by Kanes
ASEAN does not appear to have recovered yet from the East Asian currency crisis of 1997-1998 to face its major challenges. True, ASEAN’s export performance in 1999 was encouraging. Negative export growth of 1998 was transformed into positive growth in 1999, but the dollar value of exports in 1999 was lower than that of 1997 in two - Indonesia and Singapore - while it was more or less at the same level in Thailand. Negative overall economic growth of 1998 became positive in all, but the growth rate in 1999 was lower than the growth rates of 1996 and 1997. The per capita GDP of all the ASEAN countries in 1999 was much lower than in 1996: In Indonesia by 42 per cent, in Thailand by 37 per cent, in Malaysia by 30 per cent, in Singapore by 14 per cent and the Philippines by 13 per cent.

Fall in Foreign Direct Investment

The increase in exports and total output in 1999, however, was not accompanied by a rise in foreign investments. On the contrary, foreign direct investment appears to have fallen; it declined from $24.4 billion in 1997, to $ 19.3 billion in 1998 and then declined further to $ 13.3 billion in 1999. Apparently, foreign investors are still uncertain of the future of these countries. On the other hand, they are increasing their investment in North-East Asia - Japan, China and South Korea; foreign direct investment nearly doubled from $5.6 billion in 1997 to $10.2 billion in 1998 In Japan and also nearly doubled in South Korea from $2.8 billion to $5.1 billion in the same period. In China, it increased slightly - by 2.8 per cent - from $44.2 billion to $45.5 billion. This increasing inflow of foreign capital to North-East Asia parallel to the decreasing inflow to South East Asia has caused much anxiety in ASEAN. As the expanding inflows of foreign investment was a major factor in the rapid growth of ASEAN economies, there is now a growing fear that the growth rate will be adversely affected by the shrinking capital inflows. The problem is further complicated by the fact that most ASEAN members are competing among themselves for foreign direct investment. In 1996 for instance, General Motors chose Thailand over the Philippines to site its new regional car plant and this caused much disappointment in the Philippines. Shrinking capital inflows are likely to increase further the competition for them among the ASEAN countries.

Shrinking Intra-Trade

Intra-trade in exports in ASEAN rose from 20.0 per cent of ASEAN’s total exports to the world in 1992 to 23.7 per cent in 1996. Between 1996 and 1998, however, intra exports fell by 17 per cent from $78.9 billion to $65.6 billion or from 23.7 to 20.3 per cent of total exports. As ASEAN’s exports to the world had declined only by 3 per cent in this period, the fall in exports to the region was much greater. ASEAN’s imports from the world fell by 26 per cent between 1996 and 1998, but its imports from the region fell less - by 12 per cent. Thus, although the value of intra-imports in 1998 of $60.1 billion was less than $68.3 billion in 1996, it was higher as a proportion of total imports from the world - 22.6 as compared to 18.9 per cent in 1996.

ASEAN’s Intra-Trade ($ billion)

About 70 per cent of the intra-trade of ASEAN is accounted for by Singapore and Malaysia, Singapore alone accounting for nearly 45-50 per cent. Their intra-exports fell by 23 per cent but their intra-imports declined by only 13 per cent. It must, however, be recognized that 1998 experienced the worst economic crisis in the region that the fall in trade was inevitable. Increase in intra-regional trade is likely with the full recovery of the ASEAN countries.

Inherent Weaknesses

The East Asian economic crisis brought to surface some of the inherent weaknesses of ASEAN. The most important was the ineffectiveness of the regional grouping to overcome the crisis by their own efforts. They are the most rapidly developing economies in the world but they were not strong enough collectively to withstand the shock of the melt down. The second is the lack of leadership in the grouping since the crisis when the largest member - Indonesia - collapsed. Indonesia under President Suharto had provided leadership to the ASEAN in the past but after his overthrow, there is none to replace him. Third, ASEAN’s policy of non-interference in the internal political affairs of its members, resulted in inaction on the part of ASEAN in the East Timor crisis; it was outsiders - Australia, New Zealand, US and the UN - which were the main actors in this drama while ASEAN was reduced to a status of a passive onlooker. Fourth, the ASEAN’s consensus-driven decision-making, in a grouping of 10 nations at different stages of economic development, has made it difficult to reach quick decisions. ASEAN, in practice has a two-tier membership - the rich and the older members and the poor and the new members. Integrating these different economies is one of ASEAN’s major challenges. Fifth, is the ineffectiveness of ASEAN even to tackle a simple problem as forest fires and the resultant haze which is polluting the region.

ASEAN Free Trade Area (AFTA)

The ASEAN Free Trade Area (AFTA) providing for zero tariffs in the grouping is to be achieved by 2010. Originally, the target date was 2015 but it was decided subsequently to advance it to 2010. Already, about 85 per cent of tariff lines for goods traded within ASEAN are subjected to no more than 5 per cent duty, as a result of a series of decisions to reduce tariffs and integrate the economies. The decision to advance the target date for zero tariffs from 2015 to 2010 is a part of the acceleration of the ASEAN Free trade Area and the larger process of expanding free trade not only in goods but also in services. This liberalization process however, has come up against Malaysia’s decision to protect its local automobile - Proton. Under AFTA, import duties on automobiles and parts imported from neighbouring countries would be capped at 5 per cent in 2005; this is much lower than the 70 per cent tariff on some components and assembly kits in Malaysia to protect its indigenous automobile project. The reduction of import tariffs according to schedule would expose the Proton to severe competition from imported cars and it is because of this that Malaysia has decided not to cut tariffs on automobiles until January 2005 - two years beyond the 2003 AFTA kickoff.

