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The politico-economic determinants of ASEAN regional economic cooperation

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The politico-economic determinants of ASEAN regional economic cooperation

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Content THE POLITICO-ECONOMIC DETERMINANTS OF ASEAN
REGIONAL ECONOMIC COOPERATION
by
Francis Pereira
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Political Economy and Public Policy)
DECEMBER 1993
Copyright 1993
Francis Pereira
UMI Number: DP23399
All rights reserved
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UNIVERSITY OF SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
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LOS ANGELES, CALIFORNIA 90007
This dissertation, written by
Francis Pereira
under the direction of h..i.s Dissertation
Committee, and approved by all its members,
has been presented to and accepted by The
Graduate School, in partial fulfillm ent of re
quirements for the degree of
D O C T O R O F P H IL O S O P H Y
Dean of Graduate Studies
Date . November.
DISSERTATION COMMITTEE
..
Chairperson
ACKNOWLEDGEMENTS
This dissertation represents the formal expression
and treatment of a rubic question that I have ruminated on
since my undergraduate days. I had hoped that such a
methodic approach would yield, in the final analysis, a
exhaustive study of the political and economic facets of
regional economic integration. However, this dissertation
has barely scraped the surface of an intriguing and
facinating aspect of Southeast Asian economics and
politics. Nonetheless, I hope that it will, at the very
least, provide the foundations for other analytical
excursions into this field.
I am indebted to many mentors and colleagues who
have steered and guided me through the "turbulent waters"
of this dissertation. I would like to thank the faculty of
the Economics and Political Science departments at
Illinois State University, especially Drs. Alan
Dillingham and Ann Cohen, and at the University of
Southern California, for their support, help,
encouragement and academic enlightenment.
At the University of Southern California, I will
always be indebted to the members of my dissertation
committee, namely Drs. John Elliott, Morton Schapiro,
Eun Mee Kim, Gary Dymski and especially to the Chair of
the committee, Dr. Nora Hamilton. Their invaluable
insights and comments have made this dissertation a far
more polished and coherent work than it would have been
otherwise.
I would like to thank my colleagues and friends in
the Economics and Political Economy and Public Policy
Programs at U.S.C., including Dr. Faride Motamedi, for
transforming what would have otherwise been a prosaic and
tedious endeavour into an enjoyable intellectual and
growth experience. I owe my thanks to two special people,
Magdalen Wong and Susan Allen, who, by their support,
encouragement and love, have helped me realize one of my
life dreams.
Finally, but most importantly, I want to thank my
parents, Mary and Augustine, and my sisters, Angelina and
Veronica, though in a real sense, mere thanks will never
be able to repay their financial sacrifice, moral support
and love, which has enabled me to fulfil a life objective.
I dedicate this dissertation to them and hope that my
achievements henceforth will stand them proud and justify
their trust and love.
iv
CONTENTS
ACKNOWLEDGEMENTS ................................. 11
ABSTRACT ......................................... vii
INTRODUCTION AND SCOPE ........................... 1
Chapter page
I. THEORY OF INTERNATIONAL ECONOMIC
INTEGRATION .......................... 9
Introduction .......................... 9
Evolution of the Concept ............... 14
Divergence in the Literature ........... 17
Definition of International
Economic Integration ............. 23
Economic Rationale of International
Economic Integration ............. 31
Trade and International Economic
Integration ................... 31
Trade and the Paradox of International
Economic Integration .......... 4 0
International Economic Integration
and the Theory of the Second
Best ......................... 42
Tariffs and Import-Substitution
Industrialization ............. 50
Tariffs and the Public Goods
Approach ...................... 54
Summary ............................ 66
Limitations of the Theory of
International Economic
Integration ...................... 67
Transnational Corporations and
International Economic
Integration ................... 71
The Theory of International Economic
Integration and Non-Market
Economies ................... 81
The Theory of Interhational Economic
Integration and Mixed
Economies ..................... 8 3
V
The Theory of International Economic
Integration and Disparate
Levels of Development ......... 86
Accentuation of
Disparaties ............ 86
Backwash and Spread
Effects .................... 89
Conclusions ....................... 93
II. EMPIRICIAL ANALYSIS OF INTRA-ASEAN
TRADE FLOWS ........................ 98
Introduction ........... 98
ASEAN in Historical Perspective ....... 101
ASEAN Economies in Perspective ..... 103
ASEAN: Pre-Bali Years .............. 104
ASEAN: Post-Bali Summit and
Avenues of Cooperation ....... 108
Preferential Trading Arrangements .... 114
Evolution of the PTA List.......... 116
Effectiveness of the PTA........... 119
Empirical Evaluation of the Trade
Patterns of ASEAN ............... 125
ASEAN Trade Flows: Pre versus
Post 1976 .................... 133
ASEAN Trade Patterns in Chemicals
and Machinery........ 151
Conclusions .......................... 183
III. ECONOMIC IMPEDIMENTS TO ASEAN REGIONAL
ECONOMIC COOPERATION ............... 186
Introduction ...................... 186
Non-Complementarity of ASEAN
Economic Structure .............. 191
Heterogeneity of ASEAN Economies ...... 197
ASEAN Development Philosophies and
Trade .............. 203
Economic Policy in Singapore .. 205
Economic Policy in Malaysia ... 211
Economic Policy in the
Philippines ............... 215
Economic Policy in Thailand ... 220
Economic Policy in Indonesia .. 225
Summary ......... 232
ASEAN Industrialization and TNCs ...... 234
Summary .............................. 250
vi
IV. REGRESSIONAL ANALYSIS OF ASEAN TRADE
FLOWS ............................. 2 52
Introduction .......................... 252
The Model ............................ 254
The Empirical Results ................. 2 62
Regression Equation for Imports .... 2 62
Regression Equation for Exports .... 270
Regression Results for Two-Period
Import Equation .............. 278
Conclusions ................... 284
V. SOCIO-POLITICAL DETERMINANTS OF ASEAN
REGIONAL ECONOMIC COOPERATION ....... 288
Introduction ......................... 288
Socio-Political Impediments to
Regional Economic Coopeation .... 294
Territorial Claims and Bilateral
