BUSINESS
...ed to ASEAN leaders the potential utility of a similar project in ASEAN. During this time, investors were showing keen interest in NAFTA and the Single European Market, which raised concerns in Southeast Asia about investment diversion (Means, 1995). By 1993, however, it was China that loomed as the more ‘threatening’ competitor to ASEAN in providing an attractive ‘regional’ location to investors seeking such investment sites within the wider Asia-Pacific. Since 1992, a growing proportion of FDI from the ASEAN states’ traditional investors in the Asian NIEs and the OECD began flowing to China instead (Parker 1993: 61; Thomsen 1999: 16). The FDI situation in the core ASEAN countries had, consequently, become extremely worrying to political leaders, both for economic as well as political/security reasons. By the 5 early 1990s, the ASEAN countries had grown highly dependent on FDI.4 It was through FDI that these countries had emerged from the recession of the mid-1980s to engage in outwardoriented industrialisation and become significant exporters of manufactured goods. FDI also introduced the necessary technology and management/organisational skills that enabled th e ASEAN economies to plug into international production networks. FDI was, therefore, a critical source of growth and wealth creation for these economies. The economic concerns with FDI and growth were, moreover, underpinned by political imperatives as well. As has been pointed out, growth was, and remains, a crucial device for legitimating domestic political regimes in ASEAN, and this added urgency to the concern over FDI diversion, particularly since the surge in FDI inflows during the late 1980s, by fuelling growth, had helped these governments to overcome domestic tensions and conflicts that had emerged during the recession. In response, the ASEAN member governments decided to use the large market potential of AFTA as a carrot to attract FDI flows to the region to counter the attractiveness of China as an investment location.5 China by itself offered investors a potentially competing ‘regional’ investment hub in the Asia-Pacific region, particularly in view of its (potential) market size (Baldwin, 1997: 3). Cooperation among all the ASEAN countries was, consequently, seen to be necessary to deliver this large, regional market to which investors would be attracted. The FDI imperative also explains advances in AFTA since its initial adoption, both in terms of the pace of liberalisation (advanced twice) and expansion of its agenda in spite of domestic business opposition to the project. Political leaders found the potential threat to economic growth from slowing FDI inflows sufficiently overwhelming to decide in 1995 to accelerate the completion of AFTA, introduce new rules to govern regional liberalisation, and to adopt new regional liberalisation programmes in agriculture, services and investment. External threats to economic growth were, however, not the only pressures confronting the ASEAN political elite. They also needed to respond to pressures from below, particularly from their key business allies. Maintaining dominant political coalitions domestically is generally vital for regime security and to maintain incumbent governments in office (Haggard and Kaufman, 1997). This may be achieved in two ways: generalised economic growth plus 4 Between 1987 and 1992, inward FDI flows accounted for a large 11.3 per cent of gross fixed capital formation in ASEAN, compared to 3.9 and 4.2 per cent respectively for developing and industrial countries. By 1990, total FDI stock in ASEAN was 18.2 per cent of GDP compared to between 10.3 – 10.5 per cent for developing countries and 8.4 per cent for the industrial countries (ASEAN Secretariat, 1999b: 129). 5 In many ASEAN capitals, policymakers realised they could not compete with China on the basis of national-level incentives. In the words of an Indonesian official, ‘they (the Chinese) give all the incentives which we could not give’ (Nesadurai, 2003: 88). 6 selective distribution of economic rents to elite partners. While the former supports [regional] liberalisation, the latter may detract from it. This tension is reflected in the institutional design associated with AFTA. Institutional design in AFTA was based on what may be termed, ‘negotiated flexibility’, which combines rigidity of project targets and schedules with a degree of flexibility that allows member governments to address their domestic political economic imperatives. There were two approaches to negotiated flexibility in AFTA. The first saw flexibility institutionalised at the outset, or very early on in the project, as an approach to implementing AFTA commitments. This took the form of different time schedules for liberalisation as well as exclusion lists. The second saw flexibility as the outcome of a political bargaining process that was set in motion during implementation when members could not or did not adhere to their original commitments due to domestic pressures. 