Assessing ASEAN competitiveness and its readiness for East Asian Regionalism

An address by

Dr. Michael Clancy
Chairman and CEO, Philippine Business Leaders Forum

AIM International Conference on the Implications of the ASEAN Charter for
East Asian Integration

12^th March 2008

Sofitel Philippine Plaza, Manila

Note: This is an edited version of the address that incorporates both the text of the prepared speech as well as the figures and text contained in the supporting slide presentation.

Good morning ladies and gentlemen

"Assessing ASEAN Competitiveness and its readiness for East Asian regionalism." That is quite a topic to cover in 20 minutes or so and at best I can give you some ideas that will hopefully lead into lunchtime discussion and which will also set the scene for the topics that will be covered this afternoon. Let us start by looking at the issue of competitiveness before we look at readiness for integration.

The changing regional dynamic

"Unity in diversity" is the phrase commonly used to rally the faithful to the cause of ASEAN integration but what does it mean really? Does it, in fact, mean anything more than "non-interference" in each other's affairs?

Is the region really moving towards integration in any meaningful sense? Or rather is it being pushed by outside forces that are largely beyond its own control? With the emergence of giants on its borders, can ASEAN determine its own destiny or has that opportunity already passed? Does ASEAN want to fly in the slipstream of China—as one speaker mentioned earlier—or does it want to be flying alongside the likes of China? This is a question we will come back to later.

The promise of the ASEAN Charter is that it will provide a legal basis for economic, political and social integration—or at least "alignment" which is perhaps more meaningful a term at this stage—and create a single market of half a billion people here in Southeast Asia.

Sadly in the minds of many people, ASEAN has gained a reputation as being little more than a "talk shop," an entity that is incapable of meaningful decision-making and which, instead of becoming master of its own destiny, is being integrated by default into an East Asia that is dominated by China's economic muscle.

Greater ASEAN is often referred to as the heart of Asia Pacific. It is wedged between two of the most populous and fastest growing countries in the world—India and China. Both countries are aided by relatively low population growth rates (at least compared to the Philippines) and are rapidly improving the life of their people.

China has 1.3 billion people India has 1.1 billion while ASEAN has around 550 million. Both China and India are achieving rates of GDP growth that are the highest in the world. China's expansion has been based on global trade and an opening of its economy that of India has been much different and has relied traditionally on domestic consumption and internal capital to fuel its growth.

While ASEAN sits strategically between China and India. It is China—and East Asia—that commands most attention because of its growing importance to trade, manufacturing and the global economy.

Thanks to 30 years of unprecedented economic dynamism, China is rapidly expanding its middle class. China's per capita GDP (measured at purchasing power parity rates) is also increasing at a fast clip. By 2010 China will have caught up with Thailand and will be poised to overtake Malaysia. Aside from the special case of Singapore which is far and away the most successful country in Southeast Asia, Northeast Asia continues to pull away in terms of affluence as compared to ASEAN. Yet even with all the dynamism that China is showing, it will be nowhere near knocking at the door of developed country status any time soon. And if even China is not achieving that target, it is hard to see how the Philippines can do so. That is reality.

A report from the Economist Intelligence Unit, Foresight 2020—economic, industry and corporate trends, published in 2006 sought to gain insight into what the world would look like by the end of the next decade. That study predicted that by 2020, China would have overtaken the United States as the world's largest economy . (Again this is when measured at purchasing power parity rates; the USA would still likely be in the first spot when GDP is measured at market exchange rates.)

Interestingly although in terms of GDP per head, in 2020 China will still be well down the list. Singapore, followed by Taiwan and South Korea are expected to have the most affluent populations in Asia and would be the only ones able to lay claim to having achieved "first world status."

So if competitiveness is to be measured by growth in per capita GDP, China is far ahead of the ASEAN countries—and just about everyone else.

Competitiveness in terms of trade patterns

Table 1: Exports to the United States as a percentage of nominal GDP
	2001	2007
Malaysia	19.2	17.6
Singapore	14.1	11.9
Thailand	11.4	8.7
Philippines	12.6	6.7
Indonesia	4.8	2.9
Source: EIU estimates

Over the past decade the rise of China as a global trading giant has been nothing short of phenomenal. The table shows how ASEAN exports to the US have been falling comparatively while from Figure 3 we see how the share of exports destined for China has risen rapidly in each of the major ASEAN countries, but for the Philippines most of all.

The US economy still impacts on the region but, increasingly, China is the intermediary. Raw or intermediate products are shipped from ASEAN to China before heading for the USA, Europe and Japan.

But beyond that, as we have seen, the economies of East Asia are growing rapidly also and internally generated demand within East Asia is becoming a significant factor that cushions to an extent the ramifications of any slowdown in the US economy. Note that it will not compensate for a slackening of US demand but it will certainly mitigate it.

Figure 4 (below) gives us the bigger picture. Exports to the USA are still increasing but it is China that is driving US import growth. India hardly comes into the picture in terms of merchandise trade. It is simply not a global player.