Tensions ..................... 294
The Sabah Issue ................. 298
Exclusive Economic Zones and
Bilateral Tensions ........ 305
Ethnicity of ASEAN and Bilateral
Tensions ..................... 320
Overseas Chinese in ASEAN ....... 323
j Islamic Minorities and Bilateral
j Tensions .................. 333
Summary ........................... 337
Personal-Psychological Influences in
ASEAN .......................... 341
A General Approach ................. 343
i Personality and Politics: The
! ASEAN Context ................ 353
Personality and Bilateral
j Relations .................... 361
ASEAN Patterns of Diplomacy........... 374
Conclusions .......................... 382
VI. SUMMARY AND CONCLUSIONS .................. 384
Summary .......................... 384
Policy Recommendations ................ 390
NOTES ................................. 397
; WORKS CITED ..................................... 404
ABSTRACT
The theory of international economic integration
espouses the benefits of economic cooperation among
developing countries. These benefits arise from the
combination of the elements of export-oriented and import
substituting strategies, thus providing a bridge across
the difficulties of a limited domestic market faced by the
individual countries in their development pursuits. The
theoretical benefits of such a strategy undoubtedly
induced, to a large extent, the formation of the
Association of Southeast Asian Nations (ASEAN) and many
other such groupings.
However, the empirical analyses of the trade flows
demonstrate the absence of any significant increases in
intra-ASEAN trade flows between 1969 and 1986, as would
have been dictated by the traditional theory of
international economic integration. This argues for the
existence of non-traditional economic and non-economic
factors affecting the viability of international economic
integration schemes, and which the traditional theory of
international economic integration has generally ignored.
The regressional analyses of intra-ASEAN trade flows
serve, in the first instance, to validate not only the
importance of the traditional economic determinants of
economic integration, such as the size of the domestic
market, economic growth rates, taste and income levels of
the countries, but also the non-traditional economic
factors, such as disparate levels of economic development
of the country and investment patterns of transnational
corporations. Secondly, and perhaps more importantly, they
demonstrate that not all variations in the trade flows can
be attributed to variations in these economic variables.
Hence, this betrays the presence of political and social
variables which impinge upon the requisite political will
necessary to ensure the viability of any international
economic integration scheme.
In the ASEAN context, it is argued that this lack of
requisite political will underscores the bilateral
tensions in the ASEAN region, emanating from territorial
conflicts, historical animosity and ethnicity.
' I
Furthermore, xt xs argued that the pattern of dxplomacy xn
ASEAN, coupled with the elitist nature of domestic and
foreign policy formulation, may have enabled the personal
characteristics of the ASEAN political leaders to manifest
themselves in policies which, in turn, may have not
spurred ASEAN economic cooperation to the extent possible.
Index to
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O A Thai I a n A ^ y j e tna«
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Philippines
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Singapore
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1
INTRODUCTION AND SCOPE
The experiences of both the developed and the
developing countries have shown that, save rare
exceptions, internationally competitive industries have
only been established through the benefits of a large
market. It has been argued that economic integration helps
transcend this problem by providing small countries with a
means of breaking out of this insulated industrialization
pattern through the establishment of larger and hence more
efficient industrial capacities on a regional or sub
regional scale (United Nations, 28) . This argument has
undoubtedly induced the formation of many such groupings,
such as the Carribean Community (CARICOM), the Andrean
Group, and the Economic Community of West African States
(ECOWAS), spurred on, to a large extent, by the experience
of the European Community (EC). Among the most recent of
such regional organizations has been the Association of
Southeast Asian Nations (ASEAN). Not surprisingly then,
many of the regional organizations have trade promotion,
either through trade development or liberalization as one
of their primary objectives.
2
However, many of these regional groupings involving
developing countries have not registered much success in
increasing intra-regional trade. Yet amidst this backdrop
are calls for still more such groupings, designed to
generate increases in intra-regional trade. In Asia alone,
there have been at least seven proposals for regional
cooperation, such as the East Asian Economic Group (EAEG),
the Asia-Pacific Economic Cooperation (APEC) and the
establishment of a Free Trade Area. This lack of expected
success, on the one hand, has lent support to the argument
that regional integration among developing countries has
not generated large enough gains to overcome the
centrifugal forces acting against the countries in the
regional grouping. On the other hand, it has demanded an
analysis of the basic tenets of the theory of
international economic integration in search of the
existence of factors that may possibly mitigate their
applicability to economic integration among developing
countries.
Much research has been done to evaluate the success of
the EC intra-regional trade. However, comparatively little
similar research has been done to evaluate the success of
regional organizations involving the developing countries.
The success of these regional organizations have been
primarily judged by the trade flows between the countries
in the organizations. This stems from the argument that a
necessary, though not sufficient condition, for
improvement in welfare of the organization's members is
that intra-regional trade increase. Economic theory holds
that an increase in trade would lead to an increase in the
country's per capita Gross National Product and
consequently to an increase in the living standards in the
country.
This dissertation thus identifies and examines the
political and economic factors that affect the success of
international economic integration among developing
countries, in general, and ASEAN, in particular. Such an
evaluation may serve as a barometer of viability of future
regional schemes and perhaps serve as a navigational chart
through the turbulent waters of international economic
integration.
