Definitions of terms East and Southeast Asia comprises the region roughly situated south of Russian

  

UNDERSTANDING THE MACROECONOMIC

BUSINESS ENVIRONMENT Of EAST AND SOUTHEAST ASIA A Reader H.C. Blomqvist

  Definitions of terms

East and Southeast Asia comprises the region roughly situated south of Russian

Siberia and East of India. See Figure 1.

  Map of East and Southeast Asia Figure 1.

  Note that the terminology is not always clear. Sometimes the whole region is referred to as “East Asia” – especially in economic contexts. Sometimes China + Korea + Japan are called “Northeast Asia”, sometimes “East Asia”. Moreover the following labels are often used:

• “Far East”, meaning roughly the same as “East and Southeast Asia”
• “Asia-Pacific”: East and Southeast Asia + Australia and Pacific island states
• “Pacific Rim”: All countries bordering to the Pacific Ocean (includes the American side).

  In this reader, we use “Asia” for short when referring to East and Southeast Asia.

  

ASEAN is the Association of Southeast Asian Nations, the most important vehicle

for co-operation and integration in Asia. All Southeast Asia countries are members.

  : A loose co-operation structure between ASEAN and China, Korea and

  ASEAN + 3 Japan; aims at establishing a free trade area (and maybe more) in the long term.

NICs or NIEs: Newly Industrialised Countries (Economies); refers traditionally to

  Hong Kong, Korea, Singapore and Taiwan (but de facto today several other countries could also be included).

  The importance of Asia in the world economy

  Asia as a whole (including India etc.) accounted for 60 percent of the global production as late as 1820. The share reached its lowest level after World War II with 18.5 percent in 1950 and was 37 percent in 1998 (Bigsten 2002). East and Southeast Asia accounted for 31 percent of the world’s population and 00 percent of its exports

  

  in 2000. Foreign Direct Investme

  

  dominating among “developing countries” prised 60 percent in 2002. See Table 1.

  Table 1. FDI inflows to Asia, USD billion 2001 2002 United Nations (2003): World Investment Report. N.Y. and Geneva.

  Source:

  East and Southeast Asia, excluding Japan, absorbed 21 percent of global inward FDI on average 1991-96. (Japan took only 0.3%.). In 2002, East and Southeast Asia received 13 percent, excluding Japan, while Japan received 1.4%. As to outward flows, Asia (exclusive of Japan) accounted for 5 percent in 2002 and Japan for excluding Japan, while Japan alone accounted for 7.5 percent. Note that the figures may differ rather drastically from year to year.

  The direction of the FDI flows has changed over the years: In the 1980s and 1990s, Southeast Asia was the major recipient, while recently (after the Asian crisis 1997-98) China has become the leading recipient. Note that inwards FDI to Japan was very small until recently. However, during the last few years Japan has received increasing volumes of FDI, partly as a result of deliberate policy.

  In the global economy, Asia interacts mainly with North America and Europe (the so- called triad), while the rest of the world is more or less marginalised. Note also that the economic relations between Asia and North America are much closer and more developed than those between Asia and Europe. See Figure 2.

  . The triad

  Figure 2

  East Asia North America

  Europe

  Some basic economic facts

  A characteristic trait for the region is its heterogeneity:

• N.B. the size of the Japanese economy: Japan alone accounts for 65 percent of the region’s production (but only 29 percent of its exports). Note that these figures used to be much higher. China’s share of production is about 15 percent and its share of exports is 15 percent, too.
• Some of the world’s richest countries and territories are in Asia (Japan, Hong Kong, Singapore) but also some of the poorest (Myanmar, Laos, Cambodia).
• Endowments of resources are very diverse. Some are rich in natural resources

  (China, Indonesia, Philippines), some are very capital-abundant (e.g. Singapore), etc.

• Economic and political systems are very diverse. Some (like China, Vietnam and Laos) are still one-party (nominally) socialist economies, some very liberal market economies (such as Hong Kong).
• Some are very large (China) and some very small (Singapore, Brunei). Diversity seems to provide scope for a beneficial division of labour in the region. The Asian development has been development of interdependent economies. Much of the trade and FDI flows are intra-regional. This reduces the dependence of the region on trade cycles in other parts of the world. On the other hand, trouble in one major economy spreads easily to the rest of the region, as shown by the Asian crisis in the late 1990s. There are also common traits, however, with occasional exceptions:
• High growth rates on average over the long term
• High rates of savings and investment
• Emphasis on education and health care

  Structural change Economic development is regular accompanied by a restructuring of the economy.

