DEEPENING REGIONAL INTEGRATION
AND CO-OPERATION

Excellencies

Ladies and Gentlemen

I am pleased to have the opportunity to speak at this gathering.

Southeast Asia is a region of great diversity - its politics, religions, and levels of economic development.

This diversity was, and still is, a compelling reason for regional integration and co-operation. But diversity also poses a significant impediment to such efforts.

I shall deal with two broad themes on this subject of deepening regional integration and co-operation:

First, what ASEAN has done to reinvigorate itself after the 1997 financial crisis; and

Second, the way forward.

Reinvigorating ASEAN

Until 1997, ASEAN’s prospects looked bright. The economies were booming. The countries were politically stable. ASEAN was held up as a model regional organisation.

Then came the 1997 financial crisis. Like a tidal wave, it swept through the region, leaving behind a trail of devastation.

In response to the new environment, ASEAN took concrete steps to reinvigorate itself.

ASEAN countries introduced reforms to improve corporate governance, re-capitalise banks, and enhance financial supervision. They reinforced market-oriented policies.

ASEAN also sought to restore the confidence of investors through collective action. At the height of the 1997 crisis when the pain was most acute, ASEAN leaders adopted the ASEAN 2020 Vision here in KL. They pledged that ASEAN would "advance economic integration and co-operation". Instead of turning inwards, the leaders expressed their belief in "an outward-looking ASEAN playing a pivotal role in the international fora and advancing ASEAN's common interests".

Looking back, regional economic integration could have gone further and faster during the boom years before the 1997 crisis. But FDI was flowing into the region, and we did not feel the urgency to push economic integration. We failed to ensure that as a regional grouping, we stay ahead of global trends.

I am glad that ASEAN has since quickened the pace of regional economic integration. The ASEAN Free Trade Area (AFTA) will come into full effect on 1 January 2003. On that date, tariffs on 95% of goods entering the ASEAN-6 will be lowered to between 0 and 5%. ASEAN has resolved to move even further in the liberalisation of the goods trade. The ASEAN-6 has committed to remove all remaining tariffs on intra-ASEAN trade by 2010.

We have also moved forward on other integration initiatives like the ASEAN Investment Area (AIA), which binds ASEAN countries to eliminate barriers to intra-region investment. We are enhancing collaboration among our private sectors. We are working on a Roadmap for the Integration of ASEAN (RIA) to set clear milestones for ASEAN economic integration. To improve ASEAN’s competitiveness as a region, we have commissioned McKinsey & Company to study ASEAN’s strengths, and how these can be built upon to make the region a more attractive base for companies.

Another top priority is to integrate the newer members into ASEAN. ASEAN's expansion to include the Indo-Chinese countries, even though they had significantly lower levels of development, was an important strategic move. It will strengthen ASEAN in the long term. But this is also one reason why the organisation has not been able to move as quickly in economic integration as it used to.

To enable the newer ASEAN members to enjoy the benefits of integration, the Initiative for ASEAN Integration (IAI) was launched two years ago. The idea is for the older members of ASEAN to help the newer members build up economic capacity.

The Way Forward

In the last 30 years, ASEAN has made significant progress in regional integration and co-operation. From time to time, bilateral disputes and problems have cropped up. But ASEAN has consistently proven that its leaders and ministers will rise above these hiccups, keep their eyes focused on the big picture, and push ahead with regional integration and co-operation.

ASEAN is now operating in a new, dynamic and rapidly changing environment. The challenges are far more complex than what we have encountered before. What is the way forward for ASEAN?

First, we need to go even further in economic integration. We have done reasonably well in the liberalisation of the goods trade. We now need to push ahead with services liberalisation, such as in the telecommunications, financial and professional services sectors. The services sector is key for the region’s future growth.

Deeper economic integration will also enable ASEAN to reap the benefits of specialisation, and to fully tap the potential of our 500-million market. This will help us to generate additional growth. Currently, almost 80% of ASEAN trade is with economies outside the region. 90% of FDI is from economies outside ASEAN. And 3 in 5 visitors to ASEAN member countries are from outside the region. There is therefore much untapped growth potential from within ASEAN itself.

Second, ASEAN must continue to enhance its external linkages. Our commitment to maintaining an open and outward-looking focus was key to our past success, and will remain critical to ASEAN's future.

ASEAN has already stepped up such efforts. In a groundbreaking, exciting initiative, ASEAN and China agreed last year to establish a Free Trade Agreement (FTA) within ten years. When realised, it will create the single largest FTA in the world, with a regional GDP of around US$2 trillion. Studies for the ASEAN-China FTA project that ASEAN exports to China could grow by almost 50%. ASEAN and Japan are also discussing a Comprehensive Economic Partnership. A study showed that under such an agreement, ASEAN exports to Japan could shoot up by more than 44%, while ASEAN's GDP could grow by an additional 2 percentage points.