Chapter 1 reviews the traditional theory on economic
integration. Much of the traditional determinants of
intra-regional trade is aptly summarized by the "gravity
model" and its neoclassical assumptions. This chapter
challenges the relevance of some of the traditional issues
in regional economic integration involving developing
countries, such trade creation and diversion, and
highlights their limitations. It posits other factors,
such as diversification and growth of the economy which
4
may be more relevant for international economic
integration among developing countries. Similarly, this
chapter argues that the role of government, the effects of
Transnational Corporations, or the disparate levels of
economic development, may have a greater impact on the
international economic integration among developing
countries than is recognized by the traditional theory.
In general, this chapter will argue that
considerations of economic welfare alone cannot provide
the theoretical economic justification for international
economic integration. This has engendered the "public
goods" approach to international economic integration and,
consequently, requires the evaluation of the success of
international economic integration schemes according to
the extent on which enunciated objectives have been
achieved.
Chapter 2 provides a brief history of the attempts at
regional integration in Southeast Asia, and the subsequent
formation of ASEAN. This chapter briefly examines the
economies of the member countries of ASEAN and proceeds to
analyse the overall effects of the formation of ASEAN and,
specifically, the Preferential Trading Arrangement Scheme
(PTA), on the trade patterns of ASEAN. Since the PTA was
adopted as a means to spur intra-regional trade, this
chapter thus attempts to discern any increases in intra-
5
ASEAN trade among member countries, particularly after
197 6, and any shifts in trade away from traditional
sources which could signify the success of the PTA Scheme.
Although this dissertation evaluates increases in
intra-regional trade as a measure of success of ASEAN, it
however does not assert that increases in intra-regional
trade stand as the only measure of overall success of
these regional groupings. In fact, these groupings may
register successes in regional cooperation in the socio
political spheres. This is especially evident by ASEAN's
success in gaining international recognition for the
Kampuchean issue and its subsequent efforts at resolving
the issue (Busznski, 364-386). Nonetheless, regional
cooperation in the economic sphere, in the least and in
many instances, entails increasing intra-regional trade.
In particular, this chapter will analyse the extent to
which the disparate levels of development of the ASEAN
countries, determine the patterns of both intra and extra
regional trade. Furthermore, this chapter will investigate
whether the gains from ASEAN are clustered around the
growth poles of the region, as some authors have argued.
This chapter will however demonstrate that, with
nearly twenty-five years of existence, there has been no
significant changes in the trade patterns of the ASEAN
countries. The developed economies remain the major
6
trading partners of the ASEAN countries. Intra-ASEAN trade
remains dismally low and any increases have been bilateral
1 in nature, and with pre-ASEAN trading partners.
Chapter 3 examines the economic factors that affect
trade, namely the complimentary and competitive nature,
the disparate levels of development and the economic
strategies of their economies. It argues that their
existence in ASEAN stymies regional economic cooperation
and accounts for the low levels of intra-ASEAN trade.
However, more importantly, this chapter proceeds to
identify other factors endemic to ASEAN which, it is
argued, has stimied regional economic cooperation, as
manifested by low levels of intra-regional trade. In
particular, it is argued that the regionally uncoordinated
investment patterns of TNCs, engendered by government
policies, have geared ASEAN toward the international
division of labor and extra-regional as opposed to intra-
regional trade.
In chapter 4, the effects of the investment patterns
of transnational corporations and the disparate levels of
economic development of the ASEAN countries, together with
the traditional economic variables, are tested
regressionally against the intra-ASEAN trade flows.
Multiple regression utilizing ordinary least squares is
employed. In general, this chapter demostrates that the
7
investment patterns of transnational corporations and the
disparate levels economic development have skewed trade
extra-regionally. More importantly, this chapter shows
that not all the variations in the ASEAN trade flows can
be accounted for by variations in these economic
variables. This argues for the importance of the socio
political variables and whose quantification and test
remains outside the scope of this thesis.
Successful regional economic cooperation requires a
requisite political will. Chapter 5 asserts that, in the
ASEAN context, the requisite political will has been
tainted by historical animosity and bilateral tensions
between member states. Furthermore, it is argued that the
pattern of diplomacy in ASEAN, coupled with the elitist
nature of foreign policy formulation in ASEAN may have
enabled the personal characteristics of leaders to
manifest themselves in foreign policies. This, in general,
may have not spurred regional economic cooperation to the
fullest extent possible.
The main findings of this dissertation is reiterated
in Chapter 6. In general, this chapter argues that if,
economic development through regional economic cooperation
remains a credible objective of ASEAN, then several
measures will have to be initiated. In the first
instance, a greater reduction in intra-ASEAN tariff rates
8
and tariff reductions across a broader spectrum of goods,
especially goods that hitherto have been traded extra-
regionally, will be required. In addition, the elimination
of non-tariff barriers will also spur increases in intra-
regional trade. The deepening of tariff cuts and
elimination of non-tariff barriers are crucial to the
success of the other ASEAN schemes of regional
cooperation. Secondly, this chapter asserts there should
be a system of compensation established to mitigate the
unequal distribution of gains attained from regional
economic integration. Furthermore, there will have to be
consultation of and greater involvement by the private
sector in the ASEAN schemes. This chapter also argues for
greater regional coordination in the utilization of
foreign direct investment. Finally, this chapter asserts
that there will have to be greater social and cultural
exchanges to foster better cultural understanding and *
relations among the peoples of ASEAN.
