Remarks at the Conference on the Economic Prospects
and the Environment in Asia
Kuala Lumpur, 2 December 1998
I do not know whether it is a coincidence or not, but this conference is taking place between two highly important top-level gatherings in our region.
The first was, of course, the APEC Economic Leaders Meeting in this very city two weeks ago. The next will be the Sixth ASEAN Summit in Hanoi two weeks from now.
At the APEC leaders' meeting, the focus of media coverage and public discourse was on three things. The first had to do with the statements and actions of certain leaders and ministers regarding political and judicial developments in Malaysia. The second was the Early Voluntary Sectoral Liberalization initiative, on which some APEC economies had hung their hopes for the meeting's success. The third was APEC's response to the financial crisis.
The coverage that the media devoted to the comments and actions of some leaders and ministers regarding Malaysian events had little relevance to APEC's work and only served to distract people's attention from that work.
The Early Voluntary Sectoral Liberalization initiative, or EVSL, had been agreed upon at the leaders' meeting in Vancouver in November last year. This initiative would liberalize fifteen sectors well ahead of the Bogor deadlines of 2010 and 2020, with nine sectors to be freed right away, that is by 1999. The idea was to bring APEC's weight to bear on these sectors in subsequent negotiations at the World Trade Organization. In the APEC spirit, the process would be voluntary.
As it turned out, a decisive consensus could not be reached in Kuala Lumpur behind definitive commitments on all the nine fast-track sectors. Indeed, for domestic statutory reasons, Chile and Mexico had opted out of the process from the beginning. The result was an agreement among the ministers to refer the negotiations on EVSL to WTO in 1999. In the meantime, individual APEC economies can liberalize trade unilaterally in the sectors concerned on a voluntary basis.
Unfortunately, the eagerness to push EVSL tended to convey the impression that APEC's success hinged largely on EVSL. Expectations were raised too high, and were kept high even after it had become abundantly clear that agreement was not possible on all sectors for certain countries, particularly Japan. Ironically, even if consensus had been arrived at, the United States, the most assiduous and vocal proponent of EVSL, would not have been able to drop tariffs on the nine sectors, as by law the U.S. needed a certain "critical mass" in order to give trade concessions. Thus, EVSL would have gone to WTO anyway.
The inordinate attention paid to EVSL was thus misplaced, particularly in the light of the substantial progress made in the improvement of the Individual Action Plans of the APEC economies and of their Collective Action Plans. After all, the IAPs and the CAPs constitute the core of APEC's efforts. In Kuala Lumpur, improvements were made in the APEC economies' commitments, individual and collective, to bring down tariffs and other barriers to trade and investment, make trade and other economic activities easier and more efficient, and help one another to become more efficient, more capable and more competitive. Several economies pledged to subject these commitments to peer review.
In its earlier years, APEC's work concentrated almost exclusively on the liberalization and facilitation of trade and investment and on economic and technical cooperation. Finance hardly came into the picture. Even as recently as November 1997, as the financial storm was fast gathering, ASEAN had to work strenuously at the Vancouver meeting to move financial questions onto APEC's radar screen.
APEC and the Crisis
This time, with the contagion of the financial crisis spreading, APEC could not avoid dealing with the crisis. APEC, of course, is not the primary forum for addressing international financial issues. Nor have these issues been at the core of APEC's agenda. Nevertheless, at the Kuala Lumpur meeting, the leaders did review developments in the crisis, some of them positive, identify specific concerns, including its social impact, and indicate possible measures to mitigate the impact of the crisis and prevent its recurrence. The sense was expressed that these measures could be worked out in an expanded Group of 22, to which the seven leading industrial powers and fifteen developing countries currently belong.
Throughout the run-up to the leaders' meeting, ASEAN made clear its insistence that the meeting focus on the crisis and on economic and technical cooperation, which were being overshadowed by the contentious and, therefore, "sexy" subject of tariff- cutting, particularly by the full-court press mounted by some countries on behalf of EVSL.
As I told the APEC ministerial meeting, where the ASEAN Secretariat is an observer, "in these times of crisis ... hastening regional economic integration and keeping open trade and investment regimes," important as they are, "are not enough. Even in open markets, trade expansion will not take place if demand is down, if trade is not sufficiently financed, if corporations are saddled with enormous debt, if international financial flows remain volatile."
For its part, as a direct, collective response to the crisis, ASEAN has agreed to set up a surveillance mechanism to keep an eye on the movement of capital and on shifts in economic indicators. This will serve as an early warning system to alert ASEAN ministers to impending trouble in the future. ASEAN has also agreed to encourage the increased use of ASEAN currencies for intra-ASEAN trade. Bilateral payments arrangements between ASEAN countries are under negotiation. The one between Malaysia and the Philippines has been concluded.