  The share of the primary sector (agriculture etc.) decreases while that of industry increases. Finally, the service sector tends to take over as the dominant sector. For Asia, see Table 3.

  Income distribution

  East and Southeast Asia are known for “growth with equality”, i.e., the income distribution has usually not deteriorated despite high rates of growth. Note that the income distribution may be crucial for the sustainability of growth; only a reasonably even distribution makes mass markets for goods and services possible. Note also that distribution factors may be important for foreign investors – how to plan their investment and marketing strategies! See Table 4.

  Sectoral distribution of GDP, % Table 3. Country Agriculture Industry Services 1970 2001 1970 2001 1970 2001 China 42 11 45 66 13 24 Indonesia 35 16 28 36 37 48 Philippines 28 20 34 34 38 46 Thailand 30 8 26 44 44 48 Malaysia n.a. 23 n.a. 43 n.a. 49 Korea 30 5 24 44 46 51 Hong Kong n.a. n.a. 14 n..

  86 Singapore 2 0 36 31 61 69 Japan n.a. 2 n.a. 37 n.a.

  61 Source: Dowling & Valenzuela, World Bank.

  Income distribution, 2000 Table 4.

  Income share of Income share Top 20%/ Share of pop. bottom 20% of top 20% Bottom 20 % With less than

  1$/day China 5.9

  46.6

  8.0

  22 Indonesia 9.0

  41.1

  4.6

  8 Malaysia 4.4

  54.3

  12.4

  4 Philippines 5.4

  52.3

  9.8

  27 Thailand 6.4

  48.4

  7.6

  2 Vietnam 8.0

  44.5 5.6 n.a. FINLAND 10.0

  35.8 3.6 n.a. Kokko 2003.

  Source: Health status

  Health is another indicator of development; see Table 3. Health status is closely, but not perfectly, correlated with national income per capita.

  Education and technology Table 5 shows some indicators of the level of education and technology, both regarded as paramount for successful economic development.

  Helth indicators Table 3. Life Underweight Infant Sanitation Public expenditure expectancy children < mortality, facilities, %, on health, % of

  2000 age 5, % ‰ 2000 2000 GDP, 1998 Japan 81 n.a. 4 n.a. 5.7 Korea 75 n.a. 5 63 2.4 Taiwan 74 n.a. n.a. n.a. n.a.

  Hong Kong 80 n.a. 5 n.a.

  2.3 China

  70

  10

  32

  38

  2.1 Indonesia 66 26 35 66

  0.8 Malaysia 72 18 8

  1.4 Philippines 69 28

  30

  83

  1.6 Singapore 78 14 4 100

  1.1 Thailand 70 19 25 96

  1.9 Vietnam 68 33 30 73

  0.8 Kokko 2003

  Source: Table 4. Some indicators of the level of education and technology

  Public expenditure Adult literacy rate, People per Scientists and on education, 2000 telephone, engineers per % of GDP, 1997 million people,

  1995-97 Male Female 1990-2000 Japan 3.6 2 4,960 Korea 3.7

  99

  96 2 2,139 Taiwan Hong Kong

  2.9

  96

  90

  2

  93 China

  2.3

  92

  76 9 459 Indonesia 1.4 92

  82

  32 Malaysia 4.9 91

  83 5 154 Philippines 3.4 96 95 25 156 Singapore 3.0 96 88 2 2,182 Thailand 4.8 97 94 11 102 Vietnam 3.0 93 91 31 274

  Source: Kokko 2003

  Explaining economic development in Asia

  With some notable exceptions, East and Southeast Asia is the most successful example of economic development during the last four decades. See Figure 3, to get

  

  Figure 3 . Real GDP per capita in Asia, 1960 – 2000 at 1995 prices Lau 2003.

  Source:

  Given the favourable development, researchers have been looking for an “Asian development model”, i.e., is there a common set of policy measures that can explain what happened? A typical formulation is the following one (El Kahal 2001): “The Asian Model”

• A stable macroeconomic and financial system
• limited fiscal deficits
• encouraged savings
• encouraged investment, including FDI
• avoided overvalued exchange rates