9
CHAPTER 1
THE THEORY OF INTERNATIONAL ECONOMIC INTEGRATION
INTRODUCTION
There has been much ambiguity in the concept and use
of international economic integration1. It has been
invoked at various times, rather broadly, to encompass
almost all, and at times, every conceivable aspect of
international economic relations. It has run the gamut
from considerations of trade and monetary relations to
capital and labour movements (Robson, Theories, 1). It has
even been viewed as a means of harmonizing conflicts
between countries (Brewster and Thomas, 1).
Three features are prominent in the review of the
literature on international economic integration. In the
first instance, as Pelksman notes, the literature has been
widely criticized as being generally unsatisfactory,
especially with regards to integrating developed, mixed
economies:
The parts that have received most analytical
attention suffer from either very limited
applicability (customs union theory) or from the lack
of operationality (optimum currency area theory).
Other parts have remain underdeveloped (the theory of
free trade areas) or undeveloped (the theory of common
market). Both the economics and the political economy
of various possible transitionary constructions are
little understood (and in short)... integration theory
has often traded practical relevance for theoretical
elegance. (Pelksman, 333)
10
In addition, as Vaitsos interjects:
there has also seldom been a systematic analysis of
the economic and political actors who promote and
whose interest are served by regional economic
cooperation. Economic policies on integration have,
not infrequently been assumed to be footloose and
independent of the conditions imposed by the economic
and political environment within which they are
supposed to operate. (Vaitsos, 720)
Secondly, the literature has often treated the
concepts of international economic integration and customs
union as being synonymous, giving rise to much ambiguity
and confusion in their usage.
Thirdly, there has been a divergence in approaches in
the literature on economic integration. Some have argued
that this divergence reflects both a theoretical and
( t
institutional component. The theoretical component is
viewed as a response to the failure of the traditional
trade theory to explain why policies other than free trade
or modified free trade are followed by governments, and
the institutional, as a response to the recent interests
in economic integration on the part of the world's
developing countries as a means of accelerating their rate
of economic progress (Krauss, 413).
This chapter will trace, in general, the evolution of
the theoretical economic rationale for international
1 economic integration from one based purely on economic
efficiency to a much broader one utilizing the public
goods approach. This evolution reflects, in a sense, a
shift in theoretical orientation away from the analysis of
the economic effects of economic integration, to a study
of the reasons for their formation (Gunter, 1). The
purpose of this chapter then, is to highlight the key
issues in the literature, elucidating, in the process, the
ambiguity in the concept and use of international economic
integration and its synonimity with the concept of customs
union. This chapter also discusses the shortcomings of the
orthordox theory, seeks to introduce other issues not
treated adequately by, and argues for their synthesis into
the orthordox theory. It will be argued that such a
synthesized approach provides a better framework for the
analysis of international economic integration schemes, in
general, and, when transposed into the "extended gravity"
model, for intra-regional trade flows in particular.
The chapter comprises four sections. Section I affords
a brief history of the evolution of the concept of
international economic integration and a brief recount of
the dichotomy in the literature. Section II examines the
definition and implications of international economic
12
I
integration. In section III, the economic rationale for
international economic integration is explored, especially
the relevance of trade expansion in economic integration, j
and hence the significance of increased intra-regional
trade as a measure of success of economic integration.
This section will also examine the limitations and
inadequancy of increases in economic welfare as the sole
justification for the international economic integration,
the paradox between tariffs and the theory of
international economic integration, and the development of
the "public goods" argument as an economic rationale for
international economic integration.
Section IV discusses the limitations of the orthodox
theory of international economic integration, particularly
the absence of any treatment of the presence of
transnational corporations, non-market economies and
disparate levels of economic development in international
economic integration schemes. In this regard, this section
will introduce a theoretical treatment of these factors
and their applicability to international economic
integration among developing countries. This section also
explores the contemporary view that one objective of
economic integration among developing countries, besides
the efficient allocation of resources, is the
diversification of the countries' economies. In the final
analysis then, this section advocates that any framework
of analysis for international economic integration schemes
must incorporate these factors as determinants of the
success or failures of these schemes. It will thus be
argued and demonstrated that these factors are important
determinants in the level and pace of economic cooperation
in ASEAN.
14
SECTION I
A. EVOLUTION OF THE CONCEPT
Many have pointed to the lengthy discussions of the
effects of preferential commercial treaties, such as the
Methuen Treaty of 1703 and the Cobden Treaty of 1860 as
recognition by the classical economist of the concept of a
customs union. The former afforded preferential terms for
the import of Portuguese wines into Great Britain in
exchange for the removal of Portuguese prohibition of
British woolen imports. Adam Smith, Ricardo and McCulloh
were to later attack the Methuen Treaty on its "trade-
diverting" effects. However, no significant treatment of
the the theory of customs union existed prior to the
Vinerian Study. The pre-Vinerian literature on Customs
Union was sparse, and the few economists who wrote on it
tended to incorrectly view it as a step toward free trade
(Robson, Theories, 1-5).
Thus, the concept of international economic
integration as a process involving the combination of
separate economies into larger economic regions has had a
short history. Machlup, in a major study on the history of
thought on economic integration, has been unable to trace
a single instance of its use prior to 1942 (Malchup, 1977,
1-10; Robson, Theories, 1). This concept of international
15
economic integration was alluded to, but never explicitly
pronounced in the 1940s. It was not used in Winston
Churchill's speech in September 1946 when he called for
the re-creation of the European family, or in the
resolution of the Economic and Social Council of the
United Nations when it recognized the necessity of
regional economic cooperation. Nor was the term used in
Fulbright Resoultion of the U.S. Congress in March 1947
which favored the creation of the United States of Europe
within the framework of the United Nations. It was also
not used in George Marshall's address at Harvard on 5th
June 1947, on the occasion of the institution of the
Marshal Plan. It was not until October 1949 when Paul
Hoffman, the Administrator of the Economic Cooperation
Administration (ECA) made the first conspicuous use of the
concept in October 1949. In his address to the
Organization of European Economic Cooperation (OEEC), he
urged faster progress towards the integration of the
Western European economy where:
The substance of such integration would be the
formation of a single market within which quantitative
restrictions on the movement of goods, monetary
barriers to the flow of payments and, eventually, all
tariffs are permanently swept away. (Machlup, 1977,
10) .
