A Region with an Image Problem? Charting the next year for ASEAN

By Jonathan Hopfner

In 2002, the nations of ASEAN will face some of their greatest challenges yet — not only shoring up their recoveries from a lingering economic downturn, but proving to the international community that the pledges they made years ago to form a potent, unified market force can be put into practice.

While the moribund economies of the region’s two largest export markets, the United States and Japan, has forced most Southeast Asian countries to downgrade their growth forecasts for the year, the relative political stability that they are currently enjoying presents a welcome chance for economic consolidation and development. Despite the concerns of some international observers, Cambodia’s recent local elections cemented strongman Hun Sen’s grip on power and were largely free of the violence that marred earlier polls. In Myanmar, the military junta’s tentative efforts to engage in dialogue with Aung San Suu Kyi’s National League for Democracy has led many to surmise that the country stands on the cusp of positive change. Thailand, under Prime Minister Thaksin Shinawatra, is increasingly moving in the direction of Malaysia and Singapore, with a series of mergers effectively eliminating political opposition forces and paving the way for de facto one-party rule. The Philippines and Indonesia, despite occasional street-level outbursts of anti-American sentiment, have yet to undergo the mass radicalization feared by more pessimistic Southeast Asia watchers. Their respective leaders continue to command the support of the people and — crucially — the armed forces.

The region may have yet to produce a thriving democracy in the Western sense, and in some countries — Thailand, for example — the current trend is to move toward a more authoritarian style of government. But recent economic figures would seem to suggest that, in the eyes of many investors, a heavy-handed — and therefore stable -- leadership may not be a bad thing. Despite concerns about Thaksin’s business dealings and the gradual chipping away of press freedom, the Stock Exchange of Thailand was has been one of the darlings of Asia over the last year, soaring by over 20 percent, while investor standbys like Singapore have seen significant drops. A Merrill Lynch analyst recently called Thailand and Indonesia two of the "best performers of the region," adding that "valuations in these markets have got very, very cheap."

Other forecasters seem to share this optimism. In a January Economist poll showing that most predicted growth rates of about two to three percent throughout the ASEAN area in 2002 -- even for Malaysia and Singapore, which, heavily dependent on technological exports, saw their respective GDPs remain unchanged and plummet in 2001. The IMF is even more hopeful, projecting growth rates of four to six percent.

Most of these estimates, of course, are based on the assumption that a recovery will take place later this year in the US, and, to a lesser extent, Japan, where a weak yen has threatened ASEAN exports. ASEAN nations are also expected to capitalize on the gradual opening of China’s billion-strong market, with the recent agreement to establish a China-ASEAN free trade area over the next 10 years further testifying to the strong economic ties between the two sides.

Why, then, despite the generally upbeat views of market watchers, are recent developments within ASEAN being largely ignored? Compared to the fanfare that greeted China’s entry into the WTO last year, the emergence of the ASEAN Free Trade Area (AFTA) has been greeted with a resounding silence by the media and investors alike. As of December 31, 2001, the "older" ASEAN members — Brunei, Thailand, Malaysia, Singapore, Indonesia and the Philippines — were slated to lower tariffs for products moving among their borders to 0-5%, creating a significant trading bloc that local leaders hope will be able to compete with China as an investment destination. But analysts like Tobias Nischalke of the World Markets Research Center have judged the introduction of AFTA not as a "giant step in regional cooperation, but . . . a modest restart."

Much of the indifference towards ASEAN’s latest move toward integration is simply the result of lackluster marketing. ASEAN countries have shown a tendency recently to court their Asian neighbours at the expense of the world at large. Thai Prime Minister Thaksin Shinawatra, for example, has traveled to India on multiple occasions in recent months to seal satellite and IT deals, but his brief trip to Washington last year failed to convince US investors that Thailand remained committed to opening its markets. Singapore, meanwhile, has been busy courting a free trade agreement with Japan, inked on Japanese Prime Minister Junichiro Koizumi’s whirlwind ASEAN tour in mid-January. And all ASEAN leaders’ eyes, it seems, are on China, where their exports have quadrupled over the past seven years.

In addition, many global investors will wait on the sidelines until AFTA proves over the the next few months that it exists as a genuine trading bloc and not only on paper. A host of lingering disputes among members continue to undermine any beliefs that ASEAN is capable of functioning as a coherent unit. Despite Thailand’s recent gestures of rapprochement toward Myanmar’s ruling military junta, the drug trade and disputed border areas remain sources of tension between the two nations, and often flare into small-scale armed conflicts. Cambodia, Laos and Vietnam also frequently find themselves at odds with Thailand, particularly over the issue of exile groups using Thai soil as a base to launch attacks against the governments of all three countries.

But perhaps no issue better characterizes inter-ASEAN discord than Malaysia’s stubborn refusal to liberalize its domestic auto market as stipulated in the AFTA agreement. While the accord has been in effect to varying degrees for years, Kuala Lumpur has yet to indicate when it will open its gates to automobiles manufactured in Thailand and Indonesia, the major production bases for the region, effectively reneging on the free trade pact. The Malaysian government’s hesitance to hand out — or even discuss -- compensation for the losses other nations incur from its auto tariffs have deeply angered political and corporate forces in Jakarta and Bangkok. Veerawat Karnchanadul, the outspoken senior executive vice-president of Thailand’s Charoen Pokphand Group, went so far as to call the government’s faith in AFTA "stupid," adding, "for Thailand, if AFTA fails, we shouldn't think too much. What's important is that we move forward the best we can.''

Singapore has also indicated, to the displeasure of other ASEAN members, that it’s not prepared to put all of its eggs in the AFTA basket. The city-state recently sealed separate free trade agreements with New Zealand and Japan, and is pushing through similar pacts with the United States, Canada, Iceland, Australia, Norway, Switzerland and Liechtenstein. Although leader Goh Chok Tong pledged last year on a trip to Thailand that Singapore’s bilateral accords would not "open the back door for non-ASEAN members to benefit from AFTA's low tariffs," many of his regional counterparts are skeptical.

Other problems detracting from ASEAN’s appeal are more fundamental — non-performing loans remain a massive burden on most countries and much progress needs to be made in the realm of privatization. Thailand, for example, suffered a major blow in February when the National Telecommunications Commission, established to supervise the selling off of state-backed telecom monopolies, was disbanded due to concerns of corruption in the process of selecting its members.

Yet, while 2002 presents challenges for the region, like any new year, it also represents significant opportunities. If the governments of ASEAN can keep their free trade agreement on track and make further advances in liberalization and governance, investors will stand up and take notice.