• State interventionism
• selective interventions (industrial policy): targeting credit to selected industries, artificially low borrowing rates, protecting import substitutes, public investment in applied research, etc.
• export promotion
• performance-based credit allocation (cheap funding required meeting certain performance targets)
• Administrative competence
• public spending on education
• governments guided but did not override the decisions of firms policies were constantly subject to review, ineffective policies were quickly abandoned
• qualified government bureaucracy
• Political and economic stability and social cohesion
• government adapted the principle of wealth-sharing (all groups should benefit from growth)
• strong bureaucracy, insulated from political pressure; formalised negotiations between public and private sector to avoid lobbying
• Confucian values and work ethic have been invoked as a reason for success Note, however, that the above “model” is very oversimplified, as the various points apply to a very different extent in different countries. Hence the talk about an “Asian model” is strongly exaggerated. This is now widely recognised. Instead, the discussion has largely evolved about the question of whether a market-friendly environment or selective government interventionism has been the decisive factor behind the development, or whether there may be other important reasons as well. Moreover, there are also examples of less successful development in the regio. Even those cases should be possible to explain!

  The main competing arguments are:

  1) The governments have, by and large, let the markets function, which fostered efficiency and allowed specialisation according to each country’s comparative advantages. This, in combination with favourable external conditions, such as strongly expanding global trade in the late 1900s, fuelled economic growth. 2) Government intervention was crucial for “guiding” the development. The government provided, often within an authoritarian framework,

• promotion of selected industries (“picking winners”) • investment in education, health care, housing etc.
• basic institutions (law and order, property rights etc.)
• prudent macroeconomic management (keeping inflation and unemployment in check, balanced government finances etc.)
• protection against self-serving special interests 3) Other fac
• Culture (Asian cultural tradition may be conducive to development)
• Geographical factors (good possibilities for optimal division of labour, according to comparative advantages; cf. the “Flying geese” model below.
• Note that these factors must be seen as complementary to the first two categories.

  Problems

  It is easy to see that all the above explanations are “wrong” in the sense that they all can be easily criticised:

• It is misleading to think that markets have been left alone, although they were often less distorted than in most other developing countries. Most government have, in fact, intervened more or less heavily in the markets.
• Government regulations are not unusual in developing countries, but the result has often been poor. One reason is the danger for interventions to cause distortions and promote inefficiency. Another reason is that authoritarian governments may easily turn predatory. See article in Appendix 1.
• Culture etc. are long-term characteristics of a country, so why did development come so late?

  

Import substitution model: Produce for a protected home market; substitute domestic

  It seems clear that most countries have applied a mix of market-led development and government interventions. To see what the market and the government, respectively, can do, we look at the two major trade and industrialisation strategies: Import substitution (IS) and export orientation (EO):

  goods for imports. To achieve this, trade barriers, subsidies or foreign exchange controls were imposed. This was the strategy applied by most developing countries until the 1980s. Although it has been largely abandoned by now, especially in Asia, there remain traits of that policy in many countries.

  The theoretical rationale for the IS model is the so-called infant industry argument which says that new industries are not competitive with established ones in developed countries without protection. In the long run, it is argued, the protected industry will become competitive without protection through “learning by doing.” However, in practice, the results have been mostly discouraging:

• Since the domestic market is small, they are soon saturated and the growth potential is exhausted. Moreover, there is little competition, leading to inefficiency, high costs and low quality;
• It is hard to get beyond the easy phase of IS, production of simple consumption goods; when IS was extended to capital and intermediate goods production the result was often poor products at a high price.
• IS requires regulations: bureaucracy leads to slow decision-making. Decisions on investment and technological innovation at the firm level are delayed.
• Special interests are created, which want protection to go on. Firms may use resources to influence government and secure more protection; this may lead to corruption, and mitigates the incentive to produce efficiently.
• In extreme cases the special interests take over the govt and form so-called predatory regime, see below. Even if this is not the case, protectionism is difficult to dismantle.

  Conclusion

  : IS as a strategy has been unsuccessful. It is difficult to back down, however, because of strong special interests and because extensive restructuring of the industry is often necessary. In Asia, most countries (exceptions Hong Kong, Singapore, Brunei) adopted IS policies after the war. The IS policies were gradually abandoned, beginning, with the Newly Industrialised Economies (NIEs), Korea and Taiwan in the early 1960s. From the mid 1980s most of Asia had abandoned IS, but selective protection did not disappear altogether.

  The export-led model: Produce for the world market according to your comparative

  advantages, i.e., each country should specialise in products that it is relatively good at producing and import the rest. The country is then engaged in the global division of labour. Several interpretations of the EO concept is possible:

  a) Deregulate and let the markets determine what to produce; the govt may step in, however, when the markets do not work properly (e.g., research and development (R&D), education, training of labour, housing and health care);

  b) Measures that favour the export sector or particular industries with comparative advantages or potential comparative advantage. (Tax concessions, cheap credits, tariff exemption for inputs, government enterprises for input manufacturing). This alternative means heavy intervention, too. This is what is meant by industrial policy. How can government intervention be defended in the case of EO, which is, in principle, a market-oriented strategy?

