Teofilo Daquila teaches at the National University of Singapore in the Southeast Asian Studies Programme. An expert on ASEAN economic affairs, he is a visiting professor at Chulalongkorn University. He is a member of the Council of Advisers of the Yuchengco Center for East Asia, and is a research associate at Australian National University.

Over the past four decades, the ASEAN region has transformed itself from an area with enormous economic and political problems to one blessed with relative peace and prosperity. The member countries of the Association of Southeast Asian Nations (ASEAN) are Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos and Myanmar. This paper argues that the economic strength of the region relies heavily on the stability of the individual economies and the region as a whole. Further, in light of the limited influence of regional schemes upon national economic policies prior to 1992, national strategies have played a significant role in ASEAN’s economic performance. However, following the signing of the Singapore Declaration in 1992, intra-ASEAN economic cooperation has moved to a higher level. This change is the result of the institutionalization of the ASEAN summit meetings once every three years, the holding of informal summits, and the adoption of trade and investment liberalization measures towards the achievement of the ASEAN Free Trade Area (AFTA).

This article provides a retrospective and prospective assessment of ASEAN’s economic performance, and is divided into three main sections. The first section presents an overview of ASEAN’s economic performance, by focusing on the economic trends and patterns during the past four decades and their major determinants: trade expansion, massive investment inflows, and political and regional stability. The second section assesses the national, regional and multilateral initiatives and strategies that ASEAN regional economies have followed, particularly in the areas of trade and investment. The final section examines the future of ASEAN. I argue that as regional economic cooperation moves towards further global economic integration, both regional and multilateral initiatives will take on a far greater significance in shaping ASEAN’s economic performance.

WHAT HAS BEEN ACHIEVED?

Economic Boom

The ASEAN region grew strongly in the 1960s with an average growth rate of about 7% per annum. This buoyant economic performance continued in the 1970s with about 8% growth per annum as regional economies benefited from the massive inflows of foreign exchange receipts, due to the sharp increase in the world prices of primary commodities. Growth during the 1970s would have been even higher if not for the oil shocks that negatively impacted the economies of oil importers such as Singapore, Thailand, and the Philippines.

During the 1980s, the region’s growth slowed to an average rate of 6%. Regional economies experienced recessionary conditions due to the US’s high interest rate policy, the consequent debt crisis in the region, the recession in ASEAN’s major trading and investment partners, and the fall in the world prices of primary commodities. However, the 1980s also saw some positive developments with the significant influx of export-oriented foreign direct investment (FDI) from Japan and then from the new industrialized economies like Taiwan, South Korea and Hong Kong.

The recovery from 1991 to 1996 was followed by an economic contraction in 1997-98, due to the July 1997 economic crisis that began in Thailand and spread to other parts of the region. The crisis led to the weakening of regional currencies, low exports and imports, and massive capital outflows. The region experienced its largest reversal of net private capital flows from a net inflow of US$97 billion in 1996 to a net outflow of US$12 billion in 1997. The crisis also resulted in severe output contraction, massive unemployment (particularly in the manufacturing and financial sectors), closures and mergers of banks and finance companies, and a drastic reduction of people’s wealth due to losses in the financial markets. In 1999-2000, the region showed some signs of economic recovery but was interrupted by poor export performance and low FDI inflows. The September 11 incident further worsened conditions in the region, by causing economic slowdowns in ASEAN’s major trading and investment partners – the US, Japan and the EU.

Over the past four decades, the region has experienced a significant increase in its per capita income. However, there is considerable variation in the per capita incomes between regional economies, which reflects the disparities in economic development and living standards within ASEAN. The region has also experienced a rapid structural change in output, which is evidenced by the decline of agriculture coupled with the rise of the non-agricultural sector (manufacturing and services), and by the rapid expansion of exports and shift away from primary products into manufactured goods. There have been significant inflows of FDI, particularly in exportoriented industries. Moreover, the region has achieved a higher level of social development, as evidenced by higher education levels, lower infant mortality rates, longer life expectancies, reduced fertility rates, and better access to health care.