6 The compromise agreed upon generally involved a downward re-negotiation of these original commitments. To offset the fallout from re-negotiating the original commitments, however, the ASEAN governments adopted new rules and procedures to govern implementation of the revised targets. This was important not only to convince other governments in the project to continue cooperation and to raise the costs of future non-compliance, they were also useful as signalling devices aimed at convincing investors that the regional project remained viable despite the re-negotiation of commitments. Despite the many setbacks and delays along the way, AFTA is virtually in place in Southeast Asia, with intra-regional tariffs on all manufactured products (except for the automobile sector in Malaysia) at the targeted 0-5 per cent level. 7 What About APEC? Although the Asia Pacific Economic Cooperation (APEC) forum, formed in 1989, was also available as a regional instrument to ensure continued access to external markets and to inflows of foreign investment, many ASEAN states were suspicious of APEC. They did not want trade and investment liberalisation forming the central agenda item in APEC from fear that the regional organisation would become another instrument through which the US would attempt to open their markets and push for domestic economic liberalisation before they were ready to do so. Instead of rejecting the trade liberalisation agenda outright, which could have jeopardised continued US egagement in the region following the end of the Cold War, these 6 This was evident in the case of agriculture and automobiles. Problems over implementation in these two sectors had emerged as Indonesia and Malaysia respectively refused to comply with their original commitments. Inter-governmental bargaining was set in motion as a result of these disputes, which although protracted, eventually allowed the problem to be addressed through a compromise. 7 Malaysia is expected to begin tariff liberalisation of this sector under AFTA disciplines from 2005. 7 governments sought to retain their domestic political autonomy within the grouping by stressing adherence to their preferred modus operandi – open regionalism. The adoption of the principle of open regionalism in APEC reflected the preferences of its Asian members, especially the Southeast Asian states (Plummer, 1998: 309). The modality of open regionalism effectively institutionalised complete domestic latitude in regional liberalisation within APEC. Although APEC had adopted the goal of regional trade and investment liberalisation in 1994, much to the disquiet of a number of its Asian members, the open regionalist mode of cooperation in APEC allowed these governments considerable discretion in the specific tariff concessions they would offer and in their liberalisation schedules (Plummer, 1998: 308). This mode of cooperation has, therefore, helped to sustain prevailing domestic distributional coalitions by allowing national governments almost full flexibility in deciding which sectors would be subject to trade liberalisation (Jayasuriya, 2000: 39). Open regionalism was, in fact, a means of ensuring that governments did not face pressure from their APEC counterparts to liberalise politically sensitive domestic sectors. Thus, all of APEC’s key programmes, on trade and investment liberalisation as well as competition policy, operate along the lines of open regionalism , involving non-binding commitments, unilateral/non-negotiated commitments and flexible implementation (Ravenhill, 2001; Urata, 1998). This procedural approach to regional cooperation implicitly constrains the US and other like-minded members from using APEC to reform domestic economies in Southeast Asia. Although APEC’s Asian members had initially seen the project as a way to maintain continued access to markets, especially in the US, permissive international conditions since APEC’s initial days reduced the external pressures on the Southeast Asian members that might have led them to be more forthcoming with regard to APEC’s liberalisation agenda. Not only were the US and other global markets still open to Asia-Pacific exports, the Uruguay Round negotiations were successfully completed by 1994 and the WTO formed, which heralded a plus for multilateral processes and the maintenance of a liberal trading order. In other words, the original external pressures that had triggered the establishment of APEC had become rather marginal by the mid-1990s. Moreover, the Southeast Asian countries also had their own regional project, AFTA, through which they attempted to gain some control over the location of investment capital. 