How will APEC reach its targets?

By Anwar Nasution

The following article is based on a paper presented at the Conference on the Future of Asia-Pacific, held in Tokyo, 30 May-2 June 1995, jointly organized by George Washington University and Yomiuri Shimbun.

TOKYO: The Asia Pacific Economic Cooperation forum (APEC) is a relatively young and experimental inter-governmental group for forging economic integration in Asia Pacific. Unlike the European Union or North American Free Trade Area (NAFTA) or the ASEAN Free Trade Area (AFTA), APEC is not a well defined paradigm. It is neither a treaty nor an agreement. During the past six years since its inception in 1989, APEC's accomplishments have been more in politics and psychology than economics.

The annual meeting of APEC economic leaders and regular meetings of ministers, senior officials and business leaders have begun to nurture a sense of regional identity among a fast and diverse assembly of members of the Asia Pacific Community.

On substance, however, it is still searching for its own purpose and identity. Its principle is ambiguous and most of its decisions are unbinding in a legal sense.

It has set the year 2020 as the target date for achieving its goal of free and open trade and investment in the APEC region, but the operational "blueprint" for achieving this objective has yet to be invented. APEC remains a non full-fledged organization in the traditional sense and is supported by a small and modest secretariat.

Unlike other regional groups, APEC includes economies in various stages of development along the Pacific Rim. They are glued together by the same philosophy and global interests. It is an organization of relatively and increasingly open and rapidly growing economies in the Asia-Pacific region, deeply and increasingly integrated with each other, benefiting from large and expanding economic relations with the rest of the world.

Their economies were built by private enterprises operating in markets, not by governments. The sole purpose of APEC is, therefore, to strengthen the market-driven economic growth in the Pacific Rim area through trade and investment liberalization, trade facilitation and development co-operation. APEC adopts the principle of "open regionalism" as the ultimate objective of this group is to encourage multilateral global liberalization. The boundaries of APEC are defined by its economic characteristics and interactions and not by the assertion of collective international political will.

As in any other regional organization, politics and psychology are as important as economics in the APEC process. The political ingredients in the APEC process have been increased since the first informal forum, or the APEC Economic Leaders Meeting (AELM), held in Seattle in 1993. The informal APEC forum has now become institutionalized and is likely to take place once a year. To have greater psychological impact, the AELM rotates from one member country to another.

Like any other regional organization, APEC also has external objectives. It is an instrument of economic diplomacy vis-a-vis other regions both on trade and investment related issues and probably international monetary issues in the future. The Vision Statement of the Seattle forum in 1993, which spoke of "the community of Asia-Pacific economies" and welcomed the challenge to achieve free trade in the Pacific Rim, contributed substantially to the successful conclusion of the Uruguay Round. The Declaration of Common Resolve of the Bogor forum in 1994 charts "the future course of our co-operation, which will enhance the prospects of an accelerated, balanced and equitable economic growth not only in the Asia Pacific region but throughout the world as well". Specifically, it calls for a "further multilateral liberalization". This is likely to initiate a new round of trade negotiations which will move beyond the Uruguay Round agreements.

Internally, however, APEC is still a ship the in making. The following are a number of basic issues to be resolved to put more solid macro and micro economic ballast before it can start sailing.

APEC calls itself as an organization for trade and development. But it is not very clear how much of it is for trade and what development co-operation is taken to mean. The modality of economic co-operation is also not clear. Prof. Yamazawa of Japan represents the view of Asian countries which are afraid that America may use APEC to promote liberalization along the NAFTA line and use APEC liberalization as a leverage for pushing global liberalization.

Some less developed economies are afraid that America may use APEC to push internal political and social reforms in their countries. In the Kuching consensus of 1990, ASEAN countries expressed their commitment to preserving their own identity and cohesion in APEC.

To the advanced member countries, APEC is mainly a trade organization and mostly deals with trade liberalization and trade facilitation. They recognize the importance of development co- operation to increase the technological and managerial capabilities of the less developed member countries. To the Americans, development co-operation should be focused on trade facilitation such as harmonization of technical, economic and social standards.

In fact, intensification of bilateral trade disputes between America and Japan have been centered around economic issues, such as the domestic competitive policy.

The core of American trade conflicts with less developed economies in Asia is political and social issues such as human rights in China and labor rights in Indonesia. To the Japanese, technical co-operation should be limited to technical issues such as training of customs officials, transferring advanced quarantine and testing technology.

To the less developed member countries, trade liberalization, trade facilitation and development co-operation are inseparable and a mutually reinforcing package. APEC should also serve as an organization for development co-operation.