• Firms may be reluctant to take the risk involved in venturing into global markets;
• Information on foreign business environments is scarce and costly and may be an obstacle for operating on the global market;

• Capital markets are often rudimentary in developing countries (difficult to borrow for a firm to overcome initial losses, even if the long-run prospects may be good);
• New export-oriented industries may have external effects (effects that extend beyond the industry itself). For instance, technological and/or managerial knowledge can be diffused to other parts of the economy.

  c) Encourage FDI. FDI are “package deals”, involving real capital (machinery and equipment), technology, management and marketing know- how. Host countries hope for linkage effects to domestic firms and technology transfer is supposed to contribute to further growth.

  Criticism of export-led industrialisation

• A pure market solution may produce a lopsided economy (cf. Brunei (which is very dependent on oil and gas), Singapore (which became concentrated in electronics);
• Distortions in favour of exports may be equally damaging as distortions in favour of import-competing goods—“picking winners” is difficult; ex. heavy and chemicals industries in Korea in the late 70s; heavy industries in Malaysia in the 1980s, the aerospace industry in Indonesia in the 1990s etc. Cf. also the collapse of the Korean chaebol (diversified conglomerates), which were largely built with the aid of industrial policy, in the 1990s.
• The “fallacy of composition” argument: What can be done by one cannot be done by all, if all developing countries would go for export-oriented industrialisation it would not work out because of protectionism and lack of markets. Counter argument: more exports leads to more imports; the Asian countries are important trade partners for each other.

  When are interventions successful?

  As a matter of fact, the Asian governments have been interventionist (with few exceptions, such as Hong Kong), although export-oriented. To which extent this is an of growth is controversial, it is not certain that the countries have been

  explanation

  successful because of this interventionism. The question is, whether the countries could have done as well or better without interventions. (In fact, also many

  unsuccessful governments are interventionists.) There are some prerequisites for

  successful interventions, however:

• It is important that interventions do not work against the market forces in the long run. (A country whose main asset is unskilled labour, for example, should not try and develop hi-tech industries.) This view sees the government as helpful if it intervenes when markets do not the do the job properly. Interventions should not be an instrument for promoting the interest of pressure groups. In East Asia authoritarian but developmental governments kept special interests at bay, and they were prepared change policy quickly if necessary;
• A capable and reasonably uncorrupted bureaucracy, insulated from special interest groups, is important;
• The economic and social institutions should be efficient. This means factors like law and order, protection of property and contract rights, a transparent and predictable business environment etc.

  These qualities are present to differing extent in different countries in Asia. There is not “perfect” case. (In Southeast Asia generally weaker public service and institutions than in Northeast Asia.)

  The role of cultural factors and geographical synergy Culture

  The East Asian culture (particularly Confucian philosophy) is allegedly conducive to development through emphasising:

• Thrift,
• Education,
• That the group is more important than the individual, • Respect for authority).

  This is also the core of the so-called “Asian values”. These values appear most prominently in Northeast Asia, Vietnam and among the ethnic Chinese community in Southeast Asia. The idea of Asian values is a controversial one, for some discussion, see Appendix 3.

  Criticism:

• Although there may well be some truth in these ideas, it is hard to prove them as it is difficult or impossible to measure the effect of “culture” • Confucian philosophy was earlier cited as an obstacle to economic growth.
• Several non-Confucian countries have been successful as well. Note, however, the role of Chinese minority in, e.g., Malaysia, Indonesia, the Philippines and Thailand, where this group is important or decisive for the economy.

  Geographical synergy

  East Asian countries are close to each other but very different as to factor endowments. Some are labour abundant, some skill abundant and some capital abundant, etc. This may encourage a division of labour that benefits the whole group. The closeness may also promote spill over effects from one country to another; a country may benefit from being close to a successful neighbour through trade and investment links. This argument is embodied in the so-called The “Flying Geese model”. This model argues that the structural changes in the Asian economy follow a flying-geese pattern, in which economic changes in more developed countries are gradually repeated in the less developed countries, with time lags, when the comparative advantages change. Foreign direct investment from the former to the latter plays an important part in this process. This pattern also encourages trade flows. See Appendix 2 for detail on the flying geese model. Japan has a crucial role in the flying geese pattern in East Asia as the “leader of the flock”. Hence: The growth in Asia has been interdependent – large

  Criticism of the “Flying Geese”:

• Services are difficult to fit into the model: many – although not all – services cannot be removed from their users;
• The pattern has recently become blurred because of the “fragmentation” of production: The final product may be put together from a large number of standard components, manufactured in many different countries and then assembled.