16
In sum then, a specific and economic meaning of
economic integration only made its appearance between 1939
and 1949. And by 1950, with the publication of Viner's
celebrated "Customs Union Issue" economic integration was
generally accepted as a state of affairs or process
involving the combination of separate economies into a
larger economic region (Machlup, 1977, 1-13).
17
B. DIVERGENCE IN THE LITERATURE
Since Viner's work, international economic integration
has been much discussed. In general, the literature can be
divided into two approaches, namely a historical-
descriptive approach and a theoretical-analytical approach
(Haack, 3 65-387), with a preponderance of the literature
adopting the latter. The historical-descriptive approach
has primarily analyzed the achievements and problems of
integration schemes, generally measured by the extent to
which enunciated objectives are achieved. In this
approach, integration is seen as an end in itself and,
although the effects on individual member countries are
sometimes discussed, studies adopting this approach are
generally limited to examining the factors that account
for the success or lack thereof of these schemes.
These studies have also concentrated on the
distributional considerations of the gains and losses of
such schemes, which, it will be argued, is of greater
significance to understanding the dynamics of economic
integration involving developing countries. In this vein,
studies of various economic integration schemes involving
developing countries by Brewster and Thomas (19 67) , Krause
and Mathis (1970), Milenky (1973), Vaitsos (1979), Vargas-
Hidalgo (1979), Penaherrera (1980), David (1980), Hojman
(1981), Payne (1981) Robson (1983), Maldonado (1985), Hope
18
(1986), Torres Rivas (1988), Edwards and Savastono (1989),
Drabek (1989), Fuentes (1989) and Coussy (1992), among
others, have posited various factors which they assert
account for the success or lack thereof of such schemes.
For example, Payne, in his study of CARICOM, attributes
its initial success to an appropriate balance of power
between the member countries, a high degree of ideological
concensus on the means of economic development, a close
rapport between the heads of government and a limited
amount of international interest in the region. However,
Payne argues that the international economic crisis in the
mid-1970s served to radically alter these conditions which
led to the immobilization of the scheme (255-280) .
Some of these studies have attributed the paralysis
and dissolution of some of the integration schemes
involving developing countries, such as the African Common
Market (Vargas-Hidalgo, 214), and the Latin American Free
Trade Agreement (Maldonado, 65; Behrman, 1-3; Milenky, 71-
88; Edwards and Sebastano, 194) to the inequitable
distribution of these gains and losses. Specifically,
Vargas-Hidalgo argues that the unequal distribution of
costs and benefits, the politicization of integration
issues and the incompatibility of national policies are
factors that have contributed to the crisis in the
integration schemes involving developing countries. In his
19
study of the Andean Pact, he further asserts that these
conditions have been compounded by the non-compliance of
member countries with Andean Decisions (213-226). In
addition, the literature, for the most part, has ignored
the effects of transnational corporations and government
intervention on integration schemes.
A second group of studies, under the rubic of the
orthordox theory and founded on the neoclassical economic
traditions, collectively forms the theoretical-analytical
approach. These studies have evaluated economic
integration primarily in terms of the static gains and
losses generated through trade liberalization and from the
impact of customs union on the allocation of resources,
including increased production arising from international
specialization based on comparative advantage; increased
output through the exploitation of economies of scale;
the improvement in the terms of trade in relation to the
rest of the world; changes in productivity, the quality or
quantity of factors; forced changes in efficiency nurtured
by increased competition; and or the dynamic gains and
losses engendered by an acceleration in the rate of
economic growth, increased economic stability, and the
distribution of income. These studies have ignored,
however, other effects, such as diversification and
industrialization of the economy, Which, as many have
20
asserted, remains a primary objective of international
economic integration schemes involving developing
countries (Andie and Dosser, 16; de Palacios, 21;
Penaherrera, 71; Guerra-Borges, 48; Krause and Nye,
328-329; Gunter, 8).
In addition, a propenderance of the literature has
placed primary emphasis on resource allocation,
international specialization, economies of scale and the
terms of trade. Analysis on the productivity of factors
has generally been excluded by the assumption that
technical progress is exogenous and production is carried
out by processes that are technically efficient. The
distributional considerations of the gains and losses of
international economic integration are for the most part
disregarded (Robson, Theories, 11; Pelksman, 333) , as are
the political and economic factors that would account for
the stagnation or dissolution of several of these schemes.
Thus, in short, the theoretical-analytical approach
has held the attainment of economic gains as the primary
economic incentive for integration. Within this approach,
however, there are two diverging perspectives. The first
perspective assumes governments to be economically
"irrational" or non-economic. Studies adopting this view
consider the welfare effects of customs union on
production (Balassa, 1-21; Aitken, 881-891; Pelksman, 383-
21
354; Greenaway and Milner, 900-908), consumption patterns,
the terms of trade (Petith, 262-272), economies of scale
(Corden, 465-475; Choi and Yu, 195-203), specialization
(Drabek and Greenaway, 444-469; Van Brabant, 287-315), X-
efficiency and the like, as an estimation of the Union's
net economic costs, juxtaposed against the Union's non
economic benefits. For some, this reflects, in general,
the failure of economics to provide an justifiable
economic argument for the formation of a customs union.
