This book is the end product of a project on bilateralism and multilateralism in Southeast Asia. The contributions to this edited volume have been developed through a process involving presentations of papers at two international workshops held in Hiroshima and Kuala Lumpur in December 2007 and October 2008, respectively.

The contributors to this book have strictly adhered to an agreed timetable to deliver their individual contributions to this book. In so doing they have integrated feedback from the editors, from discussants at the two workshops and from other participants in the workshops. Finally, the entire manuscript benefitted from the feedback of three anonymous referees who reviewed it for ISEAS.

The project was generously funded by the Hiroshima Peace Institute (HPI) through the Hiroshima City Government, which also hosted the first workshop. Additional financial support to the two Workshops has been provided by the Asian Political and International Studies Association (APISA), Council for the Development of Social Science Research in Africa (CODESRIA) and the Konrad Adenauer Stiftung (KAS). APISA hosted the second workshop in Kuala Lumpur, Malaysia.

We acknowledge the supportive role of Associate Professor Hari Singh, the Executive Secretary of APISA for economic support, hosting, and his contribution as participant in the two workshops. We also acknowledge the supportive role of Dr Colin Duerkop of KAS for financial support and participation in the first workshop.

We would like to acknowledge the important contribution made by the discussants at the two workshops: Professor Patricio Abinales and Professor Omar Farouk at the Hiroshima workshop and Professor Johan Saravanamuttu and Dr Lam Peng Er at the Kuala Lumpur workshop.

Last but not least we would like to express our appreciation for the efforts and role played by Yukiko Yoshihara from the HPI throughout the project and in particular in connection with the first workshop. We also express our appreciation to Patricia Marin for her key role in the organization of the second workshop in Kuala Lumpur.

The Philippines and Malaysia have had an “abnormal” bilateral relationship over the past four decades. The two countries have had to close down their embassies several times since full diplomatic relations were established in May 1964. The main reason for this development is the territorial dispute over Sabah. As the current Philippine Ambassador to Malaysia Victoriano Lecaros said, “there is nothing in our relations with other countries that comes to the nature of Sabah.” The dispute over this large, 76,115 square kilometre property has been the thorn in the history of Philippines-Malaysia bilateral relations. The Sabah claim initiated or complicated two major contentious issues in the bilateral relationship which have persisted to this day: the Muslim separatist rebellion in the southern Philippines and Filipino labour migration to Sabah. The other contentious bilateral issue tackled in this chapter is the conflicting claims of the two countries over territories in the South China Sea.

Through the years, the two countries have been using bilateralism to manage the contentious issues in their relationship. In the case of Malaysia, bilateralism is the primordial way of dealing with the Philippines. Being the economically-stronger nation, bilateralism has enabled Malaysia to strengthen its position on the various contentious issues vis-à-vis the Philippines.

The Philippines, on the other hand, has been using bilateralism and multilateralism in managing contentious issues with Malaysia. The Philippines has sought to raise the dispute over Sabah in the United Nations International Court of Justice (ICJ) but has not got Malaysia's consent.

With regard to its problem with Muslim separatists in the south, the Philippines allowed the Organisation of the Islamic Conference (OIC) to play a key role in resolving the conflict with one faction of the Muslim separatists, the Moro National Liberation Front (MNLF). It has also invited Malaysia to broker the peace negotiations with the other separatist group, the Moro Islamic Liberation Front (MILF). Other nations are now also involved in the peace process.

This conclusion summarizes the book's main findings. This will be followed by a broader discussion on the relationship between multilateralism and bilateralism in the Southeast Asian context. The broader discussion will also specifically link Etel Solingen's theory chapter at the start of the book to the country studies. This linkage will assist in placing the case studies within a broader context as well as bring the book full circle. The conclusion also addresses the importance of key factors influencing the bilateral relationships in the Southeast Asian region and their impact on regional collaboration and ASEAN.

