The past year saw the ASEAN region experience its most serious economic downturn in the post-war era. What started out as a financial crisis in July 1997 quickly became an economic and social crisis. Regional exchange rates and stocks markets plunged. Gross domestic product fell for most ASEAN countries with only Singapore and the transition economies of Laos, Myanmar and Vietnam escaping a recession. The cost of the crisis was equally staggering in social terms as unemployment rose to record highs, and in some countries, threatened to destroy the economic progress achieved by a generation.

The current year sees the bottoming out of the ASEAN economic crisis with the region expected to begin the process of economic recovery. Growth would resume for most ASEAN countries and inflationary pressures are expected to diminish (see Table 1). Other recent indicators of recovery include lower interest rates, more stable exchange rates and an upturn in stock markets since the last quarter of 1998.

At this stage of the crisis, most countries are adopting more accommodative fiscal and monetary policies to stimulate domestic demand. The economic recovery in ASEAN will have to be domestic-demand led. The weakness in commodity prices, continuing recession in major Asian trading partners and the expected slowdown in the advanced countries do not augur very well for an export-led recovery.

While progress has been made in some ASEAN countries to enact new bankruptcy laws and to create a framework for voluntary debt workouts between firms and their creditors, a major breakthrough is still to be achieved. A sustainable economic recovery would depend on a comprehensive resolution of these intertwined issues.

While the new Members of ASEAN (Laos, Myanmar and Vietnam) have been relatively more insulated from the financial crisis, the transmission of the shocks through trade and investment links with the older members could not be entirely avoided. ASEAN countries are major sources of investment and major export markets for Laos, Myanmar and Vietnam. Nevertheless, the new Members are expected to grow close to their historical average in the 1990s.

The strength of economic recovery in ASEAN will depend on global developments. At the moment, prospects are not too bright since the global economy is forecast to grow at only 2.2 percent in 1999, about the same rate as in 1998. The relatively slow pace of the world economy reflects the continuing weakness in the Japanese economy and a moderation of growth in Europe and North America. World trade growth will continue to be weak in 1999 but some calm is expected to return to financial markets after the severe turbulence in 1998 and the crash in emerging markets in 1997.

ASEAN also has to be vigilant about emerging external risks. These include:

• Devaluation of the Chinese renminbi: Given the deceleration of growth in the Chinese economy and the slowdown in its exports, a devaluation of the Chinese renminbi cannot be ruled out. A renminbi devaluation could trigger off a region-wide series of competitive devaluations that could derail the recovery process.

• Rising protectionism in the developed countries: In recent months, the US has taken unilateral action to restrict imports as a consequence of a ballooning trade deficit. ASEAN exports to the US and the EU account for about 40 percent of total exports. A rising tide of protectionism in the developed countries would seriously hamper the ability of the region to use exports as an engine of recovery.

• Continued Japanese weakness: The Japanese economy contracted for the fifth straight quarter in October-December 1998. Serious questions continue to be raised about the prospects for a Japanese recovery in 1999. Since Japan is ASEAN's most important trade and investment partner, any recovery in the region would need strong Japanese growth to sustain it.

• Contagion effect from emerging market crises, e.g. Brazil and Russia: The recent financial turmoil in ASEAN, in Brazil and Russia has underscored the vulnerability of the global economy to contagion effects. While ASEAN has taken the hard decisions to restructure its financial and economic systems, the success of these programmes could easily be threatened by another round of financial instability in other emerging markets.

• US stock market correction and economic slowdown: The US stock market (as measured by the Dow Jones Industrials) is now soaring to unprecedented heights having recently broken the mythic 10,000 level. By all historic reckoning (such as P/E ratios), the US stock market is highly overvalued and ripe for a correction. A downturn in the magnitude of Black Monday in 1987 could easily wipe out several trillion dollars off Wall Street and shake consumer confidence in the US. It could trigger a slowdown in the most dynamic part of the global economy and delay ASEAN recovery.

The start of the ASEAN recovery is due to the national and regional measures adopted by members to deal with the crisis.

Collectively, the ASEAN countries have accelerated the process of economic integration in the region. In their Sixth Summit held in Hanoi in December 1998, the ASEAN leaders agreed to accelerate the establishment of the ASEAN Free Trade Area from its target date of 2003 to the year 2002. In addition, they agreed to move forward the date for establishing the ASEAN Investment Area (AIA) from 2010 to 2003 and to begin a new round of negotiations in services beginning in 1999 and ending in 2001.

A firm timetable leading up to the realisation of AFTA by the year 2002 was agreed upon by the ASEAN leaders (see Table 2 for the timetable). By the year 2000, each country would have 85 percent of the items in its Inclusion List with tariffs of 0-5 percent. This would be increased to 90 percent of the Inclusion List by the year 2001 and then for the whole Inclusion List by the year 2002. The Inclusion List refers to those products that are scheduled for tariff reduction, removal of quantitative restrictions and non-tariff barriers.

Although the establishment of AFTA was only advanced by one year, this decision by the ASEAN leaders was made in the midst of the worst economic downturn that the region has known since the post-war era. Hence, the fact that ASEAN moved forward, rather than backward (which was what some expected) is the real message. It represents an important signal of ASEAN's commitment to continue with regional liberalisation.

Apart from the acceleration of the schedule for tariff reduction, ASEAN countries are taking steps to further facilitate trade. Among the important milestones in 1998 was the signing of the Framework Agreement on the Facilitation of Goods in Transit, which aims to facilitate the movement of goods in transit among geographically contiguous countries in the region. The protocols to implement the transit agreement are scheduled to be finalised before the end of the year.