ASEAN is the world’s third largest trading group after NAFTA and the EU. However, unlike the latter two, ASEAN has only a limited degree of intra-regional trade. Levels have hovered between 20-25% of the region’s global trade during the 1990s. A significant portion of this trade comes from the bilateral trade ties between Singapore and Malaysia and between Singapore and Indonesia. Without Singapore, intraregional trade would range between 2 to 5% of ASEAN’s global trade. The low intra-ASEAN regional trade dependence stems from various factors including differences in the tariff structure of ASEAN economies, the Western orientation of ASEAN’s trade, and the ineffectiveness of support for various regional preferential trading schemes. The launching of the Common Effective Preferential Tariff (CEPT) scheme in 1993 has led to a significant increase in absolute terms, but intra-regional trade has remained at around 25% of ASEAN’s global trade.

Massive Investment Inflows

The ASEAN region has been a major recipient of FDI (about 2 to 5% of global investment in the 1990s), following the EU (40 to 50%) and NAFTA (20 to 25%). While intraregional investments in the EU and NAFTA have been historically high, that in ASEAN has been very low. The bulk of ASEAN’s FDI has come from Japan, the United States and the EU, which has accounted for about 50-60% of FDI in ASEAN during the 1990s.

The ASEAN region has received three types of FDI since the 1950s. The first type is in natural resources, given the region’s abundance of minerals and fuel, particularly oil and gas. The second type has enabled foreign investors to access the ASEAN regional market, by setting up industries to produce cheap consumer goods for the domestic ASEAN market. The third type is trade-oriented FDI in which foreign investors used the ASEAN region as a production and export base of manufactured goods for intra-regional and extra- regional distribution.

The attractiveness of the ASEAN region as an investment destination is based on its strategic geographical position, ownership advantages, and returns to investment. Geographical advantages include an abundance of raw materials, low production costs, generous investment incentives, a skilled and hardworking labor force, improved infrastructure, and a politically stable environment. In terms of foreign ownership, investors often have stronger control over their products, patents, technologies, production processes, marketing and management techniques than in their home countries. Foreign investors have also benefited from high rates of return on their equity investments in the region.

The ASEAN region is not only a recipient of FDI, but is itself an investor. Relatively tight labor conditions and the rising levels of wealth in the 1990s prompted Singaporean and Malaysian businessmen to venture beyond their borders to the rest of ASEAN and countries like China and India for new investment opportunities, especially as savings rates rise with the increasing per capita income of the ASEAN population. Prior to the July 1997 economic crisis, the ASEAN region had also received an enormous amount of foreign portfolio investments due to foreign investors’ confidence in the region’s rapid economic growth.

Regional Stability

Regional stability is another determinant of ASEAN’s economic performance. Although it is true that there have been some instability in the ASEAN region over the last 40 years,1 overall there has been broad regional stability and peace. The formation of ASEAN in 1967 – along with strong leadership by various heads of government within ASEAN – promoted regional security and political cooperation. The region’s impressive economic performance and prosperity gave ASEAN countries a common interest in working together towards promoting and maintaining regional stability.

Furthermore, the ASEAN region has consistently followed what is known as the “ASEAN way” of doing things, that is, by consensus. The display of solidarity and the resulting regional stability enhance the group’s dealings with other countries by encouraging foreign investment. A survey by the Japanese External Trade Organization revealed that the relatively stable political climate in the ASEAN region was the most important determinant of Japanese direct investment in the region.

INITIATIVES AND STRATEGIES

National Level

The ASEAN regional economies have implemented various national strategies to promote economic growth and development. Until the 1997 crisis, regional economies had a stable macroeconomic environment given their fiscal, monetary and exchange rate policies. In terms of fiscal policy, the ASEAN governments exercised greater efforts in balancing their budgets. Regarding monetary policy, the ASEAN central banks were successful in reducing inflation from the high levels in the 1970s to lower levels since the 1980s. Except for Singapore, the ASEAN economies have relied on the use of conventional instruments like open market purchases, sales of government securities, changes in the discount rate and in the reserve requirements. With respect to exchange rate policy, the ASEAN central banks have relied on the devaluation of their domestic currencies vis-à-vis foreign currencies in order to improve the competitiveness of their export commodities. Prior to the 1997 crisis, the Singapore dollar, Malaysian ringgit and the Thai baht were the more stable currencies in Southeast Asia while the Indonesian rupiah and the Philippines peso experienced relatively greater fluctuations. The recent crisis, however, resulted in a significant weakening of the regional domestic currencies – in particular, the Thai baht, the Indonesian rupiah, and the Philippines peso.

