Keynote address at the Joint Seminar on ASEAN Investment Promotion organized by the ASEAN Promotion Centre and the ASEAN Secretariat, Tokyo, 16 June 1998
To develop and present ASEAN as a single investment destination at a time of regional financial crisis is, I believe, an act of the highest statesmanship, an act of the sharpest responsiveness to the needs of the times. While the nature and cause of the financial crisis continue to be debated, it has made one thing clear, and that is the extent to which the economies of East Asia have become integrated. If the problem is regional in scale, the solution must be regional in scope. The opportunities, too, must be viewed from a regional perspective.
The fact is that long-term investments are the only enduring instrument for the countries of Southeast Asia to extricate themselves from their current economic difficulties. This is why I say that this seminar on long-term investment in the ASEAN region is so timely, even if, from a superficial point of view, some may look at the present crisis to be a bad time in which to talk investments.
ASEAN has long recognized that, in today's world, regional economic integration is the only way for the countries of Southeast Asia to compete for those investments. ASEAN knows that the economies of scale -- and the opportunities for lower costs and higher profits -- offered by regional economic integration are a potent attraction for long-term investments. This is why, even in the midst of the regional financial troubles, ASEAN has re-affirmed, at the highest level, its commitment to regional economic integration, its pledge to accomplish the ASEAN Free Trade Area, or AFTA, on schedule.
Japanese corporations have responded to such inducements for investment. In Fiscal Year 1994, the year after AFTA was launched, ASEAN received 12.4 percent of Japan's total foreign direct investments of 4.28 trillion yen. In Fiscal Year 1997, ASEAN accounted for 14.7 percent of Japan's much larger FDI flows of 6.62 trillion yen. Viewed from another angle, ASEAN received 65 percent of Japanese investments in Asia in Fiscal year 1997.
Surveys by JETRO and the Export-Import Bank of Japan show a direct link between the rise of Japanese investments in ASEAN and the attractions of regional economic integration, with Japanese firms building their strategies around regional arrangements and the establishment of regional integrated production networks. The result is that, for Japanese firms in ASEAN, returns on investment have been one of the highest in the world. Twenty-five percent rates of return on investments in the region have been common.
Economic Integration
ASEAN knows this linkage between regional economic integration and long-term investments. It knows the vital importance of such investments in the struggle for economic recovery. Accordingly, the ASEAN response to the financial crisis has been to renew its commitment to regional economic integration and to openness to the global economy. ASEAN's leaders affirmed this commitment at their informal summit in Kuala Lumpur last December. ASEAN ministers have repeatedly re-affirmed it since then.
Specifically, ASEAN remains committed to the completion of AFTA on schedule -- by 2003 for its original six signatories, with the vast majority of products subject to AFTA treatment by the year 2000, or less than two years from now. Currently, 45,715 tariff lines, or 82.7 percent of all tariff lines of the nine ASEAN members, are subject to tariff reductions to 0-5 percent and to the elimination of quantitative restrictions and other non-tariff barriers.
Aside from making intra-ASEAN trade more free, the ASEAN countries are also making it easier. Work is being vigorously undertaken, for example, in the harmonization of tariff nomenclatures, customs valuation, customs procedures and accounting standards.
Freer and easier trade within ASEAN has shown results that speak for themselves. From 1993, the first year of AFTA's implementation, to 1996, intra-ASEAN exports grew nearly 100 percent from US$43.26 billion to US$80 billion. Intra-ASEAN trade increased 28.3 percent a year during that period, while total ASEAN exports rose only 18.8 percent a year. As a percentage of ASEAN's trade, trade among ASEAN countries expanded from 21 percent in 1993 to 25 percent in 1996.
To supplement AFTA and contribute to its acceleration, ASEAN has devised the ASEAN Industrial Cooperation scheme, or AICO, which extends full AFTA treatment to complementary products of companies located in at least two ASEAN countries. The majority of companies that have applied for AICO approval happen to be Japanese, many of them involved in automotive parts or consumer electronics. This fact speaks highly of the alertness and flexibility of Japanese firms. Several applications have already been approved.
AFTA will in itself create a market of half a billion people, surely a strong attraction to investments. However, ASEAN goes beyond creating a larger market. It is working on measures directly to encourage investment in ASEAN as a single destination of capital. In a few months, I expect ASEAN member-states to sign an agreement leading to the establishment of an ASEAN Investment Area by 2010. In this area, investment opportunities will be created, impediments to investment all but eliminated, and the cost of investing and operating considerably lowered. The scheme will do this by making investment flows easier, liberalizing investment regimes, and providing for the joint promotion of investment opportunities.
ASEAN economic integration is more than the liberalization of trade and investment regimes. It also means linking ASEAN together through highway networks, railway lines, power grids, and gas and water pipelines. It means sub-regional growth areas among contiguous parts of neighboring ASEAN countries, such as the Mekong River Basin development program, the Indonesia-Malaysia-Singapore Growth Triangle, which is an expansion of the original SIJORI, the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT), and the East ASEAN Growth Area among Brunei Darussalam, eastern Indonesia, East Malaysia and the southern Philippines (BIMP-EAGA). These offer enormous opportunities, for Japanese investments and markets for Japanese industrial products. They also give Japan a chance to stimulate industrial and consumer demand in ASEAN through government and private investments. Such a rise in demand would surely be in the interest of both ASEAN and Japan.