4. The Asian Financial Crisis A different set of threats confronted the ASEAN economies from mid-1997, the most significant being the Asian financial crisis. This was a serious blow to the Southeast Asian states, whether they were directly or indirectly affected as the resultant economic disruption 8 undermined the security of political regimes and incumbent governments. From the late- 1980s, the ASEAN states had turned to the global economy (to secure markets and direct investment capital) to enhance their economic security. The financial crisis revealed, however, that the global economy and economic security are related in more complex ways than previously experienced, with the socially disruptive effects and political consequences of enmeshment with the global economy becoming evident. In response to these complex threats, members once again turned to regional cooperation as one set of instruments to help these governments deal with the crisis. This took three forms. First, the ASEAN states used AFTA to signal the region’s continued attractiveness to foreign direct investment. Thus, in addition to reform measures adopted at the national-level, whether or not in conjunction with the International Monetary Fund, the ASEAN members also advanced AFTA’s timetable for liberalisation and decided to reduce tariffs to zero in the region by 2010. These moves were aimed at convincing foreign investors that despite the turmoil of the Asian financial crisis, AFTA remained on track (Bowles, 2000: 444). The core ASEAN governments had to make sure that their respective economies remained attractive to FDI amidst the economic turmoil of the regional financial crisis, and they attempted to partly accomplish this through regional economic cooperation. As huge amounts of portfolio capital began flowing out of these economies, the imperative of maintaining direct investment became paramount, especially since domestic investments had also suffered a sharp contraction in the region (OECD, 1999: 120). AFTA became one tool in the process of maintaining foreign investor interest in the region, particularly as China still loomed as an alternative investment site. 8 The second was to support Japan’s initial call in 1997 for an Asian Monetary Fund (AMF) to provide financial support to crisis-affected economies on terms less stringent than the IMF. Although the AMF was not implemented in the end, the ASEAN economies joined their three Northeast Asian neighbours (Japan, China and South Korea) to develop the Chiang Mai Initiative (CMI), a network of bilateral swap arrangements aimed at provided members with liquidity in times of crisis. The CMI is a major achievement of the ASEAN Plus Three process that brings these two groups of countries together in what some claim is the beginnings of an East Asian regional community. Scholars of regional financial/monetary cooperation believe that the CMI could prove a valuable instrument of regional crisis management, notwithstanding the costs of doing so (Hamilton-Hart, 2003). As part of a wider 8 Although tariff barriers were employed to shield domestic industries during the financial crisis, many of these import restrictions were temporary, for a one to two year period, and were generally part of a set of short-term fiscal measures designed to reduce immediate pressure on countries’ external accounts through restricting big-ticket and luxury items (Shimizu, 2000: 83). 9 system of financial cooperation, the CMI is believed to be able to provide regional countries with some protection from the vulnerabilities associated with capital mobility, particularly through cooperation in capital account monitoring and technical assistance with financial regulation (Rajen, 2001). Other regional financial cooperation ventures that attempt to provide some insurance from future financial crises include initiatives to develop regional bond markets (Hamilton-Hart, 2003). Deeper bond markets would help mobilise Asian savings for regional borrowers and reduce Asian dependence on bank lending (mostly from extra-regional banks), a factor that has been implicated in past financial crises elsewhere (De Brouwer, 2003). The third element in regional cooperation was to address the dearth of social safety nets in the region. One of the main shortcomings revealed by the financial crisis was the lack of insurance against economic security at the individual level in most of Southeast Asia (Kahler, 2003). The region’s high growth and high savings during the 1990s masked this gap. During the crisis, individuals had to rely on family and community social support systems as the economy contracted, unemployment rose and personal insecurities rose for virtually all segments of society. Consequently, the ASEAN member states tasked the ASEAN Secretariat to draw up a programme on social safety nets, including technical assistance on designing social safety nets. As economies recovered, the impetus for this programme has waned, particularly as the member states one again focus on investment diversion as the primary threat to their economic security. 5. The Renewed Threat of Investment Diversion The adoption of the ASEAN Economic Community Project (AEC) in October 2003 reflects a renewed concern with ASEAN’s competitiveness as a site for production, particularly in the light of other competing sites, China and India in particular that are proving increasingly attractive to global capital. This project of rapid and deep integration aims for a ‘seamless’ regional integrated market where all goods, services and capital would move unimpeded across the region, regulations would be standardised or harmonised to a high degree and where regional labour movements, albeit limited to professional and skilled labour would be permitted. As with AFTA, governments in Southeast Asia regard their individual economies to be too small to compete effectively with these continental-sized economies that also offer very competitive production costs. Thus, ASEAN has opted for a macro-approach to economic security, aiming to secure broad economic growth through regional integration and the creation of what is termed a ‘seamless’ regional market. 