisis, while the second considers the implications of the sudden, astonishing recent breaking of a decades-old political logjam. As a group, these ten articles on the politics of ASEAN’s member states in the year ahead reveal innumerable unfolding political dynamics often neglected in daily news coverage. The contributions to this volume on the region’s economic prospects take as their starting point the fact that Southeast Asian economies cooled significantly in 2011. This cooling was due to the high base effect of a year earlier. Weak demand from the United States; an overall uneven global recovery; a worsening and uncertain international sovereign-debt crisis; the tsunami, earthquake, and nuclear disaster in Japan; floods in Thailand and Cambodia; and inflationary pressures across economies all threaten growth prospects for 2012 and 2013. The articles in this volume suggest that policymakers need to be on the alert on the economic front: managing inflationary pressures and the looming unemployment situation will be important focus areas. I wish to thank each of the scholars who have contributed their perspective and insight to Regional Outlook: Southeast Asia 2012–2013. Their articles have resulted in a thought-provoking book, one that ISEAS is delighted to publish for the use of a broad readership. I also wish to thank editors Michael Montesano and Lee Poh Onn for commissioning these contributions and Stephen Logan of the ISEAS Publications Unit for ensuring the publication of a book of a very high standard on a tight deadline. All analysis offered in this volume

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represents the personal views of contributors, rather than those of the governments and institutions with which they are affiliated. This trenchant and well-informed analysis will, I am confident, compel readers to reassess and refine many of their own views on the outlook for the region in the year ahead. K. Kesavapany Director Institute of Southeast Asian Studies Singapore 6 December 2011

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INTRODUCTION

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he APEC and East Asia Summits of November 2011 signaled the return of Southeast Asia to a position of importance in international politics that it had not occupied since the time of the Cold War. But the economies and domestic politics of the region have changed enormously since that time. The consequences of these changes, many of which would have been impossible to foretell even half a decade ago, will shape developments in the region during 2012. The case of Indonesia exemplifies this reality. It has defied critics sceptical of its prospects for a transition to enduring democratic and civilian rule and emerged as a society of remarkable dynamism. This success has in its turn given rise to a series of difficult near-term challenges for the country. Its stature on the global stage, demonstrated not least by its success in the chair of ASEAN during 2011, demands that its defence establishment commit itself to thinking strategically and transcending its historically inward focus. Indonesians’ and foreigners’ hopes for the country demand that Jakarta promptly address its deficient police and courts, the weak capacity of much of its state bureaucracy, and the spectre of religious intolerance expressed through violence. The presidency of Benigno Aquino in the Philippines will face similar tests during the same period if Aquino is to achieve his goal of hastening the emergence of his country from its long-time status as the sick man of the region. Observers will be keen to see how the Philippine Government’s case against former President Gloria Macapagal Arroyo proceeds and how Manila fares in its effort to advance the cause of peace in Mindanao. Progress, or its lack, in these areas may well serve as a litmus test for the Aquino administration’s campaign to improve governance in the country.

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INTRODUCTION In the case of Vietnam, the reform of governance in the economic realm will largely determine the country’s path through the year ahead. If 2011 saw the installation of a new leadership team for the Communist Party and state, 2012 will see that team test itself against the challenges posed by inflation, corruption, the risk of a widening income skew, and the persistent poor investment of resources. Neighbouring Laos has stolen a march on the challenges that 2012 may pose by bringing into its leadership men of hands-on political experience, relative youth, and high levels of education. Too, it will benefit in meeting those challenges from an increasingly active National Assembly. Brunei and Cambodia begin 2012 with few developments of apparent import on the horizon. The former will essay to stay the course of cautiously broadening political participation and encouraging social and economic diversification. Most concretely, and perhaps wisely, this broadening has at its core Brunei’s deep economic, diplomatic, and intellectual engagement with its neighbours in the Southeast Asian region. The 2012 local elections in Cambodia will serve as the backdrop to developments in the two areas of most crucial importance to its political order. These areas are, first, the structure of ties between the ruling Cambodian People’s Party and big business in the country and, second, the question of whether Hun Sen’s long-term rule will emerge as a Cambodian variant of late developmentalism. In Southeast Asia’s pre-eminent developmental state, Singapore, a political “new normal” following the general elections of May 2011 will continue to take shape. Central to this process will be the role of new media, the presence of the largest slate of oppositionists in parliament in decades, and intensifying efforts among Singaporeans to take the lead in defining their national identity and their nation’s needs, rather than ceding that task to their government. The issue of national identity will also stand at the centre of Thai politics during 2012. Efforts to rally the country to recover from the floods of late 2011 will compete with efforts to tear down the government of Prime Minister Yingluck Shinawatra by means fair and foul. The possible return of Thaksin Shinawatra and the uncertain health of King Bhumibol Adulyadej will remain in the news, but the

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parliamentary strength of Yingluck’s Phuea Thai government holds out the prospect of continued rule by an elected government rather than by the sort of ancien régime cabal for which some in Bangkok have called. Malaysian efforts to forge a workable and inclusive national identity, long beset by issues of ethnicity and corruption, will enter yet another round in 2012. Najib Razak will try to maintain control of the United Malays National Organisation while at the same time convincing his fellow Malaysians outside the party that he has a vision for a less troubled future. Whether he will call national elections during the year remains the biggest source of uncertainty. Under the leadership of President Thein Sein and thanks to his working relationship with Aung San Suu Kyi, Myanmar enters 2012 poised for the most sweeping changes to come to any Southeast Asian country in many years. The performance of the National League for Democracy in possible by-elections, the consolidation of new government institutions at the sub-national level, negotiations with armed groups representing various ethnic nationalities, and the fate of people imprisoned for political crimes all deserve close attention. At the same time, Myanmar must determine how best to use increasing aid flows, how to liberalize its economy without falling prey to rapacious cowboy capitalism, and how to begin developing the capacities both to hold the ASEAN chair and to host the East Asia Summit in 2014. In Myanmar and across the region, civil society will — in areas ranging from the environment, human rights, and gender equality to the rule of law, freedom of expression, and access to medicine and health care — continue to evolve as an important actor on the Southeast Asian scene in 2012. Its contribution to political and social change will represent one of the many pathways through which domestic developments in the region’s constituent states inform the international politics and security of Southeast Asia. Additional factors in the region’s international politics will be the ever more complex Southeast Asia–China relationship and Washington’s posture in Southeast Asia. Progress to fulfil the ambitions of the TransPacific Partnership and the East Asia Summit on the one hand and

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INTRODUCTION the role of ASEAN Plus Three and the political implications of the China-ASEAN Free Trade Agreement on the other will serve as telling indicators of the region’s future orientation. If a “Pax Sinica” is indeed to come to Southeast Asia, many details of that order will nevertheless remain to be worked out. Continued disagreement over an issue so basic as sovereign rights in the South China Sea suggests that considerable difficulty lies ahead. On the other hand, the fast-changing social orders in the nations of the region may predispose their people to continued close ties to the Western democracies and to Australia, India, and Japan, even in a time of mounting Chinese influence. That course, too, will bring many developments for which stakeholders in the region would do well to keep their eyes peeled. Economic growth for Southeast Asia as a whole will moderate in 2012 and 2013 to about 5 per cent annually. The major economies in Southeast Asia also experienced more moderate growth after the heady growth period in 2010. Factors dampening the economic forecast include weak demand from the United States and an overall uneven global recovery process. The worsening and uncertain sovereign debt crisis, high oil and food prices, and inflationary pressures across economies are also threatening the regional growth prospects in 2012 and 2013. Brunei Darussalam will continue to grow positively during the forecast period, but at a slower pace because of the global slowdown. New oil and gas drilling plans bode positively for its economy, and high oil prices will buffer its growth rates in this uncertain global economic climate. However, the country must continue to hasten its process of economic diversification in the years to come to ensure that its growth will remain sustainable over the longer term. Growth in Cambodia returned back to positive territory in 2010 and is expected to be positive for 2012 and 2013. Agriculture will play an important role in shoring up growth as the government continues to promote rice production and exports. The tourism sector is also expected to attract more visitors and construction is expected to recover further in 2011–12. However, there are some constraints that need to be dealt with, like

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rising inequality and the insecure land titles of farmers, which may not allow the full growth potential of the country to be realized. Indonesia will continue with its resilient economic expansion in 2012 and 2013. Domestic demand (driven by private consumption) and the strong inflow of foreign direct investment will boost growth in the Indonesian economy and support the momentum of growth in the next two years. Exports have continued to be robust because of the strong demand for commodity products such as palm oil and energy-related products. However, infrastructure deficiencies remain and these will need to be dealt with in the years ahead. High electricity costs and rigid labour laws are some of the other challenges making Indonesia among the most difficult countries to start a business in. In the Lao PDR the resource sector remains the main engine of growth for its economy. The main challenge for growth in Laos is that of controlling inflation and providing effective macroeconomic management to deal with massive foreign capital inflows and windfall expenditures from the resource boom. Growth is expected to be robust at around 8 per cent in 2012 and 2013. The momentum of growth has progressively weakened in Malaysia because of weakening global demand, especially for electronics and engineering products. Domestic demand in Malaysia has however shown resilience and private consumption has remained firm as a result of favourable labour market and credit market conditions. Malaysia also received the third-highest level of foreign direct investment among its Southeast Asian peers at the beginning of 2011. Malaysia’s economic development will reach a crucial stage in the coming years as the government is carrying out a comprehensive range of structural reforms to transform the country into a high-income nation by 2020. The growth momentum in the Philippines will slow in 2012 and 2013 to between 4 and 5 per cent; its budget will also remain in deficit in 2012 and 2013. The agricultural sector remains dominant in Myanmar. GDP is forecast to be between 4.7 and 8.8 per cent for both 2012 and 2013, according to various estimates. Reforms would need to carry on for Myanmar to continue to make progress and to achieve lasting economic development in the years ahead.

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INTRODUCTION The main commitment of the new government in the Philippines would be to show its resolve in strengthening public finances, whilst at the same time improving public services. The main threat to the Philippines economy would be the occurrence of a second global recession as the sovereign debt crisis continues. Agriculture and the production of rice have recovered in 2011 and the Philippines will be partially insulated from the higher global food prices. Inflation is expected to average around 4.6 per cent during the forecast period. The Singapore economy will face some challenges in 2012 and 2013 in the form of a slowing global economy and the sovereign debt crisis in the eurozone. Inflation is however expected to fall from 5 per cent in 2011 to 2.5 to 3.5 per cent in 2012 with GDP growth still in healthy territory between 4 and 5 per cent in the forecast period. The Thai floods put a severe dent in the Thai economy in the last quarter of 2011, costing between US$4 and 6 million. Nevertheless, the government’s support for long-term plans to prevent future flooding and the economic recovery from the current floods will help to stimulate the Thai economy in 2012 and 2013. Growth is forecast at between 4 and 4.5 per cent annually in both years. In Vietnam challenges remain for the country to sustain its growth performance similar to that of the last decade. A number of long-term and interrelated structural challenges will need to be addressed. One such challenge is the calibre of education and training provided in Vietnam, as there is currently a mismatch between what the schooling system provides and what employers are looking for. Another needed change is for investments in good infrastructure and utilities. Given all these challenges, Southeast Asian economies will remain interesting to monitor, especially how countries in the region tackle the global economic slowdown and handle the impact of the sovereign debt crisis in Europe. Michael J. Montesano Lee Poh Onn Editors 7 December 2011

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POLITICAL OUTLOOK

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SOUTHEAST ASIA’S SECURITY AND POLITICAL OUTLOOK Dan Slater

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f the year 2011 should have taught the world anything about politics, it is this: ordinary people possess a remarkable capacity to rise up against their governments in sudden and surprising ways. Explosive uprisings across the Middle East have transformed the tenor of global politics, and put governments throughout the developing world on high alert. Southeast Asia is by no means immune from such global shock waves. But besides the general point that “the street” can go from silent to violent in practically no time flat, what specific lessons do last year’s revolutions hold for Southeast Asia? As we look ahead, what if any shock waves might Southeast Asia experience in the wake of the “Arab Spring”? What might urban protest and response in the region look like? And what factors are most likely to spark them in some Southeast Asian countries rather than others?

Southeast Asian Shockwaves: Tracking the Abuse-Activism Connection The main argument advanced in this essay is that there is a surprisingly straightforward common thread linking urban uprisings throughout the developing world — not just in recent months, but in recent decades. Contrary to conventional (especially journalistic) wisdom, this common thread is not poverty or economic hardship, or the failed economic policies of governments in power. Instead, the spark that almost uniformly underlies the urban eruptions that we have by now become accustomed to witnessing throughout the world — including in many of Southeast Asia’s bustling capital cities — is not economic but political.

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Most simply put, this common spark is government abuse. Ordinary people will frequently endure poverty in quiet isolation for decades on end. But when a government betrays its citizenry by committing a grave, vivid, and shocking abuse of power, the potential exists for a massive political explosion. This revolutionary potential is amplified when the citizenry can pinpoint an especially objectionable head of state as the source of that abuse. The head of state thus becomes a ready rallying point for outraged citizens demanding, in raucous unison, that “the old man” relinquish the power that he has so flagrantly abused. Before looking at contemporary Southeast Asian politics through this lens, it is worth a brief glance across time and space to establish its basic value as an analytical starting point. Historically in Southeast Asia, urban anti-government uprisings erupted in Thailand in 1973 and 1992 (in the latter year during relatively good economic times) when military rulers reneged on promises to cede power to elected civilians. Something similar happened in the Philippines in 1986 and 2001, when kleptocratic presidents were toppled after committing especially brazen acts of personal venality. Soeharto’s fall from power in Indonesia in 1998 (much like Mahathir Mohamad’s near fall in Malaysia later that same year) was less about the Asian Financial Crisis per se than about its exposure of the “corruption, collusion, and nepotism” that a long-serving ruler had inflicted on the nation over the course of decades. Even in economically benighted Myanmar, massive anti-government uprisings have been sparked not by the ruling military’s grievous economic mismanagement, but by shocking instances of unpunished violence against university students (in 1988) and Buddhist monks (in 2007). There are intriguing harmonies between these earlier events in Southeast Asia and recent events in the Middle East. The fall of Hosni Mubarak in Egypt had striking parallels with Soeharto’s overthrow in Indonesia, as Mubarak’s efforts to build a family dynasty and readiness to unleash lethal violence against principled protesters to protect his dynastic ambitions pushed Egyptian society, along with an increasingly alienated military, over the revolutionary precipice. For all the talk about chronic unemployment and worsening poverty as the sparks

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that ignited the Arab Spring, it is worth recalling that the regional uprising commenced when a Tunisian street vendor set himself ablaze after being publicly slapped and having his goods expropriated by a (female) municipal officer: a moment of economic hardship for one man, but of intolerable government abuse for the many thousands who rallied behind his tragic example. One thus hears unexpected echoes of Yangon in far-off Tunis. None of this is to deny the enormous differences among the urban political uprisings that have spread around the world in recent decades. Each society has different expectations of its government; there can be no single standard for what counts as shocking government abuse across different national contexts. When considering prospects for further Southeast Asian shock waves in the near term, it is essential to proceed case by case, yet without losing sight of possible ricochet effects from protests in neighbouring countries such as China and India. In these Asian behemoths, as in much of the Middle East, rising aggregate wealth is proving to be no panacea for explosive protests over perceived corruption and abuse on the part of government officials. The best place to begin consideration of the possibility of Southeast Asian shock waves in the years ahead is with the region’s governments, rather than with their extant and potential opponents. Anti-government protests can erupt from virtually anywhere, as recent events have retaught us, but their target — the government — is always the same. And governments not only foster uprisings with abusive behaviour. They can also foresee and forestall them with pre-emptive measures. In this sense Southeast Asia is already experiencing the shock waves of Middle Eastern events. Consistent with trends that were already incipient, Southeast Asia is undergoing what appears to be a deepening, spreading, and accelerating political thaw. With the possible exceptions of Cambodia and Malaysia, governments throughout the region appear to be loosening their grips more than tightening them. This pattern distinguishes them from China’s rulers, who seem to attribute Middle Eastern revolutions to insufficient rather than intolerable government repression. Will this Southeast Asian thaw continue, or will new rounds of government abuse test the tolerance of activists and ordinary

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citizens alike? This question is of utmost importance as we consider the possibility of new shock waves in Southeast Asian politics. My notion of a political thaw — which requires a government retreat from behaviours likely to be considered shockingly abusive — applies to the region’s democracies as well as to its more authoritarian regimes. In Thailand one sees a welcome if perhaps temporary truce between dueling camps whose street protesters have been galvanized, in essence, by perceptions of intolerable government abuse. First the “Yellow Shirts” erupted in response to Thaksin Shinawatra’s perceived corrupt abuses of prime ministerial power, which at times appeared to betray the national interest and threaten the supremacy of the monarchy. Then pro-Thaksin “Red Shirts” showed equivalent outrage over their unconstitutional disenfranchisement by the military and its “old guard” political allies. Urban-rural disagreements over economic policies may be very real, but such disagreements are simply not the kind of factors that inspire protesters to pour their own blood onto the steps of government buildings. Competing conceptions of government abuse, not competing visions of economic policy, have been the beating heart of Bangkok’s recent protest shock waves. So long as Thaksin and the military each let the newly elected government perform its appointed duties without interference, the Thai thaw has some hope of enduring. In Indonesia and the Philippines too, democratically elected presidents enjoy strong popular mandates and appear generally sensitive to the concern with corruption and abuse of power that can spark major anti-government protests. The end of Gloria Macapagal-Arroyo’s controversy-ridden presidential decade has had a cooling effect on Manila’s politics, as activists can now shift from disruptive demands for her resignation to legalistic pressure for her prosecution. The explicit support of President Benigno Aquino III for bringing “GMA” to book means that prospects for improved executive responsiveness to popular dissatisfaction over corruption appear promising. Similarly, Indonesian President Susilo Bambang Yudhoyono (or “SBY”) won re-election in 2009 in large measure because he was widely

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perceived as less corrupt, and more serious about curbing corruption, than any of his rivals. To be sure, SBY flirts with disaster by preserving his warm relations with politicians and businessmen who have terrible public reputations, and by seeming to stand aside when the highly popular Corruption Eradication Commission comes under assault from its most powerful targets. Yet SBY’s internal thermometer for sensing public dissatisfaction seems a relatively sophisticated instrument, and his evident concern with cultivating a positive public image will presumably continue to lead him to respond to worries over corruption with at least moderate political energy. These factors should help keep something of a lid on anti-government shock waves in the remaining years of SBY’s presidency. It is in those Southeast Asian countries in which democratic institutions are either totally quashed or tightly controlled, however, that the current thaw will meet its greatest tests. On one end of the spectrum is Vietnam, where executive leadership is shared and regularly rotated, the public can watch government ministers face regular and critical questions from parliament on national television, and the ruling party stands out among the world’s authoritarian regimes for its readiness to apologize for its errors. Hanoi may allow less party pluralism than any of the region’s other large countries, but the Vietnamese political system is not one in which a strongman can be seen to hijack the nation in order to aggrandize his personal power. If any Southeast Asian country fits that description, it is Cambodia, where Prime Minister Hun Sen’s rule has begun to approximate the politically perilous “old man overstaying his welcome” model. In power for more than a quarter-century, and presiding over a regime that shows few qualms about using repression against its opponents, Hun Sen probably has more reason to ponder the spectre of anti-government shock waves than any of his Southeast Asian counterparts. Malaysia and Singapore — the two stable party-led regimes in the region that Hun Sen must envy most — appear somewhat more likely to follow than buck Southeast Asia’s thawing trend. In Singapore one might even make the case that the ruling People’s Action Party (PAP) is leading the trend rather than following it. The

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party’s unfamiliar experience of a slight bruising in the 2011 elections has been accepted with apparent magnanimity. PAP leaders also appear increasingly willing to consider, and potentially to confront, the issues that have most powerfully stoked voter outrage: astronomical ministerial salaries, the massive influx of foreign workers, steeply increasing inequality, and a skyrocketing cost of living. Nevertheless, the PAP has had a historic — and in many respects more than rhetorical — commitment to shared sacrifice among all Singaporeans. This history means that impassioned concerns with worsening stratification threaten to have an abuse-like impact on public dissatisfaction if not deftly and responsively addressed. Malaysia’s willingness to follow the regional political thaw is less certain than Singapore’s. The government of Prime Minister Najib Abdul Razak appears to be moving in two directions at once as it confronts upcoming national elections, the first since the ruling Barisan Nasional lost considerable ground in the 2008 polls. On the one hand, Najib has called for the abolition of the much-hated Internal Security Act and for reform of less known but more regularly employed restrictions on the media. Whether these reforms will be implemented in practice — or whether they will be accompanied by new, similarly restrictive, laws to fight “terrorism” — remains impossible to know. What is undeniable is that the Malaysian Government responded to the peaceful “Bersih 2.0” protests of July 2011, which centred on public outrage over unfair elections rather than on economic issues, with massive force. Further, opposition leader Anwar Ibrahim is shackled by yet another round of government sodomy accusations. As was its wont before Mahathir turned Malaysia in a more resolutely authoritarian direction in the 1990s, the Malaysian Government seems to be pursuing a balancing act between repressing dissent with one hand and responding to it with the other. Myanmar clearly lacks Singapore’s and Malaysia’s track record of successfully balancing repression and responsiveness. Its current political thaw is thus the most unpredictable and uncertain experiment of its kind in Southeast Asia. The long-ruling military regime has been striving to win greater acceptance in the global community. It

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recently released a number of political prisoners in a bid for greater international acceptability. Myanmar’s 2010 national elections suggested the regime’s openness to friendly civilian political involvement, even as it continues to stifle those who might challenge military supremacy. A scenario like that of Indonesia during the 1970s and 1980s seems to be the Naypyitaw government’s desired outcome. It is fortuitous that Myanmar had begun moving in a thawing direction before the Arab Spring came. Otherwise, it may have reacted by tightening controls, like China, rather than relaxing them, like Singapore at least for the time being. Yet a tragic history of dramatic failure to handle activism in non-abusive ways means that it would be heroically optimistic to expect Myanmar’s military leaders to navigate this thawing period sensitively and successively.

Conclusion In the final analysis, prospects for near-term shock waves of protest and repression, in Southeast Asia as elsewhere, will be shaped more by the rhythms of politics than by economics. Activism has become unavoidable, but the same cannot be said of government abuse. By responding to gathering public pressure for more accountable and responsive rule, Southeast Asian governments can pre-empt the destabilizing protests that the region has experienced in recent decades and that exploded across much of the Middle East in recent months. Looking out for shock waves will thus require less attention to levels of gross domestic product than to levels of a very different kind of GDP: Glaring Derelictions of Power.

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Current Sino-ASEAN Relations in Review Zhu Feng The current state of relations between the People’s Republic of China and ASEAN could be generally characterized as follows. Politically, bilateral cooperation has developed continuously, with the construction of regimes of cooperation manifesting remarkable results. Yet unresolved disputes still exist. In particular, the escalation of the South China Sea problem during recent years has rendered relations between China and some ASEAN countries tense and strained. In the economic realm, with the China-ASEAN Free Trade Agreement (CAFTA) in full effect, economic relations have become more close-knit and institutionalized. They are on the track of sound progress. Moreover, increasing nontraditional issues — especially in the area of security — are prompting both sides to strengthen multilevel and multidimensional cooperation and institution-building. This development has, in turn, made the bilateral relationship closer. Finally, three main contextual factors affect current Sino-ASEAN relations: the rise of China, the “return to Asia” strategy of the United States, and the domestic politics of the ASEAN countries. If one takes ASEAN as a unitary international actor and analyses its relations with China from that perspective, it is clear that SinoASEAN bilateral relations have made considerable progress on the political level. Since the end of the Cold War, when China first made contact with ASEAN as a regional organization and political actor, the bilateral relationship has deepened and intensified progressively. It has seen the maturation and normalization of regimes of cooperation between the two sides. China and ASEAN made the first attempt to establish a dialogue mechanism, and the ASEAN-China (10+1) and ASEAN-China-Japan-Korea (10+3) cooperation regimes have made rapid progress ever since 2003, when the two sides established a strategic partnership for peace and prosperity. They have become the main multi-field and multilevel platforms for political, economic, security, and cultural dialogue, communications, and cooperation between the two sides. The Sino-ASEAN cooperation regimes have become

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an exemplary pattern of Asian regional cooperation. They can have great importance in inspiring closer regional cooperation among Asian countries in the future. The root cause of the successful establishment, maturity, and normalization of the Sino-ASEAN cooperation regimes is that these platforms have met each side’s current demands for institutionalized cooperation. Since the end of the Cold War, the important issues faced by international political actors are no longer limited to war and peace. Rather, they have gradually extended to the political, economic, security, cultural, social, and environmental realms. Solving these problems depends on the intimate cooperation of different countries and organizations. Foreign cooperation, especially with neighbouring countries, has always been a tradition of Chinese foreign policy. Nevertheless, in solving shared problems confronting China and other Asian countries, traditional bilateral dialogues, negotiation, and cooperation have proved inferior to regional and institutional cooperation. For ASEAN, its identity as a regional grouping well established, traditional bilateral cooperation now seems behind the times. Further, the obvious difference in relative power between China and any one of the ASEAN countries gives regional cooperation regimes advantages over traditional bilateral cooperation in reducing misgivings and promoting mutual trust. Southeast Asia was long under the control of great powers. Even today it has not completely freed itself from the influence of outside powers. As a rising power adjacent to ASEAN and the country that established the tributary system, China has inevitably faced mistrust over the intentions behind both its foreign strategy and specific policies. This mistrust has even risen to the level of a refusal to cooperate with China. Institutionalized multilateralism is conducive to clearing away such doubts, to promoting mutual trust, and to consolidating the strategic partnership between China and ASEAN. ASEAN-led institutionalized regional cooperation has advanced the cooperation of major powers active in the region and consequently increased the status and prominence of ASEAN in the construction of regional regimes in Asia as a whole. ASEAN-led cooperation has also offered a platform for

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POLITICAL OUTLOOK other regional powers to participate in forms of multilateral cooperation that could reduce mistrust and reinforce mutual trust. In the long run, this pattern of cooperation is expected to lead to a win-win future for all concerned parties. In general, the Sino-ASEAN political relationship is in a period of intimacy and smooth development. Nevertheless, the recent tension over the South China Sea indicates that the further growth of the bilateral relationship is obstructed by the disputes between ASEAN members and China over this issue. Restricted access to information may well have contributed to pessimism regarding prospects for the resolution of disputes centring on the South China Sea and to overinterpretation of events there. For most scholars in China, for example, information on the South China Sea problem comes entirely from public sources, above all news media. At the same time, it must be acknowledged that these disputes are inherently hard to resolve. Though confrontation over the South China Sea is primarily a competition for energy resources, it also inevitably involves territorial issues. Whether the Spratly Islands are seen as “core interests” by the parties to the dispute or not, neither China, Vietnam, nor the Philippines has much practical room for compromise. The century-long “historical grievance” of China, dating to the First Opium War, has led to a close linkage between the legitimacy of and justification for China’s government on the one hand and the protection of the nation’s territory on the other. It has produced vehement overreaction in domestic public opinion, with expressions of strong nationalism over territorial issues. The continuously growing power of China has only reinforced these tendencies. As a result, China has no room to back down, after having made clear its bottom line of “maintaining the current status quo” in the Declaration on the Conduct of Parties in the South China Sea. The same logic can be applied to Vietnam, the Philippines, and other countries. In the minds of most of their citizens, causes of national “historical grievances” were of even longer duration than that of China and may indeed now be perpetuated by China — the great power that they currently face.

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Since these other countries have made huge profits out of the illegal exploitation of oil in the South China Sea, it is completely unrealistic to expect them to make policy adjustments in favour of China any time soon. On the other hand, the disputes over the South China Sea also involve the United States, the dominant power in the current international system. The United States sees the South China Sea as one of its vital shipping routes. It has asserted that China’s legal claim to sovereignty threatens free passage in the South China Sea. It has therefore shown support for such countries as Vietnam in diplomatic fora. This approach has escalated regional disputes over sovereignty to the level of issues relating to the structure of global power and thus compounded the difficulties faced by a rising China as it seeks to take actions to solve this problem. To sum up, the South China Sea problem is the most important sticking point in Sino-ASEAN relations. Though the substance of this problem lies in disputes between China and only some ASEAN members, it has cast a shadow over the Sino-ASEAN relationship as a whole. In the current, unstable situation, decision-makers in the countries concerned have proved able to exercise restraint and to maintain the status quo. But it is hard to predict how long this situation can last under the dual pressures of domestic nationalism and the agitation of contending political forces. Unlike the coexistence of cooperation and conflict in the political realm, the deepening of economic cooperation between China and ASEAN is a significant driving force in the development of bilateral relations. In 2010 CAFTA was officially launched. Mutual investment has increased rapidly year by year. Close economic and trade cooperation has deepened the interdependence of the two parties. It has thus laid an important strategic foundation for establishing and developing institutionalized cooperation. ASEAN is one of the most important markets for the products of Chinese industry. At the same time, China is also an important export market for ASEAN. Further, in the post-financial-crisis era, China’s economic development requires the upgrading of its industrial structure, a process that will benefit from the transfer of some low-end industries to ASEAN countries. This

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POLITICAL OUTLOOK industrial transfer would also speed up the industrialization of ASEAN member states, especially those that have traditionally concentrated on agriculture. The flow of technology and capital to ASEAN countries has also led to the interdependence of their industrial upgrading and that of China. After the financial crisis, regional economic integration has become a matter of consensus among Asian countries, and bilateral cooperation between China and ASEAN has laid a good foundation for such integration. In addition to traditional political and economic relations, nontraditional issues play an increasingly important role in the SinoASEAN relationship. The two parties have achieved broad consensus and institutionalized cooperation over issues such as the fight against terrorism, piracy, and transnational crime and responses to climate change, food crises, natural disasters, and infectious diseases. However, the two sides still have differences over other non-traditional issues, such as the utilization of cross-border water resources. On the whole, attention to non-traditional issues has promoted the institutionalization of Sino-ASEAN cooperation and integration. It has become a positive factor in the bilateral relationship. The first major contextual factor currently affecting the Sino-ASEAN relationship as characterized above is the rise of China. China’s rising power has resulted in huge and increasing influence at both the global and regional levels. Economically, the rise of China has deepened the interdependence between China and ASEAN. It is expected to promote the industrial upgrading of the two sides on the basis of regional economic integration. Politically, both a rising China and the ASEAN that faces it need institutionalized regional cooperation. Such cooperation can mitigate the difficulties caused to regional actors by China’s rise and foster joint management of growing non-traditional issues. Closely related to the rise of China is another important contextual factor in Sino-ASEAN relations: the implementation of the “return to Asia” strategy of the United States after the financial crisis. President Barack Obama and Secretary of State Hillary Clinton have made it clear that ASEAN is one of the important fulcra of the “return to Asia” strategy in the positions that they have taken since 2009.

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This is a strategic adjustment on the part of the United States as it faces a rising China. It is aimed at avoiding a pattern of Sino-U.S. confrontation in East Asia over China’s “expansion policy”, a pattern that could exacerbate regional disputes and arouse regional conflicts. This strategic adjustment is a natural reaction to the changing regional power structure and is in itself beyond reproach. Yet it has in practice influenced those ASEAN countries that have disputes with China over some issues, especially the South China Sea. It has made them more inclined to take hard-line attitudes, attitudes detrimental to the successful resolution of the disputes. One last important contextual factor that cannot be ignored in an assessment of Sino-ASEAN relations is the domestic politics of the ASEAN countries. After the financial crisis, some ASEAN economies have shown signs of economic slumps and resultant increased public dissatisfaction towards governments. This dissatisfaction in turn often makes itself felt in the area of foreign relations, with the outbreak of anti-Chinese demonstrations in Vietnam being an example. In reviewing the general status of the current Sino-ASEAN relationship and the main contextual factors affecting that bilateral relationship, one can have no doubt that the most significant achievement is the institutionalization of cooperation. Without it, the elimination of mistrust and the establishment of mutual political trust seem impossible. It is precisely because of the influence of many external factors, factors falling outside the scope of regimes of cooperation, that the outstanding disputes between the two sides are hard to resolve. Although decisionmakers on either side have little room for compromise on the South China Sea problem, a more effective and practical solution than the current unilateralism of all sides is to establish controllable regimes of cooperation on the basis of the Declaration on the Conduct of Parties in the South China Sea.

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China-Southeast Asia Relations: Purpose versus Disunity? Chung Chien-peng China’s relationship with the Association of Southeast Asian Nations (ASEAN) is driven by a strategic logic. It responds to the challenges of securing raw materials crucial to China’s economic development, of cementing growing political-economic ties with Southeast Asian nations, of alleviating their fear of a rising China, and of ensuring a peaceful and stable surrounding environment to buttress China’s increasing international influence. China meets the first two challenges through the China–ASEAN Free Trade Agreement (CAFTA) and the latter two challenges through its participation in the ASEAN Regional Forum (ARF). China will continue to back ASEAN’s leading role in regional cooperation, to prevent the appearance of a power vacuum in Southeast Asia that might be exploited by a powerful country other than China. Coinciding with China’s economic and military rise, years of American detachment from ASEAN, particularly during the George W. Bush administration, have left China with an influential role on ASEAN-led regional platforms. China would like to see this situation continue. Under the CAFTA, which took effect on 1 January 2010, low-orno-tariff deals will help feed China’s demand for raw materials and for mineral resources — palm oil, timber, rubber, crude and refined oil, iron ore and coal — from ASEAN. It will also open regional markets for China’s manufacturers. However, the comparable economic structures of the ASEAN states, particularly those of the poorer economies, mean that intensifying competition for Chinese markets may entail the displacement of workers and farmers, and years of rationalization of industries and firms. China’s inexhaustible and cheap labour supply also means that its industrial exports could drive down wages in Southeast Asia. Electronics, furniture, hardware, machinery, and textiles produced in Indonesia cannot compete with similar but cheaper and better-quality products from China. Higher steel production costs and

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capacity shortages in Southeast Asia provide China’s steel exports with broad market opportunities, and a major steel exporter to ASEAN countries like Malaysia will be seriously affected. After initial structural adjustments, ASEAN countries will develop their own economic niches vis-à-vis China. Indonesia and Malaysia have oil and natural gas, and Malaysia has rubber and tin. Vietnam and Thailand should remain competitive in rice production, Indonesia and Vietnam in coffee, and the Philippines in coconut products and metals. Yet, while Southeast Asian countries will rely on existing comparative advantages, China, with a strong industrial and manufacturing base, will be much more capable of enhancing its technologies through research and development to create new and improved products and thus enjoy better export terms of trade. China may be reproducing the old colonial-type division of labour with Southeast Asia, whereby low-value-added natural resources and agricultural products are shipped from ASEAN economies to China, from which those economies absorb high-value-added products. Underlining China’s rising economic strength, business settlements in renminbi are a growing trend in China-ASEAN trade, although as the United States and ASEAN maintain very close commercial and investment ties, the U.S. dollar is unlikely to be replaced as the region’s primary trading currency any time soon. Still, the CAFTA will lock ASEAN in as part of the worldwide supply chain for China’s booming economy, particularly after the completion of the 3,900-kilometre-long high-speed railway from Kunming to Singapore scheduled for 2020. Trade integration for ASEAN will then inevitably lead to political accommodation with China. In the security sphere, Vietnam and the Philippines have lately accused China of aggressively asserting its claims to the South China Sea, which straddles vital shipping lanes and contains hydrocarbon resources underneath its atolls, reefs, and cays. Tension was heightened by a Chinese plan, announced in January 2010, gradually to open up the disputed Paracel Islands to tourists. Furthermore, in March 2010 senior Chinese officials told U.S. counterparts that China considered the South China Sea a “core national interest” — over which China’s sovereignty was as non-negotiable as over Taiwan.

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POLITICAL OUTLOOK China was put on the defensive at the ARF Summit in July 2010 in Hanoi when numerous delegates brought up the territorial dispute over the Spratly Islands. American Secretary of State Hillary Clinton said that the United States “has a national interest in freedom of navigation”. Clinton’s comments were “virtually an attack on China”, China’s Foreign Ministry noted, adding that there was “no issue” with navigational freedom here. The United States waded into the dispute again in October 2010, when, at a meeting of Asian defence ministers in Singapore, Secretary of Defense Robert Gates reiterated Clinton’s offer of U.S. mediation in the South China Sea dispute to achieve a peaceful outcome based on international law. China is adamant about not wanting the involvement of other parties to help resolve disputes relating to the South China Sea. But Washington’s failure to ratify the United Nations Convention on the Law of the Sea nevertheless makes the U.S. position unconvincing. In late May 2011, Vietnam accused a Chinese patrol boat of slashing the submerged cable of a survey ship operated by its state-owned energy firm, PetroVietnam. In June a Chinese patrol boat reportedly cut cables from a Vietnamese ship conducting seismic surveys off Vietnam’s southern coast. Beijing maintains that Vietnamese vessels have been illegally surveying in Chinese waters. To hedge against a more assertive China, Vietnam and the Philippines have recently held bilateral naval military exercises with the United States in the South China Sea. The annual Cobra Gold exercises among the United States, Thailand, and Singapore included Malaysian troops for the first time in 2011, and the permanent deployment of U.S. combat ships in Singapore is being considered. Realizing that assertiveness in its claims of sovereignty over the South China Sea was undercutting its national security, which includes maintaining trust and friendly relations with its neighbours, Beijing has cleverly stepped back, at least for the time being. At the ARF Summit in Bali in July 2011, Chinese officials quickly agreed with ASEAN counterparts to a set of guidelines that will eventually lead from the existing Declaration of Conduct (DOC) to a binding Code of Conduct (COC) in dealing with South China Sea disputes. The guidelines call

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for claimants to reach consensus before starting cooperative projects in the disputed areas. Joint projects are currently limited to scientific research and rescue operations. Other than the usual rhetorical reassurance of U.S. commitment to Southeast Asia, which provided temporary relief from the fear of Chinese dominance, Washington brought nothing new to the ARF. Several ASEAN states have overlapping Spratly claims; so no unified ASEAN stance against China can be expected. China’s position on its sovereignty remains steadfast: resolve disputes with individual countries separately, in negotiations in which China has the bargaining strength, rather than with all claimants together. With the CAFTA and the South China Sea COC, China is laying the groundwork for a Pax Sinica. To forestall this, ASEAN decided, at its 16th Summit in Hanoi in July 2010, to invite the United States and Russia to become members of the East Asia Summit. Southeast Asians believe that America’s participation in the East Asia Summit will minimize China’s increasing domination of the region. This outcome, of course, depends on how preoccupied the United States is with domestic affairs, its massive debt problem, and troubles elsewhere in the world. In any case, a rising China cannot be wished away, particularly in its own neighbourhood.

