A. REGIONAL AND GLOBAL DEVELOPMENTS
The Challenge of Globalization
The advent of economic globalization has brought about profound implications for regional cooperation and national macroeconomic policy making. The levels of output and employment in individual countries are now considerably more dependent than it used to be on decisions made by consumers, business or governments in other countries – decisions on which an individual government has limited influence.
Economic globalization has been facilitated by several factors. One is the development of transportation and communication networks that physically link together different economies at different levels of development – industrialized, newly-industrializing, and developing economies. The other major factor is the rapid growth of trade. Between 1800 and 1913, international trade as a proportion of world product grew from 3 percent to 33 percent, and its share grew threefold between 1870 (beginning of industrial revolution) and 1913. The first half of the 1990s recorded an average increase in annual world output by 1.2 percent while world trade increased by 15 percent.
The huge international flow of capital in the form of direct investments, public and private loans, and shares in stock markets has further accelerated globalization, with macroeconomic implications for developing countries. Information technology has drastically reduced the cost of global capital mobility. Private capital flows to developing countries are now worth nearly US$300 billion per annum, compared to less than US$50 billion before the beginning of the 1990s.
The liberalization of global trade has facilitated the expansion of markets of East Asian exports. The global financial system has provided diversified sources of investment capital. However, while the inflow of foreign capital was an important factor in the economic achievements of the East Asian region, its sudden outflow triggered the East Asian financial crisis that began on 2 July 1997 when the Thai baht was “floated” following a massive attack by currency speculators. JP Morgan estimated that eight countries of emerging Asia received net bank loans of US$81 billion in 1996 – a year before the crisis started – only to face the abrupt withdrawal of US$ 84 billion in 1998.
Much analysis states that the financial crisis is a result of rapid financial liberalization without the commensurate strengthening of regulation and supervision of this sector. It is a case of under-regulated financial markets heavily dependent on foreign capital moving at lightning speed. It is a failure to appreciate fully how financial markets function in this era of economic globalization.
If this is true, the aim of any financial reform should be to reduce the susceptibility of developing economies to crises and to minimize the severity of their impact when they occur. At the same time, trends in economic globalization need to be matched by reforms in the global financial system, which recognize that large flow of capital and the greatly reduced cost of capital mobility generate fluctuations and shocks in economic activity. Even if developing countries have sound financial systems, they remain susceptible to currency shocks given the nature of global capital markets.
In this regard, the ASEAN Finance Ministers stressed on 30 April 1999 that “in view of the global nature of today’s financial markets, the reform of the international financial architecture must involve the participation of all countries including the emerging economies.” They adopted a common position on the reform of the international financial architecture. They called for “closer and more coordinated monitoring of short-term capital flows and a global agreement on the disclosure requirements for such flows.” The Ministers added that while the purpose of any international reform is to enhance efficiency and stability in financial markets and to promote global economic activity, such efforts must not lose sight of the overriding objective of improving living standards. Due priority must, therefore, be accorded to measures to protect the poor and most vulnerable segments of society.
ASEAN’s Response to the Financial Upheaval
At the national level, countries which are most affected by the regional financial crisis have demonstrated their commitment to the financial and economic reforms necessary to manage, if not avert, future crises and ensure stable and lasting growth. Measures to address the inadequacy in risk management, accounting standards, and commercial banking controls are being implemented. ASEAN recognizes that the pace of recovery will be determined to a large extent by further progress in economic and financial restructuring.
At the regional level, the ASEAN Heads of Government renewed their commitment to regional economic integration and to cooperation for long-term competitiveness expressed in specific measures embodied in the Hanoi Plan of Action. The HPA mandates the intensification of negotiations among ASEAN members on financial sector liberalization under the ASEAN Framework Agreement on Services. At the same time, the HPA calls for measures towards orderly capital account liberalization.
As a direct response to the impact of the financial crisis, ASEAN established the ASEAN Surveillance Process on 4 October 1998. It is aimed at preventing or mitigating future crises through the functioning of an early warning system and regional economic surveillance of macroeconomic and financial indicators. The ASP is supported by a forum of ASEAN Finance and Central Bank Deputies and its working group.