Fears have now arisen that following Malaysia’s example, other ASEAN members too may try to protect their favourite domestic industries. Thailand for instance, which is hoping to export cars manufactured there by foreign multi-nationals, is reported to be considering retaliation by delaying cuts in import duties on palm oil - mainly purchased from Malaysia. Further, Philippines too is considering extended protection for some categories of petro-chemicals. If these and other countries seek protection of domestic industries there would be slowing of the pace of trade liberalization to achieve AFTA.

Some analysts point out that ASEAN is concentrating too much on tariff reduction to the neglect of other shortcomings in the grouping. They believe that ASEAN should invest more in infrastructure, technology and human resources to promote modern industries, remove non-tariff barriers such as product standards and customs procedures and forge deeper cooperation in science and information technology. They want ASEAN to go far beyond mere tariff reductions.

New Approach: East Asian Group

It was perhaps the realization that the ASEAN was too small and weak and lacked a powerful voice in the international fore that made ASEAN invite Japan, China and South Korea to its summit meeting in Manila in November 1999. This broad grouping is described as "ASEAN plus Three" (APT). The 13 Asian countries agreed in a historic pact to strengthen economic, political and monetary ties as part of an ambitious long-term goal by some governments to develop an East Asian common market and a single currency. They agreed to hold annual East Asian summits of all the 13 nations and to find concrete ways of enhancing flows of funds and technology within the region. The 10 ASEAN nations and others supported the Japanese proposal for an Asian Monetary Fund which was first mooted in 1997 but quashed by the US which feared it would weaken the IMF. China, which opposed this idea, originally, reversed its stand and fully endorsed it. In fear of US disapproval and in view of the differences within the group, the final communique made a vague reference to "enhancing self-help and support mechanisms". Japan is expected to explore ways to move the idea forward; Japan further pledged new grants to replace loans offered to support ASEAN nations during the currency crisis. Behind the search of greater regional cooperation is a desire spearheaded by Japan to wrest greater control over capital flows and investment from the Western economies that dominate the IMF.

The new APT has got off the ground quite fast. Within months of the Manila Summit, trade and economic ministers held meetings and signed accords on regional swap arrangements and monetary cooperation. The region-wide system of currency swaps to help ASEAN deal with future Asian crises is similar to the network installed by the Group of Ten industrial nations in the early 1960s when they faced the first global monetary hiccups of the post-war years. ASEAN has also created a surveillance mechanism to try to anticipate and head off future crises, using sophisticated early-warning indicators and the North-East Asian countries keeping an eye on short-term capital movements in the vicinity. There is also much discussion on common currency baskets and joint intervention arrangements to replace both the discredited dollar pegs and the costly free floats imposed by the crisis. Hong Kong and the Philippines have even proposed an Asian Currency Unit on the Euro model.

ASEAN has taken new initiatives in trade too. It is negotiating a linkage with the existing free trade area of Australia and New Zealand. A study group has recommended that Australia and New Zealand dismantle tariffs for countries in both groups by 2005 while old members of ASEAN drop tariffs by 2010 and new members by 2015 or 2018. It is strongly backed by New Zealand and Singapore which are close to agreeing on bilateral free trade and Australia.

The ASEAN considers that all the groupings - ASEAN, APT and APEC are necessary building blocks in the global economy to capture new markets and expand trade while ensuring inflows of capital and technology. Meanwhile, A North-East free trade Area of China, Japan and South Korea is being studied in all the three countries and this might merge with AFTA into a grouping that covers the whole of East and South east Asia. Linking Japan, China and South Korea to ASEAN, by increasing economic complementarities, will make ASEAN more viable. The currency crisis has made the need for East Asia to come together much more pertinent than ever. It was Mahathir Mohamed, the Prime Minister of Malaysia, who first proposed an East Asian Economic group (EAEG) a decade ago, and now his dream is becoming a reality.

The East Asian nations, in short, do not want to be totally dependent on the Western nations and multilateral institutions. They realize that the Western nations failed to come to their rescue in 1997-1998, the Western banks created much of the crisis by pulling out and the IMF made thing worse by its orthodox stereotype policies. They want their own regional institutions and a say in their own fate. They also recognize their collective strength; their aggregate output (GDP) and trade volume are very near those of the US or EU and their monetary reserves are much larger than theirs: The total GDP of East Asia (ASEAN plus Three) in 1997 was $6382 billion compared to $7,834 billion of the USA and $8,093 billion of KU; trade with the rest of the world was $1,380 billion for East Asia, $1,586 billion for the US and $1,640 billion for the KU; and official monetary reserves of East Asia amounted to $668 billion as compared with $71 billion of the US and $380 billion of KU. They are further disillusioned with the failure of WTO to stop increasing protectionism in the west and the pressure of the West to link trade with labour and environmental issues. They believe that Asian economic integration will provide a stimulus to global growth, trade and investment and create a trilateral partner with the US and EU in managing the world economy.