ASEAN economies could be affected by a protracted war

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.