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A New Southward Policy

Who will be King?


Who will be King?


2015 was supposed to mark the completion of the ASEAN Economic Community (AEC). Instead, the ten members of the Association of Southeast Asian Nations (ASEAN) are facing their toughest challenge in two decades as weakening national currencies and dropping raw material prices jeopardize ASEAN’s economic take-off.



Who will be King?

By Yi-shan Chen
From CommonWealth Magazine (vol. 582 )

It is a sweltering summer day as more than 100 entrepreneurs and top executives squeeze into a banquet room at the Grand Hyatt Hotel in Taipei to attend an investor briefing on Indonesia. The venue is so crowded that the air inside is even more stifling than outdoors.

There is not a single seat left at the invitation-only event, as no one wants to miss the opportunity to meet Franky Sibarani, chairman of the Indonesia Investment Coordinating Board (BKMP).

“Investing in ASEAN is really hot,“ remarks Kristy Hsu, program director at the Taiwan ASEAN Studies Center of the Chung-Hua Institute for Economic Research. The government's "southward policy" launched in 1993, which aimed to encourage investment in Southeast Asia to prevent an overemphasis on China, failed to produce the expected results. Yet, with more than 100 participants, the annual investment delegations that Vice Minister of Economic Minister Bill Cho led to the Philippines and Indonesia over the past two years have proven highly popular. Vivian Lien, director-general of the Department of Investment Services under the Ministry of Economic Affairs, returned from Myanmar, where she had led a business delegation, in August.

In late September, Democratic Progressive Party (DPP) chairperson and presidential candidate Tsai Ing-wen proposed her "new southward policy.” Tsai pointed out that the past southward policy aimed to increase investment in Southeast Asia, whereas the objective of her new policy was to build more diverse, multi-faceted partnerships with ASEAN and India.

Economic Community and Currency Crisis

Taiwanese businesses’ enthusiasm for ASEAN stands in stark contrast to the lackluster situation in the region’s stock and forex markets.

Since the United States announced in 2013 that it would phase out its quantitative easing policy, the Indonesian rupiah, the Burmese kyat and the Malaysian ringgit depreciated more than 40 percent. Overall the Indonesian rupiah has declined 57 percent, nearly 10 percent in the first eight months of this year alone.

The currency of Malaysia, which hosted the ASEAN summit in April this year, has depreciated 14 percent. It is generally expected that the Asian currencies will further lose value as the Chinese yuan continues to depreciate. “The ASEAN Economic Community (AEC) effect continues to make itself felt. The only thing that no one expected is that slowing growth in China will cause Asian currencies to depreciate and trigger economic chaos," comments Hsu on the unexpected turn of events.

The dramatic currency decline means the AEC had a bumpy take off, and foretold that the prospects for the further integration of ASEAN after 2015 will be anything but sunny. 

“That ASEAN has come this far is already quite amazing,” notes Wang Gungwu, chairman of the East Asian Institute at the National University of Singapore and a member of Academia Sinica. Wang, who was born in Indonesia's second-largest city of Surabaya, predicts that, due to the influence of the great powers, "it will be very difficult for ASEAN to truly become a unified region."

Aside from the AEC, ASEAN actually also wants to build a political-security community as well as a socio-cultural community based on shared values and a common identity. Hsu points out that the ten ASEAN member states believe that economic unity is least controversial and easier to achieve than the two other communities. As a result, the highest expectations and criteria have been set for regional economic integration. However, in the time since 2007 only about 80 percent of these goals have been achieved.

ASEAN performed best on tariff reduction. Except for Cambodia, Laos, Myanmar and Vietnam, which as the four younger members still have a grace period for lowering tariffs, the six older members Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand completed their tariff cut schedules in 2010.

Yet, the situation is different for the service industry. Indonesia, Laos and the Philippines are all demanding amendments to the ASEAN Single Aviation Market policy, which aims to fully liberalize air travel and transport between the member states.

United yet Divided

“[ASEAN is] outwardly united but divided at heart! Everyone wants to enter the markets of the others but is not willing to open up their own market," remarks Y.S.P. Southeast Asia Holding Berhad President Frank S. Lee in describing regional mindsets. Even the six ASEAN members with zero tariffs still protect their markets with numerous non-tariff barriers, Lee says, insisting that the ten ASEAN members should be viewed separately.

After 2015 the AEC negotiations will enter deep waters in terms of reform. The United States has returned to Asia with the signing of its Trans-Pacific Partnership initiative. At the same time the simmering standoff between the United States and China has intensified in recent months as Washington deployed more military assets to disputed South China Sea waters. The ASEAN scenario will become even more treacherous as China, Japan and the United States have all increased their investment in the Asian Infrastructure Investment Bank (AIIB), the World Bank and the Asian Development Bank (ADB) in a bid to woo the ASEAN countries with infrastructure loans.

Vietnam offers the most obvious example for a dual-pronged strategy. It acts in concert with ASEAN but breaks away from the fold to pursue its own national interests when it sees fit. Over the past two years, Vietnam negotiated the TPP with the United States and other nations while on the other hand signing bilateral free trade agreements (FTA) with South Korea, the European Union and the Russia-led Eurasian Economic Union. Only fellow ASEAN member Singapore has concluded more FTAs.

Vietnam insider Yang Kun-hsiang, CEO of the Hong Kong-listed food additive producer Vedan International (Holdings) Ltd., is confident about the country’s future because it has already opened up its market and liberalized the economy to meet the demanding TPP accession criteria. “In the coming 20 years Vietnam will see epochal changes,” says Yang.

Elementary school students take a shortcut to school walking on huge water pipes in the Burmese capital of  Yangon. Will the ASEAN Economic Community provide a shortcut for the economic takeoff of poorest ASEAN member Myanmar?