However, ASEAN's strongest response to the financial turmoil has been to make categorically clear its abiding commitment to regional economic cooperation and to open trade and investment regimes. This is particularly important in the light of doubts expressed in some quarters about the durability of this commitment, doubts arising from the financial crisis. Soon after financial turmoil hit Southeast Asia, a surprisingly large number of people asked whether ASEAN would now retreat into protectionism. Specifically, they predicted the demise, or at least the significant slowdown, of the ASEAN Free Trade Area. For some reason this question continues to be asked, although it makes little sense and flies in the face of both logic and the facts.
The Logic and Facts of Regional Integration
Clearly, sliding back on regional economic integration and otherwise taking restrictive action on trade and investments are illogical, because they would be the surest way of eroding business confidence and deterring investments and would thus be self-defeating. What investors are looking for are large, integrated and efficient markets, not small, fragmented and inefficient ones. So, for ASEAN, retreating into protectionism would be exactly the wrong road to take. Forging ahead with regional economic integration and maintaining open trade and investment regimes would be the only sensible way to go.
In December last year, ASEAN's leaders collectively reaffirmed their strong commitment to the completion of the ASEAN Free Trade Area on schedule. Indeed, they called for the acceleration of its implementation. Various ASEAN ministerial bodies have since reiterated that declaration.
Two months ago, ASEAN's trade and industry ministers, meeting as the AFTA Council, heard one another report on what they had done or committed themselves to do in order to advance AFTA more rapidly. Most of the actions involve the faster transfer of products from various exclusion lists to the inclusion list of items covered by AFTA. They also include the identification of more products on which tariffs would be eliminated altogether by 2003 or, in some cases, as early as 1999.
As it is, about 83 percent of all tariff lines in ASEAN, some 46,000 of them, are covered by the AFTA scheme, with tariff rates for these products down to 5.37 percent and expected to fall to less than four percent by the year 2000. ASEAN is also moving on making trade easier and more efficient through, among other ways, the harmonization of tariff nomenclatures and of customs rules and procedures.
Improvements have been made in the ASEAN Industrial Cooperation scheme, under which the products of companies operating in two or more ASEAN countries enjoy full AFTA treatment -- that is, tariffs of at most five percent or none at all -- upon government approval of their applications for inclusion in AICO. The AICO program thus integrates the region further as a base for production.
ASEAN, too, is far along in its negotiations on trade in services, with the first package of commitments on seven priority sectors concluded last year and a second package ready for final approval this year. A new round of negotiations will be starting soon thereafter. The first package covers telecommunications, construction, financial services, business services, air transport, maritime transport, and tourism. The integration of ASEAN's market in services will not only foster competition and efficiency in the sectors covered but will also improve the supporting environment for trade and investment in general.
Also last month, the ministers signed a framework agreement establishing the ASEAN Investment Area. Under this agreement, ASEAN countries are to open most industrial sectors to ASEAN and non-ASEAN investments to the extent of giving national treatment to such investments. They are to take concerted action to promote investments into the region. The agreement, which is binding upon all ASEAN members, also provides for greater transparency, more liberal investment regimes, and modalities for dispute settlement.
A Better Business Environment
All this - the integration of markets in goods and services and the further liberalization of trade and investment regimes -- points to a better environment, a better climate for investing in ASEAN, for producing in ASEAN, for doing business in ASEAN.
At their summit meeting in Hanoi two weeks from now, ASEAN's leaders will be mandating the more rapid advance of this process of integration, of liberalization, of further improving the business climate.
Last year here in Kuala Lumpur, the leaders put forward their vision for ASEAN in the first two decades of the 21st century - what they called ASEAN Vision 2020. In it, they committed themselves "to moving towards closer cohesion and economic integration, narrowing the gap in the level of development among Member Countries, ensuring that the multilateral trading system remains fair and open, and achieving global competitiveness."
"We will create," they declared, "a stable, prosperous and highly competitive ASEAN Economic Region in which there is a free flow of goods, services and investments, a freer flow of capital, equitable economic development and reduced poverty and socioeconomic disparities."
The leaders resolved to implement the ASEAN Free Trade Area fully, accelerate the liberalization of trade in services, and set up the ASEAN Investment Area. They pledged to "reinforce the role of the business sector as the engine of growth, ... promote a modern and competitive small and medium enterprises (SME) sector," and "accelerate the free flow of professional and other services in the region."
