Dr Fernando Aldaba, CIIR's Advocacy Coordinator for South East Asia, assesses the economic and political impact of recent events in the region

Southeast Asia Research and Advocacy Unit
Quarterly Political and Economic Update ( July - September 2002 )

1. Highlights of the Political Situation in the Region

The Region Confronts Terrorism in its Own Soil

After the recent Bali (Indonesia) and Manila-Zamboanga (Philippines) bombings, the role of ASEAN in the war against terrorism has once again been highlighted. In its coming summit this November, this issue will certainly be in the agenda especially as the U.S. gears for war against Iraq. Member countries have generally supported this campaign against terrorism when the organisation as a whole in its last summit in 2001 at Bandar Seri Bagawan released the ASEAN Declaration on Joint Action to Counter Terrorism which unequivocally condemned the attacks in New York City, Washington DC and Pennsylvania on 11 September 2001 and viewed acts of terrorism in all its forms and manifestations as a profound threat to international peace and security.

In May 2002, the various police chiefs all over the region mapped out their strategies against terrorist networks operating in the various member countries. It was alleged that Osama bin Laden's network has active links with Islamic radicals particularly the Jemaah Islamiya in the Philippines, Indonesia, Malaysia and Singapore. As in the last quarter, the anti-terrorist campaign of the U.S. still continue to affect the region. The key question now is how deeply will ASEAN support the U.S. war on terror, particularly its planned attack on Iraq. This would certainly spark debates among its member nations. It is in this context that several key ASEAN members are fortifying its resolve to counter alleged existing terrorist networks supposedly operating in the region. The Philippines has asked Singapore, Malaysia, and Indonesia for another conference to enhance strategies against terrorism. The Philippines and Malaysia are the lead countries supporting the U.S. in the war against terrorism. After the Bali bombing, Indonesia has been pressured to go all out against terrorism as well. Highlights of key developments within selected countries:

The Philippines

A spate of bombings hit Zamboanga City in the South and Manila, the capital. More than a dozen people have already been killed as fears of further terrorist attacks grip the key urban centers in Manila and in Mindanao. The Philippine government has time and again explicitly supported the U.S war against terrorism, although it has been very careful in terms of outright support for an attack on Iraq.

Indonesia

The Indonesian government has succumbed to pressures to go after Islamic radicals especially after the Bali bombing which killed more than 180 tourists and locals. More recently, it has passed anti-terror legislation to strengthen its hand in the pursuit of suspected terrorists. It has also recently arrested Abu Bakar Ba'asyir, alleged head of Jemaah Islamiya, which envisions a Pan-Islamic State composed of Singapore, Malaysia, Indonesia and Southern Philippines.

East Timor

This newly independent country became the newest member of the United Nations. It has also applied for ASEAN membership to strengthen its links with the other countries in Southeast Asia.

Malaysia

The Malaysian government was in the headlines as it implemented a new policy on migrant workers. It expelled thousands of illegal workers from the Philippines and Indonesia. Workers thrown out of Sabah in Malaysia complained of inhumane treatment in prison cells before they were deported back to their home countries.

Thailand

The Thai government, on the other hand has forged an agreement with the Lao government to allow Laotians to work legally in Thailand. This is a landmark agreement, which they also would like to sign with the governments of Cambodia and Burma.

2. Highlights of the Economic Situation of the Region

A fall-out from the increased uncertainty due to the recent bombings in the region is the prospect of lower growth rates this year and next year. Investments and tourism activities will be greatly hampered. This will heighten poverty incidence among countries mostly hit by uncertainty like Indonesia and the Philippines. Military spending will likely increase in these countries to the detriment of social services. A U.S. war on Iraq especially if not sanctioned by a U.N. resolution will definitely increase global economic gloom which may lead to a deep recession worldwide. This in turn would again greatly affect the region.

Declining FDI

Economies in Southeast Asia are now worried because of declining foreign investments as investors have become increasingly averse to placing their capital in the region. Some analysts even suggest that massive erosion of confidence has been happening, as there is perception of weak political leadership and corporate governance in Southeast. For example, Japan has become "more interested in China" than in Southeast Asia. The region's growing reputation for violence and lawlessness and being the new battlefront against terrorism is scaring foreign investors away towards China, even though most of the region is profitable and peaceful, analysts say. Bombings, kidnappings and ethnic unrest hound Indonesia and the Philippines. Terrorist threats against Singapore and Malaysia are also contributing to increased uncertainty in the region, which has made both local and foreign investors jittery.

While ASEAN is still reeling from the 1997-1998 financial crisis, foreign investors are finding returns are no longer worth the perceived risk. China's entry into the World Trade Organization (WTO) opens up more attractive trade and investment opportunities and analysts say that political governance is perceived to be stronger in China, even if the long-term future of its political system may be doubtful. According to latest United Nations figures, China, including Hong Kong, drew a net $105 billion in foreign direct investment (FDI) in 2000, up 62% on the previous year. Thailand, Singapore, Malaysia, Indonesia and the Philippines drew a combined net FDI of $11.3 billion, down eight percent. Indonesia saw a $4.55 billion net outflow of FDI last year, as it struggled with ethnic violence and separatist uprisings. And with the current terrorist attacks in the region, FDI will continue its declining trend.

AFTA and its Promise?

While AFTA has definitely increased intra-ASEAN trade, its key challenge is to implement fully the accelerated schedules for the CEPT schemes and to integrate its new members, all of which lag in economic development terms. The developmental gap between the ASEAN6 and ASEAN4 could create a two-tiered ASEAN and, therefore, appropriate steps should be undertaken to uplift the CLMV economies. However, difficulties still abound in the implementation of AFTA as the member countries begin to realize they might lose competitive advantage from more aggressive neighbors and to see non-tariff measures being set up to protect local industries. ASEAN, unlike the EU, is still far from setting up a common exterior tariff system (CXT). ASEAN members are beset with differences in inflation management, fiscal and monetary policy and with diverse Most Favored Nation rates. While Singapore and Brunei have near zero if not zero tariff rates, countries like Thailand and Malaysia, which have domestic industries to protect, have higher average tariff rates.

ASEAN must also work to improve mechanisms to enforce the AFTA agreement and improve transparency of members' trade policies. Finally, ASEAN must also move on AFTA Plus measures to further promote economic integration. Some observers say that ASEAN's leverage in negotiating free trade areas (FTAs) with China, Japan and Korea will hinge on how successful it is able to implement AFTA. This expanded economic integration which is embodied in the proposed East Asia Cooperation has also been intensely debated as formalisation may mean the formation of a new secretariat which Malaysia has been actively pushing. This in turn will weaken the existing ASEAN secretariat based in Jakarta.

For further information, please contact
Dr Fernando Aldaba - Advocacy Coordinator for South East Asia
or
Matthew Heard - Press and Information Officer