  The “overseas” Chinese: More or less informal networks have been built by the activities of ethnic Chinese in Southeast Asia who conduct business between themselves. These networks also play a great role in engaging China in the economic interaction in the region.

  Industrial, trade and investment policy

  Industrial policy refers to selective interventions by the government in order to change the industrial structure of a country in a way that is perceived as favourable, i.e., more advanced. A broader definition of industrial policy includes attempts at creating a favourable business climate in general. Obviously, this includes trade policy (cf. the discussion on IS and EO policies above) and policy towards FDI. Many Asian countries used, and still use, industrial policy extensively as an instrument for development.

  Examples of industrial policy: Japan

• • A new Ministry of Trade and Industry (MITI) was empowered to guide the

  industrial development (engaged in industrial planning, financing, enforcing mergers, setting production quotas, rationing foreign exchange, and sourcing and allocating foreign technology to individual firms)

• • Rationing of funding and foreign exchange the major instruments, especially

  in the beginning; later more indicative “guidance” by the state

• The Ministry of Finance exerted strong influence on the allocation of credits
• The exchange rate of the yen was fixed at a low level: Japanese products were cheap

• • Firms were encouraged to aim for export and the infant industry protection

  such as subsidised loans, tax holidays treatment, etc were conditional on satisfactory export performance

• FDI not encour
• The regulation of competition different from that of the West: Industries were allowed to concentrate, however, competition was fierce despite a small number of players

  Korea

• Change took place from IS to EO in the early 1960s
• Export promotion through credit allocation, tax favours, tariff exemptions on inputs; measures mostly targeted very big chaebol
• Incentives linked to export performance
• Simultaneously, protection of home market, also depending on export performance
• Exchange rate policy (the value of the won was kept low)
• FDI not encour

• • Forced mergers, sales or liquidation because of inefficiency or “excessive

  competition”

• Occasional failures happened, especially in the context of the emphasis on heavy industry in the 1970s

  Taiwan

• Targeting first labour intense industry; from the mid 1970s heavy industries

  (with less success) and high-tech industries from the 1980s

• Tax incentives, export credits and insurance etc., but not selective financing
• FDI were encouraged
• State-owned enterprises (SOE) prevalent in basic industries; otherwise industrial structure was dominated by small and middle sized enterprises (SMEs)

  Southeast Asia

  The region took up many traits from export oriented industrial policy in Northeast Asia from the mid 1980s, but the state bureaucracy was usually weaker (except for Singapore) and less insulated from special interest groups and, hence, corruption a bigger problem.

  Indonesia

• Export promotion and liberalisation of foreign trade from the mid 1980s but continued targeting of some strategic sectors (capital and/or skill intensive, e.g., aerospace!) with doubtful comparative advantages. Direct state involvement (SOEs) in targeted sectors was also common
• Restrictions on FDI lifted
• Targeting of industries created elite of special interests, which were protected through monopoly rights etc.
• Foreign borrowing was encouraged, which led to a big foreign debt Malaysia • Leading theme: Assisting the “indigenous” population i.e., the Malays through

  SOEs, ownership and employment quotas in private firms (certain percentage had to be Malay), govt procurement, university quotas etc. This was the “New Economic Policy” (NEP), but the similar polices prevail today

• Problems with inefficient SOE and other protected industries and vested special interests, “cronies”
• Less protectionist IS policy to begin with than most LDCs
• FDI encouraged but channelled to special export processing zones (EPZs)
• Recent emphasis on information and communications technology (ICT); a special zone, the Multimedia Supercorridor set up around the capital area

  Thailand

• Started out as a major exporter of agricultural goods
• IS policy was sharpened during the 1970s: Textiles, pharmaceuticals, and automobile assembly were especially targeted, and the high trade barriers were

often coupled with domestic content requirements. However, investment incentives were applicable to a wide range of industries

• Shift from IS towards EO in the 1980s, especially in labour intensive industries, but domestic industry was still protected by rather high tariffs
• From mid 80s, large inflows of FDI and rapid industrialisation and export growth until the crisis in 1997-98
• Favourable development resumed in the 2000s