Consultations with China, Japan, and the Republic of Korea were held to exchange views on monitoring short-term capital flows and international financial reform. Financial cooperation with Japan has been intensified with the establishment of the forum of the ASEAN-Japan Finance and Central Bank Deputies Meeting, which met three times in the past year.
ASEAN has launched a set of common investment privileges to maintain the region’s competitiveness and attractiveness for foreign direct investment. The investment privileges are extended to all investors within the promotion period, which applies to manufacturing investment applications received between 1 January 1999 and 31 December 2000 and approved thereafter by the ASEAN investment agencies.
ASEAN has decided to further accelerate the implementation of AFTA. The six original signatories will advance the completion of AFTA by one year from the year 2003 to 2002. The newer signatories will maximize the number of their tariff lines subject to tariffs of 0-5% by 2003 for Vietnam and 2005 for Laos and Myanmar.
ASEAN has concluded the second package of GATS-plus commitments on trade in services granting market access and national treatment to ASEAN service providers. Most member countries have made commitments in all seven priority sectors: air transport, business services, construction, financial services, maritime transport, telecommunications and tourism. To build on these commitments, ASEAN has agreed to initiate another round of negotiations on services covering all sectors and modes of supply to be completed in 2001. To ensure that negotiations result in the progressive liberalization of the services sectors, ASEAN will explore other approaches to liberalization apart from the request and offer approach employed during the last round.
The Framework Agreement on the ASEAN Investment Area was signed on 7 October 1998. Under the AIA, ASEAN will implement coordinated investment cooperation, promotion, and facilitation programs; grant immediately national treatment to ASEAN investors, with the exceptions specified in the Temporary Exclusion List and Sensitive List. The Temporary Exclusion List will be phased out for ASEAN investors in the first six member countries and Myanmar by 2003, and in Laos and Vietnam by 2010; and for all other investors by 2020; and promote the freer flow of capital, skilled labour and professionals, and technology among the member countries.
ASEAN continued to promote the region as a single tourism destination. The ASEAN Tourism Ministers have launched the preparations for the Visit ASEAN Millennium Year Program in the year 2002. ASEAN is promoting investments in the tourism sector by removing obstacles to the free flow of tourism services in line with the ASEAN Framework Agreement on Services.
Greater regional integration is being achieved through the strengthening of infrastructure linkages, such as transport, telecommunications, and energy. Two landmark agreements – ASEAN Framework Agreement on the Facilitation of Goods in Transit and the Agreement on the Recognition of Commercial Vehicle Inspection Certificates of Goods and Public Service Vehicles Issued by ASEAN Member Countries – are expected to further enhance intra-ASEAN trade.
Regional cooperation to secure ASEAN’s long-term competitiveness is being undertaken through the development of the ASEAN Information Infrastructure, social development and human resource development, and cooperation in science and technology. Poverty alleviation programs and the development of social safety nets are being given renewed attention in addressing the social impact of the financial crisis.
B. SOME CONCLUSIONS
Some conclusions arise from the financial crisis, as is evident in the Hanoi Plan of Action.
First, economic interdependence has reached a stage at which developments in some countries have profound implications for the rest of the region. Therefore, cooperation and consultations on international economic and financial issues are as important as undertaking internal reform measures. As a result of global economic interdependence, the recovery of the East Asian economies hit by the crisis will depend significantly on the progress of creating global opportunities and establishing a level playing field in the world economy.
Second, internal reforms must be sustained. The crisis has exposed the weaknesses in the financial system both at the national and corporate levels. Reforms in the financial system are needed to improve corporate governance toward greater efficiency, transparency, and accountability. Such efforts should continue even beyond the period of financial crisis. ASEAN needs an orderly and well-sequenced approach to capital account liberalization in tandem with the degree of development of the domestic financial sector.
Third, regional integration is inevitable and essential. ASEAN has undertaken various policy decisions, programs, and activities “towards a concert of Southeast Asian nations.” ASEAN member countries should not backtrack on their commitment to greater regional integration, which is currently being promoted in several areas.
At the political level, regional integration is being promoted through the preservation of regional peace and security, increased mutual trust and confidence, and regular consultations on regional and global security issues.