10 Whether this project will be achieved on schedule remains to be seen. For one, ASEAN’s new and less-developed members are deeply concerned about the potential social dislocations caused by the rapid and deep integration envisaged under the AEC project. While members such as Singapore and Thailand prefer the AEC to be in place by 2015 the latest, other members prefer a later completion date of 2020. For ASEAN’s transition economies, the AEC project, while potentially offering a way to compete with China, also compounds the restructuring pains of economic transition. Vietnam and Laos are formerly socialist economies while Cambodia is attempting economic and political reconstruction after more than a decade of destruction. Even Indonesia, currently in the midst of far-reaching political change, may be unable to meet its regional integration obligations as it also undertakes painful economic reforms and experiences social transition as well. Thus, on the one hand, all the ASEAN states do feel a renewed sense of shared external danger, coming from more intense global market competition particularly for FDI, further competitive challenges posed especially by China, and the looming ASEAN-China Free Trade Area. These are all likely to act as that external push for advancing ASEAN-based liberalisation. Regional liberalisation via ASEAN then becomes one crucial means through which to position themselves vis-à-vis China. It is for this reason that many ASEAN leaders have called for ASEAN to consolidate its own economic regionalism before the ASEAN - China FTA comes into being in order to prevent ASEAN economies and their firms from being overcome by competition from China. On the other hand, domestic socio-economic tensions arising from economic transformation are increasingly evident in the region. The World Bank recently warned of a growing disconnect between regional growth and individual poverty in this region. The Bank projects that despite overall growth, the number of poor in the Philippines, Indonesia, Cambodia, and Laos could actually rise this year. The Bank is also concerned that growing inequities in the region will undermine the consensus for regional integration and increase social instability. The World Bank Vice President for East Asia and the Pacific warns of ‘a real risk of social and inter -country friction if growth is not maintained at reasonable levels, and the benefits are not shared equitably’. 9 We saw the effects of this last year in January 2003 when violence broke out in Cambodia over a rumour that Thais were claiming ownership of the historic Angkor Wat. Much of this violence was directed against Thai businesses in Cambodia. While perhaps an extreme case, 9 Address by Jemaluddin Kassum, Vice President for East Asia and the Pacific, World Bank, delivered in Singapore to the Euromoney Issuers and Investors Forum, 19 March 2003. 11 the episode also shows the level of resentment of Cambodians against what they perceive as Thai dominance of the Cambodian economy. While competing business actors as well as politicians may have manipulated the episode, as it was alleged, top-down manipulations such as these must have struck a resonant chord with the domestic population to lead to such violence. This episode reveals the dangers to regional economic integration if such an exercise only succeeds in recreating a ‘North-South’ divide within ASEAN. At the local level, there has been a rise since the 1990s of labour strikes, industrial disputes, and rural unrest especially in ASEAN’s new member states. Economic reforms have created labour dislocations, worsened by high unemployment and under-employment and weak social safety nets (Gates and Mya, 2001: 17). While some of these strikes and disputes are unjustified, the International Labour Organisation (ILO) points out that most others involve valid grouses against employers.10 The ILO is concerned about growing youth unemployment, which threatens social stability, while rural unemployment is fuelling largescale unplanned migration to cities, compounding the rising urban unemployment. In Vietnam, for instance, there is also rising rural unrest in various parts of the country, nearly all of them linked to land disputes involving local elites and allegations of corruption (Gainsborough, 2002: 698-9). It would be tempting to dismiss th is as the inevitable outcome of economic growth or to the normal grievances of those displaced by economic transition. However, Vietnamese officials themselves concede that many of these protests are well grounded, directed at shady land deals, corruption and mismanaged rural cooperatives. Even though these are clearly domestic governance issues, governments may well be pressured to delay both domestic economic reforms and regional integration by fears over the political and security consequences of socia l instability. Recently, in March 2003, Vietnam’s deputy prime minister emphasised that economic reforms would not be allowed to threaten social stability.11 Even ASEAN’s original me...