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Crunch Time for Asia-Pacific Multilateralism Amitav Acharya The coming year may well go down as a turning point in Asia’s fledgling security multilateralism. Why? For at least two main reasons. First, in November 2011 an American president for the first time attended the East Asia Summit (EAS), Asia’s newest and potentially most important multilateral forum. Although the United States joined the EAS in 2010, it was represented that year by Secretary of State Hillary Clinton. Second, China’s relations with ASEAN have entered a particularly sensitive stage. Beijing’s “charm offensive” towards its neighbours has given way to assertiveness. Although this turnaround began in 2010, the coming months will tell us whether it will prove a temporary blip or whether the Chinese will pass the point of no return in their change of approach. Engaging the two major powers of the Asia-Pacific is a primary rationale for Asia-Pacific multilateralism. It also provides a critical test of that multilateralism’s success or failure. Unless multilateral fora move to address contentious regional issues — especially the territorial disputes in the South China Sea — and to prevent them from aggravating regional tensions, they risk ridicule and irrelevance. In the past two years, the positions of China and the United States towards Asian security institutions appear to have been reversed. From the mid-1990s, China saw its participation in regional bodies such as the ASEAN Regional Forum (ARF) and ASEAN Plus Three as an important way to signal its “peaceful rise” and to counter the perception of a “China threat”. The United States, on the other hand, continued to approach its engagement with the region primarily through its bilateral alliances and relationships. For example, the U.S. Department of State in July 1998 affirmed that the “bedrock of U.S. engagement” in Asia “will continue to be its bilateral alliances and network of defense relationships and access arrangements”. The United States would “seek to complement its bilateral security ties and active engagement in resolving real threats with support for enhanced regional security dialogues”. Multilateralism was at best an adjunct to U.S. policy towards Asia.

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Moreover, two months before the first East Asia Summit in Kuala Lumpur in December 2005, Deputy Assistant Secretary of State for East Asia and the Pacific Eric John told a U.S. congressional hearing, “Nobody knows what the East Asia Summit is other than leaders coming together.” John described the approaching summit as too much of a “black box” for Washington even to realize what it was missing out on. “I would hesitate to push for an invitation to an organization when we don’t know what it does.” But all this changed with the advent of the administration of Barack Obama. The United States has embraced multilateralism vigorously. As a major step in this direction, it signed ASEAN’s Treaty of Amity and Cooperation in 2009 and thus satisfied a prerequisite for membership in the East Asia Summit. Secretary of State Clinton made a historic visit to the ASEAN Secretariat in the same year — the first time that America’s chief diplomat had visited ASEAN’s headquarters. Washington has since designated a full-time resident ambassador to ASEAN, posted to Jakarta. Perhaps most important, the Obama administration also sought and won membership in the EAS. U.S. officials now see the EAS, along with the ARF, as the main vehicle for multilateral security engagement with Asia, while APEC and the Trans-Pacific Partnership will be geared to economic engagement. As Hillary Clinton declared at the ASEAN meeting in 2010, “The East Asia Summit, where you bring other countries in addition to the core ASEAN countries together to discuss political and security matters, is a very important forum for the US to be part of. Where issues of political, economic, and security consequence are being discussed in the region, the US wants to be there.” Washington now accepts ASEAN’s centrality in Asia’s security architecture. It sees multilateralism not as an adjunct to but rather as an essential element of its security strategy in Asia. Ironically, just as China came to view multilateralism as a way of countering the “Cold War mentality” of some Asia-Pacific powers, meaning the United States, the United States has similarly come to see in multilateralism a useful vehicle for assessing China’s behaviour, and especially testing its sincerity in playing the role of a constructive regional neighbour.

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POLITICAL OUTLOOK The United States now sees ASEAN-led multilateralism as a pressure point on China that can work to Washington’s advantage. By contrast, China has adopted a more hard-line attitude towards ASEAN. In the 1990s China successfully used multilateral institutions to signal its engagement with the region and to dispel concerns about any China threat. Now, just as the United States is turning to institutions to signal its own commitment to Asia and to dispel any doubts about its staying power, doubts have surfaced about China’s commitment to multilateralism. The South China Sea issue offers the clearest example of this turn of events. Although China agreed to discuss the South China Sea dispute with ASEAN on a multilateral basis in 2005, it has in reality sought to discuss the issue bilaterally with other individual claimant nations. China also insists that it can manage the dispute by directly engaging ASEAN without the involvement of outside powers. Foreign Minister Yang Jieche has insisted, “the territorial and jurisdictional disputes should be resolved peacefully by sovereign states directly concerned through friendly consultations and negotiations”.1 This statement sent not only a clear signal to the United States to keep its nose out of this dispute but also a warning to ASEAN that it cannot expect to deal with Beijing on this matter as a group, since not all ASEAN members are parties to the dispute. Moreover, China has clearly soft-pedalled the issue of a binding code of conduct in the South China Sea, which was to follow the 2002 Declaration on the Code of Conduct (DOC). The DOC urges claimants to refrain from occupying previously unoccupied islands and from increased militarization of already occupied islands. It is not legally binding. The Chinese Foreign Minister now says that China will sign a binding code of conduct only “when conditions are ripe”. Instead, China wants to focus on measures such as holding a seminar on navigation freedom in the South China Sea and creating technical committees on marine scientific research and environmental protection. These measures would neither prejudice China’s territorial claims in the slightest nor do very much to avert military incidents involving the claimant nations.

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In the meantime, the South China Sea issue has become a point of tension between the United States and China at ASEAN-led multilateral fora. This tension first became apparent in 2010, in the aftermath of a Chinese statement that the South China Sea was one of its “core interests”. This statement generated much controversy. The drama was further heightened at the annual ARF meeting in Hanoi in July 2010. Secretary of State Clinton there asserted an American “national interest in the freedom of navigation and unimpeded lawful commerce” in the South China Sea. This assertion provoked rough talk from her Chinese counterpart, who is supposed to have looked at Singapore’s then Foreign Minister George Yeo and said, “China is a big country and other countries are small countries, and that’s just a fact.” The Hanoi meeting became a dramatic symbol of the abrupt conclusion of Beijing’s charm offensive. While ASEAN did not want the South China Sea issue to be mentioned in the Declaration of the U.S.-ASEAN summit in September 2010, that declaration did recognize the importance of “maritime security, unimpeded commerce, and freedom of navigation, in accordance with relevant universally agreed principles of international law, including the United Nations Convention on the Law of the Sea and other international maritime law, and the peaceful settlement of disputes”. At the July 2011 ARF meeting in Bali, Clinton implied that China’s claim to the South China Sea, based on nine dotted lines, was “arbitrary”. She described incidents sparked by China’s actions in the South China Sea as threats to peace and stability in the region. “These incidents”, she added, “endanger the safety of life at sea, escalate tensions, undermine freedom of navigation, and pose risks to lawful unimpeded commerce and economic development.” While China is unlikely to walk away from its dialogue with ASEAN or from the EAS over this issue, its relationship with these institutions is bound to become more complicated and problematic with the entry of the United States into the EAS. The United States has no intention of taking the South China See issue off the agenda of either the ARF or the EAS. In the case of the EAS, for example, Clinton made Washington’s aims clear in 2010, when she said that the United States would be “encouraging its development into a

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POLITICAL OUTLOOK foundational security and political institution for the region, capable of resolving disputes and preventing them before they arise”. Judging by this rhetoric, the United States is unlikely to put contentious disputes on the back burner at the EAS. Herein lies a crucial challenge for ASEAN. As China became more assertive, ASEAN seemed to welcome a U.S. role in the South China Sea conflict. Yet ASEAN must ensure that the entry of the United States into the EAS at a time of Chinese assertiveness does not lead to a collapse of multilateralism amidst tension and bickering between the two major players in Asia-Pacific security. There is a clear danger of that collapse occurring. Former U.S. Defense Secretary Robert Gates issued a warning to China at the 2010 Shangri-La Dialogue not to “intimidate” oil companies operating in the area of the South China Sea. While Gates softened his position somewhat at the 2011 dialogue, Senator John McCain was less restrained: “The events now unfolding in the South China Sea will play a decisive role in shaping the development of the Asia-Pacific region in this century.” The United States should assist the ASEAN countries, he said, to “build up their maritime … capabilities”. For its part, ASEAN should continue to press China to clarify three ambiguities when it comes to the South China Sea issue. First among these is the extent of its claim: whether to the whole South China Sea or only to the islands and their surrounding areas, and whether its claim to the latter extends twelve nautical miles or includes entire exclusive economic zones of 200 nautical miles. Second is its mode of handling the issue: whether only bilaterally or through a bilateral-multilateral mix. Third and last is its position on a binding Code of Conduct: now, or later, or never? At the EAS meeting on Bali on 19 November, Chinese Premier Wen Jia Bao appeared to adopt a conciliatory tone, but offered no concessions or clarifications on these three questions. Indonesia, as the chair of ASEAN and host of the 2011 EAS, fervently hoped to avoid a summit showdown. The answer to regional tensions lies not in inviting the United States to balance China militarily, but in expanding and deepening ASEAN’s engagement with both the United States and China. Indonesian Foreign Minister Marty Natalegawa has

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envisioned what he calls a “dynamic equilibrium” among the major powers in the Asia-Pacific region — not a conventional military balance, with its rival coalitions and arms races, but a framework that “keeps ASEAN in the middle”, akin to the “conductor of an orchestra”.2 This goal is surely worthy, but the orchestra will decline into chaos should it fail to keep U.S.-China tensions in check. NOTES 1. Ministry of Foreign Affairs of the People’s Republic of China, “Remarks by Foreign Minister Yang Jiechi at the ARF Foreign Ministers “Meeting”, 24 July 2011 (accessed 11 November 2011). 2. Personal interview with the author, Jakarta, 5 July 2011.

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The United States and Southeast Asia: Electoral Distractions Ahead? Alice D. Ba American activities in Southeast Asia in the year ahead will for the most part reflect the same priorities that dictated the activities of the past year, namely ensuring U.S. access to and inclusion in East and Southeast Asia — access to regional markets and integration, inclusion in institutional arrangements, and access in terms of U.S. freedom of navigation and mobility in the East and Southeast Asian regions. The Obama approach to these interests has been notably comprehensive, involving concerted efforts, especially on the part of the Department of State, to expand and institutionalize U.S. strategic engagement of Southeast Asia in ways that go beyond traditional security exercises and partnerships. The question is whether this approach will continue beyond the 2012 U.S. presidential election cycle, especially given the many other domestic and global interests pressing for U.S. attention. The larger and longer-term challenge for American policy on Southeast Asia will be how to demonstrate U.S. staying power not just in areas of traditional security but also in the spheres of trade, development, and regional multilateralism. Washington’s strategic engagement of Southeast Asia will face two significant challenges in 2012: election-year politics and the country’s ongoing effort to manage economic uncertainty. Under normal political conditions, situations of economic crisis would be expected to challenge U.S. relations with Southeast Asia, as with East Asia more generally, on account of the United States’ persistent trade deficits with most Southeast Asian economies. But the fact that 2012 also brings a U.S. presidential election — and one marked by particular polarization at that — raises the political stakes considerably. That latter factor means that, at a minimum, larger economic and strategic objectives risk being overshadowed by partisan and special-interest concerns. Moreover, regardless of who wins the presidential election in November 2012, it is already expected that there will be at least one especially critical personnel change in Washington. Hillary Clinton has

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made seven trips to Asia as Secretary of State and played a particular role in leading President Barack Obama’s intensified engagement of Southeast Asia as a “fulcrum” of Washington’s “turn to the Asia Pacific”. She, and the State Department more generally, has also been crucial in putting Southeast Asia back on the U.S. map, not just as a tangle of individual states and bilateral relationships, but as a regional and collective piece of Asia’s evolving geopolitical puzzle. Her expected departure is already generating concern about what will happen “after the Hillary era”, especially as regards the direction, efficacy, and relative priority of U.S.–Southeast Asia relations and Washington’s policy towards the region. Southeast Asia is and will remain an important interest of the United States, for a number of reasons. For one, the region has gained additional geopolitical importance because of the growing influence of China in Southeast Asia. For another, as of 2010 the ten ASEAN economies collectively constituted the United States’ fifth largest trade partner and its fourth largest export market. In this latter regard, ASEAN trailed only Canada, Mexico, and the People’s Republic of China, though it should be noted that Singapore and Malaysia accounted for 61 per cent of the “ASEAN” market for U.S. goods. ASEAN has also been a top destination for Asia-bound U.S. foreign direct investment, trailing Japan but outpacing China by about a third. These important economic and geostrategic interests will keep the United States tied to Southeast Asia. Nevertheless, if history is any guide, the United States’ economic anxieties, in combination with election year politicking, are likely to give prominence to shorter-term and narrower economic and political calculations. Certainly in the year immediately ahead, the financial resources and time that the United States will bring to its relations with Southeast Asia are likely to be stretched thinner than usual.

Southeast Asia as “Fulcrum” and “Pivot” The Obama administration will face an ongoing challenge as it seeks to integrate different security, economic, political, and institutional pieces into a coherent approach, one that speaks to the interdependence of

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POLITICAL OUTLOOK these issues for most Southeast Asian states. The year 2012 will see the Obama administration continuing to push for both an expansion and a re-conceptualization of U.S. policy towards Southeast Asia. For 2012, at least, that conceptualization will continue to include explicit engagement with regional frameworks, especially ASEAN. Of particular note in the recent past has been regular, high-level participation from Secretary Clinton, former Secretary of Defense Robert Gates, and President Obama himself in the ASEAN Regional Forum (ARF), the ASEAN Defence Ministers Meeting Plus, and the East Asia Summit (EAS). This is not to mention the U.S.-ASEAN Leaders Summit, which met for the third time in November 2011. The United States also recently appointed a special envoy to Myanmar. The appointment, which went to Derek Mitchell, embodies a notable effort on Washington’s part to make good on its stated interest in approaching Myanmar via what Assistant Secretary of State Kurt Campbell has termed a “sustained process of interaction”, as opposed to economic sanctions alone. The high-level activity and attention to regional frameworks, especially on the part of the Departments of State and Defense, speak to the Obama administration’s conceptualization of Southeast Asia as an important site of influence and leverage in the larger East Asian setting and even in South Asia. While bilateralism retains its historical primacy in U.S. policy towards Southeast Asia, the Obama administration — much more than past administrations — has tried to make engagement with ASEAN and its related frameworks more than a mere supplement to that policy and instead an integral part of its strategic engagement of the region. The success of the United States in adapting to the transfer of the ASEAN chairmanship will merit watching in the upcoming year, however. Expanded U.S. regional engagement in the past two years has taken place during the chairmanships of Indonesia and Vietnam, two states that the United States — during both the Obama administration and the Bush presidency before it — has cultivated and prioritized as strategic partners. Each of the two states has also shared important interests and strategic concerns with the United States. Vietnam shared with the United States an interest in multilateralizing the South China

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Sea dispute. Indonesia, which assumed the ASEAN chairmanship in 2011, shared with the United States an interest in pressing ASEAN on its historical norms and practices, and in agreeing to an ASEAN agenda that included North Korea, Myanmar, and the South China Sea — all areas of U.S. interest that have historically been off the official ASEAN agenda. Such confluences of interest have been opportune in light of the Obama administration’s clear interest in reaffirming the United States’ commitment, presence, and importance in the region. The question is whether the chairmanships of Cambodia, due to begin in 2012, and Brunei, in 2013, will afford the United States the same opportunities to pursue its goals. A particular challenge will come with Myanmar’s assumption of the ASEAN chair in 2014, regardless of which administration is in office. One can expect continued pressure on ASEAN on the question of criticism of Myanmar, especially as that country is a rare point of bipartisan consensus and popular in the United States. The United States had earlier expressed its opposition to Myanmar’s chairmanship in the absence of significant political reforms. All this is a reminder that the Obama administration’s determination to engage with Southeast Asia has notably and serendipitously coincided with ASEAN chairmanships amenable to U.S. interests and agendas. In the case of ASEAN/EAS, Thailand was chair in 2009, Vietnam in 2010, and Indonesia in 2011. In that of APEC, Singapore chaired in 2009, Japan in 2010, and the United States in 2011. In addition to the rotation of the ASEAN chairmanship noted above, Russia will be at the helm of APEC in 2012. Questions about how the next several ASEAN chairs will define agendas for ASEAN and the ARF also speak to persistent U.S. concerns about ASEAN processes. These concerns have led many observers to speculate about greater U.S. efforts to make the East Asia Summit — as opposed to the ARF — the region’s primary political-security forum. The Obama administration’s focus on the Trans-Pacific Partnership (TPP), discussed below, has also been linked by some observers to specific disappointments with APEC’s 2009 outcomes. In 2012 economic uncertainties and recurrent budget battles may present additional challenges to U.S. policy on Southeast Asia, and

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POLITICAL OUTLOOK in so doing put long-term goals at risk. For example, funding for exchange programmes, education, English language training, and other people-to-people initiatives is often most vulnerable to cuts. Threatened programmes include the Fulbright Program, which already experienced a drop in funding of $16.4 million in FY2011. Such cuts will improve the United States’ overall budgetary position relatively little. But they could have quite a large impact on the future of U.S.–Southeast Asia relations, especially as regards Southeast Asia’s next generation of leaders — a generation whose primary knowledge of the United States is in the post-9/11 context and one that has much less direct experience with the United States than the Cold War generation.

The Politics of Trade For much of 2010 and 2011, the place of trade issues in U.S.–Southeast Asian relations was overshadowed by geopolitical jockeying in the South China Sea. Yet a proactive U.S. trade policy will be critical to the restoration of American credibility in and relevance to the region. While its post–Cold War approach to Southeast Asia has been to pursue its trade agenda as mostly distinct from issues of defence and security, perceptions of the United States as an economy and as an economic partner affect overall Southeast Asian assessments of U.S. power and influence. Consequently, the economic health of the United States and its willingness to support and expand economic commitments in Southeast Asia will inform regional actors’ conception of their options and opportunities vis-à-vis the United States, not just in the areas of economics and trade but also in that of political-security relations. The United States is generally seen as the laggard in its economic and trade engagement in Southeast Asia; ongoing economic and political challenges do not help alter that perception. The domestic and international demands and politics of economic recovery are, however, likely to challenge specific U.S.–Southeast Asia trade relationships, as well as other economic and developmental commitments. While China’s bilateral trade surplus with the United

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States will remain the main focus and concern among U.S. policymakers and politicians, the United States also runs trade deficits with eightyseven other economies, including all but three of the ten ASEAN economies. Those three are Singapore, Myanmar, and Brunei. Especially in a presidential election year, discussion of trade deficits, concerns over American jobs, and protectionist pressures will become more prominent. The political discourse will also tend towards scapegoating, whether of China, other economies, or domestic political opponents. None of this will reassure Southeast Asians and others who would like to see the United States get more serious about putting its own economic and political house in order. The October 2011 passage of the Korea-U.S. Free Trade Agreement (KORUS) may be instructive in this regard. On the one hand, passage of KORUS, especially with bipartisan support and at a time of significant economic uncertainty in the United States, sends an encouraging signal regarding support for further expansion of U.S.-Asia trade relations. Hailed as the most important trade agreement since the North American Free Trade Agreement, KORUS could mobilize support for U.S. trade initiatives like the Trans-Pacific Partnership, as well as the Free Trade Area of the Asia Pacific (FTAAP). Currently, Brunei, Malaysia, Vietnam, and Singapore, along with eight other countries outside Southeast Asia, are TPP members. These initiatives serve U.S. interests on two fronts. First, they further Washington’s longstanding interest in expanding market share for U.S. exports, a matter of particular importance in the context of a depressed domestic job market. Southeast Asia has shown important growth as a market for U.S. exports during the last two years. U.S. exports to the region — and Asia in general — rose by more than 30 per cent in 2010, nearly twice the rate of growth of U.S. exports elsewhere. Continued progress towards the creation of an ASEAN Economic Community (slated for 2015) will also make the ASEAN market attractive. Second, the TPP and FTAAP respond to long-running U.S. concern over developments that would potentially exclude or detract from U.S. economic interests; read, East Asian regionalism.

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POLITICAL OUTLOOK On the other hand, KORUS — negotiations on which were concluded in December 2010 — took nearly a year to win congressional approval. As with most trade agreements, KORUS promises to bring both job gains and job losses in the United States, with the latter inevitably generating more attention. The concerns and opposition of labour were reflected in Democrats’ insistence that reauthorization of the Trade Adjustment Assistance Program (TAA), offering retraining and other assistance to “trade-affected workers”, be passed before KORUS. Republicans determined not to have KORUS prioritized over pending free trade agreements with Colombia and Panama also had to be accommodated. The larger gains of KORUS consequently took a back seat to partisan brinksmanship, which delayed passage of the agreement. Of course, domestic politics on the western side of the Pacific can also pose challenges to trade agreements, especially as agreements with the United States tend to involve onerous obligations that do not always align with other countries’ established development strategies, political-economic arrangements, and priorities. It is notable that Singapore remains the only Southeast Asian state to have concluded a free trade agreement with the United States. The year 2011 saw significant advances in TPP negotiations, in part because the United States held the APEC chair and wanted to present a finished deal at the APEC summit in Honolulu in November. Hoping to build on the momentum created by KORUS, Obama administration officials have also pressed for trade promotion authority that would allow trade agreements to be voted on with a simple up or down vote. However, domestic politics on both sides of the Pacific may still prevent the administration from being able to bring the TPP to a vote in late 2012 as hoped. Meanwhile, the progress made in negotiations may also discourage participation from economies that did not take part in the original talks, like Indonesia.

A Continued Emphasis on Strategic Partnerships The United States’ interest in strengthening its presence and strategic partnerships in East and Southeast Asia will remain fundamentally

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unchanged — despite anticipated budgetary cuts. Among the areas of U.S.–Southeast Asian engagement, security will be least affected by economic and political developments in the year ahead, though election year politicking is likely to make China more of a focus than usual. As it did in 2010 and 2011, the United States can be expected to maintain a keen, ongoing interest in the South China Sea dispute. This interest has provided the opportunity for the United States to initiate a more active defence of its regional position and maritime rights. It seems likely that concerns about influence and access will continue to guide strategic engagement with Southeast Asian states individually and collectively. Towards these ends, the United States is likely to continue its support for multilateralizing the South China Sea dispute and for Southeast Asian states’ building coastal monitoring and patrol capabilities. Also likely are continued joint military manoeuvres with key partners; in 2011 the United States conducted joint exercises of various kinds (for example, naval, crisis response, patrol, training) with all but two of the ASEAN states: Laos and Myanmar. At the same time, U.S. interest in the South China Sea dispute seems unlikely to take on the kind of confrontational dynamics that it did in 2010 and early 2011. The United States and China seem to have recognized, at least for the time being, the danger of escalation of the dispute, both directly in its own right and also in its potential to affect other aspects of their relationship. Each of these actors will doubtless push its maritime position. But there also appears to be an awareness among those working on Southeast Asia policy in the United States that an overly confrontational approach could backfire. It could, that is, undercut engagement with Southeast Asian states that worry about the negative effects of such an approach on their economic and security relations with China.

Conclusion On the Southeast Asian side of the U.S.–Southeast Asia relationship, states will remain actively supportive of continued U.S. strategic, economic, and institutional commitments, as long as they do not deem American postures overly confrontational. But economic and political

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POLITICAL OUTLOOK challenges will underscore the perennial question in U.S.–Southeast Asia relations, one centred on the sustainability and durability of U.S. commitments and attention. The Obama administration has made notable efforts to engage Southeast Asian states in response to ASEAN concerns that the United States be a regular, meaningful, and dependable participant in regional processes and that it engage the region in ways that go beyond bilateral military alliances and partnerships. The comprehensive approach adopted by the Obama administration can be expected to continue through the year ahead, albeit with instabilities and distractions of an election year. The larger uncertainties ahead will come in 2013, after the November 2012 American elections.

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Civil Society Engagement in ASEAN Terence Chong Between early 2010 and mid-2011, the Friedrich-Ebert-Stiftung (FES) gathered researchers and civil society leaders to write on the state of civil society in the ten ASEAN member countries. The FES report — An ASEAN Community for All: Exploring the Scope of Civil Society Engagement — was launched on 4 November 2011 in Jakarta. It sought to identify common trends and challenges and to provide a regional overview and better understanding of civil society organizations (CSOs). This essay highlights some of the report’s most significant findings.

Importance of the State One central finding of the FES project related to the importance of the state. The state continues to be the most crucial player in setting the conditions for civil society through the legal and institutional capacities at its disposal. However, while the state is a primary player, the everyday reality on the ground may not necessarily reflect this fact. The researchers found that that CSOs in some countries have emerged as the most important facilitators of public services. CSOs have in these cases either taken over or strongly supplemented the state’s traditional role in providing such public services as education and health care. In other cases, the state may indirectly determine the agenda of CSOs through government policies that may further entrench economic, political, ethnic, religious, or cultural divisions in society. Whether in the areas of the economy, housing, or politics, minority groups may be marginalized, resulting in the emergence of CSOs to offer representation.

Diverse Civil Society–State Relations in ASEAN There is no regional norm with regard to civil society–state relations. Researchers found that CSOs have had to negotiate specific political and historical terrain in their respective countries and to engage in different working relationships with the state.

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POLITICAL OUTLOOK One variant of CSO-state relations may be characterized as “tacit understanding”, in which there is a convergence of interests and values between CSOs and an authoritarian state, especially in the area of public service delivery. The state may not have the capacity, expertise or (political) will effectively to deliver such basic public services as health and education. It may thus rely on CSOs and/or international non-government organizations (INGOs) to fund and deliver these services. CSOs and INGOs, on their part, do not overtly champion democracy or mobilize local peoples, but rather maintain working relations with the state. Another CSO-state working relationship found may be characterized as more “advocacy-oriented and potentially conflictive” in nature. In representing marginal groups, CSOs petition for and champion the interests of these groups, usually in opposition to state or business interests. Such CSOs, particularly local non-government organizations (NGOs), may be more advocacy-oriented and seek to highlight the plight of different marginal groups to the state. Much of the advocacy work centres on issues such as human rights, indigenous rights, women’s rights, sustainable development and environmental concerns. Such cases are marked by high levels of institutional democracy and participation; assertive society-state negotiation may unfold in the mainstream media or on the ground. The report also notes that the civil society–state relationship may be perceived as a “mediated” one. CSOs enjoy some autonomy but operate largely under political and legal conditions set by the state. In such instances the regulations governing CSOs are clear and abided by, while law and order concerns are generally given high priority. The working relationship is mediated not only by concrete regulations but also by the political climate. It is important to note that these characterizations of CSO-state relations are neither mutually exclusive nor meant to typify the conditions of civil society in particular countries. They are broad and common modes of CSO-state relations found across the country reports. One, two, or all three of these modes play out on the same national civil society landscape.

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Regulatory Frameworks: An Ideal or Invisible Civil Society Most if not all ASEAN member countries have constitutions that guarantee the right of citizens to establish associations and social organizations. These enshrined rights are a clear acknowledgement of the basic human right to form and be part of social groups. Nevertheless, these rights are often interpreted and limited according to the national interests of countries, as those interests are understood by governments. In some countries the term “civil society” is not yet entrenched in popular discourse and thus not directly addressed in regulatory frameworks. For example, in the case of Vietnam, the report observes, “The term ‘civil society’ is not found in the documents of the Communist Party of Vietnam. Like any concept imported from the West, it will take time for government officials to accept the notion of civil society.” Meanwhile, in other countries, civil society has to be reinterpreted into local concepts before it gains legal recognition. The report notes that “CSOs in Indonesia can choose to become perkumpulan (associations) or yayasan (foundations) to attain legal status.” By either ignoring or reinterpreting the concept of civil society, the state has not only learned to accommodate civil society interests, but also prescribed an ideal civil society that conforms to government interests. Conformity with government interests can also be seen in postcolonial governments’ continuation of colonial practices. One common characteristic found in the report is the colonial inheritance of regulations concerning law and order issues. For example, in countries like Indonesia, Malaysia, and Singapore, the registration of CSOs — or indeed other entities like leisure or hobby groups — as well as the submission of detailed information on CSOs’ mission, constitution, leadership, and membership, is a colonial practice that postcolonial states have never terminated. Another common trend among less-developed countries is that many local CSOs do not register with the state. This renders them officially invisible, even though their work is highly evident on the ground. In the Philippines, for example, “CSOs are not required by law to be registered”. In Myanmar, “Most CSOs are not registered with

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POLITICAL OUTLOOK the state and no comprehensive list could be found for the research.” The reasons for not registering vary. Some CSOs are not willing to be circumscribed by the conditions set by the state. Some do not have the internal resources to provide the necessary information demanded in the registration process. And others are simply unwilling to be transparent in their activities.

CSO Numbers: An Educated Guess The number of CSOs in many ASEAN countries is fluid. There are several reasons for this. As we have seen, many NGOs and other CSOs are not officially registered; this situation invites estimations and contrasting numbers. Official numbers may also be outdated. Furthermore, many NGOs exist only in name or have fallen into inactivity, while others cease to exist after a short duration or merge with still others. In some cases there is no distinction among INGOs, national NGOs (NANGOs), and professional associations in the registration process; this situation conflates the numbers greatly. In short, collating the number of CSOs in Southeast Asia is little more than an educated guess. Nevertheless, some figures from the FES report serve to offer a broad picture. Brunei has about 727 registered societies, Cambodia 1,495 registered NANGOs, Indonesia about 9,000 registered CSOs, Laos around 250 INGOs and NANGOs, and Malaysia approximately 58,738 registered societies. Myanmar estimates the number of NANGOs at between 300 and 2,000. The Philippines has 115,331 registered CSOs, Singapore some 7,111 registered societies, Thailand an estimated 13,179 CSOs, and Vietnam around 4,157 professional associations.

CSO Interests and Themes in ASEAN The different stages of economic development that characterize the region mean that it is unsurprising to find a wide variety of CSO themes and interests in ASEAN. While the experiences of one country cannot be assumed to mirror those of its neighbours, several trends merit highlighting.

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CSOs, especially those concerned with agricultural, climatechange, and environmental issues and with sustainable development, are ubiquitous across the region. A typical scenario would be that of Myanmar, where “A number of CSOs have been working on environmental issues for about a decade, promoting sustainable development, environmental conservation and adaptation to climate change notably through community forestry, the creation of natural reserves and the plantation of mangroves in coastal areas.” In such cases CSOs may be seen as custodially oriented. They aim to safeguard the livelihoods of farmers, miners, and fishermen or natural resources like forests and mineral deposits. Human rights CSOs are also active across the region, regardless of level of national economic development and political regime. Such CSOs may engage in the championing of political and gender rights or concern themselves with issues of sexuality or personal freedom. In the Philippines, for example, “The experience of human rights abuses under the Marcos dictatorship had resulted in many human rights organisations. These organisations have continued even after the fall of the dictatorship because human rights abuses persist.” Meanwhile, “In the 1990s, coinciding with global discourses on democratisation, there emerged in Indonesia NGO movements for human rights and democracy advocacy.” Even in economically advanced Singapore, the country report highlights the work of “CSOs such as Maruah and Think Centre [which] focus their efforts on the ASEAN Track III civil society pathway on the issue of human rights, and groups such as AWARE and UNIFEM [which] tend to focus on more gender-specific issues.” Health and safety concerns regarding sex workers have also become important CSO themes in ASEAN. Increased travel networks and globalization have compounded these concerns. As the region’s economies become more intertwined, the outflow of migrant workers and sex workers from less-developed countries into more-developed ones has made it necessary for CSOs to tackle problems such as abuse, contractual violations, and health and safety issues. In Cambodia, the FES report notes, “There has been a major reduction of the HIV/AIDS

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POLITICAL OUTLOOK prevalence rate, better education of sex workers and greater success in communication with and creating space for people living with HIV/AIDS.” Finally, INGOs play a crucial role in many countries. In such cases the state is either unwilling or unable to deliver public services and must thus rely on international agencies or donors to supply expertise and funds. Many local CSOs also may not have the infrastructure or staff to deliver such services. In Cambodia, for example, INGOs make up nearly 30 per cent of CSOs. This figure becomes more significant when one realizes that, of this 30 per cent, 93 per cent are active. At the same time, only 45 per cent of NANGOs in Cambodia are active. Nevertheless, the relationship between INGOs and the state or other local interests may be fraught with political sensitivity, regardless of the good work of the former. In the case of Vietnam, for example, “INGOs are not recognised as part of civil society in Vietnam. However, their activities over several decades demonstrate their important role in promoting the development of civil society, especially through their support of local NGOs and CBOs [community-based organizations].”

CSO Funding: State, International, and Membership The FES report notes that funding is a perennial challenge for many CSOs. They have to rely on a variety of different funding sources. It is common for CSOs in the region to receive funds from international agencies. “All NGOs in Cambodia receive funding from foreign sources. The focus on external donors and low interest from local sources of funding reflects the way the civil society sector has emerged in Cambodia.” However, undue reliance on international agencies can lead to adverse consequences. In Laos, for example, “Fund-raising skills are virtually non-existent because of overreliance on foreign donors.” Some countries are seeing a gradual reduction in international funding for national CSOs. Countries such as the Philippines and Thailand have witnessed a steady decrease since the mid-1990s, reflecting a shift in the geopolitical priorities of donor countries. CSOs in countries like these two are also believed to be able to raise local funding support. International funding is not always consistent and

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is often dependent on the global strategic objectives of international funding agencies as well as their governments. Membership fees are another common source of funding. The FES report’s chapter on the Philippines shows that a number of different types of CSOs secure funds this way: “labour unions, homeowners’ associations and professional associations source their funds mostly from membership fees”.

CSO Human Resources: Staff and Skills, Competition for the Middle Class, and the Regeneration Process In addition to inadequate funding, human resources continue to be a serious challenge for CSOs in Southeast Asia. Without the requisite number of staff or the efficient allocation of expertise, CSOs cannot function. They may even become a hindrance to the community. In terms of human resources, CSOs in the region face three general challenges. The first challenge is the lack of staff and skills to train, develop, and nurture qualified members to run CSO programmes in a clear and efficient manner. Secondly, although the middle class is gradually expanding in Southeast Asia, engaging its members remains a big challenge for CSOs. CSOs compete with the private sector, which offers better career opportunities and higher wages. An added obstacle to the recruitment of the middle class is the fear of negative state response. Nevertheless, there are exceptions. For example, in Laos the return of overseas citizens has proved a major shot in the arm for local CSOs. The third challenge is regeneration. Even if CSOs manage to employ full-time staff or to hire personnel with the expertise required to conceive and implement their programmes, many CSOs struggle to retain their personnel and to nurture future CSO leaders.

CSO Transparency: A Culture of Professionalism and the Need for Downward Accountability Many CSOs often demand transparency from governments and businesses. But how transparent are CSOs themselves? The FES report

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POLITICAL OUTLOOK notes that more can and should be done to improve transparency and accountability among CSOs. In many cases CSOs demonstrate no transparency at all because, as in the case of Vietnam, “Only a few local NGOs have financially transparent accounting systems, while many others are reluctant to make their financial reports public for fear of revealing their inefficiencies.” One major obstacle to transparency is the absence of a culture of professionalism in CSOs. Very often decisions are made through personal contact and informal means, with little documentation. Contractual documentation is rare, as transactions may occur on the basis of personal understandings. Another trend, linked to the first, is that many local CSOs are driven by strong personalities, a reality that often results in a lack of institutionalized transparency or oversight in decision-making processes. In many cases prominent individuals have become the face of CSOs and are synonymous with them. They thus tie the fortunes of these CSOs to their own career highs and lows. This pattern may be a result of “the practice among many NGOs to recruit board members who are friends, relatives or acquaintances of the founder. In addition, many board members are not oriented on their roles, responsibilities and functions as board members.” In addition, many CSOs are not registered and thus not subject to accountability procedures. Even for those that are registered, information submitted to registration authorities is often general and not detailed, while the sheer number of CSOs makes it unlikely that state authorities will confirm the accuracy of that information. Lastly, CSOs that receive funds from INGOs or international donor agencies are more likely to be subjected to processes of transparency and accountability. Many international donor agencies demand transparency and accountability — at least to donors or stakeholders — from national NGOs and other CSOs as a basic prerequisite for funding. With regard to the accountability of INGOs themselves, they generally display upward accountability to their stakeholders and headquarters overseas. But it has been observed that they may not always show downward accountability.

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Future Challenges An ASEAN Community for All: Exploring the Scope of Civil Society Engagement provides a broad overview of the state of civil society in ASEAN member states. Though diverse in experience, civil society in Southeast Asia has played a variety of roles, from undertaking advocacy work, delivering public services, and shouldering custodial responsibility to monitoring state institutions. CSOs have also, in general, been crucial to the representation of marginal communities, the protection of the environment, and the raising of public awareness over issues such as gender, education, and health. Looking into the future, several challenges may affect the way in which CSOs perform their various roles. First, as countries experience a broadening of the middle class, the impending challenge will be for CSOs to attract more highly educated and skilled individuals into civil society work. The hope will be that some of these recruits emerge as the leaders and as the vital personnel of CSOs. This goal is important. For CSOs must engage more and more frequently with the state and with cosmopolitan stakeholders who may be outside the communities in which they work. But CSOs face stiff competition from the private sector. The better-educated middle class will more naturally be attracted to global capital and to business opportunities offering better remuneration. The second challenge is the ongoing competition for funds. This challenge is more serious for CSOs that have long been dependent on international funding. Changing geopolitical interests have meant that international donor agencies have re-prioritized their allocation of funds. Furthermore, countries like the Philippines and Thailand, long dependent on international funds, have found that their changing status from “recipient” countries to “emerging donor” countries has ramifications for the amount and frequency of international funding that CSOs receive. Finally, while many CSOs in the region subject themselves to the demands of good governance, many can also afford to do better in the areas of transparency and accountability. Whether they lack the

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POLITICAL OUTLOOK personnel to organize and present information and accounts, or their non-registration with the state relieves them of the responsibility to do so, or they do not want to reveal administrative and organizational inefficiencies, many CSOs still have a long way to go before they reach international norms of transparency and accountability. CSOs without a strong culture of professionalism or clear decision-making processes will find it increasingly difficult to secure funding, whether national or international, or even support from other CSOs.

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THE ASEAN-10

Brunei Darussalam Pushpa Thambipillai Brunei Darussalam glides peacefully from one year to another, largely unperturbed by political developments that bring changes in governments and leadership elsewhere in the region. That reality only reaffirms its manifestation as the abode of peace — Negara Brunei Darussalam — built on a foundation of Malay Muslim Monarchy. Enviably, Brunei enjoys several inbuilt features that act as necessary stabilizers for the state, the government, and the society. It does not face major setbacks, and neither will it encounter destabilizing disruptions to its socio-economic and political progress in the next few years. Observers often in fact feel that Brunei is so well fixed in its unique “mould” that most events and outcomes are predictable — even in dire situations, as when it proves susceptible to external economic conditions. In short, its established political system and revenue from hydrocarbon exports have provided both the rulers and the ruled with a stable domestic environment. All the same, Brunei cannot claim total immunity from the impact of a rapidly changing global environment. Some observers have, for example, wondered about the impact of the “Arab Spring” on Brunei. They have pointed to its status as a sole sovereign sultanate in Southeast Asia. While it was headline news in the local media, however, the Arab Spring had little direct impact on the polity. Bruneians expressed moral support for those seeking change in the affected Arab states. But the extensive coverage of the spread of “democracy” in North Africa and West Asia, both in Brunei’s local media and in the international broadcasts streamed into most homes, was indicative. It demonstrated a lack of apprehension that such exposure would sway the sultanate’s

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POLITICAL OUTLOOK

BRUNEI DARUSSALAM Land Area:

5,770 sq. km.

