Introduction

In thinking about the advent of the twenty-first century, one is reminded of George F. Kennan's opening comments in his volume of reflections published in 1996 under the title, At A Century's Ending. Citing his friend John Luckas, Kennan concurred that ”… in no instance was a century neatly bounded by the years that formally defined it”.1 Indeed, a century should be more meaningfully defined in terms of the epoch-making events (the defining moments, so to speak) which distinguish one period of history from another. Hence, if we were to use the internationalization and extra- Europeanization of the modern international system as the defining features of the twentieth century, then this century can be said to have begun in 1914 (with the outbreak of World War I) rather than 1900. If, in that sense, the twentieth century was late in arriving, the twenty-first century is already with us — that is if we take its defining features to be the end of the Cold War and the advent of the technological revolution in global communication which has added to a more interdependent world.

For ASEAN, too, it can be said without exaggeration that the twenty-first century has already begun — if we are to look at its timetable and forward-looking agenda for regional co-operation. Before the year 2000 the geographic reach of ASEAN is expected to encompass all the ten countries of Southeast Asia, thus fulfilling the original vision of the 1967 founding document of ASEAN which envisaged a regional association of Southeast Asian nations. Both Laos and Cambodia have registered their respective interests in regional membership by 1997, having already acceded to ASEAN's Treaty of Amity and Co-operation (TAC) and been granted observer status in ASEAN. Myanmar, too, submitted a formal application for ASEAN membership in mid-August 1996, being the last regional state to accede to the TAC and having acquired observer status in ASEAN and membership in the ASEAN Regional Forum (ARF) in July 1996. Following a visit to Malaysia by General Than Shwe, chairman of the ruling State Law and Order Restoration Council (SLORC), in late August 1996, Myanmar indicated more specifically a wish to join ASEAN in July 1997.

This volume comprises the revised and edited papers first presented in late February 1996 at a conference in Turin, Italy. The conference was a collaborative effort by the Giovanni Agnelli Foundation of Italy and the Institute of Southeast Asian Studies (ISEAS) in Singapore. The idea of the conference came from the Giovanni Agnelli Foundation which saw the need to promote a better understanding of Southeast Asia among the academic, business, and media elite of Italy on the eve of the first meeting of government leaders of Asia and Europe (ASEM) in Bangkok in March 1996. The Giovanni Agnelli Foundation also bore the costs of the conference and of the production of ASEAN in the New Asia. ISEAS was responsible for getting scholars from Southeast Asia and for editing and publishing this volume.

Since economic matters feature prominently in Southeast Asia-Europe relations, the focus of the conference was more economic. However, the relationship between the two regions goes beyond economics, and, further, any attempt to understand Southeast Asia must take into account the changes in the security environment. So issues of politics and security were not ignored. This is evident from the Table of Contents to this volume.

We take this opportunity to thank the authors of the articles in this volume for their contributions.

Introduction

It is common knowledge that ASEAN (Association of Southeast Asian Nations) was created in 1967 primarily for security reasons in the midst of the Cold War. Understandably, geopolitics has always been the main focus of ASEAN affairs. Economics did not receive any attention in the first decade of ASEAN, although some lipservice was paid to regional economic co-operation in the second decade. Several economic co-operation schemes,which were initiated at the Bali Summit in 1976, did not perform well, either because they were formulated hastily without careful studies or because they were implemented in a somewhat half-hearted manner.

This observation need not be taken as a criticism. For it might well be argued that tightly knit regional economic integration is not in the best interest of ASEAN, given its extensive extra-regional commercial linkages. A closer economic co-operation would have rendered ASEAN an inward-looking regional entity and might have resulted in welfare losses. Besides, the distribution of gains and losses would have been very uneven, given the wide development disparities among its members.

ASEAN may not be considered a ‘natural grouping', if the share of intra-regional trade is any measure. Intra-ASEAN trade has constituted less than one-fifth of the total trade until recently and much of it is accounted for by the entrepot trade of Singapore. ASEAN may not also meet another, more stringent, criterion of a 'natural grouping', which requires complementarity in supply structures to prevent preferential trading arrangements from hurting third countries. For ASEAN economies tend to compete with one another in international markets.