Investing in ASEAN
As I indicated earlier, more than any other country, Japan is aware of the attractions and opportunities for Japanese investments in ASEAN. However, with ASEAN suffering a severe economic downturn, the Japanese investor may well ask:
Would not investing in ASEAN be throwing good money after bad? The answer is no.
First of all, all ASEAN countries have been carrying out the structural reforms necessary to stabilize their economies and put them back on the path of growth. Some countries have begun these reforms lately and others much earlier; some have undertaken them in cooperation with the IMF and others have done so on their own. These reforms generally have to do with closer supervision and tighter discipline of the banking system, fostering greater transparency in financial and other economic transactions, promoting greater competition, leveling the business playing field, managing the external debt more effectively, and strengthening the rule of law. In some countries, where they are called for, the reforms have gone deeper, into the political system itself.
These reforms have already begun to show results. Currencies are stabilizing, inflation is getting under control, and confidence is gradually being restored.
At the same time, ASEAN has responded to the financial crisis with closer cooperation and stronger solidarity. It has renewed its commitment to regional economic integration, to liberal trade and investment regimes, to AFTA and the ASEAN Investment Area. ASEAN has intensified its cooperation in financial matters. Among the measures that ASEAN's Finance Ministers have agreed upon is the establishment of an economic monitoring mechanism, which is to keep track of capital flows, the operation of the banking systems, and the macro-economic indicators. This mechanism is intended to serve as an early-warning system for any impending problems and thus help avert a recurrence of the crisis.
ASEAN has endorsed the use of ASEAN currencies in settling intra-ASEAN trade transactions on the basis of bilateral payments arrangements. Malaysia, which has had previous experience in such arrangements, has already reached an agreement with the Philippines. ASEAN has also indicated its receptiveness to the use of the yen in its trade with Japan.
All these measures -- national and regional -- will contribute substantially to the general stability and cohesiveness of the region and to the prospects for its recovery and growth. This should fortify the sense of confidence of those Japanese investments that are already in ASEAN.
In scanning the current state and future prospects of investments in ASEAN, we must not forget those qualities that enabled the ASEAN countries to achieve amazingly high growth rates for thirty years. Those qualities remain in place - the abiding commitment to economic openness and regional economic integration, the high savings rates, prudent fiscal management, which resulted in frequent budget surpluses, balanced macro-economic policies, and, not least, people who are willing to work hard and place a high value on education. These brought about not only rapid economic growth but also a higher standard of living for the peoples of ASEAN. James Wolfensohn, the President of the World Bank, has cited some statistics: "Three decades of more than five percent growth. A decline in poverty from six in ten to two in ten. Income per capita . . . up four times in Indonesia, Malaysia and Thailand." At about the same time, Paul Krugman, the prominent American economist, predicted, "Three years from now, it won't be a surprise to talk about growth of beyond five percent" in East Asia's economies.
Japanese investments, with the backing of the Japanese Government, helped to bring about this record and this potential by making use of the qualities that are the strength of ASEAN's economies and societies -- to the benefit of both ASEAN and Japan.
There is no reason why Japan cannot continue to do so -- and do more. After all, those qualities remain in place. Moreover, forty percent of Japan's market is in Asia, much of it in ASEAN. To help revive the market and stimulate demand in ASEAN would be very much in Japan's interest. To invest in ASEAN would not only contribute to that revival but also exploit the production platform that ASEAN offers for the good of all.
And let us not overlook the fact, as many have done, that the yen has actually appreciated against ASEAN currencies over the past year. For example, from May 1997 to June 1998, the yen appreciated against the Malaysian ringgit by 42 percent, against the Thai baht by 48 percent, and against the Indonesian rupiah by 410 percent.
At the same time, with the support of the Japanese private sector, the Japanese Government could take certain policy measures to help return ASEAN to the road of rapid growth. It could open Japan's markets wider to ASEAN products. We might note the fact that the share of ASEAN in Japan's imports declined from 15 percent in 1993 to 12.6 percent in the first half of 1997. A senior ASEAN minister recently suggested a new Japanese GSP program for Japan's neighbors. Japan ought to maintain trade credits for ASEAN countries. The Japanese Government could encourage Japanese banks to be accommodating in the re-negotiation of the debt of ASEAN countries. And Japan could, of course, stimulate domestic demand for imports from ASEAN.
ASEAN acknowledges with gratitude the generous help that Japan has extended to ASEAN countries in response to the crisis -- from its contributions to the IMF to the supply of food and medicine. It would be just as helpful to ASEAN if Japan could continue to have confidence in ASEAN and express that confidence concretely in the form of investments.
Japan will find that such confidence will be more than justified and such investments amply rewarded.