Population (2010 World Bank data):

407,000

Capital:

Bandar Seri Begawan

Type of Government:

Monarchy

Head of State and Government:

Sultan Haji Hassanal Bolkiah Muizzaddin Waddaulah

Currency Used:

Brunei dollar

US$ Exchange Rate (14 November 2011):

US$1 = B$1.28

populace towards making demands for similar political changes in Brunei’s absolute monarchical system. In the context of local political culture, “absolute” in any case refers only to the final — and not necessarily “sole” — power of decision-making in the state, in the absence of the institutional primacy of the legislature. Brunei’s reintroduction of its legislative assembly since 2004 continues to offer the opportunity for moderate levels of political participation and a certain degree of transparency in the working of the government, as constituted by the monarch and his council of cabinet ministers. This trend will continue to obtain in the next several years, with only slight modifications introduced to allow increasing opportunities to the unicameral legislative body. In 2011, for instance, the introduction of election to the legislature of representatives from the village and sub-district levels expanded and deepened political participation. Further moves towards a limited mode of popular elections may emerge in future, but only in incremental stages; selective rather than universal suffrage will be the norm. What is apparent, as indicated by measures introduced in the quarter-century since independence in 1984, is that changes will neither be sudden nor substantive in ways that could upset the established pattern of

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THE ASEAN-10 the Malay Muslim Monarchy. That monarchy is obsessively proud of its political and religious traditions in a region that appears more pluralistic in comparison. The generally relaxed attitude of Brunei’s government notwithstanding, political questions and public policies directly related to the consolidation of monarchical rule and the entrenched role of the royal family will not be subject to compromise. They will remain beyond the purview of the population at large. The pivotal role of religion and language will also not be an issue for debate. Areas in which input from below can and will be allowed include certain public policies and administrative procedures. Some instruments have already allowed public opinion and feedback to contribute to certain changes or to improved decision-making. Domains such as finance and foreign policy, for example, will remain beyond the bounds of domestic influence. Foreign economic relations — including the role of the private sector in foreign trade, investment, and regional integration — have, however, been marked by a policy process opened wider to concerned participants from outside of the governing establishment. ASEAN has perhaps “encroached” into the policy domain of senior bureaucrats by introducing various structures and modalities for citizen participation in a range of issue areas. Brunei, as an active ASEAN member, has sent participants to the numerous meetings that support the ASEAN regional integration process. While effective participation and input are only limited to a core consisting of, for example, Brunei’s educated elite, in each of these channels of participation the numbers of involved citizens keep increasing. The opportunity for and the experience of collective discussion and policy input to the higher authority grow broader. With more openness and better educational opportunities, younger Bruneians also have more avenues for involvement on certain national issues. These include especially issues relating to emerging social and environmental concerns and future job opportunities. While Bruneian youth remain economically a rather pampered lot, enjoying educational opportunities from the primary to the tertiary levels, the promise of

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POLITICAL OUTLOOK a government job is not so promising anymore. The government is actively promoting the merits of self-employment or employment in the private sector. It has introduced certain schemes to promote such choices. Even if this policy means that Brunei citizens go abroad to seek employment, such a decision would be encouraged. This idea would have been virtually unheard of even a few years ago, when job opportunities seemed to abound. At the same time, the government does not condone publicly financed scholarship students’ preferring to stay abroad, as human resource development still lags far behind the developmental needs of the country. Questions of supply have made the future wealth of the state, derived from hydrocarbon resources, uncertain. But the possibility of continued supplies of hydrocarbons — the soul of the political and economic life of Brunei — is now more encouraging, thanks to on- and off-shore exploration. Formal agreements between Brunei and Malaysia on joint development of certain off-shore wells, whether they lie within Brunei’s jurisdiction or in contested areas, have ensured political and economic stability both within Brunei and in relations with neighbouring Malaysia. In fact relations with that neighbour have never been better. Sultan Hassanal Bolkiah and Prime Minister Najib Razak enjoy warm personal relations. As Malaysia shares Brunei’s only land border and as its territory bifurcates the country, Brunei-Malaysia relations are an important factor in national affairs. While foreign policy remains the domain of elites, the numerous international organizations in which Brunei participates afford wide opportunities for Bruneians to be active, both inside and outside of the country. Through the influence of information technology, awareness of social and environmental issues has also grown. The fields of environmental protection and humanitarian services are cases in point. Social media, when not decried for their negative impact, have spurred local action in response to the Australian-initiated “Earth Hour”, which has become an annual affair in Brunei. Such events have also spawned pro-green groups like the Beach Bunch, a group of dedicated youth who publicise the merits of a clean and green environment. Similarly, concerned individuals volunteer to help the poor and less

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THE ASEAN-10 fortunate and thus to alert the wider public, and the government, to the existence of common concerns. Although it is a slow process, the trend towards a broader participatory process in some issue areas is evident. The role of social forces is beginning to be seen, even if it is only limited to areas deemed “safe”. In addition to the emergence of new groups, some older non-governmental organizations (NGOs) are being revived with new enthusiasm through increased international contact. These include the Red Crescent Society and uniformed groups like the Boy Scout movement. However, in a deeply Islamic society, some organizations are still shunned by the majority of the population even though their continued existence has been publicised in the local media. These organizations include the Rotary and Lions Clubs, which attract only non-Malay members but continue their philanthropic and humanitarian assistance within the community at large. In line with the government’s concern for national security, the activities of all NGOs and similar organizations are strictly scrutinized; annual registration is required. Politically stable under the monarchical system, Brunei appears to be in no hurry to discuss the issue of succession. The institutions and procedures for such a time as there might be a change in leadership are already in place. There is no indication that the well-liked monarch will reduce his role as he celebrates his sixty-sixth birthday in 2012. His son and heir, Prince Al-Muhtadee Billah, is taking on increasingly visible roles both in domestic and foreign affairs. He is accorded prominence corresponding to his future position in the sultanate. As smooth political succession and domestic security appear assured, Brunei focuses on the creation of a more socially and economically progressive society, one less dependent on the non-renewable natural resources that provide more than 60 per cent of GDP. It seeks to see its people more reliant on business activities that would wean them away from dependence on public-sector employment. It faces the task of attracting foreign investment that will create jobs for its people. Yet Brunei fares badly on the global competiveness index, scoring high only on political stability and thus lacking the attractiveness of its neighbours. Nevertheless, certain attractive criteria have led to mounting

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POLITICAL OUTLOOK foreign interest in the petrochemical and other downstream industries. These industries could contribute to a more diversified economic base, which in turn would assure continued high per capita income and protect the high standard of living that the country now enjoys. Related to the increased emphasis on national development, there is a marked reassessment of the role of the government bureaucracy in providing efficient and timely services to realise the goals of the Wawasan 2035 (Vision 2035). That vision will be the focal point for all national policies for the next several years. High on the agenda are appropriate human resource development and the creation of a more viable knowledge-based economy. As Brunei moves forward, it is conscious of its singular state of economic dependence. Energy security is a national concern; it accounts for the dual vision of energy efficiency and conservation. The public sector, the oil industry, and the population are expected to do their share in safeguarding the country’s energy future. The recently released Energy White Paper offers an indication of this priority. Related is the concern with food security; Brunei strives to involve more of its population, with the help of foreign assistance, in increasing its rice production from a mere three per cent of consumption to contributions of at least ten to twenty per cent in the next three to five years. Heavily dependent on food imports, the government is vigorously supporting its agricultural and fisheries sectors with the twin purposes of increasing supplies and diversifying the economy. It hopes that a more diverse economy can simultaneously make up some of the slack in employment opportunities and increase the commitment of the business sector to national goals. It is inevitable that Brunei’s foreign policies reflect its domestic concerns: ensuring its national and trans-border security and meeting its economic, sociocultural, and environmental needs. The government and in particular head of state and of government Sultan Hassanal Bolkiah have built up a good network of relations with Brunei’s core neighbours — Indonesia, Malaysia, and Singapore — and with other global partners, while giving due emphasis to regional and international participation in line with the country’s interests.

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THE ASEAN-10

Cambodia Kheang Un Major anticipated political events in Cambodia during 2012 include local elections, enforcement of the recently adopted anti-corruption law and penal codes, the passage of the law governing civil society organizations (“the NGOs law”), and the deepening political involvement of Prime Minister Hun Sen’s son, Dr Hun Manet. Most of these developments in 2012 are unlikely to foreshadow major new trends. They are more likely to point to the further consolidation of hybrid authoritarianism under the domination of the Cambodian People’s Party (CPP), whose power and legitimacy are sustained through patronage politics. Decentralization exemplifies the most important prevailing pattern in Cambodian politics. Tightly interconnected one-party domination and patronage politics, on the one hand, go hand in hand with partially successful reform, on the other. Begun in 2002, Cambodia’s decentralization process devolves power to local councils through competitive multiparty elections. Donors have hoped, and the Cambodian Government in its rhetoric claimed, that these councils will bring transparency, accountability, and responsiveness to government at the local level. Donors have anticipated that grass-roots democratization will in the long run generate bottom-up demand for a broader process of democratic deepening at the national level. The third round of local elections is scheduled for 2012. As was the case in the first two rounds, it is widely expected that the CPP will receive an overwhelming majority of votes and that the party will thus maintain control over the local arena, a locus of patronage democracy in the country. Like its victories in the past, the CPP’s future victories will result from the party’s ability to manipulate what it terms “the culture of sharing”. It has artfully transformed long-held Khmer traditions of patronage to conform to Cambodia’s globally linked crony capitalism, all within the context of externally imposed democratization. The result is the emergence of a spider’s web of networks linking government officials, businesses, and the CPP — networks through which resources are mobilized and distributed. The perfection of this governmental

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POLITICAL OUTLOOK

CAMBODIA Land Area:

181,040 sq. km.

Population (2010 World Bank data):

14,138,000

Capital:

Phnom Penh

Type of Government:

Parliamentary democracy and constitutional monarchy

Head of State:

King Norodom Sihamoni

Head of Government:

Prime Minister Hun Sen

Last Election:

2008

Next Election Due:

2013

Currency Used:

Riel

US$ Exchange Rate (14 November 2011):

US$1 = 4,048 riel

art form allows the CPP to outspend resource-starved local councils, which have enjoyed only limited transfers of funds and authority over the management of local natural resources. This modified pattern of patronage politics has not allowed Cambodia to meet the intended objective of democratization, which includes transparency and accountability, in a meaningful way. But it has generated responsiveness to popular needs from the ruling-party-cum-government. The party argues that Cambodia’s cultural and historical particularity and its low level of economic development mean that “democracy” should be about responsiveness to people’s needs for tangible material benefits. Conditions of entrenched poverty mean that the majority of Cambodians do indeed value a government or political entity able to provide material goods more than the promotion of abstract notions of human rights and democracy. The symbiotic relationship between the ruling CPP and Cambodian business tycoons has led, in a number of cases, to arbitrary expropriation of resources, with negative effects

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THE ASEAN-10 on the rights of certain groups of people. The number of people in resource-rich areas affected by such expropriation is likely to rise in 2012, if improvement in the global and regional economic picture increases the demand for resources. We will, then, see continued patterns of development in which the needs of the poor are set against the needs of crony capitalists for profit, under a regime of state-sanctioned economic development. The competitiveness of opposition parties — the Human Rights Party and the Sam Rainsy Party (SRP) — in the 2012 local elections and beyond will remain low. A lack of resources and inter- and intra-party conflicts, compounded by the CPP’s domination of state institutions, hobble the opposition parties. The SRP — the CPP’s main but still distant challenger — has for instance faced internal and external pressures. Internally, parliamentarians and party activists have reportedly defected. Further defections may be expected in 2012 and 2013. Externally, SRP leader Sam Rainsy has faced court convictions, jail time, and fines. He is now in self-imposed exile from Cambodia. Following the Phnom Penh Municipal Court’s rejection of a request by Sam Rainsy’s lawyer for a retrial, it is uncertain whether he will be allowed to return to Cambodia as a free man in time for the 2012 local elections. However, the SRP will be able to capture some votes, especially — as in the previous local elections — in areas in which conflicts concerning the extraction of natural resources are under way. The adoption of Cambodia’s anti-corruption law and new penal codes produced satisfaction among those observers, Western donors in particular, who believe that the absence of such laws has been the root cause of corruption and abuse of power in the country. Their promulgation led to the arrest of and to charges against several government officials and human rights activists. In 2011 the government made a number of high-profile arrests, including those of five individuals within Cambodian Senate president Chea Sim’s inner circle on charges of fraud. Chea Sim has long been hailed as the leader of a second faction within the CPP, one that rivals Prime Minister Hun Sen’s faction. It could well be true that the arrested individuals

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POLITICAL OUTLOOK committed fraud. But the arrest of persons from just one faction in the country’s politics, in which perceptions of corruption and fraud are widespread, has generated suspicion among government critics. A number of human rights activists who were involved in the provision of legal education relating to natural resources and in lobbying international donors and the government to protect Cambodians at risk of eviction or loss of farmland have also been arrested. The charges against them have included “inciting popular protest” against the government and disrupting social order and political stability. Other NGO workers found their organizations suspended or received warnings of possible suspensions. Uncertainty over some illiberal passages in the draft NGO law has exacerbated civil society organizations’ concern over the state of Cambodia’s civic space and over their very prospects for continued existence. Passage of this law is expected in 2012. Both optimists and pessimists will find sufficient data to chart the trends that they consider likely in 2012 and beyond. For pessimists, the arrests following the passage of the corruption law, the new penal codes, and widespread speculation about the adoption of an illiberal NGOs law signal the rise of a form of rule by law in which law is selectively employed in the interests of the powerful and for the perpetuation of their power. For optimists, Prime Minister Hun Sen’s unchallengeable position and the increasing use of the law rather than of violence to silence and sideline opposition to his leadership can, along with sustained economic growth, be considered a turning point. They suggest that Cambodia has moved on to a path towards potential realization of the developmental state long featured in official rhetoric, in which economic development takes precedence over civil and political liberties. This condition, optimists might argue, suits Cambodia’s political and economic particularity. To conclude, it is no exaggeration to state that Prime Minister Hun Sen counts as one of the few contemporary Cambodian leaders with a vision for a developed Cambodia. In part because of historical circumstances and political culture and in part through strategic political design, Hun Sen’s vision has been compromised by a desire to dominate the Cambodian political scene by means of personalized politics. In

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THE ASEAN-10 recent years, his son, Dr Hun Manet, a graduate of West Point and an economist trained at the University of Bristol, has appeared on the Cambodian political scene. This highly respected, capable yet modest, actor is widely seen as being groomed as Hun Sen’s successor. He is expected to be increasingly visible in 2012, a critical year leading to Cambodia’s 2013 general elections. Hun Manet is likely to play an important role in the cabinet formed after those 2013 elections.

Indonesia Bernhard Platzdasch It can be expected that in 2012 Indonesia will see a continuation of the political trends, characterized by setbacks and calamities, that have left their mark on the country in recent years. The country is in a period defined simultaneously by political stasis and political stability. It has yet to move into the next phase of its democratic consolidation, and it is unlikely to do so in 2012. Some observers rightfully herald Indonesia as Southeast Asia’s only genuine democracy, but it is doubtful that the next few years will bring significant improvement in the overall quality of its democracy. To a considerable extent, this situation is a function of President Susilo Bambang Yudhoyono’s predilection for continuity, consensus, and compromise. These preferences are likely to characterize the President’s style of governance until the end of his term in 2014. The degeneration of Indonesia’s earlier democratic achievements is likely to continue in 2012. Several leading indicators allow us to track this degeneration. First, the country’s judiciary and police are — and are expected to remain — notoriously unpredictable and fail frequently to uphold the rule of law. Second, large sections of the bureaucracy are in disorder; they continue to perform poorly. Third, Indonesia’s main political parties have fallen increasingly into internal turmoil over positions of influence and finances. The internal problems and frictions of several important parties will persist in 2012. Fourth, corruption will remain a major concern in Indonesia for many years to come, notably because it remains vital to the existence of virtually

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POLITICAL OUTLOOK

INDONESIA Land Area:

1,919,440 sq. km.

Population (2010 World Bank data):

232,517,000

Capital:

Jakarta

Type of Government:

Presidential republic

Head of State:

President Susilo Bambang Yudhoyono

Last Election:

2009

Next Election:

2014

Currency Used:

Rupiah

US$ Exchange Rate (14 November 2011):

1 US$ = 8,962 rupiah

all political parties. For the same reason, Indonesia’s political parties have hampered and will continue to hamper the work of oversight agencies like the national anti-corruption agency and the judicial commission. The publicly exhibited commitment of political parties to battle corruption thus is and will continue to be somewhat desultory and spurious. The current overall ideological trend among Indonesia’s political parties takes them in the direction of pragmatism and expediency. While this trend is generally welcome, it has a more disquieting aspect: high party rank is increasingly given to popular television stars and other celebrities and to wealthy business people, in an effort to appeal to voters and secure party funding. As the overall quality of democracy in Indonesia follows a downwards trend, so has public disillusionment with Indonesia’s parties and with the state of its democracy in general been on the rise. Significantly, voter participation has shown continuous decline, in a pattern with alarming implications both for the general elections of 2014 and for Indonesian democracy per se. Another negative development is the proliferation of parties on the political landscape

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THE ASEAN-10 and the shift of support among a significant proportion of voters to smaller parties. This development betokens increasingly factionalized and quarrelsome, and thus more inefficient, government. Each of the past several years has featured a prominent corruption case. This pattern may or may not have set a precedent for 2012. The corruption scandal in the President’s Democrat Party during 2011 exposed deep internal frictions and left the party severely tarnished. The party enters 2012 with unresolved quarrels between its two main camps. These quarrels surround the question of how to prepare for a post-Yudhoyono future and especially the best choice for the party’s 2014 presidential candidate. This issue will dominate the Democrat Party’s internal debates during the year ahead. Most observers see incumbent party chairman Anas Urbaningrum and current Minister of Youth and Sports Affairs Andi Mallarangeng as the long-time favourites and retired General Djoko Sujanto as an intermediate favourite. Another party ill-prepared to enter 2012 is the Islamist Justice Welfare Party (PKS). This party has been struggling with the immense damage caused by several corruption cases, including one in the PKS-controlled Ministry of Agriculture. It also became the target of public ridicule when one of its MPs was caught looking at Internet pornography during a parliamentary session. These cases have had a severe impact on the party’s self-styled clean and proper image. In earlier years PKS set out to change the character of Indonesian politics, but it seems fated to resemble Indonesia’s mainstream parties, with all their considerable flaws. At the same time, the more problematic anti-Western and anti-Christian aspects of PKS’s doctrine, though now less visible, remain a matter of relevance and concern. Recent years have in fact been a period of strained religious tolerance among Indonesians. This trend is also likely to continue in 2012. The most affected religious minority has been the Islamic Ahmadiyah sect, whose legal status seems destined to remain in limbo in the years to come. In dealing with the Ahmadiyah and other issues relating to religious tolerance, the government has shown a tendency to yield to Islamist pressure because of concern over the possibility

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POLITICAL OUTLOOK of a backlash among Islamists and conservative Muslims. There is no reason to believe that this policy preference will be significantly reversed until the end of President Yudhoyono’s term of office. The disquieting spectacle of Islamist vigilante groups rubbing shoulders with local politicians and the police is also unlikely to fade in 2012 and beyond. While religious tensions have been on the rise, however, most observers consider improbable the rise of widespread sectarianism in the next few years. Internationally, Indonesia is expected to continue to play an insignificant role despite its weight as a central power in Southeast Asia. Some observers have pointed out that, when Indonesia engages on international and regional issues, it adopts a defensive and combative manner, as in its row with Malaysia over border issues in 2011. Such a stance also remains a valid cause for alarm. As a focus on issues of purely domestic relevance is another trend of recent years likely to continue in 2012, a more outward-looking perspective is unlikely to inform Indonesia’s understanding of where it stands in global affairs. In ASEAN, Indonesia’s tendency is to assume a more assertive posture. It has adopted a policy of “leading from behind”, indicating that it intends to exert an assured yet low-profile style of leadership. One observer characterized Indonesia’s international position aptly as, “ASEAN is too small for Indonesia, global politics too big.” Approaching the next general elections in 2014, all of Indonesia’s political parties will become increasingly preoccupied with preparations for the polls and selection of candidates for the presidential election due the same year. President Yudhoyono is widely expected to adhere to his consensus-driven leadership style in the remaining two years of his term. Some features of that style, among them his mounting preoccupation with his presidential status and his aversion to bold policy decisions, are likely to become even more prominent during that time. It is therefore improbable that Indonesia’s condition as a stable yet static democracy will change substantially either during 2012 or any time before 2014.

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THE ASEAN-10

Laos Vatthana Pholsena The five-yearly Party Congress, the most important political event in Laos, took place in 2011. The 576 delegates of the 9th National Congress of the Lao Communist Party (LCP) convened during 17–21 March to elect members of the Party’s Central Committee. The voting was organized in a top-down manner, arranged prior to the opening of the congress. In turn, a consensus reached by the Party’s most senior members determined the selection from the Central Committee of the eleven members of the LCP’s new Political Bureau (“Politburo”). One might argue that an LCP Party Congress is a non-event; it seldom yields any unexpected or dramatic outcomes. Indeed, its ninth occurrence followed the familiar pattern: delegates “re-elected” Choummaly Sayasone and Thongsing Thammavong to their posts, as LCP General Secretary (and President of the Lao People’s Democratic Republic) and as Prime Minister, respectively. The Party Congress is a political ritual that serves to project to the population and to the outside world an image of stability and continuity in Laos. Closer examination, however, makes evident that perceptible changes occurred during this congress. In effect, it launched the transition to the next generation of leaders. More than a third of the Central Committee’s members were new recruits, and half of them were aged below 60. More significantly, the Political Bureau welcomed three new members, namely Bounthong Chitmany, Bounpone Bouttanavong, and Phankham Viphavanh. These cadres are relatively young to hold Politburo rank. The oldest, Bounthong, is 62 years old, while the average age of the rest of the Politburo’s members is closer to 70. These three are also politically experienced. Formerly provincial governors, they have been members of the Central Committee, in the cases of Bounthong and Bounpone since 1996 and in the case of Phankham since 2006. In addition, each of the three holds a doctorate, although to be sure little is known about their degrees. We can only confirm that Bounpone earned a PhD in history and philosophy, concentrating on the history and ideology of the Communist Party itself, from Vietnam.

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POLITICAL OUTLOOK

LAOS Land Area:

236,800 sq. km.

Population (2010 World Bank data):

6,436,000

Capital:

Vientiane

Type of Government:

Communist people’s democratic republic

Head of State and General Secretary of the Lao People’s Revolutionary Party:

President Choummaly Sayasone

Head of Government:

Prime Minister Thongsing Thammavong

Last Election:

2011

Next Election:

2016

Currency Used:

Kip

US$ Exchange Rate (14 November 2011):

US$1 = 7,992 kip

I would argue that the selection of these cadres for Politburo membership — and of the new members of the Central Committee more generally — points to a trend that will in part shape the LCP’s make-up in the years to come. It heralds, that is, the professionalization of the Party’s elite through the recruitment and promotion of cadres who are better educated and have experience more relevant to the tasks facing them. Indeed, the final report of the 9th Congress was keen to stress that a third of the Central Committee members hold doctorates. Only master’s-level graduates were mentioned at the time of the previous congress in 2006. At the same time, impeccable Party credentials — decades-long Party membership, ideological training in the former Soviet Union (up to the late 1980s) or in Vietnam, as well as a seat on the Central Committee — and powerful political sponsors will continue to weigh heavily in the selection of cadres to fill top positions in the Party and in the government.

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THE ASEAN-10 This policy of strengthening the Party elite reflects the view of the Party’s senior leaders that the new generation of top cadres must possess strong ideological commitment and moral integrity, especially to fight against the erosion of the Party’s legitimacy resulting from a growing sense among the population of widespread corruption at every level of government. In this respect Bounthong Chitmany and Bounpone Bouttanavong will play a crucial role: the two are members of the Party Secretariat, the institution in charge of controlling Party personnel, while Bounthong also heads the powerful Party Inspection Committee. Behind a façade of status quo, then, the LCP has in its own cautious way made significant changes in order to maintain its grip on power. The National Assembly also held its elections in 2011. These polls do not have much political importance, however, even though assembly members are elected by every Lao citizen aged above 18 years in a single-round election; voting is mandatory in Laos. The candidates, of whom 190 contested 132 seats in 2011, had been carefully vetted beforehand by the Party’s executive organs. All newly elected deputies but one were Party members; in theory, Party membership is not a condition of eligibility to run for the National Assembly. Nonetheless, the National Assembly should not be dismissed out of hand as an insignificant state institution. It has acquired more powers and gained more visibility in the last few years, especially since the adoption of the country’s amended constitution in 2003 and the revised law on the National Assembly in 2006. It has also attracted substantial attention and support from international development agencies anxious to advance their “good governance” agenda, such as the United Nations Development Programme. The institution has striven to show to the Lao public the work of the “people’s representatives” (phouthen pasason), especially during parliamentary sessions. Broadcast live on national television, these sessions have seen ministers called upon to answer questions about some of their ministries’ less than satisfactory policies and practices. Examples of these latter have included the (mis)use of public funding or the

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POLITICAL OUTLOOK abuse of contract farming at the expense of rural households. The National Assembly is expected to be very active in 2012. Its 132 members will be shown in newspapers and on television monitoring the government’s activities and debating and adopting new laws. A record number of ninety-two new laws is said to be on the five-year legislature’s agenda. The phouthen pasason will continue to convey the Lao people’s queries and concerns to the government and to the Party. But it is very unlikely that the National Assembly will attempt to censure, block, or overturn the latter’s policies or decisions; it has an advisory role, not a decision-making one. Disagreements within the Party’s inner circles will be aired behind closed doors. Few people will know the details of such discussions. However, glimpses of these internal debates can come to the public’s knowledge through the disgrace of high-ranking cadres. The former mayor of Vientiane was, for example, promptly replaced and removed from the Central Committee shortly after the Party Congress, following allegations of exceptional levels of corruption and mismanagement. Hiccups in the decision-making process, such as the decision to halt the construction of the high-speed railway that would link Boten on the Lao-Chinese border to Vientiane, can also afford such glimpses. In April 2011 the start of that rail project, co-financed by Chinese investors (70 per cent) and the Lao Government (30 per cent), was suddenly postponed to a later, unspecified, date. The alleged reason was concerns at the highest levels of the LCP over the terms of the contract, which included the hiring of a massive number of Chinese labourers. As Laos deepens its regional economic regional integration and the Lao public gains greater awareness of social, economic, political, and environmental issues across and outside the country through access to the Internet and social media, the Vientiane government can expect to face higher expectations from its citizens. It will also face further scrutiny from foreign NGOs, international institutions, and regional partners. The controversial Xayaboury dam project on the Mekong River in northwestern Laos exemplifies such scrutiny. Protests from international NGOs and other Southeast Asian governments, including Vietnam’s, over the dam’s potential transborder environmental impact

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THE ASEAN-10 led the Lao Government to shelve that project for the time being. In other words, the new generation of Lao leaders is likely to have to take into account — or at least to manage — public opinion, inside and outside Laos, in their decision-making processes more than their predecessors ever did.

Malaysia Francis E. Hutchinson Malaysia’s defining political event of 2012 is most likely to be the country’s thirteenth general elections. Although the constitutionally stipulated deadline for those polls comes only in May 2013, it is very probable that elections will be held this year. Having come to power in 2009 upon the resignation of his predecessor Abdullah Badawi, Prime Minister Najib Razak is under pressure to win convincingly. Should he “fail” to deliver a result significantly better than the ruling coalition’s narrow 2008 victory, it is possible that Najib will face a leadership challenge from within his party, the United Malays National Organisation (UMNO). A number of drivers will influence when — and on what terms — Malaysia’s next general elections are held. Broadly, they can be separated into two categories. The first is the country’s overall economic climate and how it affects voters. The second is Najib Razak’s perceived ability to deliver. UMNO’s party elections, also slated for 2012, are an additional complicating factor. Najib needs to retain his presidency of UMNO to remain as Prime Minister, and he will be weighing the advantages and disadvantages of going into party elections before or after their national equivalent. On the economic front, the outlook is not overwhelmingly positive. Malaysia’s days of heady growth are largely over; average growth rates remain significantly below pre-1997 levels. In addition the uncertain global economic climate has led to the downward revision of growth projections for 2012, with current estimates at around four per cent. The prospects of a double-dip recession mean that the outlook could even be bleaker. That said, while the Malaysian economy may be

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POLITICAL OUTLOOK

MALAYSIA Land Area:

330,434 sq. km.

Population (2010 World Bank data):

27,914,000

Capital:

Kuala Lumpur (Administrative capital: Putrajaya)

Type of Government:

Federated parliamentary democracy and constitutional monarchy

Head of State:

Yang Di-Pertuan Agong Sultan Abdul Halim Mu’adzam Shah

Head of Government:

Prime Minister Dato’ Seri Mohd Najib bin Tun Haji Abdul Razak

Last Election:

2008

Next Election Due:

2013

Currency Used:

Ringgit (RM)

US$ Exchange Rate (14 November 2011):

US$1 = RM3.14

slowing down, the effects of several large publicly funded projects are expected to kick in. These projects include the Klang Valley Mass Rapid Transit system, the Kuala Lumpur International Financial District, and Bandar Malaysia, a large urban development project. There is also hope that the country’s growth corridors, staffed by private-sector-friendly government cadres and promoted by means of abundant incentives, will spur investment outside the Klang Valley. The real question, however, is how voters feel. Abdullah Badawi called for elections in 2008 at a time of substantial price hikes for food and basic items, and he paid the price. While high prices for oil palm and rubber mean that many in the plantation sector are doing well, the situation in urban areas is different. There is a feeling in low-income and middle-class households that inflation has eroded buying power. In addition, access to affordable housing has emerged as a significant issue in Malaysia.

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THE ASEAN-10 These considerations bring us to the next issue: Najib’s ability to deliver. He has both assets and liabilities, and a number of highprofile initiatives in the last quarter of 2011 indicated his willingness to invest considerable political capital with the hope of a return to the premiership. Najib’s biggest asset is his personal popularity. Polls conducted in the second half of 2011 made clear that he remained quite popular, substantially more popular than UMNO as a whole. Despite considerable controversy associated with his past, he has managed to project an image of unruffled urbanity. Reminiscent of Indira Gandhi, he moved to court public opinion directly rather than through his party. He has for that purpose set up his own foundation, Najib Razak Club 11, to reach out to voters. He has also sought to project an accessible, youth-friendly image. In October 2011 Najib released a “people-friendly” RM233 billion budget. Devoid of structural goals, it targets civil servants and lowerincome groups with pay rises, bonuses, and one-off payments that will reach an estimated 3.4 million households. Other notable initiatives include the expansion of government-subsidized grocery stores, and the broadening of eligibility criteria for home loans to include more middle-class families. Notably, the budget did not include a rise in “sin taxes”, which would have been unpopular among non-Malays. Its thrust shows Najib’s awareness of concerns among the urban electorate and makes clear that he is striving to address them — albeit in a populist fashion. Furthermore, Najib has moved to steal some thunder from the opposition. In September 2011 he announced the repeal of the Internal Security Act (ISA). While some associated pieces of legislation were rescinded immediately, the ISA itself is slated to be repealed in March 2012. It will be replaced by two new security laws, which will allow preventive detention to combat terrorism. While many are reserving judgment until the nature of these laws is known, the repeal of the ISA has in and of itself generated considerable goodwill for the Prime Minister. Opposition dynamics have also aided Najib as he readies himself for the polls. Comprised of the Democratic Action Party, Parti Keadilan

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POLITICAL OUTLOOK Rakyat, and Parti Islam Se Malaysia, this collection of parties is no longer “fresh” to voters. In the next elections, Malaysian voters will judge the opposition on the basis of its performance as a collectivity and assess the performance of the four state governments under its control. The disillusionment of several erstwhile senior party leaders, disagreements on the implementation of Islamic law and on the allocation of state legislative assembly and national parliamentary seats, and limited exposure through mainstream media outlets have done the opposition no favours. An ever-changing array of allegations also continues to keep the opposition’s foremost leader, Anwar Ibrahim, occupied. As long as he is not imprisoned — thus becoming a martyr — Anwar’s legal difficulties mean that his effectiveness is reduced. A number of countervailing forces can, nevertheless, undermine Najib’s efforts to remain in power. First, the government’s handling of the Bersih 2.0 rally in July 2011 attracted national and international condemnation and tarnished Najib’s reputation as a reformer. A civil society umbrella group, called the Coalition for Free and Fair Elections, organized a rally in Kuala Lumpur to promote electoral reform. Declared illegal by the government, the gathering of 40,000 participants faced tear gas and heavy-handed crowd-control tactics; 1,600 people were arrested. In the days following the crackdown, Najib’s popularity ratings dropped substantially for the first time. In the aftermath of these events, a bipartisan parliamentary select committee was set up to consider ways to reform the electoral system. Second, despite his solid work ethic, there is a perception that Najib lacks the ability to deal with hard-line elements in his party and associated civil society groups. Former Prime Minister Mahathir, current Deputy Prime Minister Muhyiddin Yassin, and the UMNOowned newspaper Utusan Melayu have positioned themselves as ardent defenders of Malay rights, sometimes in direct opposition to Najib’s policy stances. Fearing a challenge to his leadership, Najib has appeared reluctant to take such forces on. This reluctance hampers his ability to reach out to non-Malay voters. It has also led to the rollback of many of the more ambitious aspects of his reform initiatives.

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THE ASEAN-10 The still unresolved death in 2009 of Teoh Beng Hock, a political aide to a member of the opposition-led Selangor state government, compounds these problems for the Prime Minister. Teoh died after being interrogated as a witness by the Malaysian Anti-Corruption Commission. The opposition and civil society groups rejected the Royal Commission of Inquiry’s finding that he committed suicide. Until this issue is resolved, it is unlikely that Chinese voters will support the ruling Barisan Nasional (BN) coalition to any significant extent. Third, the BN does not have its election machinery in place. Long years of incumbency have seen traditional UMNO party bosses lose their appeal in the eyes of voters. Further, almost four years on, UMNO leaders in the states lost to the opposition in 2008 have yet to be named. Among other component parties in the BN, the Malaysian Chinese Association and the nominally multiracial but largely Chinese Gerakan have been singularly unable to resolve internal leadership issues or to inspire voters, in part because of the unresolved Teoh Beng Hock issue. Najib’s moves to select “winnable” candidates and to create a public affairs committee for all coalition partners may only help at the margin. Fourth, controversies associated with Najib’s period as Minister of Defence persist. A probe undertaken on behalf of the Malaysian human rights group Suaram into the actions of DCNS, a French stateowned defence contractor, is ongoing in France. DCNS is alleged to have paid kickbacks to a range of governments in Asia, including Malaysia’s. Of particular interest are the 114 million euros paid to a company linked to Abdul Razak Baginda, one of Najib’s former associates, in relation to the procurement of two Scorpène-class submarines. The Malaysian Anti-Corruption Commission declared that the payment was above board, and Suaram’s French lawyer was deported from Malaysia in July 2011. Regardless of moves taken by Najib, however, the case will proceed in France. It may uncover unsavoury facts. Over the course of 2012, these economic and political factors will converge. If global recession looms, Najib is likely to call elections early, before the effects of the slowdown are felt. Should his efforts

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POLITICAL OUTLOOK to reach out to the Malaysian public begin to bear fruit, the likelihood of early polls will be compounded. However, should the dangers of recession subside or the Prime Minister’s investments of political capital fail to translate into improved support, the Barisan Nasional may seek to buy time by delaying elections until the latter part of the year.

Myanmar Tin Maung Maung Than While Myanmar’s progress towards political liberalization during the two decades between its first post-1988 multiparty general election in May 1990 and its second in November 2010 could be described as glacial, the actions of the military-backed government of President Thein Sein during its first fifty weeks appears to resemble a sudden melting of (at least part of) the proverbial glacier. To many observers of the Myanmar political scene, including some who had been critical of the November 2010 elections and the 2008 constitution under which they were held, the pace and direction of economic and political change initiated by the newly elected government under the leadership of the executive President seemed the harbinger of a more open and democratic climate in the country. The significance of the new government’s initiatives was not lost upon much of the polity or the international community. These initiatives were widely welcomed, with varying degrees of confidence in their sustainability and inclusiveness. As expected, of course, sceptics in Myanmar’s domestic opposition dismissed the “reform” measures as merely “cosmetic” — designed to win legitimacy at home and abroad, to advance Myanmar’s bid for the chair of the Association of Southeast Asian Nations in 2014, and to make more persuasive calls for the lifting of Western sanctions. Too, there were expressions of disappointment and even outright condemnation in some circles in the West, among some exiles, and among others that viewed the 7 November 2010 elections as neither free nor fair and as lacking inclusiveness.

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THE ASEAN-10

MYANMAR Land Area:

678,675 sq. km.

Population (2010 World Bank data):

50,496,000

Capital:

Naypyitaw

Type of Government:

Presidential republic

Head of State:

President Thein Sein

Last Election:

2010

Next Election:

2015

Currency Used:

Kyat

US$ Exchange Rate (14 November 2011):

US$1 = 6.51 kyat (official rate)

These groups alleged the manipulation of votes in favour of the Union Solidarity and Development Party (USDP). Led by former Premier and retired General Thein Sein, that party was the transformed version of the military-sponsored Union Solidarity and Development Association. The National League for Democracy (NLD), which convincingly won the 1990 election but refused to re-register for the 2010 polls, effectively boycotted those elections. And complaints of unfair election laws joined those concerning manipulation. These factors tarnished the election victory of the USDP, which won overwhelmingly at the national level, taking more than 79 per cent of the contested seats in the lower house of the new legislature and nearly 77 per cent in the upper house. The USDP also did well at the provincial level, at which it emerged as the majority party in all seven states and all seven regions. When the first sessions of the national and regional parliaments were convened by the State Peace and Development Council (SPDC) on 31 January 2011, detractors pointed out that most of the military’s top leaders — SPDC chair Senior General Than Shwe and vice chair Vice Senior General Maung Aye excepted — were present as USDP members of parliament. The combined sitting of the two houses of

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POLITICAL OUTLOOK the national legislature on 4 February elected Thein Sein as President and former junta secretary and retired General Thiha Thura Tin Aung Myint Oo and USDP MP and Shan medical doctor Sai Mauk Kham as vice presidents. Formed on 30 March to take power from the SPDC, the new government also faced criticism for its heavily military composition. Of 26 USDP ministers, some 85 per cent were retired military officers. Serving general officers held the Defence, Home Affairs, and Border Affairs portfolios. A retired military officer became Minister of Foreign Affairs. The appointment of retired senior military officers as chief ministers at the provincial (that is, state and regional) level only reinforced the perception that the military remained in charge. Unfounded rumours had it that Than Shwe and Maung Aye had become leaders of a shadowy supreme council that would hold sway over the Union Government. Thein Sein launched progress towards economic liberalization measures and pledged to reduce the incidence of poverty in Myanmar. In his inaugural speech he promised to run a “clean” government and to practice “good governance”, with an emphasis on transparency, accountability, and adherence to the constitution and with due regard to the people’s wishes, to inclusiveness, and to effectiveness. Meanwhile, the national parliament turned out to be more than the rubber stamp predicted by critics of the new political system. The overwhelming majority of the USDP members and the 25 per cent bloc of military representatives did not prevent other parties from tabling motions and proposing laws on matters ranging from amnesty for prisoners to peace talks with armed ethnic groups. The government responded with its own proposals for labour laws and even for amendments of the electoral laws to accommodate demands for rights and inclusiveness. Reform measures taken by the executive and legislative branches with political implications were not so apparent during the first hundred days of the new government operation, but they came in swift succession thereafter. Initiatives touched on sensitive issues, issues treated as taboo or unacknowledged during the SPDC era. A few examples are illustrative of significant initiatives in the areas of national reconciliation, human rights, and democratic practices.

