The Strengths and Future of ASEAN In Light of the Global Financial Maelstrom
The 19th ASEAN Summit in Bali began on an optimistic note to make ASEAN part of the Global Community of Nations. This was the theme conceived by Indonesia before handing its chairmanship to Cambodia. Yet, the economic uncertainties in EU made for an un-settling summit.
Indeed, with the financial mess of EU getting more serious by the day, the dreaded prospect has come to roost: A potential triple whammy. Not only is the EU in crisis but the United States and Japan are still mired in weak economic condition. Can ASEAN weather these external threats?
For the last century, each of these three entities had been responsible for the growth in the rest of the world. Without their economic growth, ASEAN would not have prospered at all, since ASEAN has traditionally relied on them to buy their exports of manufactured goods.
Singapore, whose GDP is exposed to the vagaries of international trade by 200%, is already bracing for an anaemic growth in 2012. Singapore’s economy is usually a good barometer of the regional economic health of ASEAN, especially for Malaysia and Thailand. Malaysia and Thailand’s percentage of exports to GDP are at 100% to 95% respectively.
Yet, with the growth of China and India, which are fuelled by a private consumption of 36% and 57% respectively according to the McKinsey Institute, there is a parallel belief that ASEAN can avoid a severe meltdown with their help. The International Monetary Fund (IMF) affirmed that between 2011 and 2016, the economy of Southeast Asia is expected to grow at 4.9 %, which is 2% higher than the developed world.
Nevertheless, there are potentially three serious flaws in the projections of IMF. To begin with, the growth of China and India will continue to exert immense pressures on food and commodity prices. Countries that seek to gain from the benefits of such twin-growth are not immune to the inflation with which they concurrently caused. Nascent growth in Southeast Asia, in other words, is also negated by the inflationary pressures spurred by the growth policies of Beijing and New Delhi.
Secondly, China and India are growing on the shoulders of cheap labour. Although wages – in China in particular – are increasing, the vast availability of Chinese labour – at no less than 320 million people – will tamp down the income growth in Southeast Asia, whose governments have yet to introduce a policy of a minimum wage.
Finally, the growth in China was previously driven by a real estate boom. Now that rising interest rate, with the tightening of the Chinese finance in the formal banking sector, has begun to soften the property market in China, the economic growth witnessed throughout the Yangtze and Pearl River Delta is relenting too.
Yet, this may well be ASEAN’s moment of truth in spite of the economic headwinds it may face. Although the ASEAN Economic Community (AEC) may not be able to achieve much by 2015 – other than to eliminate tariffs across the region down to a band of 0% to 5% on 99% of the goods – ASEAN has shown the lead in financial management. ASEAN, to begin with, did not commit the error of committing itself to a single currency – which is plaguing the EU.
The Chiang Mai Initiative (CMI), together with various bilateral swap agreements, is now at US$ 120 billion; sufficient to potentially deter any speculative attack on countries low on reserves. Although the use of such facility can only be done in collaboration with the IMF – evidently to prevent the risk of moral hazard – the availability of CMI prevents Southeast Asian currencies from being sold on the short (i.e. sold on the anticipation that Southeast Asian currencies will collapse in value). The prospect of a downward spiral, as happened in 1997-1998, is therefore in the interim, prevented or stalled.
Furthermore, the ASEAN Surveillance Process (ASP), which has led to the creation of the ASEAN + 3 Macroeconomic and Research Offices (AMRO) in Singapore in May 2011, is also in place to keep ASEAN finance in the clear. And, it serves at least two purposes: AMRO will supervise financial development in the region and provide early warnings if a member country needs support. The outcome of the monitoring exercise is reported to the ASEAN finance ministers twice a year.
The review provided by AMRO provides an opportunity to consider jointly unilateral or collective action to counter potential threats to any member economy. It serves as an early warning mechanism. In sum, although ASEAN would be affected by an economic slowdown in China and India, its regional economy would not be immediately brought to its knees.
In more ways than one, ASEAN has the previous Asian financial crisis to thank for its current resilience, without which ASEAN would have been more thoroughly compromised by global events. In this vein, regionalisation helps ASEAN, even if globalisation continues to put pressures on it.