In the eyes of others such as Tan Khee Giap, chair of the Asia Competitiveness Institute at the Lee Kwan Yew School of Public Policy in Singapore, Vietnam’s outstanding performance is cause for concern. He points out that Vietnam reaps the greatest benefits from TPP membership. Should Vietnam become too U.S.-friendly as a result, this could jeopardize solidarity within ASEAN.

“After all solidarity is ASEAN’s biggest strength. Vietnam is at the crossroads now,” Tan says.

The ASEAN affairs expert points out that the TPP requires a very high degree of market opening, which means that, based on common sense, Vietnam should not sign the trade pact. Yet Washington has wooed Vietnam to join the TPP for political reasons - as one of the South China Sea claimants, Vietnam opposes China. Hanoi, for its part, calculates that Washington will not impose reforms on the Vietnamese economy out of strategic considerations, that it will remain mum on market-distorting practices such as preferential treatment for state-owned enterprises and questionable labor conditions.

“But this situation will not last long,” Tan predicts, noting that unequal treatment by the United States will trigger misgivings among TPP members, and it’s yet to be seen what the TPP will eventually look like.

FTA out, AIIB in

Prospects for concluding negotiations for the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement between ASEAN and Australia, China, India, Japan, South Korea and New Zealand, as planned by the end of this year remain dim as the incumbent ASEAN chair, Malaysian Prime Minister Najib Razak, has been tarnished by corruption allegations. Tan asserts that in the coming years the big powers will no longer fence off within ASEAN over protracted, time-consuming FTA negotiations but rather over "basic infrastructure investment." Now that China has launched its “One Belt, One Road” [also known as the New Silk Road] initiative, the AIIB is an important strategic tool for changing the rules of the game in Asia.

Street view in Hu Chi Minh City, Vietnam.

“The Belt and Road Initiative and the AIIB don’t talk about rules, it’s about signing investment agreements with whomever you like, to first pick the low-hanging fruit," Tan explains. Basic infrastructure is the economic bottleneck that the ASEAN countries face. Against this backdrop, Tan believes, China's moves are brilliant.

After the launch of the AIIB, the U.S.-controlled World Bank felt compelled to increase its investment in Asia. On July 4, at the Mekong-Japan summit meeting in Tokyo, Japanese Prime Minister Shinzo Abe pledged a new development aid package worth US$6.1 billion to the five Mekong River countries, which will increase ADB funding for infrastructure projects in the region by 25 percent. Last year, the Tokyo-backed ADB handed out infrastructure loans worth US$10 billion, up 17 percent from 2013.

“Figuring out how to secure the greatest advantage as well as achieving balance amid the great powers is a formidable challenge," says Tan.

A High Level of Democracy

Leaving geopolitics aside, the rising middle class in the older ASEAN countries that embraced democratization somewhat earlier – Singapore, Malaysia, Thailand, the Philippines and Indonesia – also has greater expectations toward political liberalization. (Note by the editor: Brunei is a sultanate)

The younger ASEAN members Cambodia, Laos and Myanmar are groping their way as emerging democracies as they try to achieve peaceful transitions from their autocratic regimes. (Note by the editor: Vietnam has a Communist one-party government)

Indonesian President Joko “Jokowi” Widodo, democratically elected last October, is the country’s first president who does not come from the political establishment or the military elite. The self-made former furniture exporter claims to stand for the estimated 74-million Indonesians who worked their way up into the middle class. Jokowi served as mayor of Surakarta and went on to become governor of Jakarta. Avoiding party politics, Jokowi is popular for his pragmatic businesslike approach to politics and his populist, hands-on style.

Middle class people in Hanoi, Vietnam.

Within ASEAN the most striking example of turmoil due to extreme political reforms is Thailand. In 2014, the country’s military seized power and suspended the constitution after the rival “red shirts” and “yellow shirts” political camps failed to end months of tumultuous street protests and clashes.

In Malaysia, more than 200,000 protesters in the yellow shirts of the Bersih movement took to the streets on the eve of the August 29 national day, demanding that President Najib resign to make way for a clean election.

Bersih, which means “clean” in the Malay language, refers to the Coalition for Free and Fair Elections. A few days later, protesters in red shirts staged an anti-Chinese rally, triggering fears of worsening race relations in the multiethnic country.

Bumpy Transition to Democracy

For Cambodia, Laos, Myanmar and Vietnam, the transition from autocratic regimes to democracy is not easy. Like a juggler, they need to keep an eye on transitional justice, democracy and stability at the same time.

On the political front, Vietnam clings to its Communist one-party system, whereas it embraces “capitalism” for its economy with even more fervor than China. Will Vietnam be able to safely continue its balancing act between a Communist regime and a capitalist economy?

On November 8, Myanmar will hold its first “true” nationwide general elections. Will the opposition National League for Democracy (NLD) led by Nobel peace prize laureate Aung San Suu Kyi be able to bring about a government change?

Cambodia, ruled by a dictatorial prime minister, Laos, a single-party socialist republic, and Vietnam will all hold general elections in the coming two years. How Myanmar handles its transition after decades of military rule will have wide-ranging influence in the region.

“In Myanmar the military will still retain 25 percent of the parliamentary seats because it’s considered necessary during the transitional period," notes Chen Hurng-yu, professor at the Graduate Institute of Asian Studies of Tamkang University. Chen, who has observed Southeast Asian politics for more than three decades, thinks that it is not necessarily a bad thing to have the Burmese junta exit the political stage gradually.

The key challenges that the rapidly developing ASEAN countries face over the coming decade are how to make the transition from autocracy to democracy while counterbalancing the big powers and meeting the expectations of a growing middle class.

Translated from the Chinese by Susanne Ganz