  China

• Market oriented reforms from 1978 beginning with agriculture
• Increasing role of town-and village enterprises (TVEs) and private firms contributed to strongly increasing exports from the mid 1980s
• Special economic zones and 14 coastal cities were used as vehicles for development and designated sites for FDI. Investment incentives, infrastructure etc. were available at those locations
• From the late 1980s possible to set up FDIs also in other parts of the country
• China tried to target certain industries (textiles, electronics, machinery) but with less than full success
• SOEs “encouraged” to export
• The exchange rate of the renmimbi was kept low in order to preserve and improve international price competitiveness
• China joined the World Trade Organization (WTO) in 2001; this entails further liberalisation of trade and financial markets (Kokko 2002)).

  Economic co-operation and integration

  In Asia there is a high degree of de facto integration (the economies are interdependent, their economic structure complementary, leading to large intra- regional trade and investment flows). However, there is relatively little organised integration and co-operation, compared to other parts of the world. Reasons: a) Colonial background, economic relations tended to be geared towards colonising countries b) Newborn states in the 1950s and 1960s had other priorities d) the big players (Japan and China) have relied on multilateral arrangements (WTO) instead of regional solutions. Institution building for regional co-operation only slowly got started in the 1960. In the 1990 the situation has gradually changed, but co-operation and (organised) integration still proceed slowly because of the heterogeneity and large size of the region (note that North America often have to be included because of their importance as trade partners). Several organisations also have a de facto background in security considerations despite being referred to as economic co-operation.

  Terminology

  is a more general and looser term than integration. In

  Economic co-operation

  principle, co-operation can concern everything between a one-off consultation (e.g. taking a common standpoint in international negotiations, building a bridge or railway between neighbouring countries, etc.) to total co-ordination of economic policies. In international organisations, co-operation is usually about production of so- called public goods (goods whose production has a positive or negative side-effect on the society at large). Examples: International trade regime (WTO), industrial standards, customs terminology and classifications, etc. means either a spontaneous process of merging economies due to the

  Integration

  working of market forces or a deliberate policy aiming at abolishing discrimination between domestic and foreign good, services and factors of production. The latter can be carried out at different levels of ambition:

  1) Trade preferences = partners lower trade barriers for certain or all goods between themselves, but not against third countries 2) Free trade area (FTA) = trade barriers are abolished between partners, but trade policy against third countries are not harmonised 3) Customs union = as FTA but members also have a common external trade policy 4) Common market = free movement of goods, services and factors of production 5) Economic Union = as customs union but also common currency and more or less unified economic policies among members Only the two first ones are realistic alternatives for Asia-Pacific at this stage. The only regional one up and working today is AEAN Free Trade Area (AFTA), which is strictly not yet a FTA since trade barriers, although low, still exist. Moreover Asia Pacific Economic Cooperation (APEC) aims at free trade among its members, but the goals are vague and far away. Moreover there are some bilateral FTAs in the region if Australia and New Zealand are included, notably between Singapore on the one hand and Japan, Australia and New Zealand, respectively, on the other.

  Organisations for co-operation and integration

  This activity got started only slowly in the 1960s and 1970s. The early attempts often have a membership extending to more than East and Southeast Asia. ASEAN was the first intra-Asian organisation; see below. There were also a few “non-starters”, e.g. the Pacific Free Trade Area (PAFTA), which was proposed as a FTA between the developed parts of Asia-Pacific and the Organisation for Pacific Trade, Aid and Development (OPTAD) modelled on the OECD.

  Important non-government organisations (NGOs)

  Such organisations emerged from the late 1960s on. They tended to have a very small bureaucracy and loose political connections. This made participation possible from countries without formal relations (such as China and Taiwan).

• Pacific Basin Economic Council (PBEC); consists of national committees of leading business people (over 1000 firms are represented). Builds relationships between the regional business communities, aims at increasing trade and FDI and promote economic and social development. Advises (and lobbies) governments as to development issues. Member committees from Australia, Canada, Chile, China, Colombia, Ecuador, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Peru, Philippines, Russia, Singapore, Taiwan, Thailand and the United States. Today PDEC is closely affiliated to APEC; see below.
• Pacific Trade and Development Conference (PAFTAD); private organisation of academics and policy advisers. Promotes policy-oriented research and

discussion of Asia-Pacific economic issues, and produces publications on international economic and development issues pertaining to Asia-Pacific.