Regional economic integration is being pursued in several forms: the ASEAN Free Trade Area, the ASEAN Investment Area, the ASEAN Industrial Cooperation scheme, the negotiations on trade in services, tourism, transport and communication, electronic commerce, energy, agriculture, and forestry. Joint monitoring of macroeconomic and other financial indicators is being carried out through the ASEAN Surveillance Process. ASEAN should continue to address the dysfunctions resulting from the interaction of a highly sophisticated global financial system with the less developed domestic financial systems of developing economies.
Regional responses to regional issues are being implemented by various ASEAN bodies. These are manifested in such agreements and arrangements as the Regional Haze Action Plan, the Plan of Action to Combat Transnational Crime, the Joint Declaration for a Drug-Free ASEAN, the ASEAN Network of Clearinghouses for Women in Development, the Plan of Collaboration on Health and Nutrition, and the ASEAN University Network.
The protection of the common heritage of mankind is being promoted through cooperation in environmental management, transboundary pollution, marine environment, nature conservation, water conservation, and observance of multilateral environmental agreements.
The haze episodes in late 1997 and early 1998 drew ASEAN member countries to work closely together to prevent, monitor, and mitigate transboundary haze pollution. The Haze Technical Task Force is currently implementing the Regional Haze Action Plan, which has three components – promotion of preventive measures, regional monitoring, and fire-fighting capability.
To jointly address other transnational problems, the ASEAN Ministers on Transnational Crime adopted on 23 June 1999 the ASEAN Plan of Action to Combat Transnational Crime. The Ministers have recognized the “that tackling transnational crime required concerted regional action in view of the its global dimension and pervasive nature.” The Plan provides for the establishment of a cohesive regional strategy to prevent, control, and neutralize transnational crime; foster regional cooperation at the investigative, prosecutorial, and judicial levels; promote the rehabilitation of perpetrators; enhance coordination among ASEAN bodies dealing with transnational crime; strengthen regional capacities to deal with sophisticated nature of transnational crime; and develop sub-regional and regional treaties on cooperation in criminal justice, including mutual legal assistance and extradition. The Plan of Action to Combat Transnational Crime includes a proposal to establish an ASEAN Center for Combating Transnational Crime.
The harmonization and cohesion of ASEAN positions in international forums – WTO, APEC, ARF, ASEM, ASEAN+3, the ASEAN dialogue system, other regional organizations, and the United Nations – are essential if only to take advantage of ASEAN’s collective weight in negotiations.
Finally, regional integration is being promoted by facilitating the participation of newer members in ASEAN. This involves closing the human resource gap, building public and private institutions, developing human skills, and assistance in opening up their economies to the region and to the world.
C. INSTITUTIONAL IMPLICATIONS
There is no alternative to regional cooperation and integration. Globalization compels ASEAN member countries to establish common positions on global issues and to take advantage of its collective weight. Regional cohesion facilitates and enhances ASEAN’s participation in international fora and negotiations. Regional integration is the only way for countries such as those in Southeast Asia to make their way in the world. Individual countries would find it extremely difficult to thrive in a globalized economy and in an uncertain configuration of power in the region.
ASEAN must continuously review its structures, mechanisms, and procedures to ensure that they remain responsive to the increasing demands of regional integration. The subject of governance, both in the public and private sectors, should remain on the agenda of ASEAN beyond this present period of financial crisis.
ASEAN should explore the possibility of undertaking more legally binding agreements to promote cooperation in various fields, such as economic dispute settlement, the environment, and transnational crime. As ASEAN economies integrate and as more serious transnational problems emerge more binding agreements rather than informal understandings may be needed to manage the integrated economy and the problems that transcend national boundaries.
Greater regional integration requires the mobilization of ASEAN resources for strategic studies, vital common projects, closing the human resource gap, and the integration of new member countries. This is particularly critical in the face of declining external sources of funds for technical assistance. Some appropriate forms of compensation system should be explored to mitigate the immediate impact of some regional policy decisions and schemes, particularly on the less-developed members of ASEAN.
The HPA calls for a concerted communications program to promote ASEAN’s standing in the international community. A coordinated and sustained information campaign is needed to gain political and popular support for ASEAN’s role and activities. The period of economic globalization and increased competition among individual countries and regions require ASEAN to get its messages across effectively to its constituencies in the region and beyond.