And what about ASEAN intra-regional trade? While trade with East Asia is growing, Intra ASEAN trade is actually falling. Intra East Asian trade now accounts for around 60 percent of the regional total but intra ASEAN trade has fallen from 22.4 percent of the total in 2000 to 20.9 percent today. Vietnam and Singapore have both seen their ASEAN trade decline the most.

Only the Philippines and Thailand appear to be more dependent on intra-ASEAN trade today than they were in 2000. The decline is somewhat surprising and suggests a need for ASEAN to look at its With the rapid rise in the value of the peso against many other ASEAN currencies it will be interesting to watch to see what happens to the Philippines trade pattern over the next one or two years.

So while ASEAN talks a lot about integration—especially economic integration, we have not yet seen very much from that process to transform ASEAN to a higher and more dynamic growth path that builds and reinforces interdependence. Indeed, quite the opposite seems to be happening. It can be argued that the issues that divide ASEAN member states are possibly greater than those that unite them.

Is ASEAN becoming more competitive? The numbers here do not suggest so. In the broader global picture, ASEAN is doing better than many emerging markets but in comparison with the regional giants, and the smaller Confucian tigers, ASEAN just hasn't got its act together. And while Asia is still the dynamo of global growth and with ASEAN performing better than much of the emerging world elsewhere, were it not for the China factor, would the Region be doing anywhere near as well as it is? ASEAN is already firmly in the Chinese slipstream.

Following the money

Let us approach our look at competitiveness from another angle. How does business view the prospects of the region? One measure of this is to look at foreign investment flows. Business votes with its cheque book.

Figure 6 shows the trend in Asian FDI from 2005 projected out to 2011 as forecast by Economist Intelligence Unit. At first blush ASEAN does not look to be doing badly at all. Between 2005 and 2007 FDI flowing into China amounted to US$253.3 billion while India received a total of $44,4 billion. ASEAN as a sub-region received a total of US$151.9 billion. But let's take a moment to decouple Singapore from the equation. The result then looks quite different.

We don't have to break the numbers down too far to show the manner in which investment into Singapore skews the ASEAN data. Almost half the total net flow into ASEAN goes to one small island state.

To look at the data another way: Just computing over the past three years, China has received some $194 in FDI for each man, woman and child; Singapore received more than $15,000 per capita while the Philippines received just $74. That tells us something about regional competitiveness.

Table 2: Inwards Fixed Direct Investment in US Dollar billions
	2005	2006	2007	2008	2009	2010	2011
China	79.1	78.1	96.1	85	87.6	90.9	92.9
India	6.7	17.5	20.2	25.0	30.0	35.0	37.0
Indonesia	5.3	6.1	6.3	6.5	6.7	7.0	7.5
Malaysia	4.0	6.1	6.6	6.5	6.8	7.0	7.5
Philippines	1.9	2.3	2.3	2.4	2.4	2.3	2.4
Singapore	15.0	24.2	29.0	27.4	27.3	28.5	29.1
Thailand	9.0	10.8	10.9	10.5	9.5	9.0	9.0
Vietnam	2.0	4.0	6.1	6.8	7.5	8.5	9.3
total ASEAN - Sing	22.2	29.3	32.2	32.7	32.9	33.8	35.7
Total ASEAN	37.2	53.5	61.2	60.1	60.2	62.3	64.8
Source: EIU estimates and forecasts; December 2007

The lions share still goes to China and warnings of overheating and a potential meltdown has done very little to abate the appetite of investors for China. In 2007 an estimated $96.1 billion went into the PRC as FDI. India attracted $20 billion in that year while ASEAN did very well at around 60 billion. Singapore took almost half of the total at $27.4 billion. Even Thailand, emerging from a political crisis managed to pull in $11 billion while the Philippines managed to get barely $2 billion—or around 1 percent of the total flowing into East Asia.

China is now the world leader among emerging markets for fixed investment as shown by figure 9 which estimates gross fixed investment as a proportion of GDP using 2006 data. The Philippines is playing catch up not just to China but to the rest of ASEAN—at least insofar as those members of the group that the Philippines most closely seeks to emulate. Investment competitiveness around the region shows wide disparities but the sad fact of life is that the Philippines is bringing up the rear.

Much more needs to be done to improve the investment climate in this country. Loans—even loans on concessional terms—are no match for bricks and mortar investment. Concessional loans may be a cheap alternative (according to one participant) but whether they be from China, Japan or Australia for that matter, they usually come on terms that give the recipient little control over the implementing agency which is usually specified by the donor.

Really, and as problems over the ZTE deal have shown, Build-Operate-Transfer schemes generally deliver a much better cost-benefit ratio than loans. For one in a BOT scheme, hard cash—private sector cash—is put into bricks and mortar that is truly fixed investment. And if the builder has to operate the facility in order to get a return on the investment there is a very strong incentive to build a project that will stand the test of time.

If figures recently quoted in the press are true, that the Philippines is already indebted to China for around $8 billion then that represents an obligation of around $100 for every man, woman and child in the Philippines.

My final slide in this section (reproduced as figure 10) shows the manner in which foreign exchange reserves have changed over the past ten years. This phenomenon is what The Economist called recently the "invasion of the sovereign wealth funds. This is perhaps the most telling slide of all. It takes us back to the Golden Rule—"He who has the gold makes the rules."