Main Findings

Etel Solingen's chapter makes it clear that there are many different forms of international cooperation with different meanings attached to them. She then goes on to identify seven different core concepts in the international relations literature dealing with the subject. The term multilateralism itself became a focus of analysis in the 1990s. Central to the concept of multilateralism is a set of protocols demanding that states forego some of their own narrow interests in order to achieve general organizing principles in relationships characterized by diffuse reciprocity. Different schools of thought such as neorealism, neoliberal institutionalism, and constructivism employ different approaches to the study of multilateralism that in turn highlight different core variables and constraints. Solingen thinks that a convergence of domestic coalitional strategies among dominant actors favouring internationalization provides a powerful incentive for multilateralism, and it was such convergence that spurred ASEAN. There was a synergy between economic and security interests in ASEAN. Nonetheless, states like Indonesia, the Philippines, and Singapore tended to favour bilateral cooperation with external countries on security matters despite their common fears. Dominant internationalizing coalitions favour any arrangements, multilateral or otherwise, that promise both domestic political and macroeconomic, as well as regional, stability; these, in turn, enhance attractiveness to foreign investment and access to global markets, technology, and capital required for sustained economic growth and domestic political survival.

LESSONS FROM AND RESPONSES TO THE EAST ASIAN FINANCIAL CRISIS

The East Asian financial crisis of 1997–98 provides several valuable lessons for all parties concerned, including governments, the private sector, and international financial institutions that came to the region's rescue. It highlights how vulnerable a small, open (capital account) economy is to an adverse shift of capital flows. It also demonstrates how quickly investors' confidence can erode and how their panic can spread contagion to neighbouring countries. The international financial rescue of 1997–98 came in slightly too late, and its initial liquidity support was too small to provide a sufficient cushion for the magnitude of capital outflows. The rescue consequently failed to calm the market, resulting in continued outflows of capital and depreciating exchange rates. Policy prescriptions also failed to recognize the negative effects of austerity measures imposed on the already worsening economies and the welfare of their people, plunging crisis-affected countries deeper into a recession. As noted by Bird and Rajan (2001), there exists a trade-off between the severity of adjustment in the short run and the availability of international liquidity in the event of a crisis. In particular, the shortage of liquidity led to a quicker and more intensive economic adjustment that resulted in much larger output losses compared with previous crises.

In August 1997, Japan, together with several ASEAN countries, proposed the idea of an Asian Monetary Fund (AMF) to provide financial support for Thailand. It aimed to raise US$50 billion to US$60 billion from six ASEAN countries, Korea, China, Hong Kong, and Taiwan, and another US$50 billion from Japan. It was designed to be independent and would take up some IMF activities, such as regional surveillance. However, the AMF proposal never got off the ground due to strong opposition from the United States and the International Monetary Fund (IMF). It was argued that such an arrangement would both create a problem of moral hazard and, in competing with the IMF, a double standard.

The different chapters in this volume discuss different dimensions of bilateralism and multilateralism in Southeast Asia. Unfortunately, definitions of these particular forms of international cooperation and competition abound and different meanings can be attached to them. This terminological variance can hinder our understanding of the phenomena under study. This chapter attempts to provide a general overview of some basic concepts underlying this collaborative project as they have been dealt with in the international relations literature. Arriving at common definitions is not always easy but, at a minimum, the effort can help raise awareness of different interpretations of concepts across contexts. At best, the adoption of consensual terminology can help carry out a more convergent set of empirical studies, with a potentially more robust set of propositions and findings.

I provide an outline of seven core concepts as they have been used in representative literature in international relations: multilateralism, multilateral/regional institutions, regionalism versus regionalization, networks, forum shopping, and bilateralism. This literature spans security and political economy. Both can inform the discussion in several ways. First, the seven mentioned concepts may have been applied to one realm (economics, for instance) in the academic literature but often spilled over into the other (security). Gauging the utility of core concepts across issueareas can provide important insights and extend our understanding of their distinct operation and meanings in each case. Second, in the real world of international politics, considerations of security and political economy are joined at the hip, in Southeast Asia and beyond. Third, it is important to understand whether the substantive evolution of multilateralism, regionalism, or any of these concepts tends to follow any sequential logic, so that economic bilateralism may beget security bilateralism, or vice-versa. These synergies are too important to disregard both in the conceptual literature and in empirical studies. Examples from ASEAN and the Asia-Pacific will be weaved through the conceptual discussion in this chapter.