The second perspective assumes that governments desire to
maximize economic welfare of the community, but are ill-
informed as to the means of their attainment (Krauss,
434) .
Consequently, this has thus engendered one
contemporary view of international economic integration as
a means to an end, motivated partly by political reasons
(Robson, Theories, 2; Axline, Underdevelopment, 1;
English, Asean's Quest, 101). These ends or goals would
include the achievement of greater national prestige
through industrial and technological advancement, the
reduction in unemployment, the accessibility of more
consumer goods for lower incomes groups in the country
(Behrman, 2), or in the vein of the New International
Economic Order (NIEO), the acceleration of economic
development through collective self-reliance (Hope, 22;
22
David, 176). It is in a similar vein that many have viewed
the formation of ASEAN in 1967. Many have argued that the
acceleration in economic activity only after the fall of
Vietnam in 1976 further validates the formation of ASEAN
as a regional response to and bulwark against the
Communist threat in Southeast Asia, rather than a regional
organization solely motivate to achieve the gains from
regional economic cooperation (Colbert, 181-182; Leifer,
ASEAN, 52-64). The emphasis in this approach thus has
been on whether the economic factors have reinforced or
have offset the political considerations.
23
SECTION II
A. DEFINITION OF INTERNATIONAL ECONOMIC INTEGRATION
Disagreement over the defintion of international
economic integration, especially whether it pertains to a
process or state of affairs is endemic to the literature
on international economic integration. It is viewed by
some as an evolutionary linear process (Balassa, Types, 2),
involving several stages, and argued by yet others that it
should be an evolutionary process2 (Axline, Carribean,
Furtado, 204). These are namely, a Free Trade Area (FTA)
where the quantitative restrictions and tariff between
member states are abolished, but each member state retains
its own tariff against the rest of the world; a Customs
Union, where two or more customs territories are
substituted for a single customs territory in that duties
and other restrictive regulations of commerce are
eliminated with respect to substantially all the trade in
products originating in such territories, and a common
external tariff adopted by the members of the Union; a
Common Market where restrictions on the movement of
people, capital, materials and other resources are
abolished; an Economic Union where there is harmonization
of economic and social policies; and a Supranational
Union, where member governments relinquish their
sovereignty for economic and social policies to a
supranational authority (Aggarwal, 1).
Theoretically then, international economic
integration, defined as a process, extends beyond a
customs union, in that it takes into account international
factor movements, it envisages the coordinated use of
instruments of national economic policy other than
commercial ones, and it evaluates integration by criteria
other than only that of efficiency in resource allocation
(Robson, Theories, 3; Furtado, 2 04). However, in practice,
most studies in international economic integration have
dealt only with customs unions, and have tended to treat
international economic integration as synonymous with
customs union. It has thus obsfucated the political and
economic reguirements necessary to move from a customs
union to a supranational union. As Axline argues:
The process of regional economic integration is a
highly politically charged activity in the sense that
national governments must cede certain degrees of
autonomy over important domestic matters to move to
each higher degree of economic integration. Moreover,
the benefits of economic integration, although
increasing the welfare of the union as a whole, do not
necessarily benefit each country in the same degree at
each stage. This is, of course, why a theory of
political integration is needed to understand the
process. (Carribean, 7)
From this approach, international economic integration
of the economies, as such, extends beyond particular
industries and sectors, and to particular products or
25
factors, intermediate or final, to incorporate the
entirety of economic activities of the region. It is the
integration of all productive resources available anywhere
in the region for the production of all the many goods and
services demanded under actual or potentially realized
conditions. It is constituted by a complete interweaving
and interdependence of all economic sectors, industries
and branches. Consequently, there are two important
implications of the process of international economic
integration.
In the first instance, complete economic integration
necessitates the equality of prices for equal goods and
equal services. This implies that all means of production
in the integrated economic region, which are both
perfectly mobile and perfectly substitutable for one
another, will receive the same prices and have the same
marginal net-value productivity in all their uses.
Secondly, it requires a system of perfect
interdependence so as to enable the economically optimal
relationship among all costs and prices in the completely
integrated area to be determined. This presupposes that
all cost calculations by enterprises and agencies in
charge of planning and allocation are made on the basis of
opportunity costs. Every means of production, irrespective
of whether they are actually used, has to be valued
26
according to the social utility that could potentially be
derived from alternative uses, and be able to "compete"
for all possibly usable means of production. In market
economies, this implies effective competition among the
enterprises and in centrally-planned economies,
competition among all conceivable alternatives under
consideration by the decision-making authority. All inputs
are considered eligible to compete for uses in the
production of all conceivable outputs, and all outputs are
considered eligible to compete for allocation among all
conceivable inputs (Machlup, 1979, 64-66).
Others, however, disagree with the definition and
concept of international economic integration solely as a
process (Vaitsos, 719-7 63; Andie and Dosser, 17; Franco,
38-86). As Vaitsos, among others, argue, the
differentiation of the level of international economic
integration, to a large extent, has revolved around the
interactions associated with the exchange of goods,
services and inputs. As such, these exchanges generally
have been evaluated with respect to the conditions which
determine price, quantities and the policies affecting
them. Vaitsos contends that a better representation of any
economic system has to account for the existence of at
least 3 types of interaction, namely interaction among
networks of power, interaction among networks of
27
information and knowledge and intractions among networks
of exchanges (Vaitsos, 720). After all, consideration of
only market exchanges ignores, as Brewster and Thomas
emphasize, the possibility that such exchanges may
generate other more severe forms of de facto
discrimination and also have been misconstrued to believe
that such exchanges could be used to destroy non-economic
barriers between communities, races and social strata
(3-7) .