• Pacific Economic Cooperation Conference (PECC); est. in 1980. The

  members are officially private individuals, but the membership makes sure that the results of its deliberations reach the ears of the decision makers. The membership has a tripartite structure: Representatives from the business community, universities and government agencies. PECC is a regional forum for co-operation and policy co-ordination in order to promote economic development in the Asia-Pacific region. PECC is the only NGO official observer of APEC; see below. Gives analytical support and information to APEC. Member committees from: Brunei Darussalam, Canada, Chile, China, Colombia, Ecuador, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Peru, The Philippines, Russia, Singapore, Pacific Islands Forum, Taiwan, Thailand, United States, Vietnam.

  Inter-governmental organisations

Asia-Pacific Economic Cooperation (APEC), formed in 1989 and originally modelled

  on the OECD is a rather loose consultative forum, but with ambitions to form a free trade area by 2010 (for developed members) and 2020 (for developing members); also including free FDI movements. APEC is important because it accounts for about 40 percent of world trade and 50 percent of world production. It is weakened, however, by its heterogeneous membership. For instance, there have been conflicts as to whether the activities should be regulated by formal agreements or voluntary co- ordination and peer pressure. (Americans propose more formal structure, Asians a less formal.) APEC is a discussion forum on trade and economic co-operation, and aims at increasing co-operation between developed and developing countries, as well as being a counterforce against trade barriers and protectionism. It aims specifically at “open regionalism”, i.e. wants to avoid forming a closed bloc.

  APEC holds annual summits, but recently the summits have been “hijacked” by the achieved. Committees, working groups and task forces provide a broad and largely informal contact surface for the member economies, however, and foster an ongoing dialogue. Membership: Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Taiwan, Thailand, United States, Vietnam.

  Important non-starter: East Asian Economic Group (EAEG) was mooted by then Prime Minister Mahathir Mohamad (Malaysia). The idea was to form an Asian counterforce to the emerging blocs in other parts of the world and a common platform for the members in, e.g., trade negotiations. Non-Asian countries would not be accepted as members.

  Due to American (!) resistance the EAEG never materialised – a watered-down version the East Asian Economic Caucus (EAEC) was established instead under APEC but never became anything beyond rhetoric. Note, however, that the recent co- operation between ASEAN and Northeast Asia (the so-called ASEAN + 3 process, see below) may create something that resembles the original EAEG.

  (ASEAN) was established in 1967 and is

  The Association of Southeast Asian Nations

  the most important regional organisation in Asia. All Southeast Asian countries are now members: Indonesia, Malaysia, the Philippines, Singapore and Thailand (1967), Brunei Darussalam (1984), Vietnam 1995, Burma and Laos (1997) and Cambodia (1999). Important schemes:

• AFTA (ASEAN Free Trade Area); most tariffs between members reduced to 0
• – 5% by the end of 2002. A rule of origin of 40 percent is applied (i.e. at least 40% of the value of a product must originate in ASEAN in order to qualify for preferential tariff rates.) Aims at full abolishment of trade and, eventually, an ASEAN Economic Community by 2020, implying free movement of goods, services, capital and labour among members;
• AICO (ASEAN Investment co-operation; “An AICO Arrangement is a cooperative arrangement consisting of a minimum of two participating

companies from two different ASEAN countries. It is not a legal entity but merely an "umbrella association" under the scheme wherein the output of the participating companies will enjoy a preferential tariff rate in the range of 0- 5%” (ASEAN Secretariat);

• ASEAN Forum; security dialogue;
• ASEM (the Asia-European Meeting) was originally proposed by ASEAN;
• System with discussions with so-called dialogue partners at the Post-

  Ministerial conferences (i.e., after the annual meetings of ASEAN’s economic ministers) on issues of common interests. Dialogue partners are: the US, Canada, the EU, Japan, Australia, New Zealand, South Korea, China and India. The benefits of AFTA are controversial. This is because trade may be diverted towards less efficient producers than would be the case under non-discriminatory arrangements. However, it is clear that making the region more attractive to foreign investors is more important as a goal of AFTA than increasing intra-regional trade.

  

ASEAN + 3; Inofficially implements the EAEC, but not a “real organisation” yet.

  Recognising the importance of establishing the same link with Northeast Asia and the important role that East Asian countries play in the region, the heads of state and government of China, Japan and Korea were invited to the Second ASEAN Informal Summit in Kuala Lumpur in 1997. The first “ASEAN+3” summit was followed by separate “ASEAN+1” meetings with the leaders of China, Japan and Korea.

