How will APEC reach its targets?

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.