Methodology

A revised version of the Armington (1969 and 1970) approach developed by Tyers (Uehara and Tyers 1980, Lin 1986) is used here because of its ability to isolate income growth effects and to account for supply-side effects without prohibitive data requirements. In the case of ASEAN integration, this approach is advantageous because it goes beyond the estimation of trade creation and trade diversion and provides estimates of growth of exports, imports, consumption, and production. More importantly, the analysis can be done on a disaggregated industrial level which allows some analysis of changes in the structure of production in the region. It should be noted that under the Armington assumption, a country will simultaneously export, import, and produce a good for domestic consumption because the same good produced in a different country is considered to be an imperfect substitute — that is, textiles produced in the Philippines are not perfect substitutes for textiles produced in Thailand. Substitution and price elasticities as well as the extent of the tariff change will determine the change in the proportion of imports to total consumption (which is equal to total production less exports plus imports). Exports are determined by imports from partners and total production is the sum of exports plus production for domestic consumption. The model is basically demand-driven but, unlike most models of this type, supply is not perfectly elastic. Production increases are constrained by supply elasticities.

In the model, there are six countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and the rest of the world) which are simultaneously producers, importers, and exporters of each commodity. The study looks at all manufactured goods with the exception of petroleum, or a total of 25 goods at the three-digit ISIC level. These goods comprise approximately 60 per cent of total ASEAN trade. The data represent the average for 1983 and 1984 imports and production. Price and supply elasticity estimates were imputed while substitution elasticities were assumed to be 2.0 for trade among the ASEAN countries and 0.5 for trade with the rest of the world.

ASEAN'S Economic Features

The total population of ASEAN member states reached 314.9 million in 1988. Extreme di sparity exists in the level of income among these countries. The lowest per capita Gross National Product (GNP) was US$490 for Indonesia while Brunei was placed at the top with US$17,000 mainly due to its abundant oil resources. Singapore, recognized as a Newly Industrializing Economy (NIE), had the second highest per capita income with US$10,450 and has since attained developed country status (Table 2.1). Indonesia and Malaysia, both rich in natural resources, are fast expanding their manufacturing capabilities. Thailand is also rapidly developing as an exporter of manufactures with a solid agricultural base; it has registered the highest growth rate in the region. The situation is not similar for the Philippines which is constrained with a host of socio-economic and political problems.

The region as a whole was considered a high-growth area during 1971–80 and has carried the momentum into the nineties. GDP growth in Thailand in 1990 was the highest in ASEAN — at 10 per cent — and is expected to be maintained in 1991. The GDP growth rate of the Philippines on the other hand was 2.5 percent in 1990, the lowest in the region, together with highest inflation rate at about 15 per cent. However, the average growth rate in the region is well above that of many developing economies outside the region. Singapore has been maintaining the economic pace with its usual role as an “entrepôt” for trade and a centre of production and investment with increased emphasis on high-technology activities.

A look into the sectoral share of GDP shows an increasing role of the industrial and service sector implying a continuing transformation of the economy from a primarily agricultural base to an industrial and service sector base. In 1989 the agricultural sector in the Philippines contributed 26.9 per cent to its GDP with the domination of the service sector (40%) and industry (33.1%).

As 1992 approaches, there is much discussion of the effects of the single market on third countries. The main concern of third countries is the creation of a “fortress Europe” rather than a Europe that will share its “prosperity” with the rest of the world. One of the traditionally sensitive sectors already subject to import restrictions is the textile and clothing industry. Since the EC market is one of the most important markets for textiles and clothing from countries of the Association of Southeast Asian Nations (ASEAN), it is useful to analyse how full economic integration of the European Community (EC) will affect its exports of textiles and clothing.

The aim of this chapter is to look into the various possible scenarios of the impact of the formation of the EC single market on third country imports of textiles and clothing. This includes an examination of the impact of specific EC policies on textiles and clothing on third countries, as well as any impact arising from changes in the textile and clothing industry in the EC countries after the formation of the single market.

The rest of this chapter is divided into five sections. The first section provides a general background of trends in textile and clothing production, employment, and trade of the EC and ASEAN countries relative to other countries. The second section compares the characteristics of the textile and clothing industry in each region. The third section describes EC policies towards third countries on textiles and clothing and the impact on the ASEAN countries up to the present time. We then look into a set of alternative scenarios regarding the impact of the EC single market on ASEAN trade in textiles and clothing. Some conclusions and recommendations are provided at the end of the chapter.