If hindsight is any help, ASEAN countries do not need regional economic co-operation to prosper. ASEAN economies have registered creditable growth rates in the past. This, however, does not mean that ASEAN is of no economic consequence. Far from it. ASEAN has helped defuse tension and prevent conflicts in the region so that its members could concentrate on economic pursuits. The usefulness of ASEAN is beyond question, although the Cold War, which necessitated it, is over. Again, the current accent is clearly on geopolitical security and stability, with economic co-operation serving as a means rather than an end.

Introduction

When a co-operation agreement between the European Community (EC) and ASEAN was signed for the first time in 1980, the relationship between the two regional groupings was asymmetrical in nature. The EC was positioned as a donor at one end while ASEAN was positioned as a recipient at the other end, though the treatment accorded to ASEAN was and remains far less preferential than the one extended to the African, Caribbean, and Pacific (ACP) countries of the Lome Convention. Both regions have witnessed dramatic changes in the subsequent years. The EC, which in the meantime had been transformed into the European Union (EU), today is hardly recognizable compared to what it was in the early 1980s. Southeast Asia of the 1990s has also experienced changes such as the creation of the ASEAN Free Trade Area (AFTA), which was considered a taboo in the early part of the 1980s. Malaysia, Singapore, and Thailand are now included in what the Organization for Economic Co-operation and Development (OECD) classifies as Dynamic Asian Economies (DAEs) or a group of semi-developed economies. Of no less importance are changes in the global economic environment which, on balance, interact in favour of world-wide integration in contrast to the disintegration of the early 1980s.

Considering the dramatic changes within the EU, ASEAN, and the rest of the world in the second half of the 1980s and the first half of the 1990s, a new look at EU-ASEAN relationship appears to be needed. Possible elements of such a reformed relationship will be discussed in the last section of this chapter.

As a prelude, a discussion is needed about how the EU and ASEAN have changed in the last ten years or so. At the risk of being speculative, possible covergence and divergence of interests between the two regions in the coming years will be explored in order to identify areas where co-operation is more likely to be productive.

Early Stage of Catching-Up

A casual look at the structure of international economic relations is enough to discover the strong association between the level of economic development and the magnitude of external transactions across market economies.

Introduction

The focus of this chapter is on foreign direct investment (FDI) in ASEAN, including Vietnam, which joined the grouping in July 1995. The treatment of the other Southeast Asian countries of Cambodia, Laos, and Myanmar is very brief as investment information on these countries is not readily available or comparable with that of ASEAN.

The rest of the chapter is divided into four sections. Section II outlines the global and regional trends in FDI. Section III surveys the trends and patterns of FDI in Southeast Asia. Section IV examines ASEAN's investment strategies and is followed by the concluding section.

Global and Regional Trends in FDI

Volume and Direction of Investments

In 1995 global FDI flows reached an all-time high of US$315 billion (UNCTAD 1996). This represents a continuing recovery from the FDI recession of 1991-92, reflecting the economic recovery of major home economies, rise in mergers and acquisitions, growing international competition, and advances in communication technology that led to increasing globalization of production, further liberalization of the regulatory regimes for FDI and trade, privatization of state-owned enterprises, and new investment opportunities in infrastructure.

The Triad (the United States, the European Union, and Japan) remained the major sources of the world's FDI stocks and flows, although the Asian newly industrializing economies (NIEs) of Hong Kong, Singapore, South Korea, and Taiwan are rapidly emerging as significant foreign investors in East Asia. The United States lost its position as the world's leading foreign investor to Japan during 1988-90, but regained that position since 1991. In 1995 its FDI stock stood at US$706 billion or one-quarter of the world's stock, and its FDI outflow (balance of payments basis) stood at US$96 billion, or 30 per cent of the world outflows. The United States was also the world's single largest FDI recipient, with US$60 billion of inflows in 1995. For Japan, outward FDI stock reached US$306 billion and outflows reached US$21 billion in 1995, the latter showing a sharp recovery but remaining significantly below the 1989-91 levels.