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THE ASEAN-10 •

•

• •

•

•

•

• • •

The President’s meeting with the opposition icon Aung San Suu Kyi (ASSK) on 19 August, along with substantive dialogue between ASSK and liaison minister Aung Kyi. The President’s call for exiles to return without fear of prosecution for political acts, coupled with two presidential amnesties, bringing the release in May of 14,578 prisoners, of whom more than 55 were classified as “political prisoners” by the opposition, and in October of 6,359 more, including 220 “political prisoners”. A peace overture, made on 18 August, to all armed groups asking them to negotiate with the respective provincial government. The establishment on 5 September of the Myanmar National Human Rights Commission (MNHRC) to “promote” and “protect” the fundamental rights of citizens provided for in the constitution. A labour law, enacted on 11 October, that allows for the formation of trade unions and for industrial action on the part of workers in most industries, with the exception of essential services and those related to security infrastructure. Amendment of the Political Party Registration Law to remove the ban on convicted persons’ becoming party members and to relax the stipulations regarding parties’ allegiance to the constitution and the requirements governing the right to contest elections. The formation of eighteen parliamentary affairs committees in the lower house and seven in the upper house, with committee seats for non-USDP MPs. These committees include those on “Rights of Citizens, Democracy and Human Rights” and “National Race Affairs and Internal Peace-making”. The relaxation of media censorship by the Ministry of Information at it applies to private publications. The formation in April of presidential advisory groups on economics, politics, and legal affairs. Allowing open discussion of problems and current issues in public fora and in the private media.

In conformity with the constitution, the SPDC’s centralized administration of public affairs, with regional military commanders holding sway over their respective territories, was replaced with a

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POLITICAL OUTLOOK decentralized structure. In this structure elected provincial authorities are to supervise local administrative bodies comprising respected persons from the community, while the civil service provides professional support. The previously pervasive military control of public affairs no longer prevails. Though regarded as minor concessions by the regime’s detrac-tors and evidently falling short of liberal democratic ideals, the aforementioned measures seem to indicate an attempt by Myanmar’s executive and legislative bodies to introduce more openness, pluralism, consistency, and rule-based procedures to the governance of the country’s politics. On the international front, Myanmar’s new government has taken initiatives to reach out to both its supporters and its detractors. It will hold the chair of ASEAN in 2014. It has also allowed the United Nations Special Rapporteur on Human Rights to visit the country after a hiatus of eighteen months. It allowed him to meet not only with relevant authorities but also with ASSK and other stakeholders in civil society and opposition parties. Myanmar has also welcomed a flurry of visits by senior European Union and United States officials. Visits have included that of Kristalina Georgieva, European Commissioner for International Cooperation, Humanitarian Aid and Crisis Response; Andrew Mitchell, Britain’s International Development Secretary; multiple trips on the part of U.S. Assistant Secretary of State for East Asian and Pacific Affairs Kurt Campbell and Special Representative and Policy Coordinator Derek Mitchell; and the first ever visit by U.S. Assistant Secretary of State for Democracy, Human Rights and Labor Michael Posner. The Americans have described their dialogues in Myanmar as frank and substantive. President Obama subsequently announced, after telephoning ASSK on his way to the East Asia Summit on Bali, his intention to send Secretary of State Hillary Clinton to Myanmar on 1 December for the purpose of furthering MyanmarU.S. engagement. On the other hand, President Thein Sein seemingly surprised China, his country’s long-standing supporter and strategic partner, by announcing the suspension of the controversial Myitsone joint hydroelectric project to provide electricity to China. Mounting resistance

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THE ASEAN-10 from civil society actors and local ethnic communities concerned about the environmental impact of a massive dam situated at the confluence of the two rivers that give rise to the Ayeyawady River, widely regarded as the lifeblood of Myanmar, preceded this decision. What will all these developments lead to as Myanmar makes its transition to “discipline-flourishing democracy”? Will these apparent reforms bring real change for the better? Is the positive trend irreversible? Is the momentum of reform sustainable? These questions are on the minds of Myanmar watchers, domestic stakeholders, and the international community. As Myanmar’s fledgling elected government takes baby steps towards socio-economic and political reforms, definitive answers to such questions remain impossible. Much seems to depend on President Thein Sein’s goodwill, political skills, and authority. He must bring the executive branch into line, persuade the legislative branch to cooperate, and assuage the concerns of the military waiting in the wings. Meanwhile, the government’s capacity to carry out the much-needed reforms needs to be enhanced rapidly and considerably. The next few months will be a crucial period for the President and his team to push the envelope of reform in a democratic and effective manner. They need full assistance and cooperation from stakeholders and from the international community if they are to break free of a legacy of past setbacks and pull off the most significant democratic experiment in Myanmar’s political history. Unanswered questions notwithstanding, several issues will certainly occupy centre stage in Myanmar politics during the year ahead. They are of concern not only to domestic stakeholders but also to the international community. In fact chances for the lifting of Western sanctions seem to be predicated on the government’s ability to undertake concrete measures on these issues and to show progress towards their resolution. First and foremost are the role of Aung San Suu Kyi and the legal status of the NLD. Under the terms of the election law, the party was officially dissolved for failing to re-register to compete in the 2010 elections. President Thein Sein, whom ASSK described afterward as “honest” and “straightforward”, accorded the NLD leader significant

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POLITICAL OUTLOOK recognition through a “historic” meeting in August. More recently, the election law was amended to change provisions that the NLD found unpalatable. On 18 November the NLD Central Committee endorsed the party’s re-registration and its participation in forthcoming by-elections. ASSK also indicated that she might contest those by-elections as a party candidate. It is thus likely that the party will field a strong team, led by ASSK herself, and win convincingly. This decision could result in a substantial bloc of some fifty seats in the legislature, with the NLD serving as the largest opposition party. It would thereby change the dynamics of parliamentary politics in Myanmar. The issue of “political prisoners” is a contentious one. Myanmar’s government refuses to recognize the category of “prisoners of conscience”. It insists that all individuals so categorized by others were convicted for breaking existing laws, though it has reportedly used the term “security prisoners” in dialogues with foreign interlocutors. Nevertheless the release of “all” such prisoners — allegedly some 2,000 before the second amnesty in October — has become a litmus test in the minds of the West and the United Nations. The MNHRC created a list of some 500 names and petitioned the President on 13 November either to include them in a future amnesty or to move them to more accessible prisons as a gesture of magnanimity. In apparent response the authorities reportedly moved some leading activists and politicians incarcerated in far-flung places to more accessible prisons. It was expected at the time of writing that another amnesty was in the offing, one that would include more “political prisoners”. The most serious issue facing Thein Sein’s government, one on which it has achieved only limited progress, remains the ongoing conflict with armed ethnic groups. Popularly known as ceasefire groups (CFGs), they are in fact groups whose ceasefire agreements with the SPDC were nullified after their refusal to be incorporated into a border guard force under the military’s unified command. Only the Wa and Mongla groups on the China-Myanmar border agreed to enter into a new ceasefire agreement, reached with the Shan State government in accordance with the government’s peace offer of 18 August. The Kachin Independence Army (KIA) and the New

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THE ASEAN-10 Mon State Party refused to negotiate bilaterally with the provincial governments concerned; they insisted on negotiating with the national government as a group under the umbrella of the United Nationalities Federal Council umbrella. The Shan State Army South (SSA-South), a non-CFG that was allied with the SSA-North CFG, also refused to talk. Instead, it set preconditions for talks with the national government. Fighting between the army and KIA and SSA troops continues. So too does armed action between the army and the non-CFG Karen National Union and CFG Democratic Karen Buddhist Army. The results have been many casualities and tens of thousands of internally displaced persons fleeing the war zone. Despite attempts by provincial governments to send peace feelers to these groups through formal and informal contacts, there has been little progress. Nevertheless, it is likely that both the government and the armed ethnic groups will try to break the impasse in the coming months by relaxing their conditions as internal and external pressures for peace mount and as they come increasingly to the conclusion that peace is essential for the success of reforms and national development. Myanmar’s bid for the ASEAN chair was favourably commented on by Jakarta’s Foreign Minister, who visited Myanmar in late October on a fact-finding mission as a representative of current ASEAN chair Indonesia. On 17 November, at the 19th ASEAN Summit in Bali, ASEAN leaders decided to give a green light to Myanmar’s request to hold the ASEAN Chair in 2014. This decision will surely enhance Myanmar’s standing in the international community and further consolidate President Thein Sein’s image as reformer. It will also, of course, lead ASEAN to encourage Myanmar to undertake further reforms in the areas discussed above. U.S.-Myanmar relations can be expected to improve further, with regular visits on the part of senior officials from the State Department. Eventual normalization of diplomatic relations, currently downgraded to the level of chargé d’affaires, could be in the cards as an American “in kind” response to further reforms. Though Myanmar’s reforms are unlikely to impress the U.S. Congress enough for it to change the laws on sanctions, the U.S. Government could relax travel restrictions and

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POLITICAL OUTLOOK increase humanitarian aid and technical assistance through channels not constrained by such law. Likely areas of cooperation include education, rural development, and poverty alleviation. Similarly, the restriction on the assistance rendered by international financial institutions will remain in place, also because of legal constraints imposed by the U.S. Congress. On the other hand, while Japan is likely to resume technical assistance and official development assistance for some infrastructure projects within a few months, EU-Myanmar relations are also likely to improve significantly. The partial removal of visa restrictions and a substantial increase in humanitarian aid and exchanges look possible.

Philippines Maria Ortuoste Conventional indicators of political performance provide superficial grounds for optimism about the administration of Benigno Aquino III. Despite a small drop in ratings, levels of presidential approval remain higher than those enjoyed by previous presidents. His high approval ratings obtain across regions and socio-economic groups, specifically on issues on which Aquino has campaigned: fighting graft and corruption, going after tax evaders, and enforcing the law. The President therefore enjoys continued support from important groups such as Congress and the business community. He has also been able to rally popular support against Chinese military assertiveness in the Spratly Islands. His early success notwithstanding, Aquino will increasingly be confronted by legacies of institutional and bureaucratic inertia, of midnight appointments, of failed foreign relations campaigns, of infighting and mistrust, of elitism and entitlement. A clear vision and a well-articulated action plan could perhaps enable him to overcome some of these problems. While Aquino has the vision, the action plan is missing. Without that plan, his administration will be hard pressed to make significant gains on the domestic and international issues that will loom large in 2012.

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THE ASEAN-10

PHILIPPINES Land Area:

298,170 sq. km.

Population (2010 World Bank data):

93,617,000

Capital:

Manila

Type of Government:

Presidential republic

Head of State:

President Benigno S. Aquino III

Last Election:

2010

Next Election:

2013 (congressional elections)

Currency Used:

Philippine peso

US$ Exchange Rate (14 November 2011):

US$1 = PhP43.22

At the core of the Aquino administration’s objectives is the well-intentioned attempt to overcome — if not entirely replace — a Philippine political culture that is marked by power-holders’ sense of entitlement and even impunity. It is this “wangwang mentality” that observers blame for what ails the Philippines — from graft and corruption to warlordism, from traffic congestion to economic malaise. Aquino’s decision to ban the abusive use of sirens by public officials was a small but symbolic move. More importantly, there have been well publicized investigations of infrastructure projects, government procurement processes, and the perks enjoyed by members of the Philippine elite, including some among the Catholic clergy. Aquino’s emphasis on local empowerment projects and determination to work with local officials known for good governance practices rather than with politicians known for their familial lineage or their private armies are positive steps towards widening the field of political influence in the country. However, the Aquino administration has not brought charges against former President Gloria Macapagal-Arroyo. Each of the six pending cases against her was filed by another entity or by an individual legislator.

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POLITICAL OUTLOOK There are also signs that the Philippine political tradition of favouring the military and close personal associates is alive and well. Aquino has been in office for two years, but he has had two chiefs of staff. Important presidential allies found culpable for the botched 2010 bus hostage incident — Alfredo Lim and Ricardo Puno — have not been indicted as of this writing. Aquino has sent ambiguous signals about the settlement of legal issues concerning Hacienda Luisita, which belongs to his mother’s family. He has favoured the KKK — kabarkada (friends), kaklase (classmates), kabarilan (shooting buddies) — as advisors, and subsequently suffered bickering among them. He is, in short, still very much a product of his social class and upbringing: a fourth-generation politician educated at a private Catholic university whose relatives are among the largest landowners in the country. Whether there will be any progress towards refashioning Philippine political culture during Aquino’s term must therefore remain an open question. Forging peace agreements is another challenge. The government has reopened negotiations with communist and Muslim rebel groups. Its apparent sincerity and its tabling of some interesting proposals are grounds for optimism about the negotiations. More importantly, the Moro Islamic Liberation Front (MILF) and the government agree on fundamental principles: sharing resources and governmental power, improving social services, developing the local economy, and making the peace process inclusive. Before the Malaysia meeting in 2011, the two sides even agreed to finish negotiations during Aquino’s term. There are, however, substantial obstacles to be overcome. Not least among these are the serious differences between the MILF’s and the government’s proposals, which have been described as the distance between heaven and earth. The MILF wants a sub-state vested with substantial powers and building on the Memorandum of Agreement on Ancestral Domain (MOA-AD), initialed but never signed by the previous administration. Aquino’s team is, however, constrained by entrenched local interests, breakaway MILF groups, previous Supreme Court decisions, and public opinion. The appearance of a new MILF breakaway group and the continuing activities of the Abu Sayyaf Group mean that violence will mar the

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THE ASEAN-10 period of negotiations between the Aquino administration and the MILF. A more serious problem for the administration is convincing the MILF that government proposals will actually be implemented. Some local leaders have successfully petitioned the Supreme Court for a temporary restraining order against the appointment of officersin-charge to the Autonomous Region of Muslim Mindanao (ARMM). These appointments were to be the first step in creating the reformed ARMM that, the government hoped, would entice MILF supporters away from their proposal for a sub-state. The MILF does not believe that the ARMM can be salvaged or that Congress will pass a new Organic Act. This pessimism is well placed: while surveys indicate that 83 per cent of Filipinos are optimistic that the Mindanao conflict will be resolved, there is no popular support for granting regional authority that could lead to the “dismemberment” of the Philippines. Additionally, amending the Constitution to accommodate MILF proposals may not be possible; the Supreme Court earlier declared the MOA-AD as unconstitutional. It is also possible that any exercise in constitutional amendment will be regarded as a ruse to change the charter to allow the President to run for a second term. The enormity of its domestic challenges means that the Aquino government would have preferred to focus on its internal agenda. The recent military assertiveness of China in the Spratlys and American statements on maritime security have, however, led the Philippines to re-examine its claims in the area of the South China Sea. Diplomatic efforts on the part of ASEAN eventually led China to sign the tepid Declaration of Conduct in the South China Sea in 2002. In September 2011 the Philippines and China also issued a joint declaration affirming their mutual interest in peace. If the Philippine Government believes that these developments will give it time to strengthen its claim and presence, it is for several reasons mistaken. First, military weakness means that the Philippines’ main option is multilateral diplomacy. But inaction and a lack of follow-through have condemned such diplomacy to failure in the past. The Philippines was able to mount a successful diplomatic offensive in the mid-1990s with joint ASEAN declarations and the opening of bilateral talks with

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POLITICAL OUTLOOK China. But the past nine years have seen only six meetings of the China-ASEAN Joint Working Group, and China has arrived at separate bilateral arrangements with other claimants. Not only is China now more diplomatically savvy, but ASEAN itself is divided on this issue: some ASEAN members do not have an interest in the Spratlys, and some are politically and economically closer to China than to the Philippines. Second, the Philippines will continue to rely on the United States. The Philippine Government was probably ecstatic when Secretary of State Hillary Clinton forcefully declared U.S. interest in the maintenance of maritime security. Since the 1990s the Philippine Government had asked the United States to clarify whether the South China Sea fell within the geographic scope of the Philppine-American Mutual Defense Treaty. But tagging along with the United States has not always been strategically advantageous for the Philippines. In the late 1990s, the Philippine military unveiled a defence modernization plan that included measures to upgrade naval defence. It put plans on hold after 9/11, when the country received substantial military support in the form of counterterrorism equipment and training from Washington. U.S. assistance is also no guarantee of success: after ten years of military operations in Mindanao, Malacañang Palace announced in 2011 that the Abu Sayyaf Group is now working closely with the transnational terrorist organization Jemaah Islamiyah in the Southern Philippines. Unless the Philippines gets over this dependency on the United States, it will not be able to pursue its own goals or, for that matter, to assert Philippine jurisdiction over crimes committed by U.S. servicemen on Philippine soil. This point brings us to the crux of the Aquino administration’s difficulties: a dearth of clear and specific action plans. Aquino has proved both meticulous as a democratic leader and willing to work within the democratic processes even at the cost of delays in his plans. He is unique in his ability to personify sorely needed moral leadership for the Philippines. However, if one wants to change the mindset of Filipinos, one must do more than ban sirens on the streets during rush hour. If one wants to overcome elitism, one must lay the foundations

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THE ASEAN-10 for meritocratic governance. If one wants to gain the upper hand in foreign relations, one must have a well coordinated multi-departmental plan. If one wants peace and national reconciliation, one must be able to implement agreements and provide real economic growth. Nineteen eighty-six is long gone, but it seems that the Philippines needs another “miracle”.

Singapore Hui Yew-Foong On 7 May 2011, Singapore held its Twelfth General Election (GE). Unsurprisingly, the People’s Action Party (PAP) was returned to power with a victory that would have been considered landslide by any standard in any other country. However, Prime Minister Lee Hsien Loong dubbed it a “watershed election”, signaling that the political landscape of Singapore had changed definitively. The new PAP government will have to renegotiate its social compact with a changing electorate. What, indeed, has changed? The PAP won 60.1 per cent of the popular vote in the GE. It still holds 81 out of 87 seats in Singapore’s new parliament. In relative terms this result is a drop from the PAP’s result in the previous election. It won 66.6 per cent of the popular vote and 82 out of 84 seats in 2006. It reflects a slight dip in the ruling party’s popularity. But it does not affect the PAP’s hold on power in real terms. To grasp how much the ground has shifted we have to appreciate the tone of the hustings during Singapore’s 2011 GE campaign. The PAP’s elections strategy has tended to focus on performance legitimacy, that is, its track record of having delivered material benefits to Singaporeans and its ability to continue to deliver. Its slogan in 2011 was of the same strain, with the party’s electoral manifesto entitled “Securing our Future Together”. This approach rode on the back of an unprecedented 14.7 per cent growth in GDP in 2010, when Singapore bounced back strongly from a contraction of 1.3 per cent in 2009.

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SINGAPORE Land Area:

692 sq. km.

Population (2010 World Bank data):

5,140,000

Capital:

Singapore

Type of Government:

Parliamentary democracy

Head of State:

President Tony Tan Keng Yam

Head of Government:

Prime Minister Lee Hsien Loong

Last Election:

2011

Next Election Due:

2016

Currency Used:

Singapore dollar

US$ Exchange Rate (14 November 2011):

US$1 = S$1.28

In spite of the strong economic figures, and thanks not least to the real-time alternative platform of the new media, unhappiness was fermenting around a few hot-button issues. These issues included the influx of foreigners seen to be competing with Singaporeans for jobs and resources, the dearth of affordable public housing, the transport woes of a burgeoning population, the rising cost of living, the growing income disparity, and ministerial pay. The perception emerged that, while Singapore had prospered, its prosperity had not benefited Singaporeans in general. Although the trigger for these issues was material, the basis for people’s complaints was more substantive, drawing on the belief that the elected government had failed to prioritize the interests of the citizens that elected it. In turn, this belief raised questions about the moral authority of the ruling party, and shifted the debate from mere development plans, such as the upgrading of neighbourhood facilities, to fundamental principles and values, such as the value of citizenship. Coinciding with this ferment was the growth in discursive space for raising substantive questions, questions not necessarily answered by claims to legitimacy due to past performance. The changing electorate,

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THE ASEAN-10 about a quarter of which was aged between 21 and 35 and did not form an emotional bond with the PAP through the experience of Singapore’s difficult early years, wanted good, fresh reasons for voting the PAP into government again. The ruling party was quick to realize how much the ground had shifted under it. This realization led the Prime Minister to apologize publicly for the government’s mistakes on 3 May, four days before the polls. Whether or not this apology re-established the emotional connection between the PAP and Singaporeans remains difficult to gauge. In the event, the party lost a five-member Group Representative Constituency (GRC) but won back a long-held single-member constituency from the opposition. What is significant is that, although the opposition seemed to enjoy a groundswell of support, whether as seen through social media or as observed at political rallies, voters did not vote “irrationally”, as had been feared. While some of the opposition parties were able to feature “star catches” such as former government scholarship–holders and former senior civil servants, these candidates were not the ones who won seats in parliament. Instead, it was the Workers’ Party’s Aljunied GRC team, anchored by veteran opposition leader Low Thia Khiang and by Sylvia Lim — who had worked the ground consistently since the last GE — that gained enough traction with the electorate to win an undisputed victory. As the dust from the hustings settled, the PAP made some swift changes to demonstrate its seriousness about addressing the major issues raised during the GE. These included the departure of three cabinet ministers, the joint resignation of Minister Mentor Lee Kuan Yew and Senior Minister Goh Chok Tong from the cabinet, and the creation of a Ministerial Salary Review Committee. The respective ministries also quickly rolled out policies to tighten the inflow of foreigners, increase the supply of public housing, improve social assistance to the poor, and expand the public transport network. Their focus also turned to expanding the reach of the government beyond traditional media, as many ministers began to use Facebook to announce and explain government policies.

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POLITICAL OUTLOOK While the PAP government has shown itself to be responsive and engaging, the increase in fully fledged elected opposition members of parliament from two to six, together with the presence of another three Non-Constituency Members of Parliament (losing opposition candidates who tallied the highest proportion of votes), will make government as usual unlikely. In her maiden speech as an elected MP, Sylvia Lim raised the question of the definition of happiness for Singaporeans, arguing that GDP growth should not be taken as the sole indicator of happiness. This argument shifts political debate to a consideration of fundamental questions about values rather than just the pragmatic questions long stressed by the PAP. One can expect political language in Singapore to be inflected by more substantive arguments in the parliamentary debates to come. To engage citizens, the government has redoubled its efforts to project a more consultative image. One important platform for engagement concerns planning for the Rail Corridor, a stretch of former Malayan Railway land recently recovered from the Malaysian Government. The scope for consultation ranges from development and preservation plans for different tracts to the naming of the former railway land. The net of consultation has been cast broadly, with the intention of involving significant stakeholders, interest groups, and members of the public through channels that allow public consultation and a feedback process. A Rail Corridor Consultation Group has also been formalized. It includes members from NGOs, interest groups, and individuals who have expressed concerns or ideas about different aspects of the Rail Corridor, such as the environment, flora and fauna, history and heritage. The project is poised to become a showcase of the PAP government’s new openness to engaging citizens in the decision-making process. While the Rail Corridor project looks set to be a textbook case of public consultation in Singapore, the case of Bukit Brown Cemetery has brought criticism of the government for the lack of consultation. In May the government announced that the cemetery had been gazetted for development, and in September the Land Transport Authority unveiled plans to build what it calls a dual four-lane road through the

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THE ASEAN-10 cemetery. Civil society groups and members of the public protested against the impending loss of another piece of Singapore’s cultural heritage and green lung. Social media were abuzz with stories of the historical figures associated with the cemetery. So far, two aspects to this episode are clearly worth noting. First has been the government’s willingness to take an active role in the documentation of the affected graves. While the public was not consulted on the development plans, the government has actively engaged key stakeholders to work to document Bukit Brown. It has proved willing to provide funding for the documentation project. In contrast, no such initiative was taken in the cases of the Bidadari Cemetery (exhumed 2001–06) and Kwong Hou Sua Teochew Cemetery (exhumed 2008–09). Second has been the much greater articulation, whether in the national press or in social media outlets, of the noneconomic value of the place, in both heritage and ecological terms. At the same time, interest in Bukit Brown has transcended narrow familial or communal interests, such that even Singaporeans without family members buried there are keen to see preservation or proper documentation of the graves. In other words, the Bukit Brown Cemetery is not simply a communal cemetery. Rather, it is seen as a repository of Singapore’s cultural heritage, and valued as such. The manner in which the drama surrounding Bukit Brown unfolds is likely to set a precedent for the manner in which the government will engage Singaporeans over unpopular decisions. Through the 2011 GE, the PAP government has become cognizant of a new generation of Internet-savvy voters, voters unwilling merely to cast their ballots once every five years and to leave everyday politics to the ruling party. This portion of the electorate will only grow with every subsequent election. Singapore’s social compact will thus have to be renegotiated to engage citizens on matters of day-to-day governance, so that they have good reasons to vote the PAP in again. The questions are, how broadly the government should engage its citizens and where to strike the balance between government priorities and citizens’ views when it comes time to make decisions.

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Thailand Nicholas Farrelly The June 2011 election of Prime Minister Yingluck Shinawatra made clear the resilience of Thailand’s second most powerful political dynasty. After weathering countless setbacks, including the 2006 royalist-military coup, the Shinawatra family has survived to capture the nation’s highest political office yet again. For deposed former Prime Minister Thaksin Shinawatra — and the constantly evolving network of political interests that he spearheads — this is a remarkable feat. Long exiled to Europe and the Middle East, Thaksin now enjoys the extra certainty that comes with having his sister in the prime ministerial suite and his men in control of levers of power in the country. Responsibility for their renewed political mandate must be credited to Yingluck, a political novice who faces a number of unenviable challenges First and foremost is the crucial relationship with her supporters. Thailand’s boisterous Red-Shirt protesters, a regular feature of national politics in recent years, and their millions of sympathizers have shown their muscle at the ballot box. These Thaksin supporters have grown accustomed to electoral dominance and have high expectations for the new government. In this respect, recovery from the disastrous floods of August–November 2011 will be a major test for Yingluck. Disruption to agricultural and industrial production means that the government confronts both a weakening economy and a major cleanup and rehabilitation effort. In policy terms support to farmers and the working poor, especially through an unprecedented increase in the minimum wage, stands at the top of the agenda for many of the Yingluck government’s supporters. The Prime Minister needs promptly to deliver on her promises to make life easier for those at the bottom of Thai society. More radical elements among the Red Shirts will not be satisfied by Yingluck’s current caution. She walks a fine line between the audacious reforms demanded by some supporters and the wariness of those Thai conservatives who threaten to topple her government at the first whiff of sedition.

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THE ASEAN-10

THAILAND Land Area:

514,000 sq. km.

Population (2010 World Bank data):

68,139,000

Capital:

Bangkok

Type of Government:

Parliamentary democracy and constitutional monarchy

Head of State:

King Bhumibol Adulyadej

Head of Government:

Prime Minister Yingluck Shinawatra

Last Election:

2011

Next Election Due:

2015

Currency Used:

Thai baht

US$ Exchange Rate (14 November 2011):

US$1 = 30.79 baht

Those conservatives present Yingluck with her second major challenge. Not least, she must handle Thailand’s notoriously interventionist armed forces with care. Thailand’s military elite seeks to maintain its stranglehold on the symbolic heart of the nation, the monarchy. Army commander General Prayut Chanocha is a formidable opponent; he is likely to continue to test the resolve of Yingluck and her team. The army is most concerned about the looming royal succession. Thai society waits, often in silence but sometimes with barely muted trepidation, for the end of King Bhumibol Adulyadej’s reign. After more than sixty-five years on the throne, Bhumibol is the only king that more than 92 per cent of Thais have known during their lifetimes. He is widely described as the “father” of the nation, and his many other titles, which include “lord of life”, also bring him unmatched aura and status. The Chakri dynasty that Bhumibol leads has ruled Thailand since 1782. It is the nation’s most important institution. But the royal family itself faces one of its most troublesome transitions

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POLITICAL OUTLOOK in the years ahead. Many observers repeat the idea that the dynasty enjoys an almost mystical capacity for reinvention. Indeed, its power to reconfigure itself has long proved one of its great assets. In the waning years of King Bhumibol’s reign, however, the diminution of palace power and legitimacy has eroded optimism about its future status. This erosion confronts the Chakris with an immense challenge of their own. Since the coup of September 2006, the palace has suffered a range of setbacks which, taken together, have sullied its public image. Royal advisors still claim comprehensive control over the crucial machinery of public communication. Yet they have largely failed to discourage the proliferation of subversive commentary, especially on the Internet. In addition, international coverage of Thai politics now invariably deals with existential questions about the future role and status of the monarchy. There have been few previous occasions since the overthrow of Thailand’s absolute monarchy in 1932 in which the country’s royalty has found itself so vulnerable to wider social and political currents. The preoccupation for the years ahead is the transition to a post-Bhumibol society and polity. The election of Yingluck to Thailand’s highest office has once again heightened the potential for a clash between the country’s leading electoral dynasty, headed by Thaksin, and the unelected guardians of the country’s sacred royal institution. In 2012 Thailand thus stares down the possibility of reinvigorated royalist street protests, Thaksin’s re-emergence as a public political force, and continued jostling among politicians, generals, businessmen, and palace aides. Such developments would also pose a major challenge to Prime Minister Yingluck and her government. At the end of the Bhumibol era, much attention naturally focuses on the potential claimants to the Thai throne. A public consensus that Crown Prince Vajiralongkorn continues to maintain the strongest claim has replaced widespread earlier speculation about who might take the throne next. Nonetheless, there are real doubts about exactly how smooth the transition may be. Princess Sirindhorn, long the favourite of many Thai royalists, still works diligently in the background.

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THE ASEAN-10 Until the time comes nobody will make a premature move. But Bhumibol’s death will result in a nationwide outpouring of grief, likely to be on a scale that will bewilder observers but which will be entirely appropriate in the Thai cultural realm. At stake will be the fortunes of the world’s wealthiest royal dynasty and the pride of a Shinawatra family political dynasty that has proved unbeatable at the ballot box. The outcome of this dynastic showdown has cultural implications that are rarely remarked upon. Generational, even cosmological, forces will be unleashed with Bhumibol’s death. Coming to terms with a new monarch — and with the other social and political changes that may follow — will test the mettle of Thais deeply accustomed to the current order. It is still unclear whether the loyalties accorded to King Bhumibol will ever transfer to his successor. In 2012 Thailand will inch ever closer to the end of the Bhumibol era. It may be that the King’s health remains stable and that he lurches, unsteadily, into 2013. But with every passing year he becomes a more ethereal figure, occupying a curious position in the Thai psyche perched between the living and the dead, mortality and deification. At the end of his life King Bhumibol will, inevitably, take on a role as a guardian spirit for those who still treasure his memory. But, just as Yingluck took the prime ministerial mantle from her brother, so will the royal family need to reconfigure itself in accordance with new social and political realities. In the meantime Thai society adjusts incrementally to the reformation that will come when King Bhumibol is no longer on the throne.

Vietnam David Koh The domestic political winds of 2011, which saw elections to senior posts in the Vietnamese Communist Party and in the government, have now calmed. In 2012, the new office-holders will have to prove their mettle and earn their legitimacy in office by tackling thorny and difficult issues of governance. We can expect strong

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POLITICAL OUTLOOK

VIETNAM Land Area:

332,000 sq. km.

Population (2010 World Bank data):

88,362,000

Capital:

Hanoi

Type of Government:

Socialist republic

Head of State:

President Truong Tan Sang

General Secretary of the Communist Party of Vietnam:

Nguyen Phu Trong

Head of Government:

Prime Minister Nguyen Tan Dung

Last Election:

2011

Next Election:

2016

Currency Used:

Dong

US$ Exchange Rate (14 November 2011):

US$1 = 21,005 dong

debates among and moves on the part of Vietnam’s newly elected national leadership. But will the bureaucratic and — even worse — incompetent machinery of the government be up to the task of improving governance in Vietnam? If the challenges to governance are not overcome or at least seriously addressed, 2012 will prove just one more year of uneven performance, with consequent implications for legitimacy, from the leadership of this one-party state. Economic growth will be coupled with high inflation and with a lack of tough, necessary policies. The perception among Vietnamese that politics lies at the root of the country’s problems will, if this scenario proves accurate, mean that they will continue to yearn for fundamental political change. The able and apathetic will remain overseas in order to avoid the unpleasant reality at home, notwithstanding the pain of being away from home permanently.

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THE ASEAN-10

The Politics of Macroeconomic Management and Economic Competitiveness Economic issues — relating above all to growth and inflation and to governance and competitiveness — have become central to Vietnam’s politics. The Vietnamese Communist Party customarily declares a target for economic growth and leaves the matter of reaching that target to the government. The target can be unrealistic; it results from discussions among more than 200 people, the large majority of them neither economists nor men and women familiar with the mechanics of the modern Vietnamese economy. The National Party Congress in January 2011 ordered a target of 7.0–7.5 per cent annual economic growth during 2011–15, but nine months later the Party revised this order and set a 2012 target of 6.0–6.5 per cent. As of the time of writing, Vietnam’s rate of growth for 2011 stood at the lower level of 5.8 per cent. The difference between a target and the forecasts used by many other governments is that the use of targets opens the risk of the pursuit of economic growth without regard to objective conditions. Taking policymaking out of the hands of nonexperts and adopting a more conservative approach to targeting and forecasting may benefit Vietnam. It may enable the country to avoid the mistake of achieving target levels through either over-expansionary or under-expansionary growth. In essence, one may view 2006–08 as a period of over-expansionary growth that resulted in Vietnam’s current macroeconomic instability and makes clear the fundamentally political nature of the country’s economic problems. In 2012 high inflation will remain the rabid dog snapping at the heels of the economy and indeed of Vietnamese society. Interbank interest rates have shown a long spike since early October 2011, but this spike is just the latest in a series of spikes since 2008. The official U.S. dollar exchange rate has also reached a new high of almost 21,000 dong to a dollar; the informal-market rate is usually slightly higher. While this rise could be good for exports, it also imports inflation and keeps the Vietnamese economy stuck in the rut of low value; other efforts to increase competitiveness are largely absent. Hubris and the

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POLITICAL OUTLOOK belief that Vietnam is an irresistibly attractive destination to foreign investors make unlikely any effort to hold exchange rates stable while improving productivity. A government budget in the red and a trade balance in deficit will also continue to be major drivers of inflation. The dilemma for Vietnam is that it does not produce goods of sufficient quality to compete with imports. Further raising the risk of continued inflation, many areas of the country — including the largest urban centres — look forward to large infusions of state capital to improve infrastructure. (There are indications that the Party is willing to open the door wider to private investment in infrastructure, both domestic and foreign, but the attractiveness of such opportunities will depend on the details of the projects in question.) On top of all these problems, the government declared in October 2011 that sovereign debt would reach 65 per cent of GDP by 2015, compared to 54 per cent in 2011. Should a global financial crisis strike, Vietnamese exports, which go mainly to the United States and to Europe, would be severely affected. In order to increase foreign exchange earnings, the government has moved to promote trade with a wider range of countries, including those that were not traditional markets for Vietnamese goods. Israel, India, and Sri Lanka are examples. But promotional efforts leave unaddressed the issue of the competitiveness of Vietnamese goods relative, for example, to Chinese exports. Hanoi pledges to restructure the economy to improve macroeconomic stability and to revise its model of economic growth to place more emphasis on quality and sustainability. Its strategies centre on export and investment promotion, on restructuring state firms, and on restructuring financial markets. While the Vietnamese Government has said that such reforms “cannot be delayed any longer”, it lacks a clear approach to the issue from which it cannot afford to run away: competitiveness. The policy outline presented by Prime Minister Nguyen Tan Dung in mid-October, at the last sitting of the National Assembly for 2011, was encouraging. His government announced a major restructuring of state enterprises, long the target of complaints about the inefficient

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THE ASEAN-10 use of capital and rampant corruption. The pace of the equitization — Vietnam’s variant of privatization — of these enterprises will increase, and oversight of state conglomerates will focus more on profits. Lossmaking firms will face equitization. The state will narrow the band of businesses that it deems necessary to control. The banking sector will also see a culling of small institutions. The Party has set a target of maintaining 3.8 million hectares of land under rice cultivation. This target embodies a strategy of both food security and promotion of rice exports, which have proved very profitable for the country. Vietnam has trailed only Thailand among the world’s leading rice export economies. An effort to increase the export of processed agricultural goods is also in the cards. An emphasis on infrastructure and development in rural areas, especially in the Mekong Delta, could result in a rural uplift in the next ten years, if implementation proves as strong as the rhetoric. But question marks abound. Economic restructuring will involve altering the political ground to make rules fair for all, whether state or non-state businesses. Constitutional amendments to facilitate this outcome are in the works for 2012. The import of constitutional change will be its effect in motivating the private sector through recognition of its legitimacy. Sources indicate that the amendments are likely to follow the revisions to the Party Platform passed at the Eleventh National Party Congress in January 2011, which saw few if any breakthroughs in the political arrangements through which the Vietnamese Communist Party rules the country. No one expects the Party to allow amendment of Article 4, which gives the Communist Party the status of the “leading political force” in the country. Through the Party-dominated National Assembly and the Standing Committee of the National Assembly, the Party will vet and approve all changes before they are put to a vote. It is not clear if any of the proposed changes will be put to nationwide referenda; these have not been customary in Vietnam. Among the most important changes for which observers of Vietnamese politics should look are those to internal Party rules. Since 1998 a list of “Things that Party Members Cannot Do” (or “list of

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POLITICAL OUTLOOK sins”) has become a permanent feature of those rules. All the same, corruption on the part of more than a few high officials cum Party members has by no means disappeared. There has also been clamour among more progressive members for the Party to allow a stronger element of competition in internal Party elections. A revised list of sins, issued in early October 2011, includes new provisions, such as those relating to electoral competition. As of this writing, the author has not yet seen this document for himself. Should it fail to abolish pre-election screening of candidates in the Party’s internal elections, the clamour is likely to continue. With generational change, the more progressive Party members may well have their way in the end. In many ways, Vietnam and its ruling party need to choose between retaining Article 4 of the State Constitution and taking needed action to reduce corruption stemming from the monopoly of political power by a single political party.