General Trends in Production, Employment, and Trade in Textiles and Clothing

To understand EC policies on textiles and clothing, we begin with a background on the trends in production, employment, and trade in textiles and clothing of the EC and ASEAN countries relative to other countries.

Why do countries form free trade areas? Economic theory shows that reducing tariffs multilaterally is almost always superior to preferential reductions in terms of world and member countries' welfare, and yet the tendency to form trading blocs has increased rather than slowed in recent years. It is not enough to look at the benefits from trade creation and the losses from trade diversion, important though these may be. It is also necessary to look at the benefits of reduced trade barriers which come from increased efficiency, gains from achieving economies of scale, and dynamic effects accrued from increased competition, learning by doing, and so on, all of which are difficult to measure. Additionally, a “collective good” argument has often been used to explain why governments have continued to lean towards free trade areas and customs unions despite the costs involved. The countries forming the union are more concerned with growth of exports and real output, industrialization being a major national goal.

Static Gains and Costs

Static effects of integration as emphasized in traditional theory generally argue that developing countries in particular have little to gain at best, and at worst may be harmed by economic integration. It is important to look at some of these indicators to ascertain a priori the possible net effect of integration on ASEAN. Six indicators will be briefly discussed in this section: (1) the size of the union and the initial share of trade conducted within the union; (2) the level and dispersion of tariff levels; (3) the initial level of development; (4) the commodity structure of trade in the region; (5) the potential for intraindustry trade; and (6) transport costs and other natural barriers.

Pre-integration Intra-regional Trade Levels

Economic theory suggests that the larger the economic area of the preferential arrangement and the more countries included, the greater the scope for trade creation. The scope for trade diversion will also be lower since it will be more likely that the lowest-cost producer will be within the union.

The economies of the ASEAN countries – Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand – are highly energy dependent. The member countries have always been vulnerable to price, supply, and demand swings relevant to energy resources. Any disruption in energy supply and price represent a serious threat to economic stability as was proved by the oil crises of 1973-74 and 1979-80. Both crises caused higher inflation, depressed the export market, and raised import expenditures. The economy of the region slowed down considerably.

In response to the volatile behaviour of the oil market, oil importing countries, since the first oil crisis, have increased indigenous energy production, diversified their source of energy supply, intensified substitution efforts to replace oil with alternative energy resources, and have reduced energy intensity significantly. Similarly, to minimize the impact of lower oil prices in the economy, Malaysia and Indonesia, the major oil exporting countries in the region, have increased the share of non-oil-and-gas exports dramatically and are now better prepared to absorb the shock of lower oil prices than in the 1970s.

However, even with these structural changes and the experience of two decades of dramatic price fluctuations, the region is still vulnerable to energy prices and supply disruptions as demonstrated by the energy problems triggered by the Iraqi invasion of Kuwait in 1990. Higher oil prices generated a multitude of problems – pressure in trade balance and balance of payments, inflation, and the curbing of economic growth in oil importing countries. The oil windfalls produced by the 1990 energy crisis were still highly significant to Indonesia and Malaysia.

The strong relationship that exists between energy and economic development in the ASEAN countries (as is true in many developed as well as developing countries) makes comprehensive energy planning imperative, but the uncertainty involved in the energy market makes such planning increasingly difficult. As a consequence the energy situation has to be assessed and policies have to be reviewed regularly.

This handbook provides basic information on the Association of Southeast Asian Nations (ASEAN), its organization and the various co-operation activities. The emphasis is on economic co-operation.

In their day-to-day work, political and administrative decision-makers, academics working on ASEAN, as well as all informed citizens of the ASEAN countries regularly require such information. It is available in many forms, but it is mostly scattered in official documents and in the fast expanding current literature on ASEAN. There is, thus, a need to provide the basic information in a handy volume. This handbook attempts to fill that need.

The material has been drawn together from many sources, and due care has been taken to be as up-to-date and accurate as possible. Nevertheless, this handbook is not an official ASEAN document and, since ASEAN is a living organization within a continuous process of change, updating will become necessary from time to time.

The ASEAN Economic Research Unit of the Institute of Southeast Asian Studies would welcome corrections and suggestions for improvement for the next update of this handbook. All such information should be addressed to the Co-ordinator of the ASEAN Economic Research Unit at the address below.