Security Order during the Cold War

Southeast Asia and the Major Powers

All of Southeast Asia, except Thailand, was colonized by the major European powers or the United States, and their wars, rivalries, and deals largely delineated the present frontiers of Southeast Asian countries. Although decolonization took place after World War II, until ASEAN was established in 1967 a sense of regional identity was virtually non-existent.

During the Cold War the Southeast Asian security order was determined largely by the United States, the Soviet Union, and China, with Japan acting as a junior partner of the United States and helping in the fight against communism by contributing to economic development of the region. France and Britain had lesser roles, mostly up to the 1950s and 1960s, in Indochina and Malaysia/ Singapore respectively, though a small British role continues to the present day through the Five Power Defence Arrangement. In the 1970s and the 1980s Southeast Asia itself, through ASEAN, sought, but with limited success, to have its own stamp on the region's security order.

There were two Cold Wars in East and Southeast Asia: the East-West Cold War which lasted from the late 1940s to the late 1980s which, in Asia, pitted the West and Japan, led by the United States, against first both the Soviet Union and China and then against the Soviet Union alone; and the East-East Cold War which from the 1960s pitted the Soviet Union against China. These Cold Wars were fought over the broad East Asian/Western Pacific landscape of which Southeast Asia was but one part. They affected this broader regional order in a number of ways.

Firstly, they gave birth to Big Power initiated security structures, the most prominent of which has been America's alliance system. To be sure, America's security treaty with Japan had its origins as much in the need to ensure that Japan did not rearm and commit aggression again as in the desire to contain the communist powers. Likewise the treaties with Australia, New Zealand, and the Philippines were originally meant as much assurance against Japan as building blocks in any grand anti-communist containment strategy.

Introduction

After World War II ended in 1945, the General Agreement on Tariffs and Trade (GATT) was established to create an open and free trading system. Together with the system of fixed currency exchange established under the International Monetary Fund (IMF) agreement at Bretton Woods, a stable global trading and monetary system was instituted. These two key post-war institutions, sustained by the hegemonic power of the United States — based on its technological, economic, and military superiority — ushered in an unprecedented period of steady expansion in world output and trade as well as closer economic interdependence in the non-communist free world. World trade in volume terms expanded at an average annual rate of 5.6 per cent between 1953 and 1963 and 8.5 per cent between 1963 and 1973, much higher than the average rate of 3.5 per cent between 1873 and 1913 and the 0.9 per cent in the inter-war period of 1919-39.

This unprecedented expansion in world output and trade in the post-war era provided the Asia-Pacific economies like Japan and the four East Asian newly industrializing economies (NIEs) — South Korea, Taiwan, Hong Kong, and Singapore — with a conducive and stable environment for export-led growth. They were lucky to set sail on the tack of industrial catching-up when the gust of wind was strongest. Consequently, from the mid-1960s to the early 1990s the four NIEs were the most dynamic middle-income economies in the world. Their annual growth rates in gross national product (GNP) per capita between 1965 and 1990 have averaged 6 to 8 per cent, almost triple the average rate of 2.3 per cent for middleincome economies of the world and double the 3.6 per cent average for countries in the Association of Southeast Asian Nations (ASEAN), excluding Singapore.

The pattern of industrialization and exports of the NIEs has been rather similar. After a short period of protectionistic importsubstitution policy in the 1950s and early 1960s, they soon turned to an export-oriented strategy for growth. During the early stage of the outward-oriented development strategy in the 1960s, the emphasis was on the production and export of traditional labourintensive products such as textiles, clothing, footwear, toys, leather goods, and other light manufactured goods.

