At 30, ASEAN looks ahead with optimism<\/p>\n
By Teofilo C Daquila<\/p>\n
What factors will determine the grouping's continued economic
\ndynamism?<\/p>\n
SINGAPORE: ASEAN continues to be one of the rapidly growing
\nregions in the world, evidenced by a high rate of economic growth
\nat an annual average of about 7 percent during the past three
\ndecades, which has been due to a combination of demand- and
\nsupply-side factors.<\/p>\n
While in the past, domestic demand (consumption and investment
\nof both private and public sectors) has contributed to a large
\nextent to total demand, the contribution of external demand
\n(exports) has grown in importance.<\/p>\n
Supply-side determinants include increase in the labor force,
\nincrease in capital formation and improvement in technology. To
\nincrease its labor force, ASEAN has relied on population growth,
\nforeign labor, extension of the retirement age, part-time
\nworkers, and the provision of child-care facilities.<\/p>\n
Savings and investment incentives as well as foreign direct
\ninvestments (FDI) have contributed to the increase in capital
\nformation. Improvement in technology is brought about by research
\nand development, hiring of foreign experts, and FDI.<\/p>\n
The ASEAN economies have experienced rapid structural change
\nin output, whereby the agricultural sector's contribution to
\ntotal output has diminished while that of the non-agricultural
\nsector (the industrial and services sectors) has increased.
\nManufacturing, the largest industrial sub-sector, has been the
\nprime mover of the ASEAN economies. The services sector has also
\ngrown in importance, particularly the financial and business
\nsector as well as the transport and communications sector.<\/p>\n
ASEAN has experienced rapid expansion of exports, as indicated
\nby the rising proportion of exports to GDP, which has been due to
\nan export-oriented industrialization policy, vigorous export
\npromotion and trade liberalization measures including tariff cuts
\nand the lessening of non-tariff barriers. Despite the adoption of
\npreferential trading arrangements (PTAs) in 1977, intra-ASEAN
\ntrade was around 15-20 percent of its global trade. Recent
\nliberalization measures include the adoption of the \"Common
\nEffective Preferential Tariff\" or CEPT in 1993. Consequently,
\nintra-ASEAN trade almost doubled from US$79 billion in
\n1993 to US$140 billion in 1995, which is about 25 percent of
\nASEAN's global trade.<\/p>\n
The structure of ASEAN exports has also undergone change away
\nfrom primary commodities towards manufactures, mainly electrical
\nand electronics and transport equipment and machinery. The
\nchanging structure of exports and output has been due to openness
\nof ASEAN to trade, capital flows, including foreign direct
\ninvestments, and external disturbances such as falling and
\nvolatile prices of primary commodities, and due to a shift in
\nindustrialization policy away from import-substitution in the
\n1950s and 1960s towards export-orientation since the 1970s.<\/p>\n
The ASEAN region has also received a massive amount of foreign
\ndirect investment (FDI), following the appreciation of the
\nJapanese yen in 1985. FDI reached a cumulative total of
\nUS$140 billion at the end of 1993, with about 24 percent coming
\nfrom Japan, 17 percent from the EU, and 13 percent from the US.
\nThe bulk of investments has been in the manufacturing sector. The
\nservices sector is also receiving a large amount of FDI.<\/p>\n
The ASEAN countries have also experienced relatively low and
\nstable inflation rates. This is due to the effectiveness of
\ngovernment policies. ASEAN economies, except Singapore, have
\nrelied on the traditional method of controlling inflation through
\na reduction of money supply. A cut in the growth of money supply
\nincreases interest rates which in turn dampens investment and
\ninterest-sensitive consumer durables.<\/p>\n
Singapore, on the other hand, uses exchange rate-targeting to
\nkeep the Singapore dollar strong and stable which in turn results
\nin low and stable rates of inflation.<\/p>\n
On the social front, ASEAN has also achieved a higher level of
\nsocial development as indicated by a higher level of education
\n(proxies by improvement in the literacy rate), longer life
\nexpectancy, a lower mortality rate, more and better housing,
\nbetter nutrition, better access to services such as
\ncommunications (in terms of people per telephone line) and health
\ncare (in terms of people per doctor). Rising per capita income,
\nFDI, and official development assistance from developed countries
\nand international organizations.<\/p>\n
On the political front, ASEAN has provided a relatively stable
\npolitical environment due to stable government and politics,
\nshelving of territorial disputes, improved peace and order
\nconditions, and other regional security arrangements such as the
\nASEAN Regional Forum. In a recent survey by the Japanese External
\nTrade Organization, political and social stability in the ASEAN
\nregion was viewed as the most important determinant of Japanese
\nFDI.<\/p>\n
Thus, since its formation in 1967, ASEAN has grown dynamically
\nand offers a potentially large market for business and investment
\nopportunities. But will dynamism in ASEAN continue? Several
\nfactors could help propel its growing dynamism.<\/p>\n
* First would be the need for ASEAN governments to maintain
\nmacroeconomic stability via prudent fiscal policies to ensure
\nthat inflation is kept under control; government, domestic and
\nforeign debt is managed properly; and that any macroeconomic
\ncrisis will be eliminated within a year or two. It is also
\ncrucial that the world financial environment remains stable
\nas an increase in the discount rate by the U.S. Federal Reserve
\nBank will trigger recessionary effects in the rest of the world.<\/p>\n
For example, when the U.S. contracted its money supply in the
\nearly 1980s aimed at containing inflation, interest rates rose
\nand generated devastating effects to countries worldwide
\nincluding those in ASEAN. A replication of this scenario should
\nbe avoided. Thus, a co-ordinated macroeconomic policy among the
\nlarge developed economies of the Group of Seven is essential to
\nensure a stable world financial environment.<\/p>\n
* Second would be for the ASEAN countries to deepen and widen
\ntrade and investment liberalization measures and reduce non-
\nlabour costs including provision of modern infrastructure, the
\nelimination of unnecessary bureaucratic procedures and the
\nlifting of regulatory controls. The creation of an ASEAN Free
\nTrade Area (AFTA) in the year 2003 is certainly a plus factor.