Over the last 30 to 40 years, the limited purpose, underloaded states of earlier times have evolved, or been moulded, into the multi-institutional, multi-purpose states which are so much a distinctive feature of the present era. The stimulus for this remarkable development has come, in part, from the relevant communities in the form of numerous public demands for various kinds of state action; and also, in part, from the desires or perceived needs of governments to become directly involved in all manner of social and economic activity within their societies. In the process, the institutional machinery of many states has inevitably become large and complex in terms of both the number and variety of components, and the range of functions performed. Indeed, the situation in most of these states is now such that the capacity of governments to govern is actually being seriously eroded by the effects of structural and functional overload. The main effects are sizeable budget deficits and foreign debts, the problems of which are frequently exacerbated by organizational inefficiencies and waste.

The significance of this last remark is particularly apparent in respect of state enterprises, or public enterprises as they are normally called: that is, those organizations within government which, although often variously structured, all have established business or commercial responsibilities of one kind or another and, thus, constitute the main means by which a government is directly involved in the development and operation of an economy. These enterprises tend, in many countries of the world, to be over-staffed, underproductive, inadequately responsive to market forces, and unprofitable. Of course, there are important exceptions, including, for example, the system as a whole in Singapore; however, the situation, in general, is that which has just been indicated. Hence, it is not surprising that many governments in the last few years have been keen to consider, and often to adopt, a variety of means of transforming selected enterprises. An underlying and continuing objective is obviously to enhance the performances of the enterprises concerned and/or to relieve the state of organizational and financial burdens which really can no longer be carried.

Both models, despite differences in methodology, base years, and coverage of goods, show that reduced preferential tariff barriers will have a positive, but not substantial, effect on trade and production in the region. Intra-ASEAN trade expands significantly in both models, in some cases by more than 50 per cent. This represents an increase of between US$1 and US$2 billion of manufactured exports. Trade with the rest of the world declines slightly, leaving only marginal changes in total trade. Because of the relatively small size of intra-ASEAN trade, the increase in trade enlarges the share of intra-ASEAN trade to total trade by about 10 per cent or less. A change in production patterns is predicted in the partial equilibrium model, though the total change in production is marginal. The problems of both models have been briefly discussed and the exclusion of possible dynamic effects or feedbacks in both make these estimates low-end for the possible effect of preferential tariff reductions in ASEAN. At the same time, the models do not account for problems caused by non-tariff barriers and different industrial standards or codes, and both assume no trade deflection.

The conclusion that can be drawn is not unequivocal. There are gains in terms of increases in intra-ASEAN trade, but the gains in terms of increased total trade and income are likely to be small.

Nonetheless, several factors may contribute to moving ASEAN in this direction. First, it should be noted that ASEAN is more prepared than it was in the past (and in the base periods of the models) to proceed with integration as their levels of industrialization and tariff differentials converge. The increasing industrialization of Indonesia and the lowering of trade barriers and privatization in most of the resource-rich countries will serve to reduce the potential sources of conflicts and problems of integration. In addition, these changes are likely to increase the gains ASEAN will reap with integration. Secondly, if tariff reductions are closely co-ordinated with industrial co-operation, gains accrued are likely to be larger.

The results of Malaysia's elections had always been dull in one respect : the ruling coalition was so well entrenched that in the past, no observer saw a possible change of government, nor even the remote chance that the opposition could break the government's two-third majority in the national Parliament. There was the possibility of the opposition effecting a change in government only at the state level in one or two of the thirteen states. Ever since the debacle in the 1969 elections, the ruling coalition had seemed quite unshakeable. However, in 1990, the ruling Barisan Nasional coalition appeared vulnerable. The opposition had galvernized around Tengku Razaleigh and organized two fronts to take on the ruling coalition. In this election, the opposition was not only talking in terms of denying the Barisan Nasional of the two-third majority, but of forming the next government with the co-operation of some political parties in Sabah and Sarawak.

At the state level, the opposition was confident of capturing the state government in at least two states. Kelantan was not only Tengku Razaleigh's home state, but also the stronghold of PAS which had won ten state seats and lost in fourteen other constituencies by majorities of less than 1,000 votes in the previous election. In Penang, the DAP had launched its “do or die” battle to take over the state government by moving its party stalwarts from their “safe” seats to contest against the “strongmen” from the ruling coalition. Backed by the assumption that the DAP would continue to win in its traditional strongholds anyway, this step was deemed necessary for the party to gain additional seats at the expense of the ruling coalition. The calculation was that with Semangat '46 winning in a few constituencies, an opposition takeover was not an impossible target.

For months, the opposition had been campaigning on the issue of a twocoalition system and the idea seemed to have been well received by the public.