At 30, ASEAN looks ahead with optimism

At 30, ASEAN looks ahead with optimism

By Teofilo C Daquila

What factors will determine the grouping's continued economic
dynamism?

SINGAPORE: ASEAN continues to be one of the rapidly growing
regions in the world, evidenced by a high rate of economic growth
at an annual average of about 7 percent during the past three
decades, which has been due to a combination of demand- and
supply-side factors.

While in the past, domestic demand (consumption and investment
of both private and public sectors) has contributed to a large
extent to total demand, the contribution of external demand
(exports) has grown in importance.

Supply-side determinants include increase in the labor force,
increase in capital formation and improvement in technology. To
increase its labor force, ASEAN has relied on population growth,
foreign labor, extension of the retirement age, part-time
workers, and the provision of child-care facilities.

Savings and investment incentives as well as foreign direct
investments (FDI) have contributed to the increase in capital
formation. Improvement in technology is brought about by research
and development, hiring of foreign experts, and FDI.

The ASEAN economies have experienced rapid structural change
in output, whereby the agricultural sector's contribution to
total output has diminished while that of the non-agricultural
sector (the industrial and services sectors) has increased.
Manufacturing, the largest industrial sub-sector, has been the
prime mover of the ASEAN economies. The services sector has also
grown in importance, particularly the financial and business
sector as well as the transport and communications sector.

ASEAN has experienced rapid expansion of exports, as indicated
by the rising proportion of exports to GDP, which has been due to
an export-oriented industrialization policy, vigorous export
promotion and trade liberalization measures including tariff cuts
and the lessening of non-tariff barriers. Despite the adoption of
preferential trading arrangements (PTAs) in 1977, intra-ASEAN
trade was around 15-20 percent of its global trade. Recent
liberalization measures include the adoption of the "Common
Effective Preferential Tariff" or CEPT in 1993. Consequently,
intra-ASEAN trade almost doubled from US$79 billion in
1993 to US$140 billion in 1995, which is about 25 percent of
ASEAN's global trade.

The structure of ASEAN exports has also undergone change away
from primary commodities towards manufactures, mainly electrical
and electronics and transport equipment and machinery. The
changing structure of exports and output has been due to openness
of ASEAN to trade, capital flows, including foreign direct
investments, and external disturbances such as falling and
volatile prices of primary commodities, and due to a shift in
industrialization policy away from import-substitution in the
1950s and 1960s towards export-orientation since the 1970s.

The ASEAN region has also received a massive amount of foreign
direct investment (FDI), following the appreciation of the
Japanese yen in 1985. FDI reached a cumulative total of
US$140 billion at the end of 1993, with about 24 percent coming
from Japan, 17 percent from the EU, and 13 percent from the US.
The bulk of investments has been in the manufacturing sector. The
services sector is also receiving a large amount of FDI.

The ASEAN countries have also experienced relatively low and
stable inflation rates. This is due to the effectiveness of
government policies. ASEAN economies, except Singapore, have
relied on the traditional method of controlling inflation through
a reduction of money supply. A cut in the growth of money supply
increases interest rates which in turn dampens investment and
interest-sensitive consumer durables.

Singapore, on the other hand, uses exchange rate-targeting to
keep the Singapore dollar strong and stable which in turn results
in low and stable rates of inflation.

On the social front, ASEAN has also achieved a higher level of
social development as indicated by a higher level of education
(proxies by improvement in the literacy rate), longer life
expectancy, a lower mortality rate, more and better housing,
better nutrition, better access to services such as
communications (in terms of people per telephone line) and health
care (in terms of people per doctor). Rising per capita income,
FDI, and official development assistance from developed countries
and international organizations.

On the political front, ASEAN has provided a relatively stable
political environment due to stable government and politics,
shelving of territorial disputes, improved peace and order
conditions, and other regional security arrangements such as the
ASEAN Regional Forum. In a recent survey by the Japanese External
Trade Organization, political and social stability in the ASEAN
region was viewed as the most important determinant of Japanese
FDI.

Thus, since its formation in 1967, ASEAN has grown dynamically
and offers a potentially large market for business and investment
opportunities. But will dynamism in ASEAN continue? Several
factors could help propel its growing dynamism.