Foreign Policy In late 2011 Communist Party General Secretary Nguyen Phu Trong visited China and State President Truong Tan Sang India. The understanding on peaceful resolution of maritime disputes that Vietnam and China achieved as a result of Trong’s visit awaits implementation. No concrete action taken so far allows for confidence that peace will rule the seas from now on. Furthermore, Vietnam’s involvement of India in the South China Sea, in particular through joint exploitation of resources, has further complicated the game. To say that Vietnam’s holding hands with India on the South China Sea irritates Beijing is an understatement. China has started oil exploration in the Gulf of Thailand, in a move that encircles Vietnam. The year 2012 is likely to be a crucial time for Sino-Vietnamese relations. It will make clear whether their understanding regarding principles relating to the resolution of disputes will be respected and adhered to. The expected tabling of the Code of Conduct on the South China Sea for all parties to disputes there will be also be an important benchmark in Sino-Vietnamese relations. Its signing and parties’ adherence to it will be a step towards peace. The absence of those developments

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THE ASEAN-10 will confirm the wisdom of Vietnam’s grand strategy: not merely to wait for ASEAN’s dealings with China to achieve Hanoi’s goals in the South China Sea, but in addition to embrace major powers with interests there, whether in the containment of China or in partaking of the South China Sea’s riches.

Conclusion If Vietnam fails successfully to tackle issues of governance, pundits and critics will continue to ask what Chinese socialism has that Vietnamese socialism lacks. To add to the insult about the incompetence of Vietnam’s bureaucracy, China is a much bigger country. Perhaps the way forward for Vietnam is to say and boast less about socialism, but to do more. Ironically, too, Vietnam’s embrace of major powers other than China could result in important domestic political changes. For that embrace will require that suspicions of “ideological enemies” be dramatically lowered. We may well, then, see foreign and domestic developments in Vietnam converge in the half-decade ahead, when increased trust of “ideological enemies” could create space for the importation of better ideas and practices of governance.

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REGIONAL ECONOMIC OUTLOOK Sanchita Basu Das

T

ogether the economies of Southeast Asia are expected to grow at 5.4 per cent in 2011 as compared to 7.9 per cent registered last year. The slower growth is owing to several factors, including a high base effect. Individually, the bigger economies like Indonesia, Malaysia, and Thailand have grown at a more moderate pace in 2011 than in 2010 (Figures 1 and 2), when they were rebounding from the global

Figure 1: Real GDP Growth in the ASEAN-5 Countries, 2007–13

15.0 13.0 11.0 (% y/y)

9.0 7.0 5.0 3.0 1.0 –1.0 –3.0 2007

2008 Singapore Malaysia

2009

2010

2011*

Thailand Philippines

2012*

2013*

Indonesia

NOTE: * 2011, 2012, and 2013 are estimated GDP growth rates. SOURCES: ADB, IMF, author’s estimate.

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ECONOMIC OUTLOOK Figure 2. Real GDP Growth in Brunei, Cambodia, Laos, Vietnam, and Southeast Asia, 2007–13

10.0 8.0

(% y/y)

6.0 4.0 2.0 0.0 –2.0 2007

2008

Southeast Asia Vietnam

2009

2010

2011*

2012*

Cambodia Brunei

2013* Laos

NOTE: * 2011, 2012, and 2013 are estimated GDP growth rates. SOURCES: ADB and author’s estimate.

recession. For most of these economies, the growth in the first half of 2011 was driven by robust domestic demand. Private consumption benefiting from higher employment, increases in farm incomes and wages, and gross fixed capital formation were the main drivers to the headline growth. The key drag on the economies came on the external front. Apart from the high oil prices, the region was also challenged by the calamities in Japan, uncertainty in the United States, and the re-emergence of sovereign debt problems in Europe. The countries that are more open to trade, like Singapore, saw much slower export growth in 2011 than in 2010. Although Malaysia saw a better export performance, it was more due to the positive price effect of high commodity and energy prices. Some countries saw export expansion in particular sectors. While

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REGIONAL ECONOMIC OUTLOOK

101

Cambodia registered buoyant exports for garments and tourism, the Lao PDR did for gold, copper, and hydropower. After the first quarter, imports rose across the region, driven by buoyant private consumption and investment and by larger volumes of oil and commodities. Given the moderation in external demand and higher imports, the current account surplus is likely to decline in 2011 (Figure 3). Inflation became another sore point for most of these economies. In the case of Singapore, Malaysia, and Vietnam, inflation has remained persistently high for most of 2011. The inflationary pressure was generally domestic driven on higher wages, transportation service, and food prices (Figure 4). Core inflation rose in many countries, prompting central banks to tighten monetary policy through increases in policy

(% (% y/y)of GDP)

Figure 3: Current Account Balance in Southeast Asian Economies, 2010–13

45.0 10.0 35.0 8.0 25.0 6.0 15.0 4.0 5.0

Southeast Asia Laos Brunei 2011* 2010

2011*

Vietnam

Thailand

2010*

Singapore

2009

Philippines

Laos

2008

Malaysia

2007

Indonesia

2006

Cambodia

–2.0

Brunei

–15.0 0.0

Southeast Asia

–5.0 2.0

2012*

Cambodia Vietnam 2012* 2013*

NOTE: * 2011, 2012, and 2013 are estimated figures. SOURCE: ADB and author’s estimate.

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ECONOMIC OUTLOOK

2010

2011*

2012*

Vietnam

Thailand

Singapore

Philippines

Malaysia

Laos

Indonesia

Cambodia

Brunei

21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 –1.0

Southeast Asia

(% y/y)

Figure 4. Inflation Rate in Southeast Asian Economies, 2010–13

2013*

NOTE: * 2011, 2012, and 2013 are estimated inflation. SOURCE: ADB, IMF, and author’s estimate.

interest rates (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam); reserve requirements (the Philippines); the exchange rate (Singapore); and curbs on credit growth (the Lao PDR and Vietnam). Fiscal policy was also tightened in the Philippines and Vietnam in the first half of the year. The general attitude of risk aversion in the global markets was also reflected in the emerging markets in the second half of 2011. The domestic stock market indices tumbled as investors sold local stocks (Figure 5). With foreign investors still holding a substantial amount of local stocks, the countries in Southeast Asia remain vulnerable to more negative developments in the Western world. This is despite the large foreign reserves that most of these countries hold which can provide a good buffer in case of any outflows. As for the foreign exchange, the global uncertainty took a toll on all the major Asian

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Figure 5. Relative Performance of ASEAN-5 Main Stock Market Indices, 2008–11

January 2008=100

160 130 100 70

Singapore STI Bangkok SET Manila PSE Composite

Oct-11

May-11

Dec-10

Jul-10

Feb-10

Sep-09

Apr-09

Nov-08

Jun-08

Jan-08

40

KLSE Composite Jakarta Composite

SOURCE: Bloomberg.

currencies as they weakened against the U.S. dollar in the later part of 2011 (Figure 6). In 2012 the economies of Southeast Asia are expected to grow by 5.6 per cent. Given the current adverse global circumstances and high inflation to boot, an expected growth rate of 5.6 per cent looks quite good! Indonesia is expected to outperform most of the other countries in the region. Indeed, the rising per capita income and stable prices offer a good environment for consumption and investment. The rapid rise in domestic demand will lead to strong import growth for both consumption and capital goods. Given that the economic woes in the United States and Europe will be protracted, the pace of export growth will be comparatively muted. This will further narrow the current account surplus to 4.3 per cent of GDP. Broadly, inflation is likely to be moderate in 2012 due to high base effect and softer oil and food prices. But a few countries may feel the

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Figure 6: Relative Performance of ASEAN-5 Currencies to the U.S. Dollar, 2008–11

January 2008=100

140 130 120 110 100 90

SGD/USD

MYR/USD

THB/USD

IDR/USD

Oct-11

May-11

Dec-10

Jul-10

Feb-10

Sep-09

Apr-09

Nov-08

Jun-08

Jan-08

80

PHP/USD

SOURCE: Bloomberg.

inflationary pressure. For Indonesia, inflation could be tending higher due to buoyed domestic demand and an increase in fuel prices as the government seeks to wean itself from fuel subsidies by 2014. Inflation in Vietnam may well stay in double digits. On the whole, policymakers need to be on alert for most of 2012 and 2013. While international commodity prices may be softening, managing inflation will remain a priority. Economic growth will continue to be a concern given the fact that the risks in the eurozone and the bumpy recovery of the United States are not going to dissipate any time soon. Additionally, capital, which has been flowing into the region at a manageable pace till now, may become more volatile if the global economic conditions worsen and the region maintains its strong economic fundamentals. In the long run, to compensate for the weaknesses in the major industrial countries, Southeast Asian economies must press forward

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with their structural reforms to cultivate domestic and regional demand, promote price stability, and foster inclusive growth. The ten economies are already on their way to form an ASEAN Economic Community by 2015. The leaders have shown their commitment time and again to speed up and strengthen the communitybuilding process. In the last few years, they have brought forward the date for meeting the goals of Vision 2020 to 2015, ratified the ASEAN Charter, implemented the AEC Blueprint, and adopted the Master Plan on ASEAN Connectivity. What is needed now is for the multiple ASEAN stakeholders to work together, create awareness about the integration, and use the policy initiatives effectively to finally raise the flows and volumes of goods, services, people, and information across the ASEAN region. REFERENCES Asian Development Bank (ADB). Asian Development Outlook Update. ADB, September 2011. International Monetary Fund (IMF). World Economic Outlook. IMF, October 2011.

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2012: A Reversal of Food Crises? Aekapol Chongvilaivan The developments in 2011 manifested ever-increasing food prices. According to the Food and Agriculture Organization (FAO), the food price index reached its peak of 209.1 in February 2011 (Figure 1). Food prices in January–October had prevailed above those in 2010 and, notwithstanding emerging signs of an economic slowdown and vulnerability in the United States and the eurozone, ran steadily above the peak of 184.6 hit during the food crisis in 2008. The bullish trend of food markets is attributable mainly to an influx of food export demands from large emerging countries like China and India, on top of plunges in rice production due to a series of major floods in Southeast Asia.

Figure 1: Food Price Index (2002–04 = 100)

250.0 200.0 150.0 100.0 50.0 0.0 Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec 2011

2010

2009

2008

2007

SOURCE: Food and Agriculture Organization.

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Southeast Asian countries have felt the effects of the unprecedented spike in food prices differently. Food exporters like Cambodia, Thailand, Vietnam, and, to a lesser extent, the Lao PDR stand to tap benefits from the substantial rises in food prices in terms of earning more revenues from farm and food products and burgeoning agro-industry sectors. In contrast, the countries that count heavily on food imports, such as Brunei Darussalam, the Philippines, and Singapore, are the most affected, as millions of the poor were affected by another round of the food price stampede. The Asian Development Bank warned that the soaring trend of food prices is “a serious setback for the region that has rebounded rapidly from the global economic crisis”. The second half of 2011 witnessed some encouraging signs as FAO’s food price index exhibited a slight decline from 202.6 in August to 190.1 in October. There are at least two catalysts that explain why the mounting trend was, though modestly, reversed. First, the 10 per cent drop in food prices in September and October 2011 reflected a slow recovery of the global economy as the sovereign debt crisis continued to loom over the eurozone and economic indicators in the United States pointed to gloomy consumer and investor confidence, sluggish industrial production, drastic inflation, and a remarkable hike in unemployment. Additionally, world production of crops, including rice, wheat, and coarse grains, has risen strongly. For instance, the United Nations estimated that the world production of rice will increase by 3.4 per cent to 482.4 million tonnes in 2011–12 as bigger crops in India, China and, not least, Vietnam compensate for the effects of the flooding on rice production in Southeast Asian countries, especially in Cambodia and Thailand. Southeast Asia, nevertheless, is experiencing several upward pressures which may force the food prices to bounce back rapidly in 2012 and thereby propel millions of the poor in the region into chronic poverty. First and foremost, the United Nations has warned of the potential for serious food shortages in parts of Southeast Asia as the floods wiped out rice paddies and other crops, leaving millions of acres of arable land inundated, and aid delivered to those in need appeared

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ECONOMIC OUTLOOK inadequate. According to FAO’s estimates, the floods eradicated 12.5 per cent of rice farmlands in Thailand, 6 per cent in the Philippines, 12 per cent in Cambodia, 7.5 per cent in the Lao PDR, and 0.4 per cent in Vietnam. Given that Thailand alone accounts for approximately 31 per cent of the world’s rice exports, the momentous slashes in rice production are expected to trigger another round of the food crisis in Southeast Asia. Even though the effects of flooding tend to be shortlived as farmers are set to replant soon after the floods recede and make up the lost production, it has been estimated that the rice price may shoot up 21 per cent to US$750 a tonne by December 2011. Furthermore, the effects of the worst inundation in Southeast Asia on food prices have been intensified by the Thai Government’s statebuying policy — a scheme pledged by Yingluck Shinawatra to win votes during this year’s election — whereby the government buys up rice from local farmers at US$480 per tonne, which is a great deal above the market price. The United States Agency for International Development (USAID) figured that this distortive policy would lead to a sharp hike in rice prices and a significant slump in rice exports by a greater extent than the effects of the floods, thereby inflicting pain deeply on countries where access to food is by and large limited. As a matter of fact, 100 per cent grade B Thai rice is currently priced at US$628 per tonne — 21 per cent above the price prevailing prior to the July election in which Ms Yingluck came to power. Last but not least, Southeast Asia’s closer economic ties to China and India have set the stage for growing food demands from the economic giants to continue. Since the ASEAN Free Trade Area and the ASEAN–China Free Trade Agreement came onto effect in January 2010, an influx of export demands has remarkably fueled a rally of food prices in many Southeast Asian countries. Sugar prices, for example, surged by 44.7 per cent in 2010–11 as a result of the trade pacts. The trend of vigorously growing food demands is expected to continue in 2012 and beyond and thereby serve as the driving factor in rising food prices in Southeast Asia. The reason is that China and India have firmly established themselves as Asian economic powerhouses with ceaseless increases in income per capita and poverty reduction,

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and the tariff and non-tariff barriers such as export restrictions and product standards that once considerably discouraged, if not hampered, the agricultural exports from ASEAN countries to China and India, have been persistently eliminated. To conclude, the year 2012 is far away from the end of the food crisis in Southeast Asia, even though the last few months of 2011 observed a reticent drop in food prices from the peak reached in February 2011. Rather, the floods in many parts of Southeast Asia, opportunistic government interventions in rice markets, and incessantly growing demands for agricultural exports from emerging economies like China and India open up large room for severe food shortages and stampedes in the region.

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Thailand as Global Automotive Hub: Impacts and Prospects after the Floods of 2011 Euamporn Phijaisanit Following the recent impacts of the earthquakes and tsunami in Japan in early March 2011, the mega flood in Thailand in October of the same year has further interrupted not only local but also regional and global supply chains of automobile production and vehicle exports. Thailand currently ranks as the world’s twelfth-largest automobile manufacturer, producing 2.5 per cent of the world’s total automobile output in 2010. Major original equipment manufacturers (OEMs), mostly Japanese foreign direct investments (FDIs), such as Toyota, Honda, Nissan, and some American FDIs, namely General Motors and Auto Alliance (Ford and Mazda), have assembly locations in Thailand with a combined annual production capacity of approximately 1.7–1.8 million units. This makes up more than 85 per cent of the country’s total automotive sector production capacity of approximately 2 million units in 2010. Before the flood experts predicted that Thailand will attain the global top ten status on output of 2.3 million units in four years; and the amount is expected to increase to 2.5 million by 2020. In 2010 more than half of the vehicles assembled in Thailand were exported, mainly to Australia, New Zealand, the European Union, the Middle East, and within ASEAN. Thailand’s share of Japan’s global car exports is one tenth. Thailand experienced its worst flooding in fifty years after heavy monsoon rains caused a large amount of water from the northern dams to flow southward into the Gulf of Thailand. Due to the overaccumulated volume, the water swamped large areas of farmlands and closed huge industrial estates in more than thirty provinces. Automotive assembly and parts factories are located mainly in and around the provinces of Ayudhya and Pathumthani in the north of Bangkok, the area most severely affected by the flood. Almost 10 per cent of auto parts for local production come from the flood-affected

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region. Thus, the average monthly production loss in the automotive sector has been estimated to be as large as 100,000 units. The floods have cut particularly Japan’s targeted car output from Thailand by nearly 90 per cent; this is not to mention production stoppages in Canada, the United States, and other parts of the world that have also been affected by the Thai supply bottleneck. With the flooding halting production, and with Thailand being the sole source of parts for some companies, the global automotive supply chain structure has been severely disrupted. In the short run, OEMs typically recover production losses by accelerating production in the post-flood months with increased work hours to utilize the full capacity of the plants. For some firms, like Honda, most severely affected by the floods, the recovery period might take longer than six months. It is also likely they will plan to shift production to alternative locations, like Indonesia and Malaysia. For example, to overcome the parts shortages at their Thailand plant, Honda had the option to divert assembly of their Jazz model to Indonesia. In fact Indonesia has already been assembling the Jazz model for several years. In the long-run, the just-in-time production needed adjustment; firms are likely to increase stocks to ensure enough supply in time of unexpected shocks. Moreover, they will tend to look for geographical locations that are likely to be least affected by natural disasters. Japanese OEMs in India, particularly Honda, have already started increasing their localization content to approximately 80 per cent, while the remaining auto parts are likely to be supplied either from Japan or other ASEAN countries. Despite the possibilities for firms to relocate, experts believe that automotive production in Thailand will only be affected in the short and medium run. In the long run, given the country’s attractive investment promotion, established coordinating public agencies and financial institutions, convenient industrial logistics, well-suited facilitating infrastructure, existing overall supply chain linkages and supporting sectors, Thailand will still continue to be an automotive production hub in the region.

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ECONOMIC OUTLOOK In retrospect, the automobile industry has been a fast growing sector by the nature of its competition, product life cycle, and consumer demand. Owing to its intensive forward and backward linkages to several key elements in the economy, the industry exerts a strong multiplier effect on the country’s growth. Due to its technology spillover, the industry has become increasingly standardized worldwide. Since the 1990s, multinational firms have been moving their production stages from their headquarters in developed countries to developing countries to take advantage of the lower labour costs. Consequently, many developing countries raced to attract FDIs by the overseas multinationals. Along with her liberalized trade regime during the same decade, the Thai Government has started to focus on industrial clusters to provide opportunities to new entrants. Thailand has been one of those countries offering attractive investment incentives to foreign firms, expecting cumulative benefits for her economy. In fact, Asia as a whole has emerged as a global automotive hub over the last two decades. This is a development that entailed the long-term accumulation of skills and the formulation of economic and social development plans. So, how does Thailand differ among the other automotive FDI recipient countries in the region? At present, Thailand’s automotive industry is the largest and one of the most advanced in Southeast Asia. It is ASEAN’s largest automotive market and assembler and the world’s second-largest manufacturer of pickup trucks after the United States. This has been the outcome of long-term industrial policies that established the country’s good fundamentals in favour of industrial supply chain clusters and linkages. The government’s support and promotion of the automotive industry has been consistent for decades. Policy and procedure have been set to facilitate the process in which this industry would grow from the assembly plant stage to the production plant stage. Being ahead of the others in the region, Thailand has long since moved on from being an assembler to being a producer of complete vehicles. In general, a manufacturer will not consider moving if the supply chains are not relocating. Moreover, excessive flooding like this has not

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been a regular occurrence for several decades. Nevertheless, even if it is still not easy for manufacturing plants to relocate to other industrial zones or move to other countries, the Thai Government must still show satisfactory political commitment and restore confidence of investors in these industrial zones. In the long run, the situation rests on the public sector’s performance during the post-flood reconstruction and overall management in making the country conducive for living and doing business. In conjunction with this, several points are worth noting. First, this flood episode called for a proper system of disaster management and plans that must be materialized at a national and, perhaps, regional cooperative level. Since regionalism has become more intensified, countries have become more connected economically and socially. Technically, they can be said to be stakeholders of one another’s crises. As crises and disasters are now tending to happen at more regular intervals, the ASEAN region as a whole must join hands to prepare for future unexpected events. Second, macroeconomic management, fiscal, and monetary policies must be reasonably consistent to effectively assist in the recovery of firms and consumers. Some measures implemented by the Thai Government have been, for example, the extension of tax payment dates for Japanese firms from November to December and the relaxing of rules of financial institutions for specific businesses. The cabinet has approved an increase in the budget deficit for the reconstruction of the provinces from disasters and to help victims, but the details have not been, and are unlikely to be, disclosed to the public. The results of the budget utilization for recovery remain to be observed over the years. Third, in terms of monetary policy, the central bank must cautiously weigh between its inflation targeting goal and the financial and operating costs of businesses that have been affected by the flood. Core inflation in the last quarter of 2011 was close to 3 per cent, the top range of the Bank of Thailand’s inflation target. Despite the central bank’s dilemma of high inflation versus high interest rates, many commercial banks and economists in Thailand share the view that the policy interest rate should remain at 3.5 per cent, at least till the end of the year.

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ECONOMIC OUTLOOK Fourth, among many other populist policies, it is important that the government is cautious in carrying out its policy on the minimum wage of 300 baht (US$9.70) in 2012 that had been promised by Prime Minister Yingluck’s Puea Thai Party in its July 2011 election campaign. Even though the rise had been pushed forward to April 2012 from January 2012, this would still make it difficult for companies to restart their operations once the water subsided. Relative to her ASEAN neighbours, the wage is 5 times higher than the minimum in Vietnam and around 2.5–4.6 times that of Indonesia. A final note, that is not something new: political stability in the country should be a variable that is not overlooked, as strikes, riots, or closures of roads, railways, airports, and seaports seriously interrupt supply channels and affect the proper functioning of economic activities.

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Myanmar: Facing the Future Moe Thuzar The year 2012 will continue to see Myanmar preparing to emerge from decades of relative isolation with a series of political and economic reforms to signal its readiness for ASEAN chairmanship in 2014. Where would reforms be most effective if Myanmar is to catch up with the rest of ASEAN in regional integration efforts and make up for the lost decades? Which direction should these reforms take? Thought leaders, policymakers, and the business community in Myanmar are asking these questions as they assess Myanmar’s ability to finally open up through ASEAN, an aspiration of many Myanmar technocrats when the country joined ASEAN in 1997.

Master Plan on ASEAN Connectivity The benefits of being more closely “connected” with other members of ASEAN are many. Consumers, workers, and the people in general would benefit from improvements in the economy through greater inflows of foreign direct investment, liberalization of the economy, upgrading of infrastructure (including transportation and ICT), development of ancillary services, and improving ability to create jobs for the populace. With the Master Plan on ASEAN Connectivity now being implemented, cooperation with other ASEAN member states and development partners to implement the Master Plan priorities will help Myanmar improve her infrastructure and streamline economic policy processes. All this will lead to a higher standard of living in the country. The current process in Myanmar to review and reform laws and procedures is encouraging. Effective participation in ASEAN processes, especially the ASEAN Economic Community, requires policy reforms and consistency in policy as well as in the application of policy. Important changes will also need to be made to the country’s education and labour policies, so that the workforce will be creative, competent,

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ECONOMIC OUTLOOK and competitive. While Myanmar has traditionally been considered an agricultural country with rich natural resources, her most valuable resource is actually her people.

Economic Competitiveness Another key concern is boosting the competitiveness of the local business community. Dr U Myint, the leading economic advisor to Myanmar’s President, has highlighted some common-sense basics for the future direction of economic reforms in this area. Levelling the playing field is important in boosting competitiveness of the corporate sector, especially through (a) fair access to the country’s natural resources; (b) fairness in granting licences and permits to take up business opportunities; (c) equal treatment in applying rules and procedures; (d) elimination of arbitrary and ever-changing rules and regulations; (e) reducing official corruption; (f) ending payment of arbitrary dues, donations, etc.; and (g) transparency and accountability in the application of rules and procedures. A unified exchange rate will facilitate transactions with trading partners and foreign investors. These are just part of a long laundry list for a country that has remained an agrarian economy since independence in 1948, through the failed years of the “Burmese way to Socialism” and the lost years under military rule. Starting from a low base, one can argue that the only direction for Myanmar to go is upwards. Myanmar is confronted with an embarrassment of choices in the array of policy and growth models or combinations thereof that she can choose from. But her success in securing a progressive and prosperous future for her people will depend on her ability to overcome the key challenges highlighted above by formulating and implementing a development policy that is appropriate for her specific situation, including progressing reforms at a pace that the people of Myanmar can absorb and adapt to. Thant Myint-U, the well-known historian on Myanmar, in his latest book Where China Meets India presents a potential best-case scenario where Myanmar will emerge from her former isolation, with balanced development, cognisant of the need for environmental protection, and

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with social mobility, all of which will assist Myanmar on the road to democratic governance. Assuming this optimum scenario, policymakers in Myanmar will need to consider the following second-order issues: How to bring about a more equitable distribution of wealth and social protection

It is tempting to push this concern to the back seat amid the current impetus of generating economic growth. However, Myanmar has been witness to, and now has the opportunity to learn from, numerous examples of pursuing growth at all costs around the globe. It is interesting that Myanmar has put poverty alleviation prominently on the national agenda for the first time in decades (poverty was hitherto hidden under the rubric of “border area development”). Balancing economic growth with environmental protection and resource conservation

This is to ensure sustainability of economic growth and preservation of a conducive living environment for her citizens. Myanmar — with her rich resources — has much to offer to the region and beyond. But exploitation of these resources needs to be properly managed. Finding a useful role for Myanmar in ASEAN

Beyond the responsibilities of hosting and chairing ASEAN summits. Up to now Myanmar has been preoccupied with domestic issues and concerns. National security and stability overrode proactiveness in relations with neighbours and the country’s position in ASEAN and other regional architecture. Foreign policy will now need to integrate economic, environmental, and social priorities. Further down the road, Myanmar will eventually need to consider her role in the world at large.

Road to Capitalism The road to capitalism is inevitable for Myanmar. The question that Myanmar and all those concerned for her development should ask is,

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ECONOMIC OUTLOOK “what kind of capitalism?” Different forms of capitalism affect a country’s development in profoundly different ways. In adapting these models to Myanmar’s local conditions, important factors such as employment generation, educational standards (including technical education), and poverty alleviation should be considered. Myanmar also faces the challenge of sustainable development — a challenge that besets the world — of reconciling economic prosperity with social and environmental security. Myanmar can add another model to the existing array: a compassionate form of capitalism that puts her people and environment at the core. Myanmar’s work has just begun. NOTE

The author is indebted to Dr U Myint and Mr Rodolfo Severino for their insights and perspectives. The views expressed in this article are the author’s own.

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The Islamic Bond Market in Malaysia G. Sivalingam The sukuk or Islamic bond market has grown both in the quantity and value of bonds issued since the formation of the Bank of Islam in Malaysia in 1983. This is because it was felt among leaders and followers in essentially a Muslim-dominated country that there was a need to develop financial instruments and capital markets that were syariah compliant, that is, instruments that did not charge or earn interest and whose value was not based on its volatility risk or uncertainty. Syariah law, for instance, prohibits funding for the purchase of securities listed in the stock exchange because it is speculative and increases uncertainty, or gharar. The issuance of the Government Investment Certificates by Bank Negara in 1983 that were syariah compliant also coincided with the rise of the dakwah (or fundamentalist Islamic) movement in Malaysia. The sukuk market also provides an avenue to channel savings into productive syariah-compliant financial instruments as opposed to speculative investments. The new Islamic financial instrument, or sukuk, which incidentally is an Arabic word, not only provides an opportunity for portfolio and hence risk diversification but also helps reduce over-reliance on banks as financial intermediaries and sources of long-term funds as they are prone to risk emanating from currency and maturity mismatches. The development of the Islamic bond market also helps widen and deepen Malaysia’s capital market and makes it an attractive destination of surplus funds from the Islamic countries of the Middle East, who may not find the Western capital markets as suitable investment centres as the financial instruments they offer may not be syariah compliant. According to the Securities Commission of Malaysia, which regulates the Islamic capital market, sukuk are a form of securities which are structured to be syariah compliant in the sense that they do not pay interest to purchases of both short-term and long-term papers. When these certificates are issued by the government they are known as sovereign sukuk and when they are issued by the private sector they are known as corporate sukuk.

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ECONOMIC OUTLOOK Instead of interest, income is paid to the owners of sukuk and this income is derived from the utilization of the underlying asset upon which the sukuk is issued. The sukuk is usually less risky and cheaper than conventional bonds as it is based on the incomegenerating capabilities of the selected underlying assets, and hence uncertainty is reduced. The emphasis is on profit sharing and not the paying of interest, which is forbidden in Islam. To be syariah compliant the underlying assets have to be selected in a transparent, predictable manner to ensure sustainable returns and low volatility of returns. There are several main types of sukuk that are issued and these include salam securities, ijarah bonds, murabaha or tawarruq bonds, istisna’a bonds, mudaraba and musharaka, bai’ bithaman ajil, and wakala. These sukuk are like bonds but they do not pay interest and are not risky as interest or riba is forbidden, or haram, in Islam and risk, or gharar, is inconsistent with the principles of syariah. These financial instruments or securities are among the common eligible sukuk identified by the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI). The characteristics of these various sukuk are described in the paragraphs that follow, before moving on to their relative importance in terms of the ringgit value. When the salam security is issued, the purchaser of the security is assured by the seller that he or she will undertake to supply a specific commodity to the buyer at a future date in return for an advanced price for the commodity which is paid in cash and on the spot when the security is issued. For farmers this provides an avenue to borrow to finance their production, as they can sell salam securities which is a contract to sell their produce at a certain price at some future specified date for which they get a cash payment today. The ijarah contract or bond is essentially a leasing agreement where in exchange for rental payment the usufruct rights to a property is transferred from the owner or leaser, or mujir, to the lessee, or mustajir, and the rent paid is termed ujrah. Syariah law protects both parties to an ijarah contract from ambiguity and uncertainty in the agreement.

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When murabaha or tawarruq bonds are sold, the financing is used to purchase assets or commodities for a client and resold to the client at a markup, which is justified because of costs involved in the temporary ownership of the commodity. Under an istisna’a bond, the bond is purchased by a bank in return for which cash is obtained to finance the purchase of equipment or construction costs and repaid when output is sold. The istisna’a is suitable for financing manufacturing. Unlike the salam, ijarah, and istisna’a bonds, the returns to mudaraba and musharaka bonds are variable and not fixed. This is because they are based on profit sharing. The mudaraba is the equivalent of investment deposits where the return is variable because it is based on the bank’s profit. A variant of the mudaraba is the wakala, under which, unlike the mudaraba, there is no profit sharing. Under the wakala the investor is assured a ratio of the investment as his return, but anything more than the ratio is kept by the bank or financial institution. The musharaka bond provides financing for establishing a partnership and the return is based on profit sharing and the size of each individual’s investment. The bai bithaman ajil represents the sale of goods on a deferred payment basis and at a price. The Malaysian sukuk market has grown rapidly since the establishment of Bank Islam Malaysia in 1983 and the establishment of the Islamic interbank money market in 1994 as trading in Islamic instruments, especially Mudaraba Interbank Investments (MII), flourished after the setting up of Islamic windows by conventional banking institutions. The Islamic interbank market provides a mechanism for the transfer of funds from surplus banks to deficit banks ranging over a period from overnight to twelve months. The return is based on a prearranged profit sharing ratio. As early as 1996, the government established a minimum benchmark rate which is the prevailing rate on Malaysian Government Investment Issues plus a spread of 0.5 per cent. This is not an obligatory rate but a guide. The Malaysian Government has encouraged the issuance of both foreign and local currency denominated debt instruments. The government has allowed foreign issuers to tap the Malaysian capital

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ECONOMIC OUTLOOK market. Malaysia issued its first sovereign sukuk in 2002. About half of the investors came from the Middle East, a third from Asia, and a fifth from Europe and the United States. The International Finance Corporation, the investing arm of the World Bank, issued bonds in Malaysia based on Islamic financial principles. In 2005 the Malaysian Government issued Masyarakah Residential Mortgage Backed Securities for its staff housing loans, which was oversubscribed by five times and the total order book was more than RM13 billion. The bidders for this sukuk included financial institutions, asset managers, insurance companies, corporations, and significant foreign investors. The bond was benchmarked against international best practices and standards. The Malaysian Government regularly issues sukuk with different maturities in order to create a benchmark yield curve. The harmonization of standards and practices is done through the Islamic Financial Services Board (IFSB) and the AAOIFI, who formulate appropriate standards to strengthen the Islamic financial system. Since transparency is an important principle of Islamic finance, the Bond Pricing Agency of Malaysia (BPAM) was set up in 2011 to expose the Malaysian sukuk and bond market to the world in collaboration with Thomson Reuters who together with BPAM value Malaysian sukuk and bonds on a daily basis. The agency delivers valuations for nearly 3,000 unlisted bonds (Edge Financial Daily, 13 October 2011). The Dow Jones Citigroup Sukuk Index launched in 2006 provides useful information of Islamic bonds worldwide. The growth of the bond and sukuk market from the end of 2005 to September 2011 was 104 per cent compared with 68 per cent in the equity market. To promote innovation in the Islamic bond market, the government exempted all expenses for the issuance of Islamic securities which adopt the principles of murabaha and bai’ bithaman ajil based on tawarru from taxes beginning in 2012. The Malaysian sukuk market is expected to account for RM1.33 billion worth of issuance by 2020. However, the volatility and uncertainty of global financial markets may have an impact on market sentiments

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as Khazanah Nasional Berhad (the Malaysian Government investment agency) had to postpone its recent offer of dim sum remimbi sukuk. However, in July 2011 the Malaysian Government was able to launch its third international sovereign sukuk offering in the last eleven years. A total of US$2 billion worth of wakala (agency) sukuk was issued by Wakala Global Sukuk Berhad on behalf of the Malaysian Government. The Securities Commission of Malaysia projects the compound annual growth rate of the sukuk market for 2010–20 to be about 16.3 per cent in contrast to the 22.2 per cent growth rate achieved in the decade 2000–2010. In 2010 the Malaysian sukuk market totaled RM294 billion and this is projected to quadruple to RM1.33 trillion by 2020. In 2010 Malaysia issued sukuk bonds worth RM40.328 billion. More than 42 per cent of these were musharaka bonds followed by ijarah bonds (33.46 per cent), tawarruq bonds (4.95 per cent), murabaha bonds (3.96 per cent), mudharabah (0.61 per cent), and bai’ bithaman ajil (0.18 per cent). The rest were combinations of ijarah, wakala, and bai’ bithaman ajil (12.39 per cent), musharaka and murabaha (1.98 per cent), and mudharabah and murabaha (0.3 per cent) bonds. 2010 — List of Sukuk Approved by the Securities Commission, Malaysia No

Type of sukuk

Value (RM million)

Percentage

1

Musharaka

16,974

42.08

2

Ijarah

13,495

33.46

3

Tawarruq

2,000

4.95

4

Murabaha

1,600

3.96

5

Mudharabah

250

0.61

6

Bai’ bithaman ajil

7

Ijarah, wakala, bai’ bithaman ajil

8 9

74

0.18

5,000

12.39

Musharaka, murabaha

800

1.98

Mudharabah, murabaha

135

0.3

SOURCE: Securities Commission, Malaysia, 2011.

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ECONOMIC OUTLOOK The sukuk market has continued to show impressive growth through most of the year 2011. The value of sukuk issuance nearly tripled to RM42.1 billion between September 2010 and September 2011 and accounted for nearly 73 per cent of the total amount of bonds issued as at the end of September 2011 (The Star, 4 November 2011).

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THE ASEAN-10

Brunei Darussalam Thanut Tritasavit Brunei Darussalam had a recorded population of approximately 417,000 according to government estimates (IMF 2011). Per capita constant GDP based on purchasing power parity (international dollars) was about 49,500. Brunei Darussalam’s GDP growth in 2011 was a mere 2.8 per cent, down from the earlier forecast of 3.1 per cent. Its economic growth prospects in 2012 and 2013 are expected to be lower due to rising risks from the eurozone debt crisis and a slowdown in the United States. Inflation rates (average consumer prices) are projected to remain contained at 1.2 per cent in both 2012 and 2013 even though food and service prices will keep it above trend despite a fall in average utility bills. Unemployment is also expected to remain at 3.7 per cent during the forecast period.

BRUNEI DARUSSALAM • Actual GDP growth in 2011 was slightly lower than forecasts at 2.6 per cent, partially due to revisions in 2010 showing a deeper decline at 1.8 per cent. • The global economic slowdown will hinder growth in 2012 and 2013, although it is still expected to be positive. • The Bruneian economy has remained relatively stable due to the pick up in domestic demand, compensating for the slower global economy. • The future of Brunei’s economy lies in the success of its economic diversification programme as these alternatives will be the key sources of growth once the hydrocarbons run out.

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ECONOMIC OUTLOOK Current account surpluses and fiscal surpluses in 2010 recovered from a drop in the previous year and increased the following year. However, a slight decrease is expected in the balance, which can be attributed to the slowdown in the global economy. The current account balance is expected to be about US$7.56 billion in 2011, and US$7.338 billion and US$7.194 billion in 2012 and 2013, respectively.

Growth Forecast for 2012 and 2013 During the forecast period of 2012 and 2013, real GDP is expected to grow by 2.17 per cent and 1.88 per cent, respectively (IMF 2011). Growth rates will continue at a lower pace due to the slowdown in the global economy but will remain positive, reflecting the buoyant global energy markets and an increase in domestic demand. New offshore oil and gas drilling plans worth up to US$1 billion in 2011–13 have been announced, with foreign partners (including Shell and Mitsubishi) following up development with investments worth up to US$10 billion, including a possible liquefaction plant in Brunei. The project’s major shareholder, Petronas, is also planning to develop a new US$1.6 billion petrochemical plant and engineering facility in the PMB (Pulau Muara Besar) zone (Oxford Economics 2011). The gas share is set to grow again due to the growth of process capacity, the arrival of new supplies, and the introduction of new customers, specifically India, slated to become a major player. In order to achieve higher economic growth over the long-term, the successful implementation of diversification initiatives is of the utmost priority. Since Brunei Darussalam’s economy is dominated by the oil and gas sector, any fluctuation in generating capacity could have profound impacts; the strength of the US dollar will also play a key role in determining oil prices. A gradual transition to more diversified sources of growth will require improvements in the business environment for the private sector, as well as development of the finance sector and the institutional capacity of the government (ADB 2011). Brunei Darussalam has shown improvement in this aspect as it was listed among the top ten countries to have improved their business environments com-

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11.754 –1.938 20.398 14.417 29,532.41 51,250.75 36,223.18 103.306 2.085 3.748 0.398 12.209 59.856 6.146 30.13 7.835 54.345

11.546 –1.765 15.611 10.733 28,425.41 38,432.79 26,423.10 104.383 1.043 3.748 0.406 6.651 42.606 6.038 38.676 4.318 40.23

2009 11.846 2.598 16.867 12.371 28,417.39 40,461.87 29,674.82 104.75 0.351 3.748 0.417 8.18 48.494 6.757 40.061 5.573 45.049

2010

NOTE: E refers to estimates; F refers to forecasts. SOURCE: International Monetary Fund, World Economic Outlook Database, September 2011.