Nineteen ninety-five was a watershed year for Malaysia. Commentators on national affairs were almost unanimous in asserting that a long period of national struggle had reached its culmination. A new post-colonial generation was entrenched in the political succession. The economic restructuring of the New Economic Policy (NEP) lay in the past, growth rates soared and Malaysia had graduated as an “upper middle income country” with a per capita gross domestic product (GDP) above that of Greece. Malaysia was looking outwards, articulating a sense of pur- pose and cultivating a new patriotism. It was a time of visionary public works, lit by the torch of technology. The world was coming to Malaysia and applauding its achievements. The April 1995 National Front electoral landslide provoked parallels with the first Alliance victory on the eve of independence in 1955. Indeed, one could see the ruling alliance surging forward in a similar wave of triumphalism, a similar promise of prosperity. One man dominated Malaysian politics to an unprecedented extent: 1995 was Mahathir's meridian. It seemed also that an era of opposition politics had come to a conclusive end. These epochal moments caused new questions to be voiced about the future. Did this represent the “end of politics” in Malaysia, the end of Malaysia's post-colonial history? Were Malaysians witnessing the demise of ethnic politics and the birth of a new kind of society — the founding moment of a new Malaysia even?

Historians tend to be wary of such talk. It smacks of bad history, the kind of rigid teleological narrative into which the histories of nations are often com- pressed. Historians now emphasize the dissonances that arise in the development of a nation or a nationalism. They chart prospective histories that look forward from the past and emphasize the variety of historical outcomes that were possible at every stage. They observe how nationalism is continually reinvented in response to new ideological challenges and social change.

Cambodia has, time and again, proved wrong the doomsmen who predicted that the coalition government formed by the two former battlefield enemies, the royalist FUNCINPEC (National United Front for an Independent, Peaceful, Neutral and Co-operative Cambodia) party and the former communist Cambodian People's Party (CPP), would collapse within six months of its formation in 1993. The coalition royal government held firm throughout 1995, and betrayed no sign of self-destructing. The odd dissenters who broke ranks with the coalition were quickly ousted, as was witnessed in the removal of outspoken Finance Minister Sam Rainsy from the government in 1994, and his subsequent removal from the party in May 1995, and the National Assembly in June 1995.

DOMESTIC POLITICS AND SECURITY

Democracy versus Authoritarianism

In an unequal battle between the forces of democracy and authoritarianism, the latter prevailed. While many within the CPP and FUNCINPEC viewed the growing strength of the coalition as a sign of national unity and a basis for economic growth, equally many among the smaller opposition parties fretted that a strong coalition was a harbinger of an emergent dictatorship that showed scant respect for the country's fragile democracy and press freedom.

A strong coalition, in turn, made the likelihood of a coup quite remote as it prevented a single individual from monopolizing political power. This led to the question: Who really ran Cambodia? It was not a marriage of equals. The CPP was the dominant force and FUNCINPEC the weaker partner in a power equation that was likely to be skewed even more in the former's favour on account of further expected defections from the latter. The CPP and FUNCINPEC shared the ministries equally between them, but the former controlled much of the provincial administration.

Stung by media criticism of its policies, the government in December 1995 issued a statement listing its achievements and accusing the press and some non-governmental organizations of slander by “wrongly interpreting facts … in a bid to tarnish the reputation of the royal government and the Cambodian people”.

Although there is considerable diversity in living standards and level of development, the countries of Southeast Asia share a number of features and have adopted similar macro-economic and sector policies and have generally been successful in achieving high rates of economic growth. These countries are all at various stages in the process of making the transition from agriculture and labour-intensive manufacturing to higher technology and skill-intensive products and further development of the services sector. Countries in Southeast Asia have generally adopted open trading systems, maintained low rates of inflation and adopted prudent fiscal and monetary policies. They have also been very successful in raising saving and investment rates to high levels while also attracting capital and technology from abroad. However, they have also been the recipients of large inflows of foreign direct investment, which has helped them to increase industrial capacity and adopt new technology.

