ASEAN fractures exposed once again

ASEAN fractures exposed once again

MANILA (Reuters): The disparate Association of Southeast Asian Nations (ASEAN) has always had a tough job convincing onlookers of its combined purpose, and its divisions are now attracting even more attention than usual.

The group, with diverse members ranging from political dictatorships to full-fledged democracies, has just wrapped up a meeting of economic ministers in Manila with a pledge to speed up the creation of a free trade and investment area.

But with some members shutting down capital accounts to defend themselves against capital flows, the commitment to greater economic openness and integration prompted skepticism.

"I thought they were all busy establishing exchange controls," Schroders Asia strategist Andrew Ballingal said.

Malaysia has imposed currency controls and Indonesia is contemplating compulsory repatriation of export earnings as debate rages about the best way to protect emerging economies from the disruptions caused by huge and volatile capital flows.

Last week, ASEAN agreed to cut as many tariffs as possible to between zero and five percent by 2000 rather than the later deadline of 2003.

It also signed a framework agreement to establish a free investment zone, removing all barriers to intra-regional investment by 2010 and to outside investment by 2020.

Ian Perkin, chief economist at the Hong Kong General Chamber of Commerce, said that at first blush, the proposals seemed contradictory but they did, in fact, make sense.

"You have to look at this a little deeper," he said. "One is for the short term, the other is for the long term."

China was proof of foreign investors' interest in putting long-term money into economies with strong potential, regardless of restrictive currency regimes, he said.

But Malaysia cannot offer investors China's market potential. It has also provoked harsh criticism following allegations of police brutality by Malaysian former deputy prime minister Anwar Ibrahim.

Anwar's allegations have come at the worst possible time for ASEAN. Where once it could shrug off international rebuke and abide strictly to a policy of non-interference in each other's affairs, now all these countries need foreign investment, and most antennae are finely tuned to international perception.

Philippine President Joseph Estrada spoke out against Anwar's treatment, but said he would attend the Asia-Pacific Economic Cooperation (APEC) meeting in Kuala Lumpur next month. Indonesia has yet to confirm that President B.J. Habibie will attend.

ASEAN has never attempted to hide its political differences, choosing instead to focus on common interests, usually issues of economic expansion and integration.

But with the economic backdrop increasingly uncertain, divisions are appearing even here, with Bangkok and Manila firmly committed to free markets while Kuala Lumpur turns its back.

Fault lines resurfaced at the ASEAN meeting, when Malaysian trade minister Rafidah Aziz said she chose not to authorize a package of "bold measures" put together by the group to stimulate foreign direct investment, which has crashed over the past year.

Rafidah said she needed to get Prime Minister Mahathir Mohamad's approval before signing the package, to be released at the ASEAN summit in Hanoi in December.

"It's very difficult to judge the commitment to and seriousness of these proposals to liberalize trade and investment in a time when there's such an uncertain regional and global economic backdrop," said Peter Perkins, strategist at Daiwa International Research.

Perkin said bilateral agreements to settle ASEAN trade deals in local currencies rather than in U.S. dollars were evidence of the group's interest in opening up to one another, but that could also signal the group would shut out outsiders.

"These talking shops are all very good anywhere in the world, but when it comes down to it, you have to convince the international investor," Perkin said.

"Ultimately, they have to get the economic fundamentals right within the ASEAN countries first, making the place attractive to foreign investors."