In response to the 1997 crisis, the ASEAN governments implemented different policy measures. Thailand and Indonesia adopted restrictive policies; as a result of IMF loan conditions, they closed and merged banks and financial companies. Malaysia, on the other hand, implemented expansionary policies and capital controls. Singapore relied more on supply-side policy measures like wage restraints, as well as worker training and re-training programs. The differences in their policies were due to national variations in (i) the extent and nature of the crisis (e.g. Malaysia’s relatively smaller foreign debt compared to Indonesia’s huge foreign debt), (ii) the pervasiveness and severity of the impact of the crisis (e.g. Singapore’s banking and financial sector being less affected than that in Thailand and Indonesia), (iii) the governments’ priorities, in terms of achieving either more internal balance (less severe impact on unemployment) or more external balance (trade surplus) or both, and (iv) the governments’ willingness to subscribe to the international financial order and its conditions (Thailand and Indonesia following the IMF conditions, versus Malaysia’s adoption of an alternative, “pragmatic” approach).2

The ASEAN regional economies have also switched from import-substitution industrialization (ISI) to exportoriented industrialization (EOI). ISI policy, adopted in the 1950s, refers to a process of restricting imports that compete with domestic products such as simple consumer goods, and the subsidization of domestic industries. The Philippines had the longest-standing ISI policy, which led to the development of an inward-looking manufacturing sector and an urban-biased development policy. In contrast, Singapore had the shortest ISI policy experience due to the small size of the domestic market and limited economies of scale.

During the late 1960s, Singapore switched to EOI which relied heavily on FDI, particularly in labor-intensive industries. Extensive government intervention in the domestic economy took the forms of building infrastructure and establishing wholly-owned or partly-owned industrial and commercial ventures. Since 1979, however, Singapore’s EOI policy has shifted away from labor-intensive manufacturing towards more skill-oriented, high-technology and high-valueadded industries. The shift in emphasis stemmed from tight labor market conditions and rising domestic costs of production which hurt the competitiveness of domestically-produced goods.

During the 1970s and 1980s, other ASEAN economies relied less on ISI and began to follow Singapore’s EOI policy with FDI. This policy continues to be implemented. Some factors which accounted for this change in industrialization policy include the limited success of ISI, declining and fluctuating prices of primary commodities, and the consequent pursuit of export diversification. The need to diversify is reflected in the changing structure of trade away from primary goods toward manufactured goods on the export side, and the rising proportion of manufactured goods on the import side.

ASEAN economies have embraced free trade, but with varying degrees of openness as reflected by the differences in their tariff structures, extent of protectionism and trade liberalization measures. Being a highly open export-oriented economy, Singapore has the lowest tariffs. Thailand has the highest tariffs, due to its ISI policy which protects domestic manufacturing industries. Indonesia, Malaysia and the Philippines have tariff structures in between those of Singapore and Thailand. More open economies like Singapore have preferred a faster pace of tariff cuts than more closed economies like Indonesia and Thailand. However, since most ASEAN countries rely on tariffs as a major source of government revenues, tariff reductions have proceeded slowly.

ASEAN economies are open to FDI to various degrees. With no natural resources and a limited domestic market, Singapore is the most reliant upon FDI. The Philippines, Indonesia, Malaysia and Thailand have natural resources and much larger domestic markets, and therefore could afford to be less dependent upon FDI. Indonesia and Malaysia are oil and gas producers and have benefited substantially from the oil price hikes in the 1970s. However, declining oil prices combined with the fact that oil is a non-renewable resource have convinced both Indonesia and Malaysia to diversify their economies and increase their dependence on FDI. Over the years, ASEAN governments have imitated Singapore by relaxing regulations on investments and foreign equity ownership for export firms. Most ASEAN governments now allow 100% foreign ownership as long as the business produces mainly for export.

Lastly, ASEAN governments have liberalized their banking and financial sectors. The financial structure has strengthened as more banks and other financial institutions have been set up, and as more diverse financial instruments (such as interest-bearing instruments) were created. Singapore and Malaysia had fairly well-developed financial systems in the 1960s and 1970s, while financial liberalization did not occur in Indonesia, Thailand, and the Philippines until the 1980s. Interest rate reforms, the entry of foreign banks, and modifications of foreign equity rules have increased trade and investment between ASEAN economies and their major trading partners.

