First of all, let me congratulate ASEAN for today’s events in recognition of the tremendous progress of AFTA, which has made ASEAN one of the largest multinational trading areas in the world, after the European Union and NAFTA.
Let me also thank the organizers for generously inviting me to join the panel this morning. We are honored to be following directly after the opening remarks of Her Excellency President Megawati Soekarnoputri. And I am honored to join these distinguished gentlemen who are with me on the podium today.
As panelists we have been asked to comment on the business prospects in ASEAN as a Free Trade Area. I have not seen the remarks of my fellow panelists, but I can se that the automotive industry is well represented by the gentlemen from Toyota and Ford. This is entirely appropriate as the automotive industry has taken the successful implementation of AFTA as a given for many years and has been making investments for over a decade as if a free trade area in ASEAN were an inevitability rather than a dream. I believe they are already being rewarded for this foresight and that their fortunes will continue to improve in ASEAN in the years ahead.
The prospects for business in any free trade area are outstanding because free trade areas promote excellence and penalize inefficiency and waste. I believe AFTA’s prospects are particularly good because it has evolved smoothly for a decade already, well within the hopes and aspirations of its member states.
I would like to focus my remarks on the services sector. This is a sector, which, I believe, has sadly been the stepchild of economic development policy not only in this region, but also throughout the developing world. Demand for services is high and growing, even in today’s relatively weak global economy. Businesses and entrepreneurs are restricted not by opportunity but by trade and investment barriers in most ASEAN countries.
I believe that the services sector, especially education, health care, IT, accounting, law and financial services offer unprecedented opportunities to ASEAN’s current and future generations. I will posit further that ASEAN’s growth in the services over the next two decades and beyond will be a greater determinant of per capita income growth and longer life spans for the rest of the 21st century than the amount of capital invested in light manufacturing, assembly and value-added export processing.
Of course there will be variations in the nature and pace of progress within the ASEAN membership, particularly among ASEAN’s members, especially its newest members – Cambodia, Laos, Myanmar and Vietnam. I will venture the prediction, however, that the faster these countries integrate their policies into the open markets implied by AFTA and take advantage of international expertise and capital in their domestic service sectors, the greater will be their economic progress.
As the region bemoans, somewhat melodramatically in my opinion, the slowdown in direct investment, I believe it is time to reflect upon the lack of investment and competitiveness in those service sectors I have just noted, but which bear repeating – education, health care, IT, accounting, law and financial services – to name just a few. We could surely add transport, distribution and retailing to this list. There are specific exceptions in some ASEAN countries but, by and large, these sectors have been highly coddled by legal barriers tightly restricting the entry of international money and expertise. The protection is essentially a hidden tax on every citizen.
All of these sectors are essential to a vibrant economy. We only have to look at the lack of international competitiveness of most of these sectors in Asia’s most advanced, yet troubled economy, to recognize the high cost of protectionism in these services. This troubled economy is, of course, the economy of Japan. Decades of protection and distortion in the services sector constitute one of the major obstacles to Japan’s recovery. Yet the development policies of most ASEAN members are replicating this tragic error.
It has been the fashion for most developing countries to treat foreign investment, if not as a necessary evil, then as dangerous requirement, rather than as a great opportunity. The reasons for this are many and complex. We need not explore them here.
Suffice is it to say that because of the perceived dangers, governments tend to see foreign investment as smoothing that primarily brings needed capital. If foreign investment doesn’t bring substantial capital, then it should not be allowed or be much more tightly controlled than capital used in manufacturing.
Of course, this has led to a high degree of protection of services. This is both because services tend to require human rather than financial capital and because services tend to be provided by the better educated members in society which often means by a privileged elite with exceptional access to political and legislative leadership.
Consequently, it has been easy to convince legislators and regulators that foreign firms should be highly restricted or kept out of accounting, law, health care, education, etc. This has greatly limited the opportunity of young professionals to join global firms in their own countries. It has prevented them from getting a direct channel into international developments in their professions and has drastically restricted the quality of the service they have been able to provide to domestic companies and customers and restricted their capabilities to service foreign investors.
These barriers don’t prevent customers from acquiring services; they simply make them more costly and drive very profitable businesses offshore. We in Indonesia are painfully aware of the effects of poor policy and domestic protection in services. The planes from Singapore and Hong Kong, for example, are filled daily with accountants, lawyers and bankers flying here to service their clients. Trading companies keep large stocks and warehouses offshore. Wealthy residents fly offshore for health care. This is costly for their clients but a wonderful gift to the creative entrepot countries of the region, Singapore and Hong Kong.
Indonesia certainly suffers in this regard. These offshore experts and traders are often prevented from operating freely in Indonesia by work permit, tax and ownership restrictions. So they work by phone, fax and email from offshore. They pay rent offshore. They hire non-Indonesians to work with them in their non-Indonesians offices. They use non-Indonesian firms to audit their books, service their cars, educate their children, heal their ill and injured. They use non-Indonesian based credit cards and buy insurance from non-Indonesian based firms. Yet most of their business is here or in the other heavily protected markets in ASEAN.
As a consultant, as a former partner in one of the major global accounting firms and now as the proprietor of small firm of my own, I am acutely aware of how individuals without capital can prosper in the services sector. It is not a coincidence that most of the leading global consulting firms have or had in their recent past names like Anderson, Coopers, Deloitte, McKinsey, Price, Touche, Waterhouse, etc.
These are the names of the visionary founders of great global service firms. I suspect many of the people in this room know well the legendary Philippine accounting and consulting firm, SVG -- SyCip, Gorrez and Velayo – which was a force throughout the region for many years.
Consulting companies are incredibly human institutions. They are usually started by bright young men and women with little capital except their brains and energy. They get exposure in larger firms and quickly see that they can do things better and often cheaper yet more profitably on their own. They don’t need much capital. They just need that first client and that first fee payment to begin what is, in essence, a simple cash flow business.
A few become global giants like the names mentioned above. Many, many more become highly prosperous members of society and great wealth creators not only for their clients but also for their employees who often become their partners or even their competitors as each generation learns from the last. The greater access such individuals and firms have to global service firms in their own country, the more they will learn, the better they will become and the more their host countries will prosper.
Now that ASEAN has progressed so far in breaking down the barriers to physical trade isn’t time to eliminate the barriers to investment and trade in services, the growth engine than can power the region out of its slump and create the real ASEAN Miracle ?
Thank you for your attention.
