Southeast Asia faces onset of democracy, China

By Karim Raslan

KUALA LUMPUR: Southeast Asia has been hit by a double whammy -- two body blows in quick succession. The first is the onset of democracy and the second is the rise of China.

Southeast Asia, with the notable exception of Singapore, is in the midst of an era of "transition politics". For the record even the lurch towards greater authoritarianism in Malaysia will be unsustainable. No amount of central control will pacify the cries for change.

Understandably new democracies -- especially in Indonesia -- are fraught with anxiety, tension and tragedy as the key players experiment with the new freedoms, testing the limits of the acceptable and the unacceptable.

Democracy, for men such as Indonesian President Abdurrahman Wahid and Speaker of the People's Consultative Assembly Amien Rais, is like a new toy: something they've heard about and discussed but never grown up with it. And because they are unfamiliar with it when they play, they can be very rough. In fact there are times when they try to force the new toy to do the impossible, breaking it in the process.

After decades of authoritarian rule, the more open, free- wheeling environment makes many people uneasy. And, of course businessmen are the most edgy since most of them loathe what they term euphemistically as "externalities" that affect their cherished business projections: political will, human rights and environmentalism.

Contrary to popular thinking there is no such thing as a democracy premium. If there were, foreign direct investment into Taiwan should have sky-rocketed after President Chen Sui Bian's election. Businessmen prefer good governance to democracy any day -- look at Singapore. They don't care about the means only the ends because democracy -- pure and simple -- scares the hell out of them.

Unfortunately, their skepticism has been proven right in certain cases. The removal of restrictions of the freedom of expression and assembly have permitted, at least in Indonesia, a worryingly escalation of age-old and barely contained ethnic, religious and class tensions. They silence the "do-gooders" by pointing at the clashes between the Dayaks and Madurese in Sampit.

The second blow is the emergence -- to our north -- of China. The futurists have talked excitedly about the Middle Kingdom's potential for decades. Well now it's real. In fact China has become the economic competitor we've always feared and more. Moreover, this year's Leaders' Summit of the Asia Pacific Economic Cooperation forum in Shanghai will provide an excellent opportunity for the Chinese to showcase their strengths.

The torrent of mindless China boosterism pouring off the television screens and pages of the international media will have a deep impact on an America slipping into recession.

With real economic growth of over 8 percent per annum, China's threat to Southeast Asia is twofold. Firstly it is now the strongest magnet for foreign direct investment in the developing world, eclipsing even Brazil.

Secondly after eight years of 7 percent growth, the manufacturing capacity accumulated means that it is also a vast engine room churning out inexpensive goods that are in turn flooding our markets.

From Vietnam and Thailand to the north, to Indonesia and Malaysia to the south, Chinese goods have become a major source of competition for the region's low cost manufacturers and assemblers.

Home appliances, electronic goods and motorbikes from China have been popping up in department stores, malls and street- markets across Southeast Asia. Last year alone exports grew at over 25 percent reaching a phenomenal US$249 billion.

Indonesia has been very badly hit by the double whammy. As a low cost manufacturing platform the republic has the most to lose with China's economic growth. Furthermore, Jakarta's political life is the most uncertain and violent.

Confusion is the order of the day as President Abdurrahman -- a man plucked from the world of non government organizations -- has proven to be such a disappointment both as a democrat and as an administrator.

Nonetheless, Indonesia presents the best, if also the most extreme, of challenges Southeast Asian policy-makers are facing from the double whammy.

One of the best examples of the changing face of business in the region is the way the motorcycle industry in Indonesia (for decades the preserve of the Japanese assemblers) is being challenged by Chinese competitors.

Many of the wealthier students shuttling to and from the political demonstrations are probably riding Chinese manufactured Sanex, Jialing and Beijing branded motorbikes.

In the past Honda, Yamaha, Suzuki and Kawasaki controlled the vast Indonesian market with sales on over 1.8 million alone in 1997. However the situation today is an example of what the future may hold for Southeast Asia.

Whilst the locally assembled brands (all Japanese with the exception of Vespa) used to dominate the local market, their position is being rapidly eroded. According to the Indonesian Motorcycle Assemblers Association as reported in Tempo magazine, in 1999 Chinese brands had barely 1.9 percent of the domestic market.

However, as of mid 2000 Chinese motorcycles had wrested some 17.2 percent of the market. A Chinese-made Sanex Beta costs Rp 7.2 million as compared with Rp10.8million for a Honda Astrea Impressa. Such a large price differential has a big impact on the Indonesian consumer.

In fact it appears that Chinese motorcycles, despite their poor reputation for service and reliability vis-a-vis the Japanese, will continue to gain momentum. The Japanese have actually been entirely displaced from markets such as Cambodia and Vietnam.

Despite the gloom, Southeast Asia can defend itself from the double whammy.

China is riding the crest of a wave and only a fool would seek to break the momentum. However such flashes of interest, as well as the wall of money, always temporary and many investors will be dismayed by China's structural weaknesses, the level of corruption and the administrative flaws.

Three other reasons will assist Southeast Asia's comeback. Firstly, Chinese society is less orderly and stable than appearances would suggest. Rural bomb-blasts and the Falungong's tenacity hint at the impending social upheaval. China has yet to experience the democratic transition we are undergoing. When the Chinese democratize the shock waves will be felt all over Asia. Let's hope that having begun democratization earlier we will emerge faster.

Furthermore, Southeast Asian societies are a more open and syncretic. We absorb new ideas and make them our own.

If -- and this is a big if -- we manage to marry the forces of democracy and good governance we will secure our future and emerge stronger and more dynamic. Democracy -- if we are clever -- will be our weapon.

Secondly, China's cheap exports (or "dumping") have been generated from a deluge of easy money. The investment bankers and multinationals are inadvertedly creating an asset bubble similar in scope to Southeast Asia's infamous mid-90s bubble. If, in five years time, the socialization of costs in China continue to be ignored, the banking system will collapse.

Thirdly, Southeast Asia has to plunge ahead with the long avoided administrative and corporate reforms. We cannot hope to compete against the Chinese unless we have set in place the "soft" infrastructure of law courts, legal enforcement, as well as greater accountability and transparency in governance. Southeast Asia cannot compete in terms of cost.

These reforms will not result in an immediate turnaround in our competitive position vis-a-vis the Chinese. It will take time.

Eventually, however, the respect for the rule of law -- and zero tolerance of corruption -- as well as the sanctity of contract in Southeast Asia will become a major factor in our competitive make-up.

The writer is a Kuala Lumpur-based lawyer and author.