INTRODUCTION

During the 1997–98 East Asian financial crisis, the affected economies experienced a massive outflow of portfolio capital. To effect the transfer of such financial resources, the current account of the balance of payments underwent a dramatic reversal within a relatively compressed time period accompanied by massive reduction in domestic spending, sharp depreciation in the real exchange rate, and upward pressure on the real interest rate. This paper studies Malaysia's experience with current account reversal following the outbreak of the financial crisis. During the period 1997–98, the economy experienced a net short-term capital outflow of RM34.6 billion, representing 6.5 per cent of nominal gross national product (GNP). In response, the current account reversed itself from a deficit that averaged 6.2 per cent of GNP during the period 1990–97 to a surplus of 13.7 per cent in 1998.

The magnitude of the current account reversal in Malaysia was the largest among the four East Asian economies that were most severely affected by the currency crisis. As Table 1 indicates, the current account in Indonesia reversed from an average deficit of 2.5 per cent of nominal gross domestic product (GDP) from 1993–97 to an average surplus of 4.6 per cent from 1998–2000, representing a reversal of 7.1 per cent. For Thailand, the switch-around in the current account amounted to 15.7 per cent of GDP. In contrast, Malaysia's external balance reversal during the same period amounted to 19.3 per cent of GDP. Such a massive turnaround in the current account, however, was accomplished with relatively less severe contraction in domestic demand. In 1998, economic activity in Malaysia contracted by 7.4 per cent compared with 13.1 per cent in Indonesia and 10.5 per cent in Thailand. Malaysia's current account reversal therefore appears to have been less painful in terms of the contraction necessary to achieve the reduction in domestic absorption to effect the transfer of resources abroad.

Thai-Malaysian bilateral relations have undergone some turbulence since the 1990s up until now. Prior to that and especially during the Cold War both countries had broadly convergent foreign and defence policies that were essentially anti-communist and pro-Western. Apart from such broad strategic convergence, both countries had common security threats that necessitated coordinated security cooperation. Such threats included an active communist insurgency, banditry, and transnational criminal activities. At the elite interpersonal level, Malaysia's first Prime Minister, Tunku Abdul Rahman, had Thai ancestry and maintained very cordial relations during his term in office from 1957 to 1969. Reciprocally, Thai elite also treated Malaysia as a special case and maintained friendly bilateral relations. From 1967 onwards, the Association of Southeast Asian Nations (ASEAN) provided similar structural coherence at the broader regional level. After the communist victory at the conclusion of the Second Indochina War in 1975, ASEAN became galvanized to deal with what was perceived as threats to Thai sovereignty and security. Hence, between 1975 and 1988, ASEAN provided structural cohesion and support to the bilateral relationship. However, the fall of the Prem government in Thailand in April 1988 led in turn to a new policy initiative under the Chatichai government that downgraded Vietnam as a source of threat to Thai security.

This new Indochina Initiative disengaged Thailand from previous ASEAN policies toward Vietnam and resulted in closer Thai collaboration with the countries of mainland Southeast Asia. Almost simultaneously, Thailand-Malaysian bilateral relations deteriorated rapidly. Since then and into the post-Cold War period, Thailand-Malaysian bilateral relations have been subject to more turbulence than before. The issues that have led to a deteriorated relationship include an admixture of traditional and nontraditional security concerns. More recently, the ongoing political violence in southern Thailand has been a serious source of bilateral tensions.

This chapter examines Thai-Malaysian relations from a historical and structural perspective.

INTRODUCTION

Capital flight from the emerging economies of East Asia in 1997–98 precipitated the most notable geo-financial crisis of the second half of the twentieth century with lasting international economic and political effects. Thailand, Malaysia, the Philippines, and Indonesia (the ASEAN-4) in particular were severely distressed by near simultaneous exchange rate and asset price collapses that devastated banking and financial sectors, slashed real investment and induced recessions (see, for instance, Chang and Velasco 1999, Eichengreen 2002, Furman and Stiglitz 1998, Glick, Moreno and Spiegel 2001, Goldstein 1998, Makin 1999 and Radelet and Sachs 1998). South Korea, an advanced economy, also suffered directly although quickly recovered, while Hong Kong, Taiwan, and Singapore were punished indirectly through associated trade shocks that dampened or negated previously strong growth rates.