With around $1.5 trillion in reserves it is no wonder that China is flexing its muscle and using its new found wealth to advantage. No nation on Earth thinks more strategically or negotiates more adroitly than China but that does not mean that ASEAN countries—the Philippines in particular, should not strengthen their hand in terms of coming to terms with China. Sadly we see very little by way of strategic thinking from ASEAN at the present time.

So what does it all mean?

ASEAN was inaugurated originally on 8^th August 1967 in Bangkok. This year it is already forty years old. China this year celebrates 30 year's of Deng Xiaoping's economic reform programme. Which of the two has made the most progress?

While ASEAN still talks about integration and reform, China has got on and done it.

This brings me to my final point. Whether or not ASEAN now develops its Charter and its priority integration areas is largely irrelevant. China has a carefully planned programme of strategic investments that allow it increasingly to call the shots. While ASEAN wrings its hands over whether to allow further foreign direct investment, China has gone ahead and done it.

The trade and investment pictures tell the story. Most ASEAN businesses are not looking at each other except as competitors. Tariffs may have gone down but the non tariff barriers are still there.

Regional integration has been an underperformer because it has failed to produce a cohesive single market and shows little signs of doing so even now. With 550 billion people ASEAN could be a force to be reckoned with. And growth in the future has to come more and more from domestic consumption rather than reliance on export led growth drivers. It is those countries that show strong domestic demand that will weather the vagaries of global fluctuations the best.

And here again, the Philippines is extremely vulnerable. I believe around 70 percent of GDP growth now comes from domestic consumption. But this consumption is artificially skewed by remittances and as such is vulnerable to the vagaries of the global cycle. Take remittances out of the equation and domestic consumption would just about collapse. To build a Philippines that is genuinely strong, we need jobs and wealth generated within the domestic economy and that means foreign direct investment and not more foreign indebtedness. I don't see any other solution that would lift the Philippines out of the bind that it is now in.

Ladies and Gentlemen, Regionalism is a fact of life already but ASEAN is not in the driver's seat. My prediction is that unless there are some rapid changes and genuine leadership, ASEAN will likely be a permanent appendage to the Chinese juggernaut, a supplier of components and raw materials but unable to influence the terms of its engagement in any meaningful way.

It need not be like that. But, outside of one country, ASEAN leaders have so far failed to show the kind of leadership necessary to make the rest of the world sit up and take note. And for that, one only has to look at the investment flows. The ASEAN region is not yet ready for integration of itself so how can it be ready for integration into a wider grouping? "Absorption" maybe, but that is not the same thing.

But the Philippines can take the lead in a manner that would improve its international competiveness. Leaving aside the so-called ASEAN priority integration areas which appear good on paper but which seem beset still with problems posed by those non-tariff trade barriers we spoke about earlier—even after the formal barriers have been removed—my personal view is that the Philippines should emphasise and work towards the following:

• Governance
  

  Problems of governance are the most pressing of all. Nobody underestimates the problems of bringing corruption and rent-seeking behaviour to heel but equally it has to be recognised that it is the biggest single deterrent to long-term foreign investment. It simply has to be addressed.
  

• Reform of the Labor Code
  

  After corruption, dealing with the complexities of the Labor Code appear to be a major disincentive to foreign investors coming to the Philippines. I recognise the complexities of labour market reform in the context of a democratic society. But surely some harmonisation of codes throughout ASEAN would provide suitable cover for the Philippines to look at how the world has changed and to introduce labour market reforms that—ASEAN-wide—conformed to global best practice.
  

• Logistics
  

  I am told it costs more to ship a 40' container from Manila to Cebu than it does from Manila to Hong Kong. Transport and logistics charges are a major impediment to cost-competiveness throughout the region. If logistics can be made more efficient, perhaps regional trade would prosper to a greater extent than it has so far. As an archipelagic economy, this is no more than self-interest.
  

• Education
  

  ASEAN—the Philippines in particular—could be Asia's education hub. But foreign investment into the education sector needs to be liberalised and fast. It will reap domestic benefit. It will reap foreign exchange benefit.
  

• Agricultural collateralisation
  

  East Asia built its prosperity—in Taiwan and Korea anyway (two countries in which I have previously lived and worked)—on the basis of land reform that enabled farmers and rural dwellers to borrow against their land value. This created cottage industries and then wide-scale industrialisation. While in both countries for many years, politics was the preserve of the elite, that elite allowed the masa to grow rich through the sweat of their labour. In the Philippines sadly, the elite appears to want both the politics and the economy to itself. Yet, people in this country are hard-working and industrious. Give them the means to prosper and watch this country take off big time.
  

Neither the Philippines nor ASEAN as a whole need be swept along by events. But it will take leadership to change the paradigm.

There is much I have left out and much I am sure you could take issue with. But in the time available I hope I have done two things. In the short-term there is some food for thought to go with the lunch being served and in the longer-term some benchmarks against which we can judge progress the next time we meet.

Thank you and good morning.