Intra-Regional Level

The expansion of ASEAN membership from five nations in 1967 to ten members in 1999 – with the addition of Brunei (1984), Vietnam (1995), Laos (1997), Myanmar (1997), and Cambodia (1999) – combined with rising per capita income increase the opportunities for intra-regional trade and investment. Several intra-regional trade liberalization measures aimed at reducing or eliminating tariffs and other trade barriers are in effect: the Preferential Trading Arrangements (PTA), the Common Effective Preferential Tariff (CEPT), and the ASEAN Free Trade Area (AFTA). Recent figures indicate that intra-ASEAN trade has increased to around 25% of total ASEAN trade since CEPT was adopted in 1993. During its 15th meeting, the AFTA Council announced that each of the original six members (Indonesia, Malaysia, the Philippines, Singapore and Thailand) had reduced tariffs to 0-5% on at least 90% of its tariff lines in the inclusion list. The newer ASEAN members are given a longer period to achieve this reduction in light of their current level of economic development. Each member of ASEAN has a 10-year time frame of tariff reduction program under AFTA. Vietnam is targeted to fully implement the AFTA in 2006, while the target year for Laos and Myanmar is 2008, and 2010 for Cambodia.

The ASEAN region has also undertaken measures to liberalize trade in services. As the region grows and per capita income increases, the ASEAN people demands more goods and services. More services and institutions have been created to meet this rising demand, which is reflected in the growing importance of the services sector, particularly in financial services, transportation and communications. The ASEAN Framework Agreement on Services was signed by the ASEAN Trade and Industry ministers in December 1995 to liberalize trade in services in seven sectors: air transport, business services, construction, financial services, maritime transport, telecommunications and tourism. During the 4th ASEAN informal summit meeting in Singapore in November 2000, the leaders signed the e-ASEAN Framework Agreement which provides for the liberalization of intraregional trade in information and communications technology (ICT) products and services by eliminating duties and non-tariff barriers in three stages: 2003, 2004 and 2005 for the original members. For Cambodia, Laos, Myanmar and Vietnam, the three stages will take effect in 2008, 2009 and 2010.

Intra-regional investment liberalization measures have also been adopted. First is the ASEAN Investment Area (AIA) scheme which will encourage greater private sector participation in welcoming foreign investors. The second initiative is known as the ASEAN Industrial Cooperation (AICO) scheme which allows joint ventures between ASEAN nationals and foreign investors whose products or services will be given tariff preferences. Third is a type of Growth Triangle sub-regional cooperation like the Singapore-Johor (Malaysia)- Riau (Indonesia) growth triangle, popularly known as SIJORI. This scheme exemplifies the positive synergy of factor endowments and comparative advantage, whereby Singapore provides excellent infrastructure and skilled labor, while Johor and Riau provide land and lower-cost labor. The success of the SIJORI growth triangle has led to its expansion to include other parts of Indonesia and Malaysia, which is an indication of its positive spillover effects. This concept has been replicated in other parts of the ASEAN region including (i) the East ASEAN Growth Area (EAGA) scheme which involves Brunei, Indonesia, Malaysia and the southern Philippines, and (ii) the inter-state areas along the West-East Corridor (WEC) of the Mekong Basin in Vietnam, Laos, Cambodia and Northeastern Thailand under the ASEAN Mekong Basin Development Cooperation scheme.

The recent economic crisis have provided lessons for ASEAN in terms of the need to strengthen financial cooperation. Some of the proposed strategies include the use of domestic currencies in trade settlements and the setting up of the Asian Monetary Fund by Japan. The proposed establishment of AMF, to be capitalized at US$100 billion, aims to provide immediate financial assistance to crisis-hit countries in the future. However, the United States dismissed the proposal, fearing that it would diminish the effectiveness of the IMF and its policies in Asia, and the AMF proposal was rejected in the fifth APEC meeting in Manila. However, PM Mahathir brought up the AMF idea again during the World Economic Forum in Singapore in 1999 and a modified version of the AMF proposal was discussed in the informal summit meeting of the ASEAN Finance Ministers in Manila in 1999. More recently, a network of bilateral swap arrangements among ASEAN countries, China, Japan and the Republic of Korea has been negotiated to assist ASEAN members in times of temporary balance-of-payments crises. Following the agreement on the Chiang Mai Initiatives (CMI), ASEAN agreed to enlarge the size of the ASEAN Swap Agreement to US$1 billion effective in November 2000. Substantial agreements on the bilateral swap arrangements have been reached between Korea and Japan, Malaysia and Japan, and Thailand and Japan.