In the area of standards and conformance, a Framework Agreement on Mutual Recognition Arrangements was concluded to provide the basis for accelerating the development of bilateral as well as regional mutual recognition agreements on standards and conformity assessment among ASEAN Members. The next step is the identification of sectors or products for which MRAs can be developed. Initial guidelines to help identify these priority sectors include the value of intra-regional trade, the existence of technical barriers to trade and if there is a strong interest from some countries.

Plan of Actions to implement the Customs Vision 2020, which calls for "An ASEAN Customs Partnership for World Class Standards and Excellence", have been finalised in 15 major areas, including tariff classification, valuation, cargo processing and post clearance audit.

ASEAN exports to the rest of the world grew by 5.9 percent although imports fell by a huge 14 percent (see Table 4). Exports to the major markets of the US and the EU grew by 5.3 percent and 2.5 percent respectively. However, exports to the rest of East Asia fell significantly reflecting the major contractions in the economies of this part of the world. Exports to China, Hong Kong, Japan and ROK declined by 1.4 percent, 6.6 percent, 13.9 percent and 12.7 percent respectively. Only exports to Taiwan grew. Overall, exports to East Asia fell by US $ 12.6 billion or by 13 percent. ASEAN imports from major trade partners fell across the board. Major declines occurred in imports from the EU (US $ 11.5 billion) and Japan (US $ 13.9 billion).

EXTRA-ASEAN TRADE
JULY 1996-JUNE 1997 TO JULY 1997-JUNE 1998
(US $ Millions)

As a consequence, ASEAN turned a major trade deficit of US $ 45.3 billion in the July 1996-June 1997 period to a US $ 10.3 billion surplus in the July 1997-June 1998 period. Major turnarounds were experienced with regards to the EU, Japan and the US. Large surpluses were recorded with the EU (a surplus of US $ 4 billion), the US (US $ 10.7 billion surplus) and Hong Kong (US $ 11.6 billion). ASEAN continued to run a huge deficit with Japan (US $ 21.6 billion) but this was markedly lower than in the previous period.

As a result of the economic weakness in the region, intra-ASEAN trade fell by nearly 17.6 percent from US $ 87.9 billion to US $ 72.5 billion (see Table 5). This was in marked contrast to the positive growth of ASEAN exports to the rest of the world during the same period. Malaysia (-33 percent), Singapore (-12.8 percent) and Thailand (-32.8 percent) experienced major declines in intra-ASEAN trade. On the other hand, Indonesia experienced a major expansion in its intra-ASEAN exports growing by nearly 29.4 percent.

TABLE 5
INTRA-ASEAN EXPORTS
JULY 1996-JUNE 1997 TO JULY 1997-JUNE 1998
(US $ Millions)

To forestall the occurrence of future crises, as ASEAN Surveillance Process (ASP) has been established. The ASP is a peer review process in which finance ministers meet to survey regional financial and economic conditions, exchange relevant experiences and determine the scope for coordinated policy action on macroeconomic and financial issues.

The need for a regional surveillance mechanism is underscored by the failure of international financial organisations to sound the alarm before the crisis struck the region in July 1997. The regional contagion that followed showed that investors perceived ASEAN countries as alike in risk and hence retreated from ASEAN markets in markedly the same way. Increasingly, the fates of financial markets in the region are tied together and financial risks that threaten one market threaten the others. Each ASEAN country there-fore has a strong interest in seeing to it that its neighbour’s financial house is in order and to forestall any individual weakness from growing into a regional problem.

Given the need to make ASEAN an attractive destination for foreign direct investment, the ASEAN leaders have made a special effort to address the needs of the investment community.

First, a set of short-term investment incentives have been granted to all investors, whether ASEAN or non-ASEAN, effective from 1 January 1999 to 31 December 2000. These include minimum three year corporate income tax exemption or a minimum 30 percent corporate investment tax allowance, 100 percent foreign equity ownership, duty-free imports of capital goods, domestic market access, minimum industrial land leasehold period of 30 years, employment of foreign personnel and speedy customs clearance. The privileges cover manufacturing investment applications received and approved by the respective ASEAN investment agencies in 1999 and 2000.

Second, the leaders agreed to accelerate the timetable for the establishment of the ASEAN Investment Area, which is intended to make the region a single destination for foreign direct investment. They agreed to extend national treatment to ASEAN investors and to open up the manufacturing sector to foreign direct investment from ASEAN sources. However, countries could maintain a negative list of sectors, which would temporarily be excluded from the national treatment and market access commitments until the year 2003 at the latest. Originally, the negative list could be maintained until the year 2010 but this was deemed too far beyond the planning horizon of most investors.

The services sector make up a significant proportion of the economies of the ASEAN Members. It is more than 60 percent of Singapore's economy; close to half for the Philippines and Thailand; and a little more than 40 percent for most other ASEAN countries.

ASEAN Countries have become major exporters and importers of commercial services. In 1997, Singapore exported US $ 30.1 billion worth of services making it the twelfth largest exporter in the world. In the same year, Singapore and Thailand imported US $ 18.9 billion and US $ 17.4 billion worth of services making them the eighteenth and twentieth largest importers respectively.

ASEAN Cooperation in services was initiated to strengthen the capacities of services suppliers in the region. ASEAN countries are to enter into negotiations on specific commitments on market access and national treatment covering all services sectors and all modes of supply. The first round of negotiations began on 1 January 1996 and concluded on 31 December 1998 with the negotiations initially focusing on financial services, maritime transport, telecommunications, air transport, tourism, construction and business services.

Two packages of commitments were concluded during the negotiations. The first package of commitments was completed within a time frame of 18 months, i.e. 30 June 1997. The second package of commitments was concluded in December 1998 during the Sixth ASEAN Summit. In the effort to maintain the momentum of services liberalisation, ASEAN has agreed that a new round of negotiations to further liberalise trade in services will begin in 1999 and will