As the current chairman of the Non-Aligned Movement, President Soeharto of Indonesia would like to see APEC as a model for North-South dialog. Aside from market access, typically less developed countries usually need capital and technology from the more advanced nations.

As a matter of fact, six of the existing APEC working groups deal with development issues and only two with trade related matters. The Seattle forum spoke of the establishment of an APEC educational program. When Indonesia took over the APEC leadership in 1994 it added other development issues, including human resource development, investment in infrastructure, small and medium size enterprises and private sector participation in APEC.

APEC has not addressed the question of how to help finance either infrastructure projects or liberalization programs in less developed member countries. Without an adequate infrastructure, less developed economies cannot attract private sector investment and increase trade to reap the benefits of economic co-operation. This financing issue is entrusted to normal official aid mechanisms and market channels. Emphasis is given to private sector investment, both direct and portfolio investment.

The recent financial crisis in Mexico and alignment of major currencies indicate that the existing mechanism may be inadequate, given the increasing uncertainties in the current international monetary system. The special forum for annual meetings of APEC's ministers of finance and central bankers, created by the Seattle forum, has no power to directly address these financial and macro economic issues because their mandate is limited to exchange of information. The absence of resources for financing temporary illiquidity because of economic liberalization will slow down the pace of economic deregulation, particularly investment and capital movements, in less developed countries.

The recent Mexico crisis reminds us that liberalization of trade, investment and capital movements in less developed economies can cause major economic problems unless corresponding changes are made in the exchange rate and other macro economic policies. Liberalization of imports can lead to increase in trade deficits. Liberalization in the asset market could encourage massive private sector capital inflows attracted by higher yields than in industrialized countries. The massive capital inflows can mask the onset of serious imbalance as such inflows can quickly reverse into outflows that produce severe financial problems and even greater economic crisis.

The second lesson from the Mexico crisis is that the market psychology can produce contagion effects in other emerging markets through which many innocent bystanders, such as Chile, Thailand and Indonesia, are seriously affected even if their own economic conditions and policies are unlikely to create problems directly.

The problems are magnified by the currency realignment, particularly for those countries with large foreign debts whose import bills are denominated in the appreciating currencies. The last lesson from the liquidity problem in Mexico is that stabilization programs in less developed economies require support from the international community.

To achieve the target dates, the Bogor Declaration spoke of commitments of APEC member economies to pursue further unilateral deregulation by accelerating the implementation of their Uruguay Round commitments. The Declaration includes a weak standstill commitment that speaks about "best endeavors" to avoid any increase in trade protection. However, it is up to an individual country to determine the coverage and the speed of its deregulation program. Moreover, APEC has no mechanism to co- ordinate and review the progress of the programs in its member countries.

Because of the expensive economic and social costs of the liberalization process in developing economies, Thailand and Malaysia had a point when they submitted their reservations to the strong wording of the Bogor Declaration. These two countries only committed themselves to the liberalization process in consonance with their GATT/WTO commitments. Based on the same reason, Malaysia further proposed to allow each APEC member country to undertake the liberalization process on a best endeavor basis commensurate with the country's capacity to undertake such a program and the level of its development.

APEC's first and only achievement so far in this area is the adoption of the APEC Non-Binding Investment Principles by the Ministers Meeting in November 1993 in Seattle. Movements are occurring on customs harmonization and other aspects of trade- facilitation. The investment principles are consistent with GATT/WTO principles and contains eight items, namely: (1) transparency; (2) most-favored nation treatment; (3) establishment of investment; (4) national treatment; (5) transfers; (6) nationalization and compensation; (7) performance requirements; and (8) taxation and investment incentives.

Both politics and psychology play central roles in the APEC process. The APEC unbinding principles and commitments are not hollow and useless documents. They have helped the political dynamics within individual member countries speed up their respective unilateral broad based deregulation programs.

As the foundation of their market-driven economic growth has been the open multilateral trading system, every APEC member country is fully aware that its prosperity depends on the progress of its internal economic deregulation.

The more efficient their economies the higher the rewards they receive. The rewards are: high capital inflows, low unemployment rates, and rapid rates of growth of both exports and national product.

The less disciplined and more distorted economies will be punished by the market mechanism. However, a number of internal issues have to be resolved and its institutions strengthened to achieve its goal in creating a free trade area in the Asia- Pacific region by the year 2020.

Dr. Anwar Nasution is a professor of economics at the University of Indonesia, Jakarta, and the Sasakawa Distinguished Professor for the Chair in Development Policy at the United Nations University, World Institute for Development Economic Research, Helsinki, Finland.