Regional Economic Performance

The economies of Southeast Asia faced a number of challenges in 1995. For the countries within the Association of Southeast Asian Nations (ASEAN), continued rapid growth put pressure on labour markets, stretched productivity capacity and threatened continued price stability. Controlling inflation without a slowdown in growth was a paramount concern of public policy for many economies in the region. In a rapidly globalizing international environment, Southeast Asia faced intense competition in external markets and the need to upgrade skills and technology to meet these challenges intensified. Moreover, the financial crisis in Mexico posed a potential risk to the region as there was a ripple effect on other emerging markets. However, prompt policy responses and the strength of underlying economic fundamentals kept the disruption within Southeast Asia to a minimum. While stock markets weakened in the weeks immediately following the crisis, business returned to normal very quickly.

The transitional economies of Myanmar, Cambodia and Lao PDR, and to a lesser extent Vietnam, faced the serious challenge of continued structural adjustment from centrally planned to market-driven activities.

We are pleased to present the twenty-third issue of Southeast Asian Affairs, an annual of comprehensive regional coverage on the political, economic, and social trends and developments in Southeast Asia.

Designed to be easily readable yet in-depth, informative and analytical, the annual has come to be a useful tool for all serious students, academics, diplomats, senior executives, journalists, and publicists who seek to understand the dynamics of Southeast Asian developments.

The year 1995 saw further substantial economic gains in Southeast Asia. Growth rates were high in virtually all countries of the region. The most significant development of the year was the expansion of ASEAN to include Vietnam and moves to incorporate the remaining countries of Southeast Asia into the organization within the next few years. The domestic political systems of the countries in the region were relatively stable and chances of inter-state conflict in Southeast Asia remained minimal. However, the tensions in the Taiwan Strait and the deterioration in U.S.–China relations constituted a dark cloud in an otherwise rosy environment. Southeast Asian Affairs 1996 looks at some of these developments and trends.

Finally, I take this opportunity to thank all the authors who have contributed much to make this publication possible. While the Institute encourages the statement of all points of view in the publication, the authors alone are responsible for the facts and opinions expressed in their articles. Their contributions and interpretations do not necessarily reflect the views of the Institute or its supporters.

Introduction

In 1995, Indonesians celebrated the fiftieth anniversary of the Republic's proclamation of independence with deserved pride in the nation's accompishments. The year-long festivities marking Indonesia's golden anniversary included numerous commemorations of the nation's growth and stability, and solemn remembrances of the sacrifices of its revolutionary freedom fighters. None the less, the celebrations masked the profound concerns of Indonesia's political and intellectual élite who are increasingly fragmented and divided over key issues affecting the nation as they position themselves for the much anticipated post-Soeharto era.

Yet Indonesians do have much to celebrate. The country's economic achievements and successful social programmes have been internationally recognized and praised. The widely circulated World Bank report, The East Asian Miracle, pointedly identified Indonesia as one of East Asia's (and the world's) consistently “high-performing economies”. President Soeharto has received prestigious awards from United Nations agencies citing Indonesia's success in food self- sufficiency and population control. Indonesia's economic “miracle” has become well known and it is increasingly seen as a rapidly industrializing nation, eager to participate in the global economic community. Its per capita gross national product (GNP) has grown exponentially, from a mere US$60 in 1967 to approximately US$900 in 1995. The praise has been so fulsome, however, that it has obscured recognition of some shortcomings in Indonesia's economic growth, particularly in terms of the gap between those who have most benefited from development and the vast majority of the population which remains quite poor. None the less, poverty has been reduced and the quality of life for most Indonesians has measurably improved.

Most of the credit for Indonesia's economic and social policy successes must go to the New Order government of President Soeharto which has ruled for nearly thirty years. In part, Indonesians in 1995 celebrated and acknowledged the New Order's success as well as fifty years of national independence. Indo- nesia's economic growth and general improvements in most social and quality of life indicators date from the replacement of the “Old Order” of President Soekarno with the “New Order” development-oriented government of General, later President, Soeharto.