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.