Vaitsos argues that economic international need not
necessarily represent a linear progression from a Free
Trade Area to a Supranational Union. In contradistinction,
he proposes that there may be multiple approaches to or
stages in economic integration, each representing an end
in itself. For example, some countries may pursue
integration by projects where interdependence is promoted
through concrete action for common benefit (Kuyvenhoven
and Mennes, 3; Franco, 40). However, such an approach to
economic integration would not lead to the creation of
larger global units. Other approaches to economic
integration could involve integration on a more global
scale through the integration of markets, or integration
through development. In the latter, countries may pursue
common policies on economic development, based on
planning, to achieve specific objectives, and utilize
28
multiple types of interations which are not necessarily
based on the market system (Vaitsos, 72 0).
In a somewhat similar vein, and echoing the sentiments
of Axline, Pelksman takes issue with the economic and
political requirements of the process of international
economic integration. Pelksman observes that there is an
inconsistency with the assumptions between the
neoclassical trade theory, the cornerstone of the
orthordox theory of international economic integration,
and the stages of international economic integration, as
espoused by Balassa. The neoclassical trade theory assumes
a given working force, capital stock and technology;
maximum competition among atomistic economic agents; the
homogeneity and perfect substitutability of all factors;
the absence of internal or external dis-economies; perfect
foresight and a given access to raw materials and inputs;
the free access to a full range of technologies; complete
information about markets and products for producers and
consumers, respectively; the absence of the introduction
of new products; the absence of international and perfect
intra-factor movements; and the absence of government
interference in the economy, except at the perifery and
only through tariffs (Pelksmans, 336).
However, as Pelksman argues, the first three stages in
international economic integration imply the classical
29
laizzez-faire economies with the absence of government
intervention and thus constitutes pure market integration.
! The last two stages, on the other hand, involve
harmonization of policies and thus require government
participation, constituting, as such, pure policy
integration. This then gives rise to Pelksman's "dichotomy
of integration" theories (334).
The disagreement over the conceptualization of
international economic integration is exemplified by what
the Economic Commission for Latin America has labelled as
the Central American 'crisis of expectation'. The main
'expectation' has been that, with the creation of the
Central American Common Market (CACM), Central America was
set on a path which was to lead to full economic
integration as represented by a Supranational Union.
However, as the Commission argues, such a notion was never
incorporated in the General Treaty of Economic
Integration:
In reality, the General Treaty does not contain a
single clause calling for the unification or
harmonization of economic policies at all levels.
Rather, it tends towards arrangements based on partial
commitments to facilitate the formation relatively
loose arrangements over objectives of limited scope -
the establishment of free trade zones and adoption of
a common tariff within five years - all of which was
accomplished. (Fuentes, 90)
_
Abstracting from the diasgreement over definition,
30
there are, nonetheless, three salient aspects of
international economic integration. First, economic
integration proports and encourages some division of
labour based on specialization. Secondly, it involves some
mobility of goods or factors or both. Thirdly, it involves
the discrimination of goods and factors external to the
grouping and the non-discrimination of those goods and
factors within the scheme. (Machlup, 197 6, 64).
International economic integration can be more broadly
defined to encompass both a "state" or "process" if it is
viewed as the situation where two or more countries
formally associate to achieve some economic objective,
through specified joint endeavours, which each country
feels it would be able to achieve less effectively if
pursued individually. Adopting the broader definition of
international economic integration, and in the absence of
any quantitative specification for the requisite number
and geographical location of the states involved,
international economic integration is synonymous with
regional economic integration, with the latter implying
integration within a specific geographic space. This
definition thus implies that the success of international
economic integration schemes would have to be evaluated in
terms of whether a specified economic objective has been
attained.
31
SECTION III
THE ECONOMIC RATIONALE OF INTERNATIONAL ECONOMIC
INTEGRATION
: I
Trade is an important component in the theory of
international economic integration. This section reviews
the theoretical significance of trade in the theory. The
neoclassical trade theory, however, expounds the
superiority of free trade over restricted trade. This thus
creates a "paradox" between the benefits of free trade
and the theory of international economic integration,
which is, in essence, protectionism on a regional basis.
This section will thus explore how this "paradox" is
resolved. In addition, this section examines the
inability of increases in economic welfare alone to
theoretically justify international economic integration
and, as a result, the development of the "public goods"
approach in the theoretical literature.
A. TRADE AND INTERNATIONAL ECONOMIC INTEGRATION
Many of the international economic integration schemes
profess, as one their objective, trade promotion, either
through trade liberalization or trade development. As
Vaitsos, among others, have asserted, the issue is not
the relevance of intra-regional trade but rather the
amount of such trade that is necessary to sustain the
integration process, the required policies necessary for
its attainment, its effect on the rest of the economic
system and its multiple objectives, and whether trade
should be the primary force of integration or whether it
should be used in specific areas as one of the instruments
which serve other more significant policy options within
the context of regional cooperation (Vaitos, 745).
Furthermore, the importance of trade in international
economic integration does not revolve around purely
economic gains, as Haas and Schmitter, in their study of
LAFTA, assert:
As the principal means for accomplishing the goals
of LAFTA, trade is central to the politics of
integration. All other issues in LAFTA, with the
exception of international payments cooperation grew
out of the problems surrounding the liberalization of
trade and the participation of the member states in
costs and benefits. The interaction between the two
sets of factors illustrate the nature of the politics
in LAFTA: the actual results of trade -gains, losses
and their distribution among the member states - and
the policy responses for the policy responses to this
situation. A comparison of the two will show how
LAFTA, pressure groups, the secretariats of
international agencies and other political forces came
to calculate their respective balances of costs and
benefits. (Haas and Schmitter, 33)
The importance of trade is evidenced from the
enunciated objectives of many of the international
economic integration schemes. For example, the General
Treaty of Central American Economic Integration envisaged
33
planned development of integrated industries linked to
gradual trade liberalization (Guerra-Borges, 48).