\nOther schemes include the ASEAN Investment Area and sub-regional
\nco-operation; namely, the Sijori Growth Triangle involving
\nSingapore, Johor and Riau; and the East ASEAN Growth Area
\ninvolving Brunei, Indonesia, Malaysia and the southern
\nPhilippines.<\/p>\n
In the case of Sijori, Singapore provides excellent
\ninfrastructure and skilled labour, while Johor and Riau provide
\nland and lower-cost labour, following the theory of comparative
\nadvantage.<\/p>\n
ASEAN, however, should not concentrate on intra-ASEAN economic
\npotential alone. It is also important to forge closer economic
\nrelations with the rest of the world as the world becomes highly
\ninterdependent. A recession in ASEAN's major trading and
\ninvestment partners (the U.S., Japan and the E.U.) will hurt the
\nregion as her openness to trade and investments has been
\nrising.<\/p>\n
* Third has to do with the expansion of ASEAN-7 to ASEAN-10
\n(with the inclusion of Cambodia, Laos and Myanmar). The ASEAN
\nmarket has grown from 202 million in 1970 to 491 million in 1996.
\nThe ASEAN states combined population is about 113 million bigger
\nthan NAFTA and 120 million bigger than EU-15. Assuming an ASEAN-
\n10, its regional income presently stands at some US$660 billion
\nwhich is expected to double every eight years.<\/p>\n
* Fourth is the need for ASEAN to continue reforming the
\nfinancial sector. As ASEAN expands and as per capita income
\nrises, more and diverse financial institutions and instruments
\nwill be demanded and created. In reforming the financial sector,
\nthe ASEAN economies need to further promote their financial co-
\noperation as well as to institutionalize the ASEAN Finance
\nMinisters meeting in order to boost intra-ASEAN trade and
\ninvestments.<\/p>\n
* Fifth is the need for the ASEAN governments to privates some
\nstate-owned enterprises, and deregulate and liberalize some
\nindustries to provide more competition. A Framework Agreement on
\nServices was recently signed which will provide preferential
\nliberalization of trade in services with priority to sectors such
\nas financial\/business, airport and maritime transport,
\ntelecommunications, tourism and construction.<\/p>\n
* Sixth is the need to increase research and development
\nactivities through higher spending on R&D, foreign direct
\ninvestments, and government incentives including allowing public
\nsector employees, teachers and researchers to become not only
\ninnovative and creative but also business-oriented as well as
\nproviding government subsidies to private firms and entrepreneurs
\nto undertake innovation.<\/p>\n
* Seventh is the need for continuing dialogues among ASEAN
\nmembers, between ASEAN and her dialogue partners (U.S., E.U.,
\nJapan, South Korea, Canada, Australia, New Zealand), and
\nmultilateral dialogues including the APEC and WTO meetings. The
\nrecently concluded APEC meeting in Manila and WTO meeting in
\nSingapore attest to the growing importance and dynamism of ASEAN
\nas it has shown a change in negotiation style from being merely
\npassive to becoming active, participants in multilateral
\nnegotiations.<\/p>\n
To conclude, while the factors cited above will work in favor
\nof ASEAN's growing dynamism, there are also other factors which
\nwill work against ASEAN. First, the formation of regional trade
\narrangements (RTAs) such as Nafta and E.U. might slow down
\nASEAN's dynamism due to the protectionistic sentiments within
\nRTAs. Second, the emergence of new markets like India, China,
\nEast European countries, and other labour-abundant countries will
\nprovide stiff competition to ASEAN in terms of trade and
\ninvestment diversion. The pluses however are likely to outweigh
\nthe minuses, and the ASEAN region will continue to be a
\ndynamic one.<\/p>\n
Dr. Teofilo C Daquila is with the Master's Program in
\nSoutheast Asian Studies at the National University of Singapore.<\/p>",
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