The leaders resolved to bind their economies further together through infrastructure, through the ASEAN Power Grid, a Trans-ASEAN Gas Pipeline and Water Pipeline, a trans-ASEAN transportation network, multi-modal transport, an agreement on goods in transit, and integrated telecommunications networks.
They stated their determination to build a "world-class" standards and conformance system to facilitate the free flow of ASEAN trade and to develop their customs services to world standards of efficiency, professionalism and service.
They committed themselves to the development of human resources in all sectors of the economy through quality education and training. They emphasized the importance of accelerating the development of science and technology, including information technology.
A Summit of Concrete Measures
In Kuala Lumpur, the leaders decided that they would devote this year's summit in Hanoi to devising concrete measures to move ASEAN toward the realization of their vision. We can expect that those measures will be specific, realistic and possible to achieve in the next three to six years. These directives, in the economic area, will be their mandate to their governments and their commitment to their peoples. They will be a mandate and a commitment for pushing the recovery of ASEAN's economies, for strengthening market integration, for greatly improving the business climate for investment and trade, for raising the skills of ASEAN's people, and for ensuring ASEAN's competitiveness in the global marketplace.
The leaders are expected to take strong steps to hasten the AFTA process and to draw investments into ASEAN. An agreement on facilitating goods in transit is expected to be signed. The leaders are expected to approve measures to cushion the social impact of the crisis, protect the environment from the heightened threat posed by the crisis, and develop people's skills to prepare them for a fast-changing market.
On the occasion of the Hanoi summit, the leaders of ASEAN will be meeting with those of China, Japan and the Republic of Korea. The meetings with all three Northeast Asian leaders and with each of them in turn will be of great importance to the future of our region. China is a rising force in the regional and the global economy. Japan is the world's second economic power, Asia's leading economy and ASEAN's leading economic partner. ASEAN and Japan are tightening their collaboration, in substantial terms, for dealing with the effects of the financial and economic crisis. Korea is a victim of the crisis, and is cooperating with ASEAN in dealing with it.
The Hanoi summit promises to be a productive one for the near-term prospects of our economies and for their long-term potential. Already, perceptions of the region's economic prospects and potential are less pessimistic than they were before.
The eminent economist Milton Friedman recently said of Asia's situation, "The idea that one crisis discredits three decades of growth is allowing the headlines to overwhelm history."
The 1998 Arthur Andersen Report on International Investment indicates that multinational companies regard Asia excluding China and Japan, meaning essentially ASEAN plus South Korea and Taiwan, to have better prospects as an investment location than any other region of the world.
Creeping Confidence
There are three reasons for this creeping confidence.
The first is that the factors that made three decades of rapid growth possible remain in place in ASEAN - healthy budgets, high savings rates, natural resources, relatively good infrastructure, and an educated, skilled, motivated and mobile labor force.
The second is that ASEAN members are dealing forcefully with the ravages of the crisis, each in its own way - a clean-up of the banking and financial system, capital infusion, expansionary measures, belt-tightening. Some are doing it in partnership with the IMF, others on their own. Finance ministers and officials are coordinating their moves where appropriate. Already, these efforts are starting to show results. Currencies are being stabilized. Inflation is coming under control. Interest rates are going down. There are guarded forecasts of the beginnings of a recovery sometime next year.
At the same time, it has begun to sink in that, in their own self-interest, ASEAN members are serious about regional economic integration and about keeping their economies open to trade with and investment from the rest of the world.
The third is that the international community seems to be finally getting itself together in grappling with what has become a global problem. The Group of 22 has met twice. Most recently, the APEC leaders have given some directions for their ministers and officials in dealing with the problem. Japan, for one, now seems ready to give support, in terms of substantial resources and quiet leadership, for the efforts of ASEAN countries to put their economies on the road to recovery.
The task will be difficult. Many obstacles, political as well as economic, even cultural, are in the way. The recovery will take time. But now is the time for business people who are alert to opportunities to take a close look at ASEAN. ASEAN's market of 500 million people is integrating and further opening up to trade and investment. The economic reforms now taking place will make ASEAN a better place in which to do business. The ASEAN countries' underlying strengths remain in place. The leading developed countries and the international financial institutions are now geared to give support to ASEAN's efforts.
In tennis, hitting the ball early on the bounce gives a player a better chance of winning the point than meeting the ball at the peak of its rise or on the way down. Similarly, an enterprise that gets into ASEAN early on its bounce will have the better chance of scoring points, making profits and benefiting from ASEAN's economic recovery.
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