GDP, constant prices (B$ billion) GDP, constant prices (% change) GDP, current prices (B$ billion) GDP, current prices (US$ billion) GDP per capita, constant prices (B$) GDP per capita, current prices (B$) GDP per capita, current prices (US$) Inflation, average consumer prices (index) Inflation, average consumer prices (% change) Unemployment rate (% of total labour force) Population (million) General government revenue (B$ billion) General government revenue (as % of GDP) General government total expenditure (B$ billion) General government total expenditure (as % of GDP) Current account balance (US$ billion) Current account balance (as % of GDP)

2008

2011E 12.174 2.768 19.311 15.599 28,502.46 45,211.32 36,520.66 106.675 1.838 3.7 0.427 11.775 60.974 7.069 36.606 7.56 48.467

Brunei Darussalam: Selected Economic Indicators, 2008–13F

12.439 2.171 19.34 15.635 28,436.42 44,214.92 35,743.15 107.955 1.2 3.7 0.437 11.537 59.653 7.412 38.323 7.338 46.932

2012F

12.673 1.88 19.842 15.739 28,346.10 44,382.18 35,206.06 109.251 1.2 3.7 0.447 11.779 59.364 7.502 37.811 7.194 45.706

2013F

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ECONOMIC OUTLOOK pared to the previous year. However, the overall ranking is still poor and further improvements need to be made in order to enable this transition. Economic diversification can also be achieved by reducing the attractiveness of public sector employment for recent graduates in order to enhance the supply of highly skilled labour to the private sector (IMF PIN 2011). Initiatives such as public official support for activities that develop entrepreneurship, including among women, would help boost private sector growth. An initiative that could potentially ensure an efficient long-term allocation of investment is to remove price distortions by allowing prices to move in tandem with international prices. This, in turn, could also prop up domestic demand for a broader range of goods and services. Brunei Darussalam’s major export markets include Japan, South Korea, Indonesia, India, and Australia, while it imports mainly from ASEAN, the United States, the European Union, Japan, and China. The country’s growth prospects during the forecast period hinge on the states of these economies and, depending on their movements, Brunei Darussalam’s economy will follow suit in tandem to a lesser extent. REFERENCES Asian Development Bank (ADB). Asian Development Outlook 2011. April 2011. Economist Intelligence Unit (EIU). Country Report Brunei. October 2011. International Monetary Fund (IMF). World Economic Outlook Database: September 2011 Edition (accessed 8 November 2011). International Monetary Fund PIN (IMF PIN). Public Information Notice 2011 Article IV Consultation with Brunei Darussalam (accessed 8 November 2011). Oxford Economics. Brunei Country Economic Forecast. October 2011.

Cambodia Jayant Menon After a sharp contraction in 2009 due to the global financial crisis, GDP growth in Cambodia returned to positive territory in 2010, on

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CAMBODIA • Growth in Cambodia has returned to positive territory after a sharp contraction in 2009. • Agriculture, especially rice production, is expected to play an important role in boosting Cambodia’s GDP. • Economic inequalities have continued to rise and the Government of Cambodia is planning to launch a national social protection agency to address this issue.

the back of bouyant agricultural production, exports, and tourism. The government estimates that growth came in at 6 per cent in 2010. Agriculture grew by an estimated 4.4 per cent in 2010, led by an increase in paddy rice production. The volume of exported milled rice almost tripled in 2010, a result of favourable weather, increased investments in irrigation, and the new rice production and export policy launched by the government in August 2010. Cambodia plans to become a major rice exporter and has set a target of exporting at least one million tons of milled rice a year by 2015. Cambodia currently exports paddy rice to neighbouring countries for processing. Industry expanded by an estimated 8 per cent in 2010 with the recovery in demand for Cambodian garments and footwear exports. Garment exports grew by 24 per cent in 2010, while footwear exports grew by 57 per cent. The garments and footwear industry created some 55,300 new jobs in 2010 (World Bank 2011a and 2011b). Meanwhile, services grew by a moderate 3.3 per cent in 2010 as tourist arrivals rebounded by 16 per cent and tourism receipts increased by 14.4 per cent in 2010. Tourists from Asia made up the bulk of tourist arrivals (ADB 2011). In 2011 and 2012, GDP is forecast to pick up further to between 6 and 6.8 per cent, although growth will remain below its historical average. Agriculture will play an important role as the government continues to promote rice production and exports. The tourism sector is expected to attract more visitors and construction is expected to

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ECONOMIC OUTLOOK recover further in 2011–2012 (EIU 2011 and World Bank 2011a). Current efforts to boost economic ties with China and other Asian economies should also help shore up aggregate demand. Cambodia’s exports are expected to pick up, partly as a result of the European Union’s relaxed rule of origin on preferential tariffs for least-developed countries’ exports, which became effective on 1 January 2011. This notwithstanding, the merchandise trade deficit is expected to increase, owing to Cambodia’s reliance on imported capital goods. A less expansionary fiscal stance in 2010 reduced the overall fiscal deficit to an estimated 5.9 per cent of GDP, from 8.1 per cent in 2009. Tax revenues rebounded to an estimated 12.7 per cent of GDP, higher than the budget plan of 12.3 per cent for 2010. Expenditures amounted to an estimated 18.6 per cent of GDP, slightly higher than the 17.6 per cent budget target for 2010 but still lower than the 20.5 per cent reached in 2009 (ADB 2011). The government should continue consolidating counter-cyclical spending as the economy continues to recover, but forecasts from the Economist Intelligence Unit (EIU) see the deficit remaining relatively unchanged, with only a slight decrease to 5.7 per cent in 2011, and then a slight increase to 6 per cent in 2012 owing to increases in capital outlays. Although revenue prospects are anticipated to improve further (the government aims to raise revenue collection by 0.5 percentage points of GDP a year over the medium term), the overall deficit continues to be financed by concessional loans and grants. Cambodia’s donors have pledged about US$958 million in assistance in 2011 and US$751 million in 2012. With the pick up in growth, the inflation rate reached 4 per cent in 2010 and is expected to accelerate further to 6.4 per cent in 2011 due to higher global food and commodities prices. Inflation is expected to slow to about 5.6 per cent in 2012, in line with lower global commodity prices. Broad money (M2) growth remained strong at 21.3 per cent in 2010, driven by increased deposits of foreign currency at banks as well as credit to the private sector, which expanded by 27 per cent in 2010. However, growth in bank lending to the private sector remains well below the levels reached before the global financial crisis. Broad

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THE ASEAN-10 money growth is projected to reach 14.9 per cent and 18 per cent in 2011 and 2012, respectively. The current account deficit narrowed slightly to 4.1 per cent of GDP in 2010, but is expected to widen to 9.3 per cent of GDP in 2011. Foreign exchange reserves reached $3.802 billion at the end of 2010 and are expected to rise further in 2011 and 2012. The riel appreciated slightly against the dollar in 2010 and is expected to remain relatively stable in 2011. Cambodia remains heavily dollarized.

Addressing Inequalities and Achieving More Inclusive Growth While Cambodia’s recent impressive growth performance has resulted in a significant decrease in poverty incidence, both income and nonincome inequalities have continued to rise. Income inequalities are reflected in sharp increases in the Gini coefficient, rising from 38.3 in 1994 to 41.9 in 2004 and 44.4 in 2007, while non-income inequalities are evident in limited progress on realizing some of the Millenium Development Goals, particularly health, sanitation, and gender (see Hill and Menon 2011). Apart from the rural-urban divide, rising economic inequalities also threaten past economic achievements. A recent World Bank (2011b) report notes that “large disparities, especially when perceived to be generated in ways lacking legitimacy, have the potential to weaken social cohesion and fuel social strife”. Therefore, both the size of the measured inequalities and the means by which they have come about matter. In both respects, there are concerns about Cambodia. Apart from threatening social stability, rising inequalities can also hamper future growth, as well as dampen the impact that growth can have on poverty reduction. Both the pace and pattern of Cambodian economic growth needs to be more inclusive. Therefore, inclusiveness refers not just to the importance of reducing poverty, but also various aspects of equity, equality of access and opportunity, and protection of the most vulnerable. Many of Cambodia’s “non-poor” are only marginally above the poverty line and may slip below it for all manner of reasons. They also lack

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ECONOMIC OUTLOOK access to basic services such as education, health, clean drinking water, and sanitation. Inclusiveness must include progress in the delivery of these essential services (Menon, Mitra, and Arnold 2011). Recognizing these challenges, the government has drafted a national social protection strategy to be launched in 2011 (Government of Cambodia 2011). Immediate priorities of this strategy involve the expansion of targeted programmes such as free health care for the poor and the pilot testing of programmes, including conditional cash transfers and generating employment opportunities through labourintensive public works (ADB 2011). Although these programmes will protect and improve livelihoods of the most vulnerable in the short run, a long-term strategy that targets improvements in governance and the quality of institutions is required to ensure that growth is inclusive and can proceed in a sustained manner. Both poverty and inequality have a regional dimension in Cambodia. Although detailed sub-national statistics are not available, there is a large and growing gap between urban and rural living standards. Therefore, any attempt to increase the inclusiveness of growth must target rural development. A major challenge concerns promoting rural dynamics and a broad-based improvement in living standards, since about 90 per cent of the poor live in rural areas. This provides both the case for rural development promotion and also the proximate explanation for the absence of a sharp increase in poverty in times of economic slowdown. However, there are major constraints that need to be addressed before inequality can be reduced and growth made more inclusive. Rural infrastructure is still very underdeveloped, requiring large investments. Energy costs are high, about double those in neighbouring countries, and serve as a major constraint on growth. Trade continues to be curtailed by extensive informal trade barriers, mostly illegal levies on road transport. Rural credit markets are poorly developed, in part owing to uncertain land titling. It is estimated that only about 10 per cent of the country’s rice farmers have secure land titles. As long as these binding constraints remain, Cambodia’s economic potential will not be realized.

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–2.7

–0.6

6.1 6.1

Current account balance (% of GDP) IMF World Economic Outlook, September 2011

Inflation/CPI average (% change) IMF World Economic Outlook, September 2011 ADB Asian Development Outlook 2011, Update

7.7 7.7

–2.5

–2.9

4,089 –5,439 –1,351

5 8.4 10.1

5.5 18.3 10.1 3,692 –4,771 –1,079

10.2 10.2 10.2 10.2

2007

10.8 10.8 10.8 10.8

Fiscal balance (as % of GDP)

Exports, goods fob (US$ million) Imports, goods fob (US$ million) Trade balance (US$ million)

Real GDP growth (% change) Cambodia National Institute of Statistics IMF World Economic Outlook, September 2011 WB Global Economic Prospects ADB Asian Development Outlook 2011, Update Economist Intelligence Unit, Cambodia Country Report, November 2011 Agriculture sector growth (% change) Industry sector growth (% change) Services sector growth (% change)

2006

25.0 25.0

–6.2

–2.8E

4,708 –6,509 –1,800

5.7E 4.1E 8.9E

6.7 6.7 6.7 6.7E

2008

–0.7 –0.7

–5.2E

–8.1E

4,302 –5,876 –1,574

4.9E –15.0E 2.9E

–2.0 –2.0 0.1 –1.5E

2009

Cambodia : Selected Economic Indicators, 2006–13F

4.0 4.0

–4.1

–5.9

5,538 –7,421 –1,883

4.4 8 3.3

6.0 6.0 4.9 6.3 4.7

2010E

6.4 5.5

–9.3

-5.7

6,541 -9,136 -2,595

5 7.5 6.9

6.7 6.0 6.8 6.5

2011E

5.6 5.5

–6.7

–6

7,027 –9,685 –2,658

6 5 7.1

6.5 6.5 6.5 6.3

2012F

3.6

–4.5

–5.8

8,168 –11,311 –3,143

6.5 6 7.4

6.8

7.0 6.6

2013F

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3,761 30.2 12.6 17.6 66.6

3,527 114.2 98.9 15.3 136.9 1,411 4,057

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

2,641 4,077

4,215 42.1 19.4 22.7 129.3

5.4

2008

3,288 4,165

4,364 49.5 26.1 23.4 74.3

35.6

2009

3,802A 4,051A

4,433 106.8 63.2 43.6 132.8

4,121 4,146

4,787 112.6 68.3 44.3 139.6

4,180 4,196

4,937 122.9 75 47.9 149.9

18

14.9

A

21.3

2012F

2011E

2010E

(continued)

4,434 4,298

5,165 137.2 87.8 49.4 164.2

23.4

2013F

NOTES: A refers to actual; E refers to estimates; F refers to forecasts. SOURCES: Unless otherwise noted, all data are from the Economist Intelligence Unit, “Cambodia Country Report, November 2011”.

2,143 3,999

61.8

40.5

2007

M2 money supply growth (% change) External debt (US$ million) Debt stock Debt service paid Principal repayments Interest Debt service due

2006

Cambodia : Selected Economic Indicators, 2006–13F

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THE ASEAN-10 REFERENCES Asian Development Bank (ADB). Asian Development Outlook 2011. Manila: ADB, 2011. Economist Intelligence Unit (EIU). “Cambodia Country Report, November 2011”. EIU, 2011 Government of Cambodia. “National Social Protection Strategy for the Poor and Vulnerable”. Phnom Penh, 2011. Hill, H. and J. Menon. “Reducing Vulnerability in Transition Economies: Crises and Adjustment in Cambodia”. ASEAN Economic Bulletin 28, no. 2 (2011): 134–59. Menon, J., S. Mitra, and D. Arnold. “Growth and Inclusion”. In Asia 2050: Realizing the Asian Century, edited by H. Kohli, A. Sharma, and A. Sood. Sage, 2011. World Bank. “Cambodia Economic Monitor, February 2011”. Washington, DC: World Bank, 2011a. ———–. “East Asia and Pacific Update 2011, Volume 1”. Washington, DC: World Bank, 2011b.

Indonesia Reza Siregar A broad-based economic expansion signals another year of resilient economic performance amid global financial turmoil. During the second quarter of 2011, the non–oil and gas sector of the Indonesian economy grew by about 6.6 per cent. For the first time since 2005, this sector has grown at a faster rate than the overall GDP growth rate. More importantly, this record growth accentuates the broad-based economic growth that the country has pulled off recently. Exports continued to grow robustly in the first nine months of 2011 and domestic demand, driven by private consumption, has once again contributed the most to economic growth. Most encouragingly, investment growth continued to be robust. In 2010 the quarterly average of net direct investment to the country was more than triple that of the number in 2009, and the rising trend continued during the first half of 2011. Gross fixed capital formation (proxy of investment), reaching well above 30 per cent of GDP since 2009, has finally attained the level it was at prior to the 1997 East Asian economic crisis, and has recently been among the highest in Asia. The broad-based economic growth

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INDONESIA • Broad-based economic growth for the first nine months of 2011 signals another year of resilient economic expansion. • The healthy balance of payment position has been sustained by both a trade surplus and a strong surge of capital inflows. At the same time, inflationary pressure has moderated during the third quarter of 2011. • The sound banking sector provided much needed liquidity to the economy and sustained the growth momentum even during the height of the sub-prime crisis. • Managing exchange rate volatility and appreciation pressure in particular amid strong and unpredictable surges of capital flows into the economy, have been costly for the balance sheet of the central bank, Bank Indonesia. • The frail economic outlooks in the U.S. and the eurozone economies weighed in heavily on the forecast global economic growth for 2012. • However, domestic demand and direct investment are expected to cushion and support economic momentum in Indonesia, and growth is expected to be kept at around 6.4 per cent in 2012. • Infrastructure, high electricity costs, and the rigid labour law and bureaucracy remain some of the classic challenges and bottlenecks keeping Indonesia among the most difficult countries to start a business in in the region and undermining the country’s economic growth potential.

has also generated additional job opportunities and hence steadily reduced the unemployment rate in the country. In April 2011 Standard & Poor’s had improved Indonesia’s credit rating to BB+, the last of the three major credit rating agencies to upgrade sovereign debt to one notch below investment grade. The Indonesian rupiah strengthened to Rp8,450 to the U.S. dollar in early October 2011, an appreciation of over 30 per cent from the rate reported in late November 2008. A healthy balance of payment position has been sustained by both a trade surplus and the strong surge of capital inflows. Exports continued to be robust, riding predominantly on strong demand for

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THE ASEAN-10 commodity products such as palm oil and energy-related products. The year-on-year growth in August 2011 was reported at over 37 per cent, compared to about 24 per cent of import growth, hence contributing to the widening of the trade surplus. Despite heightened global market uncertainties, portfolio capital surge to Indonesia reached well above US$12.5 billion in the second quarter of 2011, almost double the reported amount in the first quarter of 2011. Similarly, international bank lending and issuance of debt securities reported an impressive growth in 2011, reflecting the search for higher yields by banks and corporate sectors around the globe. Inflationary pressure has moderated during the third quarter of 2011. The year-on-year inflation reported in September 2011 was around 4.6 per cent, well below the rate of 5.8 per cent in 2010. The inflationary pressure is expected to be well anchored and within the 2011 inflation target of Bank Indonesia. With the moderating inflationary pressure, Bank Indonesia shifted its policy focus to growth promotion. From October to November 2011, the monetary authority cut its policy rate twice, pushing the Bank Indonesia rate from 6.75 per cent to 6 per cent. The sound banking sector provided the much needed liquidity to the economy and sustained the growth momentum even during the height of the sub-prime crisis. The banking sector remains the dominant part of the domestic financial sector. The capital adequacy position of the Indonesian banking sector in recent years has remained well above the Basel III requirement even during the peak of the sub-prime crisis in late 2008 and early 2009. More importantly, the banks have continued to earn profits and at the same time maintained quality lending, as demonstrated by the level of non-performing loans well below 4 per cent even during the turbulent period of 2008 to the first half of 2011.

Mounting Cost of Foreign Exchange Management Amid strong and unpredictable surges of capital flows into the economy, managing exchange rate volatility and appreciation pressure

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ECONOMIC OUTLOOK in particular have been costly for the balance sheet of the central bank, Bank Indonesia. This cost has been driven by both significant reserve accumulation, especially in 2010 and the first three quarters of 2011, and the interest rate gap between the Bank Indonesia rate and the U.S. Federal funds rate. From August 2010 to August 2011, the international reserve of Bank Indonesia increased by more than 50 per cent to about US$125 billion. During this same period, the Bank Indonesia policy rate was on average about 6 per cent above the U.S. Federal funds rate. The recent cuts in the policy rate by Bank Indonesia by a total of 0.75 per cent in October and November should significantly reduce the cost of sterilization. In addition, mounting risk exposures associated with foreign participation in local currency bonds and central bank certificates warrant closer monitoring. Indonesia is one of many emerging markets that witnessed a rapid and massive accumulation of foreign investors’ holdings of the country’s local currency bonds and central bank certificates. Foreign investors could act as catalysts for the development of local bond markets, particularly by diversifying the institutional investor base and creating greater demand for local emerging market debt securities. However, an increased foreign presence could also result in greater volatility in local bond markets. Experiences of the emerging markets after the collapse of Lehman Brothers in September 2008 demonstrated that sudden withdrawals by foreign investors from the bond markets could introduce greater bond yield volatility and in turn have two potentially adverse impacts: (a) increase the cost of new borrowing and (b) complicate the conduct of open market operation to stabilize bond yields and manage exchange rate pressures. Following the collapse of Lehman Brothers, the foreign investors’ holding of Bank Indonesia certificates plunged from 54.7 trillion rupiah (slightly over US$6 billion) in July 2008 to a mere 6.5 trillion rupiah (or slightly over US$720 million) in November 2008. By the end of August 2011, foreign investors held around 55 trillion rupiah (about US$6.1 billion) and 247 trillion rupiah of government bond (roughly US$27.5 billion).

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Infrastructure Deficiencies Remain In May 2011 the government unveiled the master plan to develop the economy to be among the top ten globally by 2025, underlining a growth objective averaging 7–9 per cent per annum. This requires massive financing of which around 70 per cent is expected to come from the private sector. Given the upbeat outlook of the economy and the strength of the flood of direct investment, financing is unlikely to be the hurdle to the 2025 vision. Poor infrastructure is however a major impediment. In the 2011 World Economic Forum Global Competitiveness Index, Indonesia ranked 76 out of 142 countries in terms of infrastructure quality. The successful passage of the much awaited Land Acquisition Bill should facilitate the launch of a number of infrastructure projects. Infrastructure, high electricity costs, the rigid labour law and bureaucracy are some of the classic challenges and bottlenecks that are keeping Indonesia among the most difficult countries in which to start a business.

Key Assumptions Despite the heightened global economic uncertainty, driven largely by debt overhang in the United States and sovereign debt uncertainty in the eurozone, the Indonesian economy is expected to expand robustly by 6.5 per cent in 2011, among the fastest in Asia. The frail economic outlook for the United States and the eurozone economies weighed in heavily on the forecast moderating of global economic growth in 2012. However, domestic demand and direct investment are expected to cushion and support economic momentum in Indonesia and growth is expected to be kept at around 6.4 per cent in 2012. Trade surplus should continue in 2012, but should wane respectably compared to 2011 with the high risk of global economic slowdown. Exports, in particular, should expand only moderately, due to fragile demand from the traditional major trading partners and the strong local currency. During the third quarter of 2011, around 30 per cent of Indonesia’s total non–oil and gas trade surplus was generated from its trade with the European Union. Volatile financial inflows, particularly

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35.0

External Debt (% of GDP) 52.1 10,950

33.0

–1.0

11.1

139.6 116.1 0.1

6.1 5.3 11.7

2008

66.1 9,403

28.8

–1.6

2.8

119.5 84.3 2.0

4.6 4.9 3.4

2009

96.2 8,991

26.5

–1.0

7.0

157.9 119.7 0.9

6.1 4.6 8.5

2010

130.0 8,700

25.0

–1.4

4.0

198.9 157.3 0.2

6.5 4.7 8.1

2011F

150.0 8,600

24.0

–1.8

4.9

248.6 204.5 0.1

6.4 4.7 7.8

2012F

NOTES: E refers to estimates; F refers to forecasts. SOURCES: Consensus Forecast, International Monetary Fund Database, Bank Danamon Database, Asian Development Bank Database, author’s estimates.

56.9 9,419

–1.3

Fiscal balance (as % of GDP)

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

6.1

118.0 84.9 2.5

6.3 5.0 9.2

Inflation/CPI average (% change)

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

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

2007

Indonesia : Selected Economic Indicators, 2007–12F

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141

THE ASEAN-10 portfolio capital, should continue, albeit at a more moderate rate given that yield and growth are expected to remain low in major world economies. Inflation should temper with overall weaker global demand, especially in 2012. Price level increase should be well within the annual inflation target of Bank Indonesia of 5 per cent.

Laos Kyophilavong Phouphet Economic Performance The Lao economy has performed well. GDP has been projected to increase from 8.4 per cent in 2010 to 8.6 per cent in 2011 and 8 per cent in 2012. The main driver of the Lao PDR’s economic growth so far has been the resources sector — mining and hydropower. For 2012, the main sources of economic growth will stem from the industry sector (15 per cent growth), the agriculture sector (3 per cent growth), and the services sector (6.5 per cent growth). Due to credit expansion during the previous year and increasing world commodity prices (food and fuel), inflation has increased although exchange rates have remained stable. Inflation which was stable at 0.1 per cent in 2009, had increased by about 6 per cent in 2010 and 7 per cent in 2011. The Lao PDR’s currency, the kip, appreciated against the U.S. dollar by about 3 per cent in 2011. The main reasons for appreciation of exchange rate were massive capital inflows to finance mining and hydropower projects, a weakening U.S. dollar, and the monetary authorities’ policy to stabilize the exchange rate and control inflation. Fiscal balance in the country has improved. The budget deficit, as a share of GDP, will decrease from 6.6 per cent in 2009 to 4.9 per cent in 2010 and 2.4 per cent in 2011. The main reason for the narrowing budget deficit is due to increasing government revenues from mining and hydropower projects and an increase in effective tax collection. In addition, the government has also controlled inappropriate expenditure and made more effort and improved on tax collection measures.

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LAOS • Laos has enjoyed economic growth; the resource sector is still the main source of this growth. • In the medium term, high growth is expected to continue due to mining and hydropower activities. • However, the main challenge for growth is controlling inflation and effective macroeconomic management to deal with massive foreign capital inflows and windfall expenditures from the resource boom. • Improving the doing business climate in order to increase the competitiveness of non-resource sectors is also a crucial challenge for Laos.

The current account deficit has narrowed compared to deficits during the global financial crisis in 2008. However, the current account balance to GDP has increased slightly from 8.6 per cent in 2010 to 9.4 per cent in 2011. The main reasons for the growing trade deficit are increasing import demand for investment goods from the mining and hydropower project sector. The external debt burden remains high, at about 50 per cent of GDP in 2010 or about 5 per cent of total exports. Most of this debt is long-term public debt and it exceeds the accepted threshold from the International Monetary Fund. However, this trend seems to have declined compared to the previous year.

Economic Outlook Growth is expected to be robust, about 8 per cent for 2012–13 based on the assumption that the world economy will be recovering somewhat, the hydropower and mining sectors will be active, and the 7th Socio-Economic Development Plan (2011–2015) will be implemented effectively. The industry sector is forecast to continue to grow in the double digits. Agriculture sector growth might decline slightly due to climate volatility and floods, while the service sector might expand due to the expansion of private banks and the financial sector, as well as increasing tourism.

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THE ASEAN-10 Inflation is expected to increase in the medium term. The inflation rate is expected to increase by around 3 to 5 per cent due to increased food prices from the global and Thai markets (with Thailand affected by floods) and the expansion of credit from the previous year. In addition, the exchange rate (kip/US$) is expected to appreciate by about 0.2–0.5 per cent due to capital inflows and a weak dollar; the exchange rate will be about 7,960 to the U.S. dollar in 2012–13. This figure assumes increased capital inflows from foreign direct investments, expanding mineral and electricity exports, and a prudent exchange rate policy for de-dollarization. The trade deficit is expected to rise due to the increase in demand for investment goods from the resource sector projects. The ratio of budget deficit to GDP is expected to decline about 1.3 per cent in 2011–12 because tax revenues from the resource sector are expected to increase and the government might control expenditures.

Main Challenges of Development There are five main challenges for the Lao economy. First, is the need for appropriate macroeconomic adjustment to respond to massive foreign capital inflows from natural resources investment and short-to-medium-term capital inflows from establishing the stock exchange market. In addition, effective expenditure management of booming sector windfalls is also a crucial challenge for the long-term development of Laos. The recent appreciation of the real exchange rate might contract the size of the non-booming sectors due to a decline in their competitiveness. This syndrome is commonly referred to as the “Dutch disease”. Second, it is also necessary to continue with monetary and fiscal policy discipline and banking sector reforms. So far the government has operated on budget deficits and has had rising quasi-fiscal liabilities. In addition, the monetary authorities have also provided loans to the local government for infrastructural development. These effects might lead to accelerating inflation and macroeconomic instability. Third, it is essential to continue to promote financial sector reforms. Although banking reform has improved the state-owned commercial

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336.0 9655.0

Foreign exchange reserves (US$ million) Exchange rate at year end (S$/US$1)1/2

536.0 9341.0

2521.0 4.0

2521.0

–2.9

5.6 58.8

663.0 2,156.0 –1,493.0 –15.8

4.4 9.1 8.6

7.9 7.5 7.5

2007

636.0 8466.0

2931.0 4.2

2931.0

–2.0

3.2 18.3

863.0 2,816.0 –1,953.0 –16.5

10.4 9.1 3.7

7.9 7.2 7.0

2008

635.0 8400.0

3083.6 4.8

3083.6

–6.6

0.1 31.2

1,500.0 2,517.0 –1,017.0 –13.8

15.9 7.3 3.1

7.1 4.6 7.0

2009

512.0 8235.0

3323.1 5.2

3323.1

–4.9

6.0 39.1

2,125.0 3,031.0 –906.0 –8.6

15.0 6.5 3.0

8.4 5.4 7.8

2010

595.0 7997.4

3549.9 6.1

3549.9

–2.4

7.0 22.5

2,467.0 3,667.0 –1,200.0 –9.4

15.0 6.5 3.5

8.6 8.4 7.7

2011E

736.0 7960.2

3514.4 5.1

3514.4

–1.3

6.5 22.5

2,764.0 4,186.0 –1,422.0 –10.6

15.0 15.0 3.5

8.0 6.7 7.7

2012F

736.0 7925.2

3479.2 5.2

3479.2

–1.5

6.7 22.5

2,847 4,751 –1,904.0 –10.8

15.0 15.0 3.5

8.0

2013F

NOTES: E refers to estimates; F refers to forecasts. 1 Values from 2009 to 2012 are based on the 7th Socio-Economic Plan (2011–2015) and consultation with economists at government agencies. 2 Data on long term debt is not available, assuming that total debt is long term debt. 4 Author’s estimation for 2011 and 2013 based on 7th Socio-Economic Plan (2011–2015) and consulation with policymakers. SOURCES: IMF (2011); GoL (2011); WB (2011a).

2351.0 3.6

Long-term debt (US$ million)2 Debt service ratio (as % of exports)

–3.0 2351.0

Fiscal balance (as % of GDP)

Total debt outstanding (US$ million)

4.7 37.2

660.0 1,589.0 –929.0 –10.3

14.2 9.7 2.5

8.1 8.4 8.1

Inflation/CPI average (% change) M2 money supply growth (% change)1

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

— industry sector growth (% change)1 — services sector growth (% change)1 — agriculture sector growth (% change)1

GDP growth (% change) Lao government IMF WB

2006

Laos: Selected Economic Indicators, 2006–13F

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145

THE ASEAN-10 banks’ balance sheets and banking practices, the financial system is still weak and there is lack of financial depth in Laos. Fourth, the business climate for the private sector and competitiveness in non-resources sectors have to be enhanced. Despite the significant efforts of the Lao Government to improve the business climate for the private sector in the previous year, the ease of doing business is still poor compared to neighbouring countries. Fifth, is the need to continue to cope with the ripple effects of the floods in Thailand. The Lao economy has strong links with the Thai economy. Heavy damage from floods has led to increases in commodity prices, declining investments from Thailand, and a reduction in exports and remittances, which will have negative implications for the Lao economy. REFERENCES Bank of Lao PDR. Annual Economic Report 2010. Vientiane: Bank of Lao PDR, 2010 Government of Laos. 7th National Socio Economic Development Plan (NEDP) for 2011 to 2015. Vientiane: Ministry of Planning and Investment, 2011. International Monetary Fund (IMF). “Lao People’s Democratic Republic: Staff Report and Public Information Notice”. IMF, 2011. Kyophilavong, P. and T. Toyod. “Impacts of Foreign Capital Inflows on the Lao Economy”. In Empirical Research on Trade and Finance in East Asia. Research Series, vol. 142, edited by Toyda and Chou. Hiroshima Shudo University, 2009. World Bank. “Lao PDR: Economic Monitor — May 2011 Update”. Vientiane: World Bank, 2011a. ———–. “Lao PDR Development Report 2010: Natural Resource Management for Sustainable Development — Hydropower and Mining”. World Bank, 2011b. ———–. “Lao PDR: Investment Climate Assessment — Policies to Promote Growth in the Non-Resources Sectors”. World Bank, 2011c.

Malaysia Chia Wai Mun and Li Mengling Economic Performance In January 2011 the projections for the overall world economic growth rate were revised upward by the International Monetary Fund (IMF),

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ECONOMIC OUTLOOK

MALAYSIA • Malaysia reported the strongest real GDP growth in 2010 given the brisk investment activities and robust consumption. • The momentum of growth has however slowed in the first half of 2011 due to shrinking global demand. • Inflationary pressures in 2011 are building up because of robust growth in 2010. • The rise of China is acting as a wake-up call to Malaysia. It has become clear that old policies will no longer work and that rapid structural changes are inevitable and favourable for the country’s long-term development.

with the growth rate of the United States being upgraded the most (0.7 per cent) among G-3 economies. The prospects for Asian economies remain encouraging, fuelled by the two engines: China and India. As a consequence of the brisk investment activities and robust private consumption, the Malaysian economy was able to bounce back from the recession in 2008–09, reporting the strongest real GDP growth for the decade, at 7.2 per cent in 2010. However, the momentum of growth has progressively weakened over the first two quarters of 2011, at 4.9 and 4 per cent respectively as shown in Figure 1. The major reason for the slower growth is the weaker external trade due to shrinking global demand, especially for electronics and engineering products. The underperforming electronics sector has raised concerns about the underlying competiveness of the Malaysian economy. In spite of the wavering global demand, domestic demand in Malaysia has shown resilience. Private consumption remains firm as a result of favourable labour market and credit market conditions. The sector has demonstrated bullish growth, expanding at 6.6 per cent during the first quarter of 2011. Public consumption also expanded at a robust pace of 6.1 per cent during the first quarter. In line with domestic

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147

THE ASEAN-10 Figure 1: Real GDP Growth

Jun-11

Feb-11

Oct-10

Jun-10

Oct-09

Feb-10

Jun-09

Oct-08

Feb-09

Jun-08

Oct-07

Feb-08

Jun-07

Feb-07

Oct-06

Jun-06

Feb-06

Oct-05

Jun-05

12 10 8 6 4 2 0 –2 –4 –6 –8

Real GDP: YoY%

demand, growth in the services sector was sustained. Moreover, the implementation of planned investment projects kept gross fixed capital formation elevated, providing further stimulus for the economy. Even though exports were lower than last year, they continued to provide support to the domestic economy. Furthermore, strong economic fundamentals and favourable rates of return encouraged a surge of foreign direct investment (FDI), providing an additional boost to the economy. The continued foreign capital inflows saw the recovery of FDI from its plunge in 2008–09. Malaysia received the third-highest level of FDI among its Southeast Asian peers at the beginning of 2011. Within the first quarter alone, FDI inflows reached US$3.7 billion, which was equivalent to 40 per cent of the total FDI received during 2010. Estimates suggest that FDI continues to underperform and therefore Malaysia could tap into a larger unrealized potential. Massive capital inflows are evidenced by the surge in the local stock and bond markets. Malaysia’s inflows have been

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148

ECONOMIC OUTLOOK largely characterized by portfolio investments. The increasing amount of capital flows into Malaysia is exerting upward pressure on the ringgit. Malaysia’s real effective exchange rate (REER) is currently above one standard deviation from its mean, as shown in Figure 2. Experience suggests that a large amount of capital outflows could drastically affect both the financial market and real economy. Therefore, any sudden reversal in flows will also affect the ringgit’s performance. Production losses sparked by interrupted supply from Japan have put a temporary damper on economic growth in the second quarter. These losses are, however, unlikely to have much impact on the growth for 2011 as a whole. Japan is among Malaysia’s top five export destinations and accounted for almost a third of Malaysia’s mineral fuel and petroleum exports last year. Given Japan’s reconstruction demands, total exports to the country grew by 9.5 per cent in July 2011. As a result, the previous production losses are very likely to be offset as the year progresses.

Figure 2: Real Effective Exchange Rate

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

114 112 110 108 106 104 102 100 98 96 94 92

Real Effective Exchange Rate Index (2005 = 100)

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149

THE ASEAN-10 Similar to the woes of its Asian peers, inflationary pressure is building up with the positive real GDP growth performance. While still relatively benign, inflation rose on higher food and energy prices amid sharp increases in global commodity prices. Food prices have increased at exponential rates since 2005, and the Food and Agriculture Organization (FAO) of the United Nations predicted that price increases were not likely to fall in the near future. With rising trade deficits in food and energy, Malaysia has seen inflation being pushed up by rising food and energy prices in recent months. In June 2011 the consumer price index (CPI) was up by 3.5 per cent compared to the previous year. These higher prices will dampen consumers’ spending habits, putting pressure on private consumption, as evidenced by the recent fall in the retail trade index (RTI) in Figure 3. The economic rebound also paved the way for macroeconomic policy normalization. Bank Negara Malaysia (BNM, the central bank)

Figure 3: Consumer Price Index and Retail Trade Index

120

160 140

115

120 110

100

105

80 60

100

40 95 Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

90

20 0

Consumer Price Index (2005=100) Retail Trade Index (Cut off pt=100)

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150

ECONOMIC OUTLOOK had previously cut the overnight policy rate (OPR) to a record low level in response to the downturn in 2008 and 2009. After that, the central bank had raised the OPR three times since March 2010, by a total of 100 basis points, bringing the rate to 3 per cent. This was followed by a pause that lasted until May 2011, when the central bank tightened the reins again. However, in light of weak international demand conditions, the central bank refrained from tightening rates in the latest monetary policy meeting in July. Overall, the Malaysian economy is likely to see a moderate expansion of 4.5 per cent during 2011, with investment and private consumption as the main drivers. Private consumption will continue to be buoyed by the positive development in labour income and the low unemployment rate. While the outlook remains positive, rising inflation and uncertainties around global development are posing downside risks to the Malaysian economy.