  ASEAN now regularly holds joint meetings – usually after ASEAN summits or ministerial conferences – with representatives of China, Japan and Korea on issues of economic co-operation. Free trade ASEAN-China is aimed at officially by 2010. For Korea and Japan (2012) the process has not gone that far, but in the case of Japan a framework agreement has already been signed.

  ASEAN has also agreed to form a “partnership” with the “Closer Economic Relations” group (consisting of Australia and New Zealand), comprising of a FTA, among other things.

  Growth triangles

  The process of regional integration in ASEAN has partly taken place through so- called growth triangles. The general idea is to link adjacent parts of two or several countries with different comparative advantages based on, e.g., differences in technology, labour endowment, natural resources, capital etc., to form a sub-region conducive to growth. Such a growth triangle is “borderless” regarding goods and capital movements, although there remain barriers against the movement of labour. Thus large wage differences remain part of the picture.

  The first, and most important, such “triangle” the Singapore-Johor-Riau (SIJORI) area was conceived after 1988 with a revision of investment regulations in Indonesia. At first the development was mainly based on joint ventures between Singapore government-linked companies and the Indonesian private sector. Subsequently MNCs based in Singapore began to locate investments in Batam and Bintan (in Indonesia), which both can offer land and labour at low cost. The cost of labour in Riau province is only about one-fifth of that in Singapore and land is very cheap compared to Singapore, too. Business grew rapidly after development of infrastructure and transport links.

  The greatest impact of the SIJORI triangle has been in Batam. Relations between Singapore and Johor are much older than the Growth Triangle concept, for historical reasons. Companies from Singapore moved to Johor before there were any formal agreements because of the short distance and cultural closeness. However, the third leg of the triangle, the Johor-Riau link is still weak due to the alleged lack of complementarities and the physical distance. The central government in Malaysia has also been less interested in the project than Indonesia and Singapore.

  Other attempts at forming growth triangles:

  In ASEAN

• Penang (Malaysia) – Sumatra (Indonesia) – South Thailand (the “Northern

  Triangle”)

• Brunei – Mindanao (Philippines) – Sabah & Sarawak (Malaysia) – Kalimantan

These are far less important and have to a great extent remained in the level of rhetoric only. One problem is that they lack an important hub like Singapore.

  In East Asia

• Guangdong & Fujien provinces (China) – Hong Kong – Taiwan • The area around Tumen river: China – Korea – Russia Although all these hold some activities they are much less formal than the growth triangles in Southeast Asia.

  Appendix 1.

THE ENDOGENOUS STATE AND ECONOMIC DEVELOPMENT: A SURVEY

International Journal of Development Issues, Vol. 1, No. 2, 2002

  Hans C. Blomqvist Swedish School of Economics and Business Administration

  POB 287 FIN-65101 Vasa

  Finland E-ma

  Tel.: +358-6-3533 734 August 2002

  Introduction

  The history of post-war economic development is mostly rather depressing reading in

  

  Even the recent serious recession cannot wipe out the enormous progress that took place over preceding decades in these countries. Because of this there is now a voluminous literature on what has sometimes — rather misleadingly — been called “the Asian model” (see, e.g. Islam 1994, Jomo 1997: 27, 157), aiming at finding out its “secrets”.

  Much of the discussion has evolved around the relative importance of market forces versus government interventions (cf., e.g., Aoki et al. 1997: 1, Smith 1995, World Bank 1993). In the context of explaining the successful Asian development it is possible to distinguish roughly between two groups of authors, the “neo-classicists” and the “structuralists” (or “statists”) emphasising either the role of the free market or the selective interference of governments.

  The dichotomy between “state” and “market” is, however, unfortunate in two respects. Firstly, the importance of interaction between market forces and institutions, mostly created by the state, is obscured by this distinction (cf. Zysman and Doherty 1995). Due precisely to a complicated interaction of this kind we can observe many different types of development patterns, not least in Asia, which all seem to be viable. Secondly, the role of the state has mostly been seen in a traditional instrumental perspective by both neoclassicists and statists. The proper role of the state is presumably one of identifying and correcting market failures, according to the neoclassical approach (cf. the approach taken in, e.g., Balassa 1991, World Bank 1993, 1997) and one of “governing the market” (Wade 1990) according to the structuralist approach. In both cases government interventions may be misguided and excessive and create distortions and “rents” which are potential sources of additional distortions (c.f. Islam 1992). What then determines what types of interventions are actually undertaken and to what extent? It seems like mainstream economics has been slow at addressing those problems.