ASEAN economies could be affected by a protracted war

S. Pushpanathan, Assistant Director for External Relations, ASEAN Secretariat, Jakarta

The US showdown in Iraq has began with more than 1,000 cruise missiles pounding Iraq and over 4000 air sorties by US led coalition forces to decapitate President Saddam Hussein's regime and to disarm Iraq's weapons of mass destruction.

Analysts have predicted that a protracted war will severely hit the world economy, which is already sluggish. This scenario could become a reality now with President Bush's statement that the war could be "longer and more difficult than some predicted".

The problem may become more complex in the next few days if Saddam decides to use his biological and chemical weapons on the advancing allied forces which he used during the Iran-Iraq war and reportedly on his own people.

Alternatively, a heavy casualty of US and allied forces will further lead to more and intense anti-war demonstrations in the US and could affect the Americans' support for the war. More deaths would also put more pressure on the Labour government in the UK. The transatlantic alliance between the US and Europe would be further strained.

The commencement of the war has started to weaken the US dollars driven by market sentiments that the war would be short and swift. The US Federal Reserve could be cutting interest rates, which are already low, to mitigate the low confidence and spending in the US economy due to uncertainties about the duration of the war and its likely consequences.

Many Asian countries are taking steps to tide over the economic impact of a prolonged war. These steps will include tightening monetary policy, ensuring stability in the financial markets and other fiscal measures to spur the economy. The announcement of Japan to inject US$8.3 billion into money markets will help to stabilize the global financial system.

The ASEAN Foreign Ministers who held a retreat in Sabah recently were divided on the support for the US-led war in Iraq but all recognized the repercussions of a long war on the ASEAN economies. The ASEAN Secretary General Ong Keng Yong said that the war would hurt the region's shaky recovery and that a prolonged war could cut ASEAN's economic growth by up to one percent.

A protracted war could affect the ability of the US market to absorb ASEAN exports due to the likelihood of slumping US demand for consumer goods and the sinking US dollar which may push up the prices of ASEAN exports. This would have a negative impact on the export-dependent ASEAN economies which require a steady flow of exports to consolidate their recovery and to keep jobs.

Oil prices could increase again. Should President Saddam launch massive retaliatory attacks on Kuwait and other countries, light up the oil wells and use chemical and biological weapons on the advancing coalition forces, market sentiments would change and drive the oil prices up. Some have argued that the oil prices could hit the US$40-$45 dollars a barrel range if the war continues beyond weeks despite the assurance of OPEC to increase the supply to keep prices stable.

Except from Indonesia and Malaysia who are net oil exporters, other ASEAN countries would be affected. Higher oil prices will put inflationary pressures on ASEAN economies even though the inflation rates are still reasonably low in most ASEAN countries.

Since the financial crisis, investments into ASEAN have fallen with some countries showing recovery only in recent years. Most of the investments are now flowing into East Asia, especially China. A longer war will only further affect the investment flows into ASEAN as US and European businesses will be less willing to invest given the current uncertainties.

Besides, the possibility of radicalism spurred by the US-led war could further dissuade investment flows into the region. This is especially so if the war is less swift and results in a heavy human toll.

ASEAN efforts to revive tourism after the Bali bombing is expected to be muted if the war continues beyond the expected period.

Singapore, Malaysia and Thailand which has been seeing an increase in tourist arrivals could be affected while the efforts of Indonesia and the Philippines to attract tourists could be hampered resulting in a overall fall in tourist arrivals to ASEAN which registered close to 40 million tourist arrivals in 2002.

Indonesia and the Philippines may be affected in terms of overseas remittances from their nationals working in the Gulf, which provide an important source of revenue.

Kuwait is especially vulnerable to retaliation by Iraq which could result in the evacuation of these nationals, estimated to be about 110,000, from the Gulf region. Indonesia and the Philippines have already drawn up contingency plans for such an eventuality with the latter also setting up a center in Kuwait to facilitate swift evacuation of its nationals.

ASEAN is now more prepared to tackle any economic situations, especially after the lessons learnt during financial crisis of 1997. Besides, the economic conditions in ASEAN countries are favorable for these countries to overcome any short-term economic difficulties.

Most ASEAN countries have current account surpluses, low inflation rates and their exports to the US are less price elastic, at least in the short-run. The account surpluses will help to cover any short-term increases in oil prices and so control inflation. It will also help to finance government spending to reinvigorate the ASEAN economies in the short-term.

Moreover, the expanding and intensifying intra-ASEAN and intra-Asian trade will act as a buffer to any declining ASEAN exports to the US. The ASEAN plus Three Process, launched after the 1997 crisis, would play a important role should a crisis hit the region as a consequence of a prolonged war, especially in stabilizing the regional financial markets and proving assistance to needy countries should there be economic difficulties through the series of regional and bilateral swap arrangements that have been concluded.

Economic relations between the US and ASEAN will endure and continue to be the engine of ASEANs economic growth and prosperity. The US has a stake to ensure its economy remains buoyant to further impress upon the region and the Muslim world that the war in Iraq is not targeted at any particular religion but at ridding Iraq of Saddam's regime. ASEAN countries are expected to provide humanitarian assistance to post-war reconstruction efforts in Iraq led by the UN.

The important thing for ASEAN now will be to take the necessary measures to cushion any short-term effects of a protracted war by working together as a region and with its East Asian partners, and ensuring security so that investment flows and tourism would not be adversely affected.

The views expressed in this article are those of the writer.