Extra-Regional Level

ASEAN’s involvement in extra-regional forums like Asia Pacific Economic Cooperation Forum (APEC) and Asia-Europe Summit Meeting (ASEM) further expands its economic horizons. In APEC, ASEAN has been considered as the cornerstone for an open-regionalism strategy paving the way for the goals of Bogor Declaration (to free trade and investments in the region by 2010 for developed countries and 2020 for developing countries). There are also new linkages between ASEAN and its third major trading and investment partner, the European Union. The first meeting of ASEM, a trans-atlantic and trans-pacific regional forum,3 brought together leaders of the ASEAN, EU-15, China, Japan and Korea in its first meeting held in March 1996. This was an important step towards a more meaningful and enhanced relationship between Asia and Europe in establishing political dialogue, economic cooperation, and social and cultural development. There are signs that ASEAN is taking the initiative in establishing these extra-regional connections. A recent ASEAN trade and investment mission to Europe was aimed at attracting more European investments and gaining greater access to European markets for ASEAN products.

ASEAN’s link to the global economy is also strengthened through multilateral organizations like the World Trade Organization (WTO). The goals of the WTO are as follows: (a) that member countries implement tariff reductions in industrial products, (b) that quotas on imports of textile, apparel, and agricultural products are replaced with less restrictive tariffs, (c) that the Multi-Fibre Agreement will be dismantled, (d) that trade in textiles and clothing will be integrated into normal GATT rules, and (e) that dispute settlement mechanisms be strengthened. The WTO’s trade liberalization measures encourage the ASEAN region to compete on a less protectionist basis with other countries in agricultural and textile products.

WHAT LIES AHEAD FOR ASEAN?

Following the 1997-98 economic crisis and September 11, ASEAN’s future depends on the implementation of various strategies and initiatives discussed earlier at the national, regional and multilateral levels. The strength and stability of the ASEAN economies individually and the region as a whole are dependent on the national strategies to a large extent, and to regional and multilateral strategies to a lesser extent. However, in the long-run, as ASEAN further integrates with the Asia-Pacific region through APEC, with Europe through ASEM and with the global economy through the WTO, ASEAN will increasingly rely on both regional and multilateral initiatives.

National governments should maintain a stable macroeconomic environment through prudent fiscal, monetary and exchange rate policies; the continuation of an export-oriented industrialization strategy centered around the attraction of FDI; and to further reform and develop the banking and financial sectors. From the regional perspective, ASEAN needs to implement trade, investment and financial liberalization measures to achieve a higher degree of integration. On the global level, ASEAN needs to strengthen its linkages with Japan and the US through APEC, and with the EU through ASEM. It also needs to actively participate in future WTO negotiations, as well as in the future re-designing of the global financial architecture.

While the above strategies are desirable, ASEAN’s future would also depend on whether economic or political disturbances take place at national, regional, or international levels. Due to their small size, ASEAN economies will continue to be vulnerable to various forms of external influences like hikes in oil prices and interest rates, liquidity crunches, capital account crisis, and poor export performance.