* First would be the need for ASEAN governments to maintain
macroeconomic stability via prudent fiscal policies to ensure
that inflation is kept under control; government, domestic and
foreign debt is managed properly; and that any macroeconomic
crisis will be eliminated within a year or two. It is also
crucial that the world financial environment remains stable
as an increase in the discount rate by the U.S. Federal Reserve
Bank will trigger recessionary effects in the rest of the world.

For example, when the U.S. contracted its money supply in the
early 1980s aimed at containing inflation, interest rates rose
and generated devastating effects to countries worldwide
including those in ASEAN. A replication of this scenario should
be avoided. Thus, a co-ordinated macroeconomic policy among the
large developed economies of the Group of Seven is essential to
ensure a stable world financial environment.

* Second would be for the ASEAN countries to deepen and widen
trade and investment liberalization measures and reduce non-
labour costs including provision of modern infrastructure, the
elimination of unnecessary bureaucratic procedures and the
lifting of regulatory controls. The creation of an ASEAN Free
Trade Area (AFTA) in the year 2003 is certainly a plus factor.
Other schemes include the ASEAN Investment Area and sub-regional
co-operation; namely, the Sijori Growth Triangle involving
Singapore, Johor and Riau; and the East ASEAN Growth Area
involving Brunei, Indonesia, Malaysia and the southern
Philippines.

In the case of Sijori, Singapore provides excellent
infrastructure and skilled labour, while Johor and Riau provide
land and lower-cost labour, following the theory of comparative
advantage.

ASEAN, however, should not concentrate on intra-ASEAN economic
potential alone. It is also important to forge closer economic
relations with the rest of the world as the world becomes highly
interdependent. A recession in ASEAN's major trading and
investment partners (the U.S., Japan and the E.U.) will hurt the
region as her openness to trade and investments has been
rising.

* Third has to do with the expansion of ASEAN-7 to ASEAN-10
(with the inclusion of Cambodia, Laos and Myanmar). The ASEAN
market has grown from 202 million in 1970 to 491 million in 1996.
The ASEAN states combined population is about 113 million bigger
than NAFTA and 120 million bigger than EU-15. Assuming an ASEAN-
10, its regional income presently stands at some US$660 billion
which is expected to double every eight years.

* Fourth is the need for ASEAN to continue reforming the
financial sector. As ASEAN expands and as per capita income
rises, more and diverse financial institutions and instruments
will be demanded and created. In reforming the financial sector,
the ASEAN economies need to further promote their financial co-
operation as well as to institutionalize the ASEAN Finance
Ministers meeting in order to boost intra-ASEAN trade and
investments.

* Fifth is the need for the ASEAN governments to privates some
state-owned enterprises, and deregulate and liberalize some
industries to provide more competition. A Framework Agreement on
Services was recently signed which will provide preferential
liberalization of trade in services with priority to sectors such
as financial/business, airport and maritime transport,
telecommunications, tourism and construction.

* Sixth is the need to increase research and development
activities through higher spending on R&D, foreign direct
investments, and government incentives including allowing public
sector employees, teachers and researchers to become not only
innovative and creative but also business-oriented as well as
providing government subsidies to private firms and entrepreneurs
to undertake innovation.

* Seventh is the need for continuing dialogues among ASEAN
members, between ASEAN and her dialogue partners (U.S., E.U.,
Japan, South Korea, Canada, Australia, New Zealand), and
multilateral dialogues including the APEC and WTO meetings. The
recently concluded APEC meeting in Manila and WTO meeting in
Singapore attest to the growing importance and dynamism of ASEAN
as it has shown a change in negotiation style from being merely
passive to becoming active, participants in multilateral
negotiations.

To conclude, while the factors cited above will work in favor
of ASEAN's growing dynamism, there are also other factors which
will work against ASEAN. First, the formation of regional trade
arrangements (RTAs) such as Nafta and E.U. might slow down
ASEAN's dynamism due to the protectionistic sentiments within
RTAs. Second, the emergence of new markets like India, China,
East European countries, and other labour-abundant countries will
provide stiff competition to ASEAN in terms of trade and
investment diversion. The pluses however are likely to outweigh
the minuses, and the ASEAN region will continue to be a
dynamic one.

Dr. Teofilo C Daquila is with the Master's Program in
Southeast Asian Studies at the National University of Singapore.