Numerous factors triggered the international capital flow reversals that caused financial crisis in the ASEAN-4. These included poor corporate governance, overvalued exchange rates and excessive foreign borrowing by domestic banks for unproductive projects. However, fiscal balances had generally been sound and inflation rates moderate. In contrast, overall budget balances measured as a proportion of GDP have deteriorated markedly in the ASEAN-4 economies since the crisis, turning pre-crisis fiscal surpluses to deficits that remain high by the standards of developed economies (Makin 2005). Most notably, Malaysia and the Philippines have posted persistent deficits between 4 to 6 per cent of GDP since 2000 (see Figure 1).

The consolidated public debt (inclusive of the debt of all tiers of government and non-financial public enterprises) to income ratios of the ASEAN-4 economies have accordingly risen well above pre-crisis levels (see Figure 2) to historically high levels across the region. They are generally well in excess of the average public debt to income ratio of advanced economies of around 25 per cent (IMF 2003).

Public debt grew strongly because the ASEAN-4 governments actively deployed fiscal policy as a post-crisis counter-cyclical measure to boost domestic demand in the context of a global economic slowdown. Accelerated domestic financial liberalization also facilitated issuance of public debt instruments in home markets over this time.

Regionalism in contemporary Southeast Asia began inauspiciously in the 1950s with the Bandung Conference and the ill fated Association of Southeast Asia (ASA) and Malaysia-Philippines-Indonesia (Maphilindo) — separate efforts to organize mainland and insular Southeast Asia. Nor was the Southeast Asia Treaty Organization (SEATO) any more successful, a weak American attempt to create a multilateral Western alliance for Southeast Asia against Soviet and Chinese challenges to the region's political future. Only in the late 1960s did non-communist Southeast Asian states create an indigenous political organization — ASEAN — that has survived and even prospered over the past forty years, producing a number of spinoff organizations with expanded memberships including the great powers. The family consisting of ASEAN Plus Ones, ASEAN Plus Three, the ASEAN Regional Forum (ARF), the Asia Pacific Economic Cooperation (APEC) forum, and most recently the East Asia Summit constitute the most elaborate politico-security-economic combination international bodies in the developing world. But how effective are they? Have ASEAN and its institutional offspring gained traction? Do they function as a security community? Have they aggregated political and economic interests collectively? Have they presented a united political front to other states? And have they worked together to resolve their internal security problems and protect each other against external threats?

Until the Asian financial crisis of 1997–98, ASEAN was generally considered the most successful multinational political organization among developing countries in the world. ASEAN's international reputation was burnished in the 1980s by its ability to keep the United Nations focused on the necessity of repelling Vietnam's invasion and occupation of Cambodia. Hanoi's subsequent withdrawal — though achieved because of the Chinese-Soviet rapprochement — was seen as a major ASEAN victory. ASEAN also arranged annual meetings between the Association and the great powers (the United States, China, Japan, and the European Union) to discuss an agenda of political, economic, and security issues generated by the Southeast Asian states.

INTRODUCTION

The onset of the Asian financial shock in the summer of 1997 led to a simultaneous contraction of almost all sectors of production in the crisis-hit country. While the theory of propagation mechanisms from the financial to the real sector in business cycle has been explored (see, for example, Bernanke, Gertler, and Gilchrist 1996), empirical works that aim to identify and measure a shock impact within a general equilibrium framework are rare. This paper attempts to fill the gap.

Using the specific case of Indonesia, Thorbecke (1998) and Azis (1998, 2000a) were among the first who attempted to adopt a general equilibrium model for such an analysis. While the former used the Social Accounting Matrix (SAM) multipliers, the latter traced the economy-wide impacts using Structural Path Analysis (SPA) and subsequently employed a price-endogenous CGE model with detailed specifications of the financial sector.

The limitation of previous SAM multipliers and SPA studies was the arbitrary manner with which the shock is introduced to the modelled economic system. Within these studies, the standard practice was to induce an artificial fall in the output of sectors that are known ex-post to contract during the crisis. Such an ad hoc method of introducing shock into the system does not capture the actual mechanics of the crisis which was triggered by movements in the financial variables (i.e., foreign capital) rather than in production. The problem is that sectoral output can decline because of numerous types of shocks, of which a financial turmoil is only one of them. Simply reducing the sectoral output artificially thus fails to recognize the origin of the crisis and neglects the linkage between financial sector and the rest of the economy.