Economic Outlook Malaysia’s economic development will reach a crucial stage in the next few years as the government will carry out a comprehensive range of structural reforms to transform the economy into a high-income nation with a knowledge-based economy by 2020. Following the recession in 2008–09 and the strong rebound in 2010, economic growth is expected to carry on at the pace before the crisis, with domestic demand as the key driver. As the global recovery becomes more broad based and reform momentum picks up, the Malaysian economy is expected to move on to a more stable growth path, with real GDP growth projected to be 4.4 per cent in 2012 and 5.5 per cent in 2013. On the demand side, private consumption will continue to expand amid a fairly strong labour market. Despite efforts to consolidate the fiscal balances, government spending will still account for around 14 per cent of total GDP, guided by the Tenth Malaysia Plan (10MP). The 10MP is a medium-term spending programme for 2011–15 that focuses on improving infrastructure and education for the local workforce. Exports will continue to contribute to a large proportion of GDP, growing by 6.7 per cent a year on average. The current account

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151

THE ASEAN-10 surplus will remain large at 11.5 per cent of GDP on average. The gradual improvement in external conditions is likely to boost demand in Malaysia for imports of intermediate goods used in the manufacturing of exports. Import growth will also be supported by growing domestic demand. However, since the pace of expansion in imports in value terms will remain similar to the rate of export, the contribution of net exports to GDP growth will be marginal. On the supply side, the industrial sector will continue to account for a large share of the economy, at over 40 per cent, but both its size and growth rate are expected to remain smaller than the services sector. The services sector will become the largest and most dynamic part of the economy, as the government allocates more resources to this sector. The financial services, wholesale trade, and hotel and restaurant sectors will be the most dynamic segments within the services sector. Growth in financial services will be encouraged by gradual liberalization of the industry. The agricultural sector, particularly palm oil production, will also be important in terms of raising rural income and consumption. The government’s policy agenda will focus on a range of initiatives to turn Malaysia into a high-income country by 2020. Under the Government Transformation Programme (GTP), the Barisan Nasional (BN) has outlined several key initiatives, which include tackling corruption, improving education, and upgrading basic rural infrastructure. In order to balance its budget by 2020, the government will tighten the fiscal policy. In June 2011 the government passed a supplementary budget for 2011 that will add RM13.2 billion (US$4.4 billion) to the existing operating expenditure of RM162.8 billion. If the government revenue grows at 2.3 per cent (which is the target rate in 2011), the budget deficit is expected to widen to RM58.5 billion, equivalent to 7.2 per cent of the estimated GDP. Compared to the budget deficit in 2010, this is a noticeable deterioration, as shown in Figure 4. In 2012 and 2013, the government will gradually restrict operating expenditure by reducing subsidies on food and energy as part of the subsidy rationalization programme. At the same time it will increase

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ECONOMIC OUTLOOK

Figure 4: Trend in Budget Balance

0

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

–10

–1

–20

–2 –3

–30

–4

–40

–5

–50

–6

–60

–7

–70

–8 Budget balance (billion ringgit) Budget balance (% of GDP)

revenue by expanding the tax base to reduce the budget deficit. In 2013 a goods and services tax (GST) will be introduced, although the implementation of the tax is likely to be hampered by opposition from households and businesses. With the surge in interest-rate-sensitive capital flows complicating the conduct of monetary policy, macro-prudential measures and the statutory reserve requirement will be used instead of the OPR. As the central bank believes that inflation will not rise to problematic levels in 2011, the BNM is expected to sanction one more increase in the OPR, which will rise to 3.25 per cent by the end of 2011. However, the recent sharp appreciation of the ringgit together with persistent concerns about increasing capital inflows suggests that BNM will not push up interest rates sharply. In 2012 the domestic demand growth will slow down compared to the growth rate in 2011. As a consequence, the central bank is expected to keep the interest rate unchanged since it will place a higher priority over the short term growth amid weak

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153

THE ASEAN-10 global growth prospects. As domestic demand growth accelerates in 2013, the BNM will sanction incremental increases in the OPR in order to contain inflationary pressures. The central bank will also play a leading role in improving regulations in consumer finance, corporate finance, and insurance. Malaysia will continue to play a leading role in the development of Islamic banking and finance. Liberalization of financial markets continues and access to corporate finance will be broadened. For the ringgit, it is expected to appreciate against the U.S. dollar, but the exchange rate regime of a managed float against a tradeweighted basket of currencies will be maintained. The strong ringgit will continue to be supported by current account surpluses, capital inflows, as well as the positive interest rate differential with the United States. The currency is expected to appreciate from RM3.08/US$ in 2010 to RM2.97/US$ in 2011 and to RM2.93/US$ in 2012 and further to RM2.84/US$. The BNM will continue to stress that it does not attempt to maintain the ringgit at a particular level and intervenes only to minimize volatility and prevent currency misalignments. It will not impose capital controls to contain the appreciation of the ringgit since there has been no heavy pressure in recent years. The internalization of the Malaysian banking system, bilateral trade agreements, and regional economic integration will prompt the central bank to allow offshore trading of the ringgit. On the one hand, the cost-push inflation resulting from the increasing food and energy prices are expected to continue to induce inflationary pressures in the years to come. The government’s efforts to rationalize its extensive subsidy scheme will exert upward pressure on prices. The CPI inflation will accelerate to 3.3 per cent in 2011, from 1.7 per cent in 2010. It will fall slightly to 3.2 per cent in 2012 and increase again to 3.4 per cent in 2013, with the introduction of GST by the government. On the other hand, disinflationary influences will also be strong. The government is expected to sign additional bilateral free trade agreements in the forecast period. The removal of trade barriers and increased regional economic integration will contribute to the maintenance of a low inflation environment. Another source that

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ECONOMIC OUTLOOK will help to keep inflation moderate comes from the reduced imported inflation. Since the ringgit is expected to appreciate against the U.S. dollar, and most of Malaysia’s imports and exports are denominated in U.S. dollars, imports will consequently become cheaper. Despite faster growth in imports than in exports, Malaysia will continue to run substantial trade and current account surpluses. It will broaden the range of goods that it exports, but the economy will still remain highly sensitive to the global electronic goods cycle. In 2010 China overtook Singapore to become Malaysia’s largest export market in terms of volume, but the value of imports from Singapore exceeded those from China by a wide margin. However, a large domestic Chinese population gives Malaysia a special advantage as closer trading relations developed with China. Since China will remain as one of the fastest growing economies in Asia, this will create increasing opportunities for Malaysian exporters. As a result, it is expected that there will be a shift in the relative importance of Malaysia’s trading partners, and China is likely to overtake Singapore as Malaysia’s largest trading partner.

Key Risks and Challenges Measured on a purchasing power parity basis, Malaysia’s GDP per head was the ninth highest in Asia and Australasia in 2010. Malaysia is an advanced developing country in the sense that it is far ahead of other Asian developing countries, but productivity levels are low compared with the highest-ranking Asian developed nation, which is South Korea, or with Malaysia’s neighbour and competitor, Singapore. The major obstacles to economic progress and higher productivity are insufficient numbers of highly educated and highly skilled personnel in the workforce. In the near term, Malaysia faces three key risks. The first is a dampened growth momentum as a consequence of the weakerthan-expected global recovery. The second is a further strengthening of inflationary pressure, which may undermine consumer spending. The third is the weak fiscal consolidation, which may hurt policy credibility and would limit the ability to deal with future shocks. The rise of China is acting as a wake-up call to Malaysia. It has become clear that old policies will no longer work and that rapid

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155

THE ASEAN-10 structural changes are inevitable and favourable. Specific issues on the reform agenda for the next few years include the phasing out of price controls and subsidies, in a process that is widely considered necessary in order to create a more competitive domestic economy. The government will also press ahead with changes to the country’s positive-discrimination policies, which favour the bumiputra (ethnic Malays and other indigenous people). The discrimination policies hamper labour market efficiency. Further reforms in this area will attract greater inflows of foreign direct investment (FDI), since FDI has the potential to become a major engine of economic growth again in the next few years. However, the government is unlikely to dismantle affirmative action policies altogether due to fear of alienating its Malay support base. Over the medium term, the implementation of structural reforms needs to be accelerated for Malaysia to successfully become a high income nation by 2020. Weak implementation of the structural reforms will weaken consumer sentiments and investment behaviour, and consequently hamper economic growth. While progress is being made with the GTP, and the projects under the Economic Transformation Programme (ETP) would help to boost economic growth, a more lasting impact would require more broad-based improvement in productivity and the investment atmosphere. The New Economic Model (NEM) has been set out to address these two areas. However, the progress made so far is limited. Even though investor sentiment has warmed towards the project-based approach, there is scepticism with respect to the NEM measures. With intensifying competition in the region, accelerating the pace of structural reforms is becoming an immediate concern. In the long term the economic policies will focus on the need to remain competitive and to catch up with more-developed economies. However, several factors are likely to limit the long-term growth of Malaysia, including the political difficulty of extending equal opportunities to all racial groups, the impediment to advancement from conservative Islam, and the large geographical distance between Sarawak and Sabah in northern Borneo and peninsular Malaysia.

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–3.3 55.0 43.2 4.0 82.4 3.53

Fiscal balance (as % of GDP)

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

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

NOTES: F refers to forecasts. SOURCE: Economist Intelligence Unit.

3.6 16.6

160.9 123.5 37.4 16.7

5.8 4.5 7.5 5.2

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

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

GDP growth (% change) — Industry sector growth (% change) — Service sector growth (% change) — Agricultural sector growth (% change)

2006

101.3 3.31

61.6 38.5 4.8

–3.2

2.0 11.0

176.2 138.5 37.7 15.9

6.5 3.0 10.3 1.3

2007

91.5 3.46

66.2 43.4 3.6

–4.8

5.4 13.3

199.7 148.5 51.3 17.5

4.8 0.7 7.7 4.3

2008

96.7 3.42

66.4 42.7 5.6

–7.0

0.6 9.5

157.7 117.4 40.3 16.5

–1.6 –7.4 3.1 0.6

2009

106.5 3.08

70.2 40.1 5.1

–5.7

1.7 7.1

197.0 152.6 44.4 13.5

7.2 8.6 6.8 2.1

2010

Malaysia: Selected Economic Indicators, 2006-2013F

129.6 2.97

78.2 41.0 3.9

–7.2

3.3 6.1

212.7 168.0 44.7 12.3

4.5 4.0 5.1 2.3

2011

135.0 2.93

80.1 42.4 3.1

–5.9

3.2 12.7

224.0 178.8 45.2 11.8

4.4 4.2 4.7 2.5

2012F

141.8 2.84

84.4 44.3 3.1

–5.2

3.4 10.1

240.6 193.8 46.8 11.2

5.5 5.0 6.2 2.6

2013F

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THE ASEAN-10 REFERENCES Economist Intelligence Unit (EIU). Country Forecast: Malaysia. September 2011. International Monetary Fund (IMF). Regional Economic Outlook Asia and Pacific: Managing the Next Phase of Growth. April 2011. ———–. World Economic Outlook: Slowing Growth, Rising Risks. September 2011. The World Bank. Malaysia Economic Monitor. April 2011.

Myanmar Thein Swe According to the Asian Development Bank (ADB), GDP growth in fiscal year 2010 improved to around 5.3 per cent from 5.1 per cent for FY2009, in the post Cyclone Nargis (2008) period. This trend was also similar to the estimates of the International Monetary Fund (IMF) and the Economist Intelligence Unit (EIU) of The Economist (for the same period) at around 5.5 per cent and 3.3 per cent respectively. Although the recovery was led by improvements in the agriculture, mining, manufacturing, and transport and communications sectors, the standard of living still remains low compared with neighbouring countries. Agriculture remains the dominant sector of employment at about 40 per cent of GDP. Agriculture (which also includes fisheries, livestock, and forestry) production rose in FY2009 (ending in March 2010), particularly in the Ayeyarwady and Yangon regions, which have been gradually rehabilitated after Cyclone Nargis. The GDP growth in FY2010 could be attributed to a construction boom in Nay Pyi Taw, the new capital city of Myanmar, and to the construction of a highway connecting Nay Pyi Taw with Mandalay. The growth recovery was also due to the economic recovery in the neighbouring countries that import goods such as foodstuffs and natural gas from Myanmar. In the case of agriculture, FY2010 growth decline was due to drought in the central dry-zone belt and to remaining soil salinity in the cyclone-affected area of the Ayeyarwady delta regions.

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MYANMAR • Myanmar’s economic growth has improved for the past two years since 2009 and inflation has dropped to a modest single digit. • The economy is also forecast to grow moderately with foreign investment in construction and with increased agriculture credits. • However, the new civilian government would have to accelerate reforms in order to utilize its full potential.

The forecast for GDP growth in FY2011 and FY2012, according to the ADB, is around 5.3 per cent and 5.4 per cent respectively. The IMF forecast is 5.5 per cent for both FY2011 and 2012, while the EIU forecast is 3.2 per cent for FY2011 and 4.7 per cent for FY2012. But according to the official GDP growth mentioned in the statement of the Governor of Myanmar on 23 September 2011, at the 2011 Annual Meetings of the World Bank Group and International Monetary Fund, the GDP growth for FY2012 is expected to be 8.8 per cent. In the past the official GDP growth figures were considerably higher than the ADB, IMF, and EIU estimates, and were inconsistent with variables closely related to economic growth. As economic data from official sources are not timely, it is however difficult to realistically assess such estimates. Recently the government has reduced the money-creation method to finance the fiscal deficit; rather, it has financed part of the fiscal deficit through the issuance of government treasury bonds. This has reduced inflation from over 30 per cent in 2007 to a single digit of around 8 per cent in recent years. But higher domestic demand and increased global prices of food and fuel could also affect the cost of living in the country. In early 2011 the government decided to suspend rice exports due to price increases within the country. Despite those measures there were cases of illegal rice exports to neighbouring countries. The deficit in the current account has increased from around 1.3 per cent of GDP to 4.3 per cent in 2011, projected to be 4.8 per cent

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THE ASEAN-10 in 2012, and might widen further to 5.3 per cent of GDP in 2013. Although gas and food crop exports are likely to be increased, the imports of industrial products, including capital equipment and construction materials, might offset revenues from exports and the current account deficit might even rise further. Hence, recently the government has stopped many ongoing construction projects in the new capital Nay Pyi Taw, to reduce the current account deficit. In the external accounts, natural gas exports continue to support, to a large extent, the import requirements of the country. But because of the fall in export price for gas by about 20 per cent, the earnings from this sector were significantly reduced. However, due to increased demand for gas from Thailand, the receipts from gas recovered to $2.7 billion in FY2010. Also, the recent strong growth in the mining sector will continue with the increase in the production of jade and other gemstones due to the recovery in regional demand. Sanctions imposed by the United States and countries of the European Union therefore had little impact on the international trade of the country. Although investors are to be given special privileges under a new Special Economic Zone Law, there are still constraints and challenges for doing business in Myanmar. Furthermore, domestic investment will be inadequate due to limited access to capital. The new civilian government formed after the November 2010 election, although comprising mostly former military officers of the previous government, realizes that extensive reforms are needed to push the economy forward. Myanmar’s economy still has untapped potential and the new government realizes that it is lagging behind neighbouring countries in many aspects, including the standard of living. Poverty reduction would require significant economic growth as well as equitable distribution of income and wealth, both for the urban population as well as the rural population, including the ethnic nationalities or national groups. A string of unexpected but encouraging steps and reforms following the new government’s recent decisions has offered modest hope for Myanmar and its people. A comprehensive reform package

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ECONOMIC OUTLOOK is needed, including improvement in equitable domestic and foreign investment policy, significant fiscal resource generation for social and infrastructure development, alignment of a single foreign exchange rate, and restructuring and developing a sound financial sector with transparent macroeconomic management, particularly in the agriculture and export sectors. The government is also aware of the need to reform the financial sector, including unifying the exchange rate. President U Thein Sein has said recently that strengthening of the Myanmar currency (kyat) is necessary due to the weak U.S. dollar hurting the economy. This is because Myanmar’s commodity exports are priced in U.S. dollars. Other reasons for the appreciation of the kyat is the sale of state enterprises — the privatization and asset sales that have to be settled in kyat and the supposed speculation in kyat by Chinese investors. Economists believe that huge inflows of foreign cash for infrastructure projects, high oil and gas prices, and the sale of government industries and other assets are also driving the Myanmar kyat to rise. The official exchange rate has been pegged at kyat 8.5 for one Special Drawing Rights of the IMF since 1977, currently equivalent to kyat 5.5 for one U.S. dollar. But there are several, informal, parallel exchange rates that the government uses in its accounting. Multiple currency practices and rates are used for different types of transactions and this is a serious obstacle to macroeconomic reforms. A paper by IMF economists in 2008 said the system created distortions, was opaque, and costly. It argued that unifying the different rates would help Myanmar benefit from a more efficient allocation of resources (Hori and Wong 2008). Although the state sectors use the official rate of about K5.5 to one U.S. dollar for imports, private sector businesses use the market rate, which appreciated from a record low of about K1,400 in 2007 to K750 in early June 2011. It has since stabilized at around K800. The strong kyat has significantly affected exporters, who spend kyat to produce commodities but earn U.S. dollars in return, making some export items, particularly agriculture and fisheries products, unprofitable in the international market. Also, farmers, whose products constitute

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THE ASEAN-10 almost 70 per cent of the country’s economy, are being hit hard on their agricultural export earnings. The Union of Myanmar Federation of Chambers of Commerce and Industry confirmed they had also discussed the issue with the new government. Similarly, the Myanmar Rice Industry Association wanted a more stable exchange rate and said the appreciation of the kyat had “severely hurt the business community”. “Our country’s economic policy is for exports to drive economic growth, so I want to see a reasonable foreign exchange rate for both exporters and producers”, said U Ye Min Aung, who is also the managing director of Khittayar Hinthar Rice Specialist Company. In a meeting with more than forty business and social organizations on 18 August 2011, President U Thein Sein explained the recent government initiatives such as increasing pension rates, reducing taxes, and alleviating poverty during the new government’s first five months in office. He also mentioned a reduction in taxes to stimulate economic development. In order to stimulate economic development and exports, the government reduced export tax from 10 per cent to 7 per cent, and income tax to 2 per cent from 5 per cent, effective July 2011, to give exporters some relief from the fall in export earnings due to the appreciation of the Myanmar kyat. The new government has exempted rice, beans and pulses, corn, sesame, rubber, freshwater and saltwater products, and animal products from export taxes for six months from 15 August 2011 to 14 February 2012. The Myanmar Government also requested the IMF to assist in its plan to unify the exchange rate and to remove restrictions on foreign currency operations as required by Article VIII of the International Monetary Fund’s Articles of Agreement. This is the first time in almost four decades that the government is planning to change the country’s official exchange rate. Unifying the exchange rate and removing restrictions on foreign currency operations will enhance Myanmar’s competitiveness when the ASEAN Free Trade Area and the ASEAN Economic Community become effective in 2015.

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ECONOMIC OUTLOOK Hence, at the request of the government (Central Bank of Myanmar), an IMF delegation (from the Monetary and Capital Markets, Legal, and Asia and Pacific Departments) visited Myanmar from 19 October to 1 November 2011, to assist the government in its plans to unify the exchange rate and to lift restrictions on current international payments and transfers with the intention of accepting Myanmar’s obligation under Article VIII, Section 2(a), 3, and 4 of the IMF’s Articles of Agreements. IMF members accepting the obligations of Article VIII undertake to refrain from imposing exchange restrictions on payments and transfers for current international transactions or from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. Although the government is willing to assist in unifying the exchange rate with the help of the IMF, challenges remain as there are many powerful and vested interests that might block or delay its implementation. The financial sector in Myanmar is underdeveloped and needs improvement, but has the potential to support the needed economic growth. Four new banks and forty-nine new branches were approved in 2010, thereby improving private credit significantly. However, banking assets are low and only about a third of the private sector financing is from the formal banking sector. Although privatization of state assets is to be encouraged for private sector development, more transparency in the privatization process would improve investors’ confidence in asset valuation and would provide greater competition. The development of the private sector depends on good governance as well as a strong regulatory and policy environment. Demand for agriculture credit is large, but the availability is limited and inadequate. Although there were improvements, farmers could not afford farm inputs to optimize cultivation. There are encouraging developments and indications of additional external assistance from bilateral and multilateral sources for agriculture credit and microfinance credit in rural areas in the foreseeable future. A review of the earnings from gas exports would be useful. At present it has very little impact on GDP and the fiscal budget due to

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THE ASEAN-10 the conversion of earnings at the official exchange rate. If converted at the market exchange rate, the revenue of the government will increase significantly. This increase in revenue would enable increased expenditure in the social sectors such as health and education and other components of the social infrastructure. At present the Ministry of Education, Ministry of Health, and Ministry of Social Welfare received 4.97 per cent, 1.46 per cent, and 0.23 per cent respectively of the total national budget for FY2011–12. On 23 August 2011, in answer to a question by a member of parliament in the Myanmar Lower House of Parliament, the Health Minister said that his Ministry received a very small health budget — only about 43 per cent of its essential needs. Bearing this in mind, there is a dire need for an increased budget for the social sectors to improve existing standards and for future human capital development. The government newspaper, New Light of Myanmar, reported on 19 October 2011 that a seminar on budget processing was held for the parliamentarians. According to the 2008 constitution, budget bills are one of only three to be submitted directly to the Pyidaungsu Hluttaw (Union Parliament — national-level bicameral legislature — Joint Session); the other two pertaining to finance and revenue and national planning. Many are of the view that this budget seminar for representatives might herald increased transparency in terms of how the nation’s budget is formulated and how revenues are spent. The new government has created an environment where steps towards reforms are taking place today. The true test of the new government of President U Thein Sein will be whether it institutes more meaningful and irreversible reforms that put real political and economic power in the hands of the people of Myanmar through their representatives in the parliament. The November 2010 election, in which the main opposition party (Daw Aung San Suu Kyi’s National League for Democracy, NLD) did not participate, was based on the 2008 Constitution that reserved 25 per cent of the seats in parliament for military personnel. The election also ensured that the military-backed Union Solidarity and Development Party (USDP) would dominate the remaining contested

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ECONOMIC OUTLOOK seats. As envisaged, the USDP “won” more than 80 per cent of the seats contested and the new government was formed mainly of former military government leaders, now in civilian clothes. The new president, first vice-president, and speakers of both the upper and lower houses of parliament were all members of the former military government. The majority of the new cabinet members were also former military officers. There were a few civilians in the government, including the second vice-president who is a civilian doctor of the Shan ethnicity and some civilian members in the technical ministries. Nevertheless, President U Thein Sein indicated in many of his speeches after assuming the presidency the establishment of a new reform agenda which comprises poverty reduction and anti-corruption policies, including good governance. This resulted in some positive changes, such as a number of media and press restrictions being eased, more open Internet access, and removal of Internet website bans and controls. Myanmar used to be one of the countries in the world with extensive Internet restrictions. Now it has lifted its ban on international news websites, exiled-Myanmar news websites, and YouTube. Martyr’s Day and International Day of Democracy ceremonies were observed with participation from the opposition NLD members. The political climate within the country has also improved since the meeting between Daw Aung San Suu Kyi and President U Thein Sein. Following the meeting she has been allowed to communicate with international communities and is also allowed to conduct political activities without restrictions. She was officially invited to attend a national-level three-day workshop on economic development in Nay Pyi Taw and many follow-up workshops and seminars in Nay Pyi Taw as well as in Yangon. She believes that the President is genuine and sincere. The government also granted amnesty to over 6,000 prisoners, including over 200 political prisoners recently. It was also reported by senior government officials, including the chairman of the lower house of parliament, that the government is planning a second round of amnesty. On 4 November 2011, the President signed into law the amended Political Parties Registration Law that opened the way for

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THE ASEAN-10 both the NLD to re-register and for Daw Aung San Suu Kyi and other former jailed NLD members to contest in future elections for the parliament. On 18 November 2011, a total of 106 members of the central committee of the NLD from the 14 states and regions of the country will meet to decide whether it will re-register as a political party or not. Differences of opinion on whether the party should register or not have already begun to appear. Some NLD members have expressed their opinion that they could not accept the 2008 Constitution. However, further releases of political prisoners, including the release of a substantial number of NLD members from prison, would be an indication of the government’s sincerity for political reconciliation and could be a decisive factor in whether the NLD will re-register or not. The announcement by the President of the suspension of the US$3.6 billion Myitsone hydropower dam project financed by China and the release of over 200 political prisoners has significantly changed the political atmosphere in the country. While the Myanmar Government has said it acted according to the will of the people on concerns about the environmental impact of the Myitsone dam, China was not happy with the decision and called for talks to resolve the issue. The Chinese Government remains hopeful that the Myitsone dam project will resume in the near future. This 6,000-megawatt dam project in Kachin State in northern Myanmar, bordering the Yunnan province of China, was one of seven dams China was to build on the upper reaches of the Ayeyarwady River. Upon planned completion in 2019, the Myitsone hydropower dam was expected to produce 29,400 million kilowatt hours a year, nearly all of which would be exported to China. Many bilateral and multilateral institutions have also praised the government for initiating the reform agenda and have encouraged the government to continue with more meaningful and concrete steps towards the implementation of these reforms. The European Union, International Monetary Fund delegations (with team members from the World Bank and Asian Development Bank), and other bilateral and

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ECONOMIC OUTLOOK multilateral institutions (including the United States and the UN) visited the country to show their constructive support and offer assistance for the government to further implement these new reforms and changes. Most of the discussions between the government and bilateral and multilateral institutions were constructive and frank. The United States has also been actively advocating change and high-ranking U.S. officials have now held several rounds of talks with government representatives in Myanmar and in Washington DC. The United States has also indicated that, while maintaining economic sanctions, it is ready to respond step by step in kind if genuine democratic reforms are implemented and human rights are improved. The United States also shares and supports the four goals that were outlined by the government, namely democracy, human rights, development, and national reconciliation. It is to be noted that the United States has now refrained from objecting to the multilateral financial institutions visiting Myanmar to assist with the economic and financial reform agenda. In return for these tentative signs of reform, the U.S. government has lifted its travel restrictions on some Myanmar government officials, including Myanmar Foreign Minister Wunna Maung Lwin, who attended the opening of the 66th session of the UN General Assembly in New York in late September 2011 and later travelled to Washington DC to hold a rare meeting with senior U.S. State Department officials. U.S. Special Representative and Policy Coordinator for Myanmar, Derek Mitchell, has visited the country three times since it started its reform agenda. On his third visit, on 3 November 2011, he met with the Commander-in-Chief of the Myanmar Defence Services, General Min Aung Hlaing. It was reported in the government newspaper, the New Light of Myanmar, dated 4 November 2011, that they focused their discussions on the promotion of bilateral relations between Myanmar and the United States, and cooperation between the two armed forces. It was the first time in twenty-three years that the chief of Myanmar’s armed forces met with a high level U.S. official. Among the many bilateral and multilateral delegations that visited Myanmar after the new government was formed and the reform agenda was announced by President U Thein Sein, was the Foreign Minister

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THE ASEAN-10 of Indonesia, Natalegawa. The purpose of his trip was to assess recent political reforms in the country. As the current ASEAN chair, Indonesia has been charged with determining whether the Myanmar Government is ready for a regional leadership role. After his visit to Myanmar, Natalegawa said that he thought significant changes were happening in the country. After his return to Indonesia, Natalegawa was quoted by Agence France Presse as saying that “ASEAN leaders have expressed tremendous support for Myanmar’s bid to host the regional summit in 2014.” He also said, “the overwhelming sense that I obtained during the course of the May summit of ASEAN and the ASEAN foreign ministers’ meeting in July … was positive.” On a similar note, the United States is no longer objecting, but has indicated that it is up to ASEAN to decide on Myanmar taking the chair of the group in 2014. Japan’s foreign ministry also released a statement on 14 October 2011 that it appreciates the changes and reform agenda as a concrete step towards democratization and national reconciliation. Japan is planning to strengthen its cooperation in four fields: exchange of personnel, official development assistance (ODA), economic relations, and cultural exchange. With regard to ODA, Japan is to announce the resumption of both the rehabilitation of the Baluchaung No. 2 hydropower plant, which was suspended after democracy movement leader Daw Aung San Suu Kyi was detained in 2003, as well as the construction of the Myanmar-Japan Center for Human Resources Development, which was suspended after anti-government demonstrations in 2007. Japan plans to begin on-site surveys by the end of this fiscal year 2011. Lack of support from international financial institutions like the IMF, the World Bank, and Asian Development Bank due to sanctions has deprived Myanmar of some US$2 billion in ODA annually. Since the new government was formed, Myanmar appears to be re-balancing its relations with its neighbouring countries, especially with China and India. China has recognized Myanmar’s contribution to the economic growth of the underdeveloped southwestern provinces of China,

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ECONOMIC OUTLOOK especially Yunnan province bordering Myanmar’s northern Kachin State. Yunnan province’s economic boom was due to a large extent by the easy access to agricultural and other natural resources from Myanmar. Similarly, with the construction of gas and oil pipelines, roads and railways from Myanmar’s Kyaukpyu deep seaport in the Bay of Bengal, and many other development projects funded by China, the relationship between China and Myanmar will continue to strengthen even with the suspension of the Myitsone dam project. For India, Myanmar has become increasingly important for its “Look East Policy” and it intends to use Myanmar as a crucial land bridge to the rest of Southeast Asia. U Tun Lwin, the chairman of the Myanmar Pulses, Beans and Sesame Seeds Merchants Association, who accompanied President U Thein Sein on a recent trip to India in October 2011, says that India is looking for ways to invest in Myanmar’s agriculture and energy sectors, including expanding airline services between the two countries. India is Myanmar’s fifth-largest trading partner. It is also a major importer of pulses and beans. Myanmar exports a total of more than one million tonnes of beans annually. However, bilateral trade could significantly increase if transportation and communications and financial and banking services could be improved. India has been wooing Myanmar through cooperation in joint energy projects involving oil and natural gas, infrastructure projects, and in strengthening security cooperation in an effort to counter the dominant influence of China in Myanmar. During the visit of President U Thein Sein, India provided a US$500 million credit line for developmental projects in infrastructure and irrigation and agreed to strengthen economic, agriculture, energy, education, and security ties. Roads and a seaport are also being developed by India in Myanmar that would give the remote northeastern Indian states easier access to port facilities and boost their economic development. Bangladesh, the western neighbour of Myanmar, is also an important trading partner. Myanmar has strengthened its trade and economic relations with Bangladesh. Bilateral trade between Myanmar and Bangladesh have stood at around US$140 million annually for the past few years. Myanmar exports to Bangladesh marine products,

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THE ASEAN-10 beans and pulses, and kitchen crops, while it imports from Bangladesh pharmaceuticals, ceramics, cotton fabric, raw jute, kitchenware, and cosmetics. Bangladesh’s third-largest export of pharmaceutical products goes to Myanmar. Myanmar exports around 23,000 tonnes of marine products annually to Bangladesh, which is the fifth-largest marine products import for that country. The two countries formally opened border trade in 1994; the two border points with Bangladesh are Sittwe and Maungdaw in western Rakhine state, Myanmar. A few years ago, a dispute over the maritime boundary emerged when Myanmar began exploring deep-sea oil and gas resources in the Bay of Bengal. However, the two sides agreed to resolve the dispute over the maritime boundary peacefully in accordance with the dispute settlement procedure under the United Nations Law of the Sea, in Hamburg, Germany. The oral pleadings for the final round over the case have been completed and a final judgement is expected in March 2012. According to a report from Nay Pyi Taw, Myanmar is confident that the judgment will resolve the maritime boundary dispute between Myanmar and Bangladesh and make an important contribution to friendly relations between the two neighbours. Thailand, the eastern neighbour of Myanmar, is also strengthening its business and trade relationship, particularly in gas imports from Myanmar. It is building an additional gas pipeline for new gas coming on stream in 2015 and also lengthening the existing Trans ASEAN gas pipeline to ensure energy security in the ASEAN region. Last year an agreement was also signed between Myanmar and Thailand to build a mega deep-sea free port project in Dawei, Tanintharyi region in the southeastern part of Myanmar, estimated to cost around $60 billion. With the recent floods and overcrowding of industries in Bangkok and neighbouring areas, Thailand is interested in moving many of its industries to this Dawei Deep Sea Port area. The area is to be developed as a special economic zone with state-of-the-art facilities, including construction of a 160-kilometre road and rail links between Dawei Deep Sea Port and Kanchanaburi, Thailand. Voyage time from the Indian Ocean to Thailand, Vietnam, China, and Japan could be reduced by an average of ten days. The vessels could also avoid the

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ECONOMIC OUTLOOK need to pass through the historically well-known pirate lair of the Strait of Malacca, making transportation more secure. Geographically, Myanmar is surrounded in the northeast and northwest by two booming economic neighbours, China and India, whose combined total population accounts for nearly half of the world’s. Myanmar is also a member of ASEAN. Excluding Myanmar, ASEAN is a region with a population of over 500 million. To the west of Myanmar is Bangladesh, with another significant population of over 160 million. So Myanmar is in the Asia that has become the fastest economic growth region in the world with the twenty-first century being considered the Asian century. Myanmar’s foreign trade is mainly with Asian countries. Nearly all of Myanmar’s exports (around 90 per cent) go to Asia, especially to neighbouring countries. Similarly in the case of imports, nearly 80 per cent are also from Asian countries. Hence, economic sanctions have very little impact on Myanmar’s foreign trade. The ASEAN community is Myanmar’s second most important investor and trading partner after China. Myanmar’s economy is also expected to be integrated into the ASEAN Free Trade Area and ASEAN Economic Community in 2015. Myanmar, strategically located in the centre of booming Asia, is still lagging behind others in the region and appears to be the least prepared for integration into the competitive Asian economy. Although recent positive but small steps in Myanmar in the areas of economic and political reforms are encouraging, in-depth diagnostic assessment is needed to introduce rational policies and guidelines for implementation. The momentum for further reforms and political reconciliation is crucial in order that the objective of poverty reduction and socio-economic development will be achieved. REFERENCES Hori, Masahiro and Yu Ching Wong. “Efficiency Costs of Myanmar’s Multiple Exchange Rate Regime”. IMF Working Paper, WP//08/199. Asia and Pacific Department, IMF, August 2008. Central Statistical Organization. Statistical Year Book 2009. Ministry of National Planning and Economic Development, Myanmar.

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11.9 5.5 12.0 3.4 19.6 13.2 7.9 6,349.0 3,313.0 3,036.0 0.6 32.9 30.0 –3.0 8,237.0 8,237.0 0.9 2.3 5.6 1,185

10.7 3.6 3.6 1.1 18.0 11.6 5.6 6,873.0 4,617.0 2,256.0 –2.2 22.5 14.8 –3.5 8,002.0 8,002.0 0.5 3.4 5.4 1,185

2008 10.1 5.1 5.1 1.8 17.7 12.2 5.6 7,481.0 4,137.6 3,343.4 –1.3 8.2 30.6 –4.8 8,186 8,186 0.4 3.5 5.5 1,055

2009 12.0 5.3 5.5 3.3 18.6 11.6 4.7 8,804 4,541 4,263 –2.2 7.3 42.3 –5.1 7,998 7,998 0.4 3.7 5.6 970

2010 12.0 5.3 5.5 3.2 19.0 12.0 5.0 7,963 4,892 3,071 –4.3 8.3 26.1 –5.2 8,145 8,145 0.4 3.9 5.3 885

2011F 8.8 5.4 5.5 4.7 20.0 13.0 6.0 8,282 5,283 2,999 –4.8 8.2 20.4 –4.8 8,273 8,273 0.4 4.1 5.4 950

2012F 8.8 5.4 5.5 4.7 20.0 13.0 6.0 8,613 5,706 2,907 –5.3 8.2 19.1 –5.0 8,439 8,439 0.4 4.3 5.4 900

2013F

NOTES: F refers to forecasts. SOURCES: Ministry of National Planning and Economic Development, Myanmar; CSO, Selected Monthly Economic Indicators; ADB Key Indicators for Asia and the Pacific 2011; Asian Development Outlook (ADO) April 2011; ADO 2011 Update August 2011; IMF World Economic Outlook, September 2011; Economist Intelligence Unit (EIU), Country Report: Myanmar (Burma), August 2011.

GDP growth (% change) Asian Development Bank International Monetary Fund Economist Intelligence Unit — industry sector growth (% change) — services sector growth (% change) — agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Current account balance (% of GDP) Inflation/CPI average (% change) M2 money supply growth (% change) Fiscal balance (as % of GDP) Total debt outstanding (US$ million) Long term debt (US$ million) Debt service ratio (as % of exports) Foreign exchange reserves (US$ billion) Official Exchange Rate (Kyat/US$1) Market Exchange Rate (Kyat/US$)

2007

Myanmar: Selected Economic Indicators, 2007–13F

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Philippines Aladdin D. Rillo With uncertain global outlook, the Philippines will be confronting the likelihood of a moderate growth in 2012. Real GDP growth is expected to grow modestly to 4.8 per cent from 3.9 per cent a year ago, due mainly to weakening external demand. However, growth will still remain within trend. Private consumption will continue to be a key driver to growth, expanding by 5.2 per cent, on the back of steady overseas remittances and sustained unemployment. But due to the deteriorating external environment, the slow pick up in exports — the other growth driver — will dampen growth prospects. In fact, electronics exports (which account for 60 per cent of exports) are expected to grow below potential at 6 per cent, as a result of weak global demand from advanced markets and slow recovery in global and regional supply chains disrupted by the Tokyo earthquake and Thailand flooding. Given the increased interdependence of the Philippine economy with the rest of the world, the outlook in the coming months will depend on how the current global uncertainties will be resolved. Any intensification of these uncertainties will definitely spell more difficulties for the country. To help limit more downside risks to growth, and to offset the government underspending last year, public consumption is projected to grow higher at 4.5 per cent from 1.7 per cent in 2011. Government spending will be boosted by the carry-over infrastructure projects under the US$7.1 billion “stimulus” plan that was implemented in 2011. A number of original projects that were allocated last year have not been implemented, including the US$130 million project on construction and rehabilitation of roads, bridges, and flood control facilities; as well as the US$260 million project under the National Housing Authority. In addition, some projects under the Public-Private Partnership (PPP) are also likely to be undertaken this year. Therefore, implementation of all these projects together will help public consumption to contribute strongly to growth this year. As a result, a higher budget deficit (2.5 per cent of GDP) will continue to be incurred. However, this figure is still

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PHILIPPINES • Low export demand will continue to weigh on growth prospects despite a stable domestic demand supported by steady remittances. • Increasing domestic investment remains a key challenge for sustained growth. • Political commitment is crucial to sustain hard-won economic gains.

within the 2 per cent deficit range being targeted by the government until 2016. Given the current environment of slow growth and low business profitability, weak private investment will continue to challenge the economy from growing above potential. The government has planned to increase capital spending next year to support domestic investment (mainly through the PPP projects), but it is unlikely that fixed capital investment will pick up strongly. In addition to increased risk aversion generated by the slowdown in advanced economies, investors are still deterred by concerns over the country’s business climate, including rising costs and wages and poor infrastructure. As a result, investment growth is likely to slow to 4.4 per cent, before picking up slightly to 5.7 per cent in 2013, when a gradual recovery in both global and domestic economies is expected. On the production side, the services sector will continue to provide a bright spot for the country’s growth prospects. In particular, the business process outsourcing sector in the country — which now ranks as the third largest in the world (after India and China), with revenues of US$10.7 billion — is still expected to anchor the growth of the services sector. The robust expansion in services activity will also help offset the modest growth in the industrial sector (4.3 per cent), whose prospects this year will be dimmed by lower export demand for manufacturing (especially electronics and industrial machinery) and a low capacity utilization rate (currently below 80 per cent). Meanwhile, a strong pick up in the growth of the agriculture

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ECONOMIC OUTLOOK sector is expected this year at 4.5 per cent from 2.3 per cent in 2011. In addition to the recovery from last year’s disappointing production due to damage to crops from strong typhoons, the implementation of planned agricultural projects (e.g., the US$30 million project by the Department of Agriculture to build irrigation structures and farm-to-market roads) and support from multilateral organizations (like the World Bank’s Mindanao Rural Development Program Phase II) will contribute to growth in the agriculture sector in the coming year. With significant downside risks on global demand and increasing strains on global financial markets, the country’s external balances will generally come under pressure from rising import bills for commodities and slowing exports. Growth in merchandise exports is going to slow markedly by 28.8 per cent from the estimated growth of 7.8 per cent in 2011. However, volatile oil and commodity prices, despite the fact that they have eased relative to their previous peaks, will cause merchandise imports to further increase, thus creating a trade deficit of US$3.8 billion compared to its level of US$6.8 billion a year ago. Largely because of sluggish export growth and moderation in capital flows and remittances, the current account will generate a small surplus amounting to 2.3 per cent of GDP by the end of 2012. Reflecting this, the official reserves are seen to improve slightly at US$59.2 billion by year end as the peso consolidates at PhP41.6 against the U.S. dollar. Although food and fuel prices are expected to subside in the coming months, the inflation rate will remain elevated in the short term (averaging 4.8 per cent from 4.5 per cent in 2011), which means that the monetary policy stance is expected to be on a tightening side. Unless the downside risks to growth become more significant and the current financial strains deeper, domestic liquidity (M3) is not expected to ease further (projected growth rate of 11.8 per cent). Policy rates are also likely to remain unchanged from their current levels for most of the year. On the fiscal front, the commitment by the government to further stimulate the economy will not only widen the budget deficit,

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7.1 5.9 6.6 10.9 50,466 55,514 –5,048 4.8 2.8 10.0 3.41 –0.2 55.8 37.14 33,751 41.40

3.7 4.7 0.4 2.7 49,078 56,746 –7,669 2.1 9.3 14.9 5.39 –0.9 57.0 31.29 37,551 47.48

2008 1.1 4.1 10.9 –0.4 38,436 43,092 –4,656 5.6 3.2 7.5 4.19 –3.7 57.3 32.56 44,243 46.35

2009 7.3 5.3 2.7 17.0 51,432 54,702 –3,270 4.5 3.8 10.8 3.73 –3.5 55.2 30.09 62,373 43.88

2010

Notes: E refers to estimates; F refers to forecasts. Sources: Country websites (NSCB, BSP); EIU; Consensus Forecast Asia; author’s estimates.