Another issue faced by ASEAN as a regional institution is its potential irrelevance. Delay in the implementation of some intra-regional trade and investment liberalization measures has affected the move towards a more closely knit regional economic grouping. Malaysia, for instance, decided to delay tariff cuts on automotive parts until 2005, which resulted in vociferous opposition by Thailand. There are genuine concerns that the implementation of the regional free trade agreement may be delayed. Some countries have instead engaged in the formation and negotiations of bilateral free trade agreements. According to the Straits Times, Senior Minister Lee Kuan Yew stated that “it is in the interest of all Asian states to conclude bilateral trade deals because multilateral talks at the WTO are moving slowly.”4 In fact, Singapore has already signed a bilateral free trade agreement with New Zealand which came into effect in January 2001, with Japan in December 2001, and is completing similar deals with Australia, Mexico and the United States. This has been criticized by Malaysian and Indonesian leaders who have argued that Singapore’s bilateral trade talks would undermine ASEAN unity. In response to their criticism, Prime Minister Goh Chok Tong said that “Singapore’s FTAs are open to any country that is willing to undertake the necessary obligations and [he] hoped that other ASEAN countries will join Singapore’s FTAs when they are ready, or forge their own FTAs with their trading partners.”5 Presumably, the trend towards bilateralism will continue, unless the ASEAN members fully support and commit themselves towards implementing their trade and investment liberalization measures and unless the multilateral trade negotiations proceed at a faster pace. However, the upcoming mega free-trade blocs in Europe and the Americas should compel ASEAN to strengthen its own grouping and even expand it to include other Asian countries for a larger AFTA.

Still another issue that ASEAN has to grapple with is the emergence of new market economies like China and India. This may provide both opportunities and threats to the ASEAN regional economies. On the negative front, there is the potential of trade and investment diversion. For example, while ASEAN received the lion’s share of FDI in the Asian region during the 1990s, the emergence of China as an increasingly important economy and its entry into the WTO has attracted about 70% of FDI into China, with just 30% flowing into the ASEAN countries. This is particularly true in labor-intensive industries. On the positive side, with rising income per capita, China provides a bigger market for ASEAN exports of goods and services. Thus, both ASEAN and China should work out ways to strengthen their economic relations for their mutual benefit particularly in the areas of education, tourism and information technology.

To a large extent, ASEAN’s future economic performance will continue to be affected by national strategies and developments taking place within the respective economies. In the long run, however, both regional and global strategies will exert significant influence on the ASEAN region.

Endnotes

1 These include the Vietnam war from 1962-73, the Vietnamese invasion of Cambodia in 1978, the confrontation between Indonesia, Malaysia and Singapore from 1963-65, the territorial disputes between Malaysia and the Philippines and between Singapore and Malaysia, communist insurgencies and kidnappings in various parts of ASEAN. There were also political instabilities which led to the overthrow of Philippine presidents Marcos in 1986 and Estrada in 2000 and Indonesia’s president Suharto in 1998.

2 Following the onset of the crisis, Malaysia experienced loss of investors’ confidence, significant capital outflows, depletion of foreign exchange reserves, severe impact on the stock markets, and marked depreciations of the ringgit. With Anwar Ibrahim as finance minister, Malaysia followed IMFlike measures including tight monetary and fiscal policies (a combination of high interest rate and reduced government spending policy) together with financial reforms. Anwar’s policies were consistent with those implemented in Indonesia and Thailand, the worst hit countries. However, with the sacking of Anwar Ibrahim in August 1998, Prime Minister Mahathir rejected the IMF-like policies arguing that IMF’s policies would further aggravate the domestic economic conditions. Instead, as Malaysia’s finance manager, PM Mahathir was able to rescue the Malaysian economy through a combination of an easier fiscal and monetary policies (ie. higher government spending and lower interest rates) and imposition of currency and capital controls. Moreover, statutory reserve requirements were reduced from 14.5% in March 1989 to 4% in September 1998. Mahathir’s policies proved to be effective as the Malaysian economy staged an economic recovery and capital outflows were contained. The former IMF managing director Michel Camdessus noted Malaysia’s ability to recover from the crisis through its adoption of a “soft system of control”. Business Times, 18 May 1999, p. 9.

3 Various considerations led to the establishment of ASEM. On the EU side, the Europeans in the 1990s noticed the impressive economic performance of the East Asian economies which led to the European Commission’s publication entitled ‘Towards a New Asia Strategy’. The Europeans were also awakened by the launching of APEC in 1989 and the holding of the first APEC summit in Seattle in 1993. On the Asian side, ASEM will provide opportunities for Asians to encourage Europeans to invest more in the region and to gain continued and better access for Asian products. See Yeo Lay Hwee, ASEM: Beyond Economics, Panorama, April 1999, p. 5-6.

4 See Chua Lee Hong, “FTAs: a way to reach out to the world”, The Straits Times, 31 Jan 2001, p. 9.

5 See Chua Lee Hong, “ASEAN must deepen economic ties with partners”, The Straits Times, 9 May 2001, p. A7.