And for the first time, ASEAN Economic Ministers met their Indian counterpart in Brunei this year to explore how ASEAN and India could broaden economic linkages. Other collaborative arrangements being explored include Korea, Australia and New Zealand. In particular, I believe that we should accelerate our linkages with Australia and New Zealand, two developed countries in our neighbourhood which have long and deep linkages with ASEAN. This will bring us significant economic and strategic advantages.

This need for ASEAN to strengthen its external linkages also explains why Singapore has embarked on a strategy to conclude FTAs with ASEAN’s key partners. Our FTAs are not exclusive agreements. They play a pathfinder role. Our FTA with the US, for instance, will help strengthen ASEAN’s links with the world's largest economy. We hope that it will evolve into an ASEAN-wide FTA. At the least, we hope that our FTAs will help other ASEAN countries conclude their own bilateral FTAs.

My comments on deepening external linkages are also relevant in the political context. For example, ASEAN leaders have already agreed to initiate ASEAN-plus summits. Next month in Cambodia, ASEAN will have the first-ever summit meeting with India. We should also consider, at an appropriate time, summit meetings with other important external partners like the US and Australia. These initiatives will help to maintain strategic balance in the region.

Third, ASEAN needs to respond to the rapid changes in the strategic landscape in East Asia. A nascent sense of an East Asian community is emerging, although ASEAN and the Northeast Asian countries (China, Japan and Korea) have yet to crystallise a common vision on the nature and direction of East Asian co-operation.

We should push ahead with greater integration of East Asian economies. It will put us in better stead to respond to the formation of large economic blocs in Europe and the Americas.

However, as the two regions of East Asia draw closer, there is some concern whether ASEAN will lose its identity and role in a broader East Asian framework.

I believe that history, culture and geography will always be complicating factors in the relationship between China, Japan and Korea. ASEAN therefore has a critical role to play - that of an interface to facilitate interaction between the three countries. In any case, ASEAN must make sure that it continues to drive this emerging community, through the ASEAN-plus-three process.

Fourth, ASEAN has to deal with the challenges and opportunities posed by a rising China.

China has drawn in proportionately more investments than ASEAN after 1997.

Rightfully, we should not be seeing such a trend. ASEAN has a combined population which is half that of China’s. It is not a negligible market. ASEAN opened its economies to foreign investors years before China did. Its economic institutions were more developed than China’s. But push factors have reduced FDI inflows into ASEAN, as much as China’s pull factor has.

However, if ASEAN now restructures its economies and integrates them more deeply, it can increase its share of FDI into East Asia. It must convince the business community too, that it remains committed to trade liberalisation and to achieving its Vision 2020. It must not backslide on the implementation of its agreements.

ASEAN is also well positioned to ride on China’s growth. For example, ASEAN countries are already benefiting from the rapid increase in Chinese tourists. And in the year 2000, one fifth of the US$500 million Chinese outbound investments came to Southeast Asia.

My fifth and final point is that ASEAN must deal with the threat of international terrorism. This is not a faraway problem. It is present here in the region. Malaysia, Philippines and Singapore have arrested radical Muslims who are prepared to use terrorist methods to advance their political causes.

I am encouraged that ASEAN Interior Ministers, who met here in April, have agreed on practical measures to enhance anti-terrorism co-operation. ASEAN is also working with the ARF (ASEAN Regional Forum) and Dialogue partners in a multi-layered response to counter the threat. We must not give the impression that Southeast Asia is an unstable region or a risky location for investments.

Conclusion

Clearly, these are not the only challenges that ASEAN will have to face in the coming decades. There are others, including those which we may not have foreseen.

But the general way forward for ASEAN is clearly faster and deeper integration, internally, and with the rest of East Asia, rather than slower and less.

In this context, there are some questions that we should ask ourselves at some further point in time. For instance, should ASEAN work in the medium term towards an "ASEAN Economic Community" not unlike the European Economic Community of the 1950s? The European Economic Community, at its inception, aimed to remove tariff and non-tariff barriers, and attain full connectivity in transport, telecommunications and other economic links. In the longer term, should ASEAN remain a free association of independent states that voluntarily synchronise their policies, or should it evolve into an entity like the EU?

These are questions which require us to take a very long view. But it is worthwhile trying to imagine alternative futures for ASEAN. Only when we think boldly and creatively, will we throw up new ideas to propel the region into the developed world.

Thank you.

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