GDP growth (%) — Private Consumption — Public Consumption — Gross Fixed Investment Exports (US$ million) Imports (US$ million) Trade Bal (US$ million) Current Account (% GDP) CPI Inflation (ave; %) M3 growth (end-period; %) Interest Rate (ave; %) Fiscal Balance (% GDP) Public Debt (% GDP) Total External Debt (% GDP) Reserves (end-period; US$ million) Exchange Rate (end-period)

2007

Philippines: Selected Economic Indicators, 2007–13F

3.9 5.0 1.7 4.7 55,443 62,250 –6,807 2.7 4.5 9.9 4.4 –2.6 55.7 27.6 54,887 42.9

2011E 4.8 5.2 4.5 4.4 39,443 42,250 –3,807 2.3 4.8 11.8 4.7 –2.5 55.1 25.4 59,202 41.6

2012F

5.3 5.6 5.9 5.7 58,164 55,855 –2,309 2.2 4.7 13.4 4.7 –2.3 55.1 25.4 59,202 41.6

2013F

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ECONOMIC OUTLOOK but will also serve as an opportunity for the Philippines to go back to the capital market with longer tenures. In this volatile environment, there are three important challenges facing the policymakers in the Philippines to sustain growth and maintain financial stability. First, efforts to implement policies that support the enhancement of domestic demand should continue. It is about time that the Philippines implements strong policies to promote the growth of domestic investment. The current initiative to support public-private partnerships in infrastructure is a good one and should be sustained with other policies that eliminate key infrastructure bottlenecks, improve trade and investment facilitation, and enhance the investment climate. Renewed interest in the region to focus on financial inclusion and inclusive growth should encourage the authorities to take serious initiatives in these issues. So far the government has already taken decisive steps in the development of micro-insurance. But more actions are needed to support domestically sourced growth through increased domestic investment. Second, given the increased integration of the domestic markets to global financial markets, as well as the increasing financial strains, there is a need to sustain the foundation for a strong upswing through reforms that promote healthy banking and corporate balance sheets and accommodative financial conditions. Restoring the health of the banking sector will allow the resumption of lending activities that are critical to much-needed growth in investment and manufacturing. In addition, the Philippines should continue to promote financial regulatory reforms, including enhancing its risk-assessment and crossdebt management capabilities. Finally, with all the political controversies confronting the country, it is important that the current programmes on economic development and reforms be not sidelined by these controversies. Indeed, political stability matters if the hard-won gains of reforms are to be preserved. This is also crucial to establish the credibility of the government in the eyes of investors and the international community.

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Singapore Sng Hui Ying Recent Economic Development On the back of the slower growth momentum seen worldwide, the Singapore economy has cooled significantly from the sizzling growth rates achieved in the first half of 2010 (see Figure 1). Persistently high unemployment in the United States and the worsening sovereign debt crisis in the eurozone jointly work as a drag on the global economy. The negative impact on the Singapore economy was broad based, affecting both the manufacturing and the services sectors. On a quarter-on-quarter basis, the Singapore economy suffered a 6.3 per cent contraction in the second quarter of 2011, but managed a slight 1.3 per cent expansion in the third quarter, narrowly missing a technical recession.

Figure 1: Muted Growth Rates in 2011

50

y/y% Growth (real)

40 30 20 10 0

1Q10

2Q10

3Q10

4Q10

1Q11

3Q11

–10 GDP

Manufacturing

Construction

Services

SOURCE: CEIC Database.

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SINGAPORE • On the back of a deteriorating global economy, the Singapore economy has cooled significantly from the sizzling growth achieved in 2010, growing at –6.3 per cent and 1.3 per cent quarter-on-quarter in the second and third quarter of 2011. Economic growth for the whole of 2011 is forecast to be around 5 per cent. • Going forward, the Singapore economy faces significant downside risks as the U.S. economy falters and the eurozone debt crisis worsens. The MAS has warned that growth could be below 3–5 per cent in 2012. GDP is projected to grow between 4.3 per cent and 4.8 per cent in 2012 and between 4.2 per cent and 5 per cent in 2013. • CPI inflation is expected to be around 5 per cent in 2011 and 2.5–3.5 per cent in 2012. • In the Monetary Policy Statement announced in October 2011, the MAS has maintained the policy of a modest and gradual appreciation of the S$NEER policy band in the next six months, but with a reduced slope of the policy band, so as to balance the inflation risk and the risk of an economic slowdown.

The stagnant growth in the advanced economies has dampened demand for electronic products, an important pillar of Singapore’s manufacturing sector. The manufacturing sector, the growth propeller in early 2010, has become a major braking force in the economy in 2011. As a result of the easing global electronic demand, the manufacturing sector contracted 5.8 per cent year-on-year in the second quarter of 2011 (see Figure 1). The positive growth seen in the third quarter was supported by the volatile biomedical manufacturing cluster; the electronic cluster remained and is expected to continue to remain weak. Both the construction and the services sectors underwent a gradual slowing down in the first three quarters of 2011. Going forward, growth rates of both sectors are expected to remain low with the global economic and financial uncertainties exerting a negative pull, while steady tourist arrivals and increased public sector construction activities will provide a positive push. In view of the sharp increase in housing prices in recent years, the Ministry of National Development

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THE ASEAN-10 has committed to building more public flats and speeding up their completion, both for sales and for rental. The move to build more public flats will be positive for the construction industry, which has suffered from a decline in private sector building activities. As consumer spending in the developed countries sputters, growth in demand for Singapore non-oil domestic exports (NODX) is slowly grinding to a halt. Furthermore, the export sector was also being squeezed by the appreciating Singapore dollar. It can be seen from Figure 2 that the underlying trend of the NODX has been downwards since the last quarter of 2010 and the decline has not been arrested. Figure 3 gives a breakdown of the NODX into electronic products (around 33 per cent of NODX) and pharmaceuticals (around 12 per cent of NODX). The export growth of electronic products has been in negative territory since February 2011 and the NODX was largely supported by the highly volatile pharmaceutical sector. Going forward, the export sector is expected to continue to struggle as the external outlook continues to deteriorate.

Figure 2: Export Growth Slowing to a Halt 40% y/y% Growth (nominal)

30% 20% 10% 0% –10% –20%

NODX

Sep-11

Jul-11

Mar-11

May-11

Jan-11

Nov-10

Jul-10

Sep-10

May-10

Jan-10

Mar-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

–40%

Jan-09

–30%

3-month moving average

SOURCE: CEIC Database.

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Figure 3: Declining NODX of Electronic Products and Volatile NODX of Pharmaceuticals 100% y/y% Growth (nominal)

80% 60% 40% 20% 0% –20%

NODX: Electronic Products

Sep-11

Jul-11

May-11

Jan-11

Mar-11

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Jan-09

–60%

Mar-09

–40%

NODX: Pharmaceuticals

SOURCE: CEIC Database.

Economic Forecast The Ministry of Trade and Industry forecast Singapore GDP growth to be around 5 per cent for the whole of 2011, significantly lower than the 14.5 per cent growth recorded in 2010. The longer term outlook, however, is fraught with uncertainties as the eurozone sovereign debt crisis remains unresolved and the political struggles in the United States may limit the dosage of the much-needed fiscal stimulus. In the baseline scenario, where no major financial crisis erupts, economic activity in the major industrial economies is likely to expand at a frustratingly slow pace due to the persistently high unemployment rates and the fiscal consolidation in these countries. Even China, which served as the global economic growth engine

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181

THE ASEAN-10 during and after the 2008/09 global financial crisis, was forecast by the International Monetary Fund (IMF) to grow at a more moderate rate of 9 per cent in 2012 on the back of the Chinese Government’s effort to keep inflation in check and the unwinding of fiscal stimulus. All these point to a slower but positive growth rate for Singapore in 2012 and 2013. Singapore’s GDP growth rate in 2012 was forecast to range between 4.3 per cent and 4.8 per cent — 4.3 per cent (IMF), 4.7 per cent (EIU), and 4.8 per cent (ADB). The Monetary Authority of Singapore (MAS), however, painted a gloomier picture; it expected that “the Singapore economy will expand more slowly in 2012 and growth could be below its potential rate of 3–5%”. The growth rate for the Singapore economy in 2013 was forecast by the EIU to be 5 per cent, and by the IMF to be 4.2 per cent.

Figure 4: CPI Inflation Remains Stubbornly High

6 5 4 3 2 1 0

Jul-11

Sep-11

May-11

Mar-11

Jan-11

Nov-10

Sep-10

Jul-10

Mar-10

May-10

Jan-10

Nov-09

Jul-09

Sep-09

May-09

–2

Mar-09

–1 Jan-09

y/y% Growth (seasonally adjusted)

7

CPI Inflation

SOURCE: CEIC Database.

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Inflation Outlook Consumer price index (CPI) inflation remained stubbornly high in the first nine months of 2011 despite the tightening of the policy stance by the MAS since April 2010 (see Figure 4). The appreciating Singapore dollar has, to some extent, kept imported food and fuel inflation in check. However, rising housing prices and escalating premiums of the Certificate of Entitlement (COE) have led to CPI inflation hovering around the 5 per cent level, above the targeted 2–3 per cent level. Going forward, inflationary pressures emanating from abroad are expected to subside as the slowing global economy would put a damper on fuel and commodities prices. In the short term, however, the severe flooding in Thailand had inundated large areas of paddy fields and could further push up food prices. Domestically generated inflation, on the other hand, is likely to remain firm in the coming year. The further tightening of COE supply and the temporary shortage of completed housing are going to hold up transport and accommodation costs. In addition, the Singapore Government’s commitment to restrain the employment of foreign workers via a higher foreign workers levy, at a time when Singapore’s labour market is already tight, is likely to put an upward pressure on costs and feed the inflation pressure. The MAS expects CPI inflation to come in at around 2.5–3.5 per cent in 2012.

Exchange Rate Policy The MAS manages the Singapore dollar in a band against a basket of currencies by changing the centre (the fundamental value), the slope (the speed of appreciation/depreciation), and the width (the allowed range of volatility). The MAS announces its policy stance twice a year, once in April and once in October. Since April 2010, in view of tight factor markets and strong pressures on domestic costs and prices, the MAS tightened the monetary policy thrice, and the Singapore dollar has appreciated steadily as a result of the policy move (see Figure 5).

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Figure 5: Strengthening SGD 120

0.84 0.82

118

0.80

116

0.78

114

0.76 0.74

112 110

0.72 0.70

Appreciation

0.68

108

0.66

106

0.64

NEER Index (lhs)

Jul-11

Sep-11

Mar-11

May-11

Jan-11

Nov-10

Sep-10

Jul-10

May-10

Jan-10

Mar-10

Nov-09

Sep-09

0.62

Jul-09

May-09

Jan-09

Depreciation

Mar-09

104

USD/SGD (rhs)

SOURCE: CEIC Database.

The Singapore dollar hit a high of 1.20SGD/USD in August 2011, a 16 per cent appreciation from March 2010. However, both the NEER and the SGD/USD exchange rate have fallen since August 2011 on the back of a decrease in investor risk appetite as the eurozone debt crisis deepens and Asian growth prospects dim. In the latest MAS Monetary Policy Statement announced on 14 October 2011, the MAS pointed out the deteriorating growth prospects in Singapore’s major trading partner and, as a result, growth in the Singapore economy could fall below its potential rate of 3–5 per cent. In addition, although headline inflation could stay elevated due to higher imputed rental cost of owner-occupied housing, core inflation, which excludes private road transport and accommodation costs, was expected to ease in 2012. The MAS thus will continue with the policy of a modest and gradual appreciation of the S$NEER

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Notes: E refers to estimates; F refers to forecasts. Source: Economist Intelligence Unit.

1.441

25.6 5.7

Total external debt (US$ billion) Debt/exports ratio (%)

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

3.1

2.1 13.4

388.1 330.9 57.2 27.3

8.8 6.9 9.0

Budget balance (as % of GDP)

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

Exports of goods & services (US$ billion) Imports of goods & services (US$ billion) Trade balance (US$ billion) Current account balance (% of GDP)

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

2007

1.439

25.5 5.2

1.5

6.6 12.0

442.1 402.4 39.7 14.7

1.5 –1.1 4.1

2008

1.403

20.3 4.9

–1.0

0.6 11.3

366.5 323.2 43.3 19.2

–0.8 –1.8 –0.7

2009

1.288

21.8 4.2

0.2

2.8 8.6

470.0 407.6 62.4 22.3

14.5 25.3 10.1

2010

Singapore: Selected Economic Indicators, 2007–13F

1.239

23.7 3.9

0.3

4.8 11.5

563.0 494.3 68.7 18.9

5.0 5.2 5.0

2011E

1.234

25.0 3.9

0.8

3.1 11.3

604.7 538.2 66.5 17.4

4.7 5.0 4.6

2012F

1.206

26.8 3.9

1.1

2.1 12.0

663.9 598.6 65.3 16.8

5.0 5.2 4.9

2013F

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THE ASEAN-10 policy band over the next six months, but with a reduced slope of the policy band.

Thailand Pongphisoot Busbarat Since the final quarter of 2009, the Thai economy enjoyed continuous growth over six consecutive quarters to the second quarter of 2011. However, annual GDP growth was initially expected to decline from 7.8 per cent in 2010 to approximately 3.5–4 per cent in 2011. This trend could be seen from the growth of 3 per cent by the end of the first half of 2011. The positive factors are attributable to continued external demand from Asia, domestic consumption, and a more stable political situation, while the challenges are mainly due to flooding in parts of the country, the earthquake and tsunami that devastated Japan, and recession in Europe and the United States.

The Impacts of Floods in 2011 The Thai economy has suffered from a contraction in the last quarter of 2011 due to the worst flooding experienced in five decades. It is estimated that the flood will cost approximately US$4–6 billion, resulting in negative GDP growth in the fourth quarter of around 1.9–2.2 per cent and reducing annual GDP by 1.1–2 per cent. The Bank of Thailand (BOT) has readjusted its GDP growth estimate for 2011 to 2.8 per cent from its previous estimate of 3.8–4 per cent. However, some private research, such as by Kasikorn Thai Bank and Thanachart Bank, estimated a greater contraction that will reduce GDP growth to around 1.5–1.7 per cent or even to 0–0.5 per cent under the Thai Chamber of Commerce (TCC)’s worst-case scenario. The flood has swept over more than 1.9 million hectares in the nation’s northern region, the central plain, and Bangkok metropolitan area. Most of the areas are important to the country’s agricultural production in the north and upper-central plain as well as industrial parks along the lower Chao Phraya River and in Bangkok. As at the

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THAILAND • Thailand is experiencing its worst flooding in five decades. Coupled with the global recession, it will considerably slow down its economy until early 2012. • Post-flood rehabilitation, however, will help stimulate growth through both government spending and domestic consumption in 2012–13. • The government’s policies to stimulate domestic demand and consumption will trigger a rise in prices in the long run. However, public debt is also expected to expand if not carefully managed. • Flood prevention and water management systems will be central to the sustainability of Thailand’s future growth.

end of October, there were more than 724,000 households or around 2,130,000 people affected, with almost 400 people killed or missing. TCC estimated that the total economic loss could be at least US$13 billion or reach US$17–20 billion if the recovery is not carried out quickly. The impact on the agricultural sector is likely to be felt in economic loss of around US$1–2.3 billion. The floods have damaged 1.3 million hectares of farmland, of which 1.2 million hectares account for the majority of Thailand’s rice production. The Office of the National Economic and Social Development Board estimated that the agricultural index will contract by at least 1.6 per cent in the last quarter of 2011 compared to the same period of the previous year. Rice production has also shrunk considerably by 26.5 per cent, while available land for rice production has shrunk by 20 per cent. The flood will likely affect the price of rice in the world market as Thailand will be unable to supply almost one million tonnes of rice for the global market. Market prices in 2012 are expected to rise 20 per cent from the current price of US$1,200 per tonne. The manufacturing sector will also face considerable losses. The Federation of Thai Industries has estimated that the floods will incur

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THE ASEAN-10 costs of at least US$3 billion for the industry, while the TCC projected the figure could be around US$13–16 billion, especially should Bangkok be flooded longer. Thailand’s manufacturing production is likely to drop by around 10 per cent in the last quarter of 2011, which will reduce the annual GDP growth in the manufacturing sector to 0.1–1.1 per cent. The floods cover Thailand’s major industrial parks in the provinces north of Bangkok, especially Lopburi, Ayutthaya, and Pathumthani, where Thailand’s automobile and electronic industries are concentrated, as well as other manufacturing industries, including textiles, shoes, food and beverages, rubber and plastic. The affected areas account for 10 per cent of Thailand’s automobile production. Much of the production has an upstream focus to supply parts and components to other manufacturers in other provinces and countries in Southeast Asia, particularly Indonesia. Most factories in the area have already suspended production. According to Thailand’s Automotive Industry Club, car production will consequently drop from 1.8 million cars to 1.5–1.7 million cars for 2011. Ayutthaya province, the third-largest industrial zone after Bangkok and Samut Prakan, is one of the most affected areas. Production in Ayutthaya constitutes approximately 11 per cent of Thailand’s industrial sector. It is also a cluster hub for the electronics industry, accounting for around 30–40 per cent of output, and has links with other production lines in Pathumthani, Nakhon Ratchasima, and Prachinburi. Overall, the flooding has damaged around 44.5 per cent of Thailand’s electronics industry. Significantly, Thailand is the second-largest exporter of hard disk drives (HDD) after China, with production concentrated in Pathumthani, that accounts for 25 per cent of global production. As a result of the flooding, around 25–30 per cent of the world’s production of HDDs has been disrupted in the last quarter of 2011. This will lead to a supply shortage and a spike in HDD prices by 20 per cent in the first quarter of 2012. Thailand’s overall exports in the last quarter of 2011 are expected to decrease to 15 per cent. This is due to the ongoing deceleration of global demand due to economic uncertainties and fragile economies in Europe and the United States. The floods also affected around 0.5 per

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ECONOMIC OUTLOOK cent of the annual total exports. Rice exports will fall by almost 10 per cent, while exports of electronic products to Europe and Japan will suffer a contraction of around 6–8.5 per cent. Regarding the tourism and service industries, the floods will likely adversely affect the country’s tourism revenue as winter is Thailand’s peak tourist season. The expected loss in tourism and service industries is around US$1.6–2 billion. Although Thailand’s tourist destinations in the south and other parts of the country may not be affected by the flooding directly, the ongoing situation is likely to discourage tourists from travelling to flood-affected areas in the central plain and Bangkok, at least until the first or second quarter of 2012. The number of foreign tourists is expected to decline by 3–4 million from an annual estimate of 19 million people. Retail businesses are also likely to be affected by the floods. Concerns over future employment and income amongst consumers will grow and, as a result, domestic consumption in the last quarter of 2011 will contract, especially for luxury goods. The shipping and logistic industries are also expected to be affected by damages and the blockage of roads and other means of transport. However, the recession of water anticipated to commence after November 2011 will trigger the consumption of items related to construction, repair services, and consumer goods.

Prospects The flooding will put pressure on the Thai economy, at least until the end of the first quarter of 2012, when the country will need to recover from the damage wrought. However, the Thailand Development Research Institute estimates that the Thai economy will experience growth in the post-flood period. This is mainly due to the fact that many economic activities related to reconstruction and repairs will likely grow considerably, particularly the demand for construction materials, water pumps, car repairs, and insurance. Moreover, demand for consumer products is expected to rise, especially automobiles, motorcycles, food products, medicinal products and services, bottled water, and electronic supplies (such as laundry machines, refrigerators, television sets).

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THE ASEAN-10 Future prospects for growth will benefit from the resumption of major government policies and increases in government spending. Many policies of the Pheu Thai government, such as pay increases for workers and public servants, are intended to drive domestic demand and consumption. According to the 2012 budget, the government plans for a budget of US$79 billion, an increase of 11.3 per cent, and to run a budget deficit of US$13 billion, or 3.4 per cent of GDP. This will expand its consumption by 11 per cent, while public investment is likely to grow around 19 per cent. Inflation in 2012 is expected to rise to around 4 per cent due to the higher wage policy and high consumption in the post-flood period. It may slightly readjust to 3.8–3.5 per cent when the economy largely recovers by 2013. Trade will expand as firms try to maintain their production by sourcing substitute components from other suppliers. However, agricultural exports, particularly rice, may still contract as the new harvest will not be due until August or October 2012. As a result, growth in exports may be slower than that of imports. The government’s spending and investment in 2012 will also increase even more than previously planned considering the post-flood recovery plan. Relief packages and compensation to help affected households and industries will be rolled out at the end of 2011 and early 2012. At the same time, the government’s measures to boost investment will also help the country to restore both production and employment in the second quarter of 2012 onwards. The government has recently committed to spend US$26.6 billion for its long-term plan for flood prevention and economic recovery. The budget of US$4 billion for contingency measures to help small and medium businesses, farmers, and individuals over the next few years has also been set out, with US$0.67 billion approved to be allocated within January 2012. This will definitely help stimulate the Thai economy. If the management of this plan is successful, Thailand’s economic expansion will continue. However, public spending on various policies and plans will increase the country’s public debt burden. Depending on how well the world economy — particularly the United States and Europe — peform in the next few years, the Thai economy will also risk challenges to recovery and to sustain high growth.

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–1.1

Fiscal balance (as % of GDP)

111,000 33.4

76,104 42,499 8.2

–0.3

5.4 9.2

175,200 175,600 –400 0.8

2.5 3.0 1.0 4.0

2008

138,400 34.3

75,308 42,179 7.6

–4.7

–0.9 6.8

150,700 131,400 19,300 8.3

–2.3 –5.0 0.9 1.0

2009

172,100 31.7

100,561 49,906 4.7

–2.0

3.3 10.9

193,700 179,600 14,100 4.6

7.8 13.0 5.0 –2.0

2010

191,200 30.5

112,000 53,500 4.5

–2.8

3.8 8.9

236,000 226,296 9,704 3.7

2.5 1.0 4.0 3.0

2011E

207,900 31.0

128,800 58,315 5.0

–.4

4.0 10.9

245,676 243,494 2,182 2.2

4.0 4.0 3.5 2.2

2012F

220,000 31.0

148,120 62,980 5.5

–2.0

3.8 9.5

262,628 257,982 4,645 2.5

4.5 4.0 6.0 2.8

2013F

NOTES: E refers to estimates; F referes to forecasts. SOURCE: Bank of Thailand, Office of the National Economic and Social Development Board, Ministry of Finance, World Bank, IMF, Economist Intelligence Unit, KTB Research Unit, and author’s estimation.

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

74,414 40,400 11.9

2.3 6.3

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

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

15,1250 13,8470 12,780 5.7

4.9 6.0 5.0 1.0

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)

2007

Thailand: Selected Economic Indicators, 2007–13F

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THE ASEAN-10 The Thai economy in the last quarter of 2011 will grow slowly at around 2.8 per cent or lower. The flooding and the global recession are the main factors accounting for 1.1 per cent and 0.2–0.3 per cent of decreases in GDP, respectively. However, growth is expected to increase in 2012–13, due mainly to the country’s recovery, reinvestment in affected industries, and government expenditure. GDP growth is forecast to be around 4–4.5 per cent for the next two years. However, Thailand’s long-term growth lies in whether or not it can successfully restore foreign investors’ confidence in the country’s water management and natural disaster response. Failing to do so may result in the relocation of foreign investment to other countries. REFERENCES Bank of Thailand. “Statistics” (accessed 24 October 2011). Centre for Economic and Business Forecasting. Analysis: Flooding and Impacts on the Thai Economy. Bangkok: Centre for Economic and Business Forecasting, University of the Thai Chamber of Commerce, 2011a. ———–. Summary of Economic Condition and Estimation for Third Quarter of 2011 and 2012. Bangkok: Centre for Economic and Business Forecasting, University of the Thai Chamber of Commerce, 2011b. Department of Disaster Prevention and Mitigation. “Summary of Current Situation on Flooding, Storm and Landslide” (accessed 6 November 2011). Economist Intelligence Unit. Thailand: Country Report, November 2011. London: Economist Intelligence Unit, 2011. International Monetary Fund. World Economic Outlook Database (accessed 2 November 2011). Kasikorn Research Centre. “K-Econ Analysis” (accessed 4 November 2011). “Keep an Eye on US$26.6 Billion Rehabilitation Plan” (in Thai), Bangkok Biznews, 11 December 2011 . Ministry of Finance. Thailand’s Economic Forecast for 2011 and 2012. Bangkok: Ministry of Finance, 2011. Office of the National Economic and Social Development Board. Economic Outlook: The Economic Performance in Q2 and Outlook for 2011. Bangkok: Office of the National Economic and Social Development Board, 2011. Thai Chamber of Commerce. “The Thai Chamber of Commerce Estimated the Damage Reached THB700 Billion”, 2011 (accessed 4 November 2011). World Bank. World Databank (accessed 1 November 2011).

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Vietnam Nick J. Freeman In economic terms alone, Vietnam is now a major international player, as indicated by a number of metrics. Its population of close to ninety million makes it the thirteenth largest country in the world and it is one of the world’s largest exporters of a number of essential goods, including rice, robusta coffee, pepper, natural rubber, footwear, garments, and seafood. Ignore the Vietnamese economy at your peril. And yet, Vietnam enters 2012 with its economic model under increasing scrutiny. Despite almost a quarter of a century of relatively consistent and robust economic growth and commendable results in poverty alleviation, concerns have been growing about the long-term sustainability of Vietnam’s economic trajectory. (In 2010 average per capita income passed the US$1,000 milestone for the first time and the poverty rate declined to just 12 per cent.) In its socio-economic development strategy for the next ten years, the aspirations of the country’s leadership is for it to be a middle-income, industrialized economy by 2020. Although it is not really clear what that vision means, industrialization is typically viewed as a means to an end, rather than an end in itself. And the toll placed on rural areas and agricultural land is becoming increasingly worrisome, as is the widening disparity in incomes between the urban rich and some stubborn pockets of poverty in rural areas. Political developments dominated much of 2011, with the convening of a Congress of the ruling Vietnam Communist Party (VCP), followed by national elections for the National Assembly and the unveiling of a new Cabinet. While Prime Minister Nguyen Tan Dung survived the Vinashin debacle and kept his post, there were changes made to the State President, Party Secretary, Chairman of the National Assembly, and numerous ministerial positions. These new leaders were confronted with some particularly vexing economic challenges in 2011, including high inflation, downward pressure on the local currency, and perennial concerns about the trade deficit, the foreign exchange reserves, and the health of the banking sector. The global economic downturn is

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VIETNAM • The impact of the latest global economic downturn on Vietnam has been, yet again, surprisingly mild, thus far at least. The pace of domestic economic growth has lessened slightly, but remains commendable. Indeed, the economy experienced overheating in 2010–11, as the policy measures enacted to counter the global economic slowdown in 2008–09 were not withdrawn quickly enough. • Nonetheless, the general sense is that the economic situation in Vietnam has been allowed to deteriorate since 2010, and policymakers currently lack both a realistic vision for long-term sustainability and the volition needed to carry it out with real clarity of purpose and vigour. Inflation has been running far too high, the local currency has been under devaluation pressure, and the banking sector looks fragile in places. • Much will depend on the acumen of the new ministers and other leadership personnel appointed in 2011 to tackle both the current shortterm challenges posed to the economy and to chart a viable long-term strategic path for Vietnam’s development, including through the notorious middle-income trap. Failure to do so could see yet more of the sheen come off Vietnam’s enviable economic track record of the last twenty years.

also providing a grim backdrop, with new foreign direct investment inflows trending down and a domestic stock market in dire need of improved investor appetite. It was these factors that prompted the VCP to enact Resolution 11, early in 2011, which effectively comprised a series of short-term administrative measures to get the economy back on track and avert a series of potential economic crises. Under Resolution 11, target figures for GDP growth, monetary supply growth, and bank credit growth in 2011 were all revised down, a cap was put on the fiscal deficit, rules governing foreign exchange and gold trading activity were tightened, and the large state-owned enterprises were told to get out of non-core business activities. These measures were intended to cool an economy that showed strong signs of overheating (inflation was in excess of

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ECONOMIC OUTLOOK 20 per cent and interest rates on loans were 14 per cent or more); largely the consequence of stimulative measures — such as rapid domestic credit and public spending growth — introduced in 2009 to 2010 to try and ensure that the global economic downturn did not cause the Vietnamese economy to stall. If one assumes that Vietnam regains its basic equilibrium in 2012, as seems likely, then a number of more long-term and interrelated structural challenges will need to be addressed if the economy is to continue growing at broadly the same pace as over the last decade. The first challenge pertains to the calibre of education and training provided in Vietnam. Over 1.5 million young people join Vietnam’s labour force each year, and yet many lack the skills that employees say they need. Whether school graduates or university graduates, the quality and forms of education being provided often does not match demand. Too few students are able to gain access to higher education, while the quality of university research is particularly worrisome. Salaries at all levels of education are low and places of learning have remarkably little independence to make decisions on key issues like the curriculum, which are set and imposed at the national level. A radical transformation in education is urgently needed in Vietnam. The second is investment in good infrastructure and utilities. The pace at which infrastructure investment is being enacted is not sufficient for the burgeoning corporate sector, and the quality of many projects leaves much to be desired. Meanwhile, the government’s recent attempt to push through a glamorous (and expensive) high-speed rail line, having neglected the very basic rail network for decades, is indicative of the poor level of planning. This predicament extends to urban planning also. Thirdly, a much more robust attempt to thwart corruption is also needed, as endemic corruption is serving to distort and pervert a spectrum of essential activities, from policymaking through to public administration and enforcement. The considerable costs incurred by corruption, in terms of lost opportunities and the adverse impact on the enabling environment for business, should not be discounted. Meaningful public administration reform will be critical in any concerted attempt

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THE ASEAN-10 to thwart corruption, which also poses a real risk to social stability and long-term economic sustainability. Fourthly, recent years have seen a virtual stalling of the equitization programme for state-owned enterprises, and the economic might of some of the larger state-owned corporations has even grown. The underlying rationale seems to have been to try and consolidate assets under single corporate entities in key business sectors, in a bid to develop firms that might be able to compete on a regional and even international level. But what has happened in practice is that these large-scale corporations have often used their privileged access to capital and other assets to develop diverse businesses that extend well outside their areas of competency. This in turn has had a deleterious effect on the business enabling environment, particularly for private companies, who have seen a marked rise in their operating costs since 2009, but virtually no improvement in the regulatory framework in recent years, which remains highly bureaucratic. Nonetheless, private companies generated industrial production growth of almost 15 per cent in 2010, compared with 17 per cent for the foreign invested sector and a woeful 7 per cent by the SOE (state-owned enterprise) sector. Even though SOEs generate around a quarter of Vietnam’s GDP, these laggards reportedly hog about 40 per cent of total investment. As for those (mostly state-owned) corporates that have ventured overseas, the general experience has been fairly disappointing thus far, with single digit rates of return. Nonetheless, we can expect to see a larger Vietnamese corporate profile in Cambodia, Laos, and Myanmar in particular in the coming years. This foray will include a number of Vietnamese commercial banks, partly because the domestic banking market has become saturated. But here too, the banking and finance sector in Vietnam is quite fragile and in much need of consolidation. Vietnam’s ranking in various surveys and indicators has been dropping, in line with the deteriorating economic situation and poor investor sentiment towards Vietnamese assets of various kinds, including the currency, real estate, bonds, and equities. At the time of writing, the country’s long-term sovereign rating at Standard & Poor’s is BB– (negative outlook), B+ (stable outlook) at Fitch, and B1 (negative

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20,964 16,018

NotES: E refers to estimates; F refers to forecasts. OURCES: Asian Development Bank and author estimates.

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

23,022 17,486

6.5

5.5

–3.1 21,816

–4.6

Fiscal balance (as % of GDP)

23.0 20.3

62,268 79,837 –17,569 –11.8

6.3 6.0 7.4 4.7

2008

19,253

8.3 46.1

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

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

48,228 60,736 –12,508 –10.0

8.5 10.2 8.9 3.8

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

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

2007

14,148 18,479

7.5

27,929

–10.6

6.9 29.0

56,322 68,079 –11,757 –6.2

5.3 5.5 6.6 1.8

2009

12,382 19,498

8.5

–8.0

9.2 33.3

60,544 72,660 –12,116 –4.0

6.8 7.7 7.5 2.8

2010

Vietnam: Selected Economic Indicators, 2007–2013F

15,000 21,000

9.0

–6.0

19.0 15.0

65,000 75,000 –10,000 –3.7

5.8 7.0 6.5 3.0

2011E

17,500 23,000

9.5

–5.0

11.0 22.0

70,000 78,000 –8,000 –3.7

6.5 7.0 7.0 3.5

2012F

20,000 25,000

10.0

–5.0

9.0 25.0

75,000 83,000 –8,000 –4.0

6.5 7.0 7.0 3.5

2013F

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THE ASEAN-10 outlook) at Moody’s. In the most recent iteration of the World Bank’s Doing Business annual survey, Vietnam ranks 98th out of 183 countries (a drop of eight places on the previous year’s ranking of 90th). In the Fraser Institute’s Economic Freedom of the World annual report for 2011, Vietnam ranks 88th (out of 141 countries), just behind South Africa. In the Global Competitiveness Report for 2011–12, Vietnam ranks 65th (out of 142 countries) and joint 116th (out of 178 countries) in Transparency International’s 2010 Corruption Perceptions Index.

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THE CONTRIBUTORS

Political Outlook Amitav Acharya holds the UNESCO Chair in Transnational Challenges and Governance in the School of International Service of the American University in Washington and serves as Visiting Professorial Fellow at the Institute of Southeast Asian Studies. Alice D. Ba is Associate Professor in the Department of Political Science and International Relations of the University of Delaware. Terence Chong is Senior Fellow in the Regional Social and Cultural Studies Programme of the Institute of Southeast Asian Studies. Chung Chien-peng is Associate Professor in the Department of Political Science of Lingnan University in Hong Kong. Nicholas Farrelly is Research Fellow in the College of Asia and the Pacific of the Australian National University. Hui Yew-Foong is Fellow in the Regional Social and Cultural Studies Programme of the Institute of Southeast Asian Studies. Francis E. Hutchinson is Visiting Research Fellow at the Institute of Southeast Asian Studies. Kheang Un is Assistant Professor in the Department of Political Science of Northern Illinois University. David Koh is Senior Fellow in the Regional Strategic and Political Studies Programme of the Institute of Southeast Asian Studies. Maria Ortuoste is Assistant Professor of Political Science at California State University, East Bay, and a former head of the Center of Inter-

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THE CONTRIBUTORS national Relations and Strategic Studies in the Philippine Foreign Service Institute. Bernhard Platzdasch is Visiting Research Fellow at the Institute of Southeast Asian Studies. Dan Slater is Associate Professor in the Department of Political Science of the University of Chicago. Pushpa Thambipillai is Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. Tin Maung Maung Than is Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. Vatthana Pholsena is Research Fellow of the Centre National de la Recherche Scientifique (CNRS) in the Institut d’Asie Orientale of the Ecole Normale Supérieure Lettres et Sciences Humaines in Lyon, France. She represents the CNRS and the Institute of Research on Contemporary Southeast Asia (IRASEC) in Singapore. Zhu Feng is Professor in the School of International Studies and Deputy Director of the Center for International and Strategic Studies at Peking University.

Economic Outlook Pongphisoot Busbarat is Research Associate at the Department of Political and Social Change, School of International, Political and Strategic Studies, College of Asia and the Pacific, The Australian National University. Sanchita Basu Das is Lead Researcher for Economic Affairs in the ASEAN Studies Centre at the Institute of Southeast Asian Studies. Chia Wai Mun is Assistant Professor in the Division of Economics, School of Humanities and Social Sciences, at Nanyang Technological University, Singapore. Aekapol Chongvilaivan is Fellow and Coordinator of the Regional Economic Studies Programme at the Institute of Southeast Asian Studies.

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THE CONTRIBUTORS

201

Nick J. Freeman is an independent economic development consultant, based in Hanoi, Vietnam. G. Sivalingam is Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. Li Mengling is a doctoral candidate in the Division of Mathematical Sciences, School of Physical and Mathematical Sciences, at Nanyang Technological University, Singapore. Jayant Menon is Lead Economist in the Office of Regional Economic Integration at the Asian Development Bank, Manila, the Philippines. Euamporn Phijaisanit is Associate Professor at the Faculty of Economics at Thammasat University in Bangkok, Thailand. Kyophilavong Phouphet is Associate Professor in the Faculty of Economics and Business Management at the National University of Laos, Vientiane, Laos. Aladdin D. Rillo is Director and Chief Economist at the ASEAN Integration Monitoring Office (AIMO), ASEAN Secretariat. Reza Siregar is Director of Research and Learning Content at the Southeast Asian Central Banks (SEACEN) Research and Training Centre in Kuala Lumpur, Malaysia. Sng Hui Ying is Research Associate in the Division of Economics, School of Humanities and Social Sciences, at Nanyang Technological University, Singapore. Thein Swe is a Senior Lecturer, teaching Economics, Finance and Globalization Studies in the International Business MBA Program, and South East Asian Institute of Global Studies, at Payap University, Chiang Mai, Thailand. Moe Thuzar is Lead Researcher for Socio-cultural Affairs in the ASEAN Studies Centre at the Institute of Southeast Asian Studies. Thanut Tritasavit is Research Associate at the Institute of Southeast Asian Studies.

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THE CONTRIBUTORS THE EDITORS Michael J. Montesano is Visiting Research Fellow at the Institute of Southeast Asian Studies. Lee Poh Onn is Fellow in the Regional Economic Studies Unit at the Institute of Southeast Asian Studies.

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