Similarly, one of the priority objectives of the
the promotion of intra-group trade (Robson, Theories, 45),
as was the case with the Andean Pact (Vargas-Hidalgo,
215), CARICOM (Payne, 257), NAFTA and ASEAN (Saw,
Economic, 1-200). Furthermore, the preamble to the
Montevideo Treaty linked trade expansion among the
participants of LAFTA with the basic regional objective of
accelerated economic growth (Wionczek, 318).
This importance of trade, especially as a stimulus to
domestic expansion based on economies of scale, was first
recognized by Adam Smith in his famous dictum on the
limitations of the market. As Smith argues:
As it is the power of exchanging that gives
occasion to the division of labour, so the extent of
this division must always be limited by the extent of
the power, or, in other words, by the extent of the
market. (121)
As the economies of scale increase, an expansion of
demand from abroad would not only increase output but
would also lower price. This in turn would raise real ^
incomes and so provide more savings for investment in
additional or larger capital facilities leading to
further economies of scale in an ever expanding "virtuous"
c f?*
Communuate Economique de l'Afrigue de l"Ouest was
34
circle. The Smithian concept of trade is thus seen as a
vent for surplus in which unused or underutilized
resources can be utilized more efficiently as a result of
trade, thus directly raising real incomes and forgoing the
need to reallocate resources from import-competing
sectors. This suggests that domestic resources are not
simply given, but in many cases, generated in response to
the stimulus of trade (Findlay, 24).
Theoretically then, for the less developed countries,
the promotion of trade, either through trade
liberalization or trade promotion, would enable them to
obtain the needed capital goods, raw materials, technical
skills, and even entrepreneurship (Baldwin and Kay, 124).
Trade promotion would thus encourage the movement of
capital, promote healthy competition, check inefficient
monopolies, and naturally increase the size of the market
which would result in the exploitation of ever greater
economies of scale (Aggarwal, 30; Page, 50). These
beneficial effects of trade have been partially
substantiated in econometric studies by Caves (1991) and
Salvatore and Hatcher (1990). As such, trade is
proportionally more important, in general, for the
V*
economic growth of the developing countries than the
developed (Rosenbaum and Tyler, 243).
35
The theoretical importance of trade has been
empirically justified in studies by Emery (19 67), Massell
(1968), Pearson and Fitch, Syran and Walsh, Healy
(Aggarwal, 30-31), Michaelly (1977) and Tyler (1981), all
of which suggest that, generally, a 1% increase in exports
results in between a 0.33% to 0.46% increase in per capita
Gross National Product. These findings are again
substaintiated by Ram, who concluded that the importance
of exports in the 1970s has increased, contrary to the
prevalent view (415-427). In addition, several other
studies have shown that the economic growth and
industrialization in the Newly Industrializing Countries
(NICs) have been driven by growth in exports, averaging
some 2 0 percent between 1960 and 1970, particularly of
manufactured exports (Moon, 161; Chow, 55-63).
Furthermore, other studies suggest that the fall in per
capita GDP in the member countries of the Central American
Common Market, equivalent to the loss of two decades of
growth, has been attributed to, among other factors, the
contraction in intra-regional trade (Irvin and Holland,
4). Concommitantly, others have thus argued that a
permanent solution to the current Latin American crisis
and resumption of growth requires the enhancement of the
role of the export sector and an increase in exports
(Edwards and Sevastano, 189) .
36
To a large extent then, given the importance of trade
as an engine of economic growth and one of the main
objectives of many economic integration schemes, the
empirical analysis undertaken to gauge the success of such
schemes, has evaluated their ability specifically to
generate increases in intra-regional trade. It should be
noted however, that increases in regional exports per se
is a necessary but not sufficient condition to ensure the
success of such schemes. In the Andean Pact, for example,
Chile increased its participation in Andean trade between
1971 and 1975 more than any other member country did
between 1971 and 1978, only to abandon the Pact in 1976
(Hojman, 140). What perhaps would be more important would
be the composition of the trade flows in terms of new
products, generally manufactured goods, and traditional
ones attained through international economic integration
engendered industrial development. The inability to attain
these new products has been attributed to the stagnation
in LAFTA and UDEAC, the conflicts and regression within
the Central American Common Market, the breakdown of the
East African Community and the problems in CARICOM
(Penaherrera, 71).
Nonetheless, the empirical analyses of international
economic integration schemes have been traditionally
rooted in the framework of neo-classical trade theory,
37
i
manifested most succinctly by the gravity model, and used
most notably in the works of Pullianen (1963), Linneman
(1966), Aitken (1973), Hewett (1976) and Brada and Mendez
(1985), among others. The gravity model is generally
represented as follows;
X
where
X^j = the value of exports from country i to j
A = constant
Y^Yj = income in the exporting and importing
countries respectively.
Nj^N-s = population in the exporting and importing
countries respectively.
D^j = distance between countries i and j
Pj^-A = dummy variable equal to 2 if country
belongs to the kth preference area; and 1
otherwise.
e^j = lognormal error term.
The income variables are used as proxies for the
1 productive potential and effective demand of the importing
| and exporting countries. Economic theory asserts that the
I larger the incomes of the countries, the larger would be
I
their effective demand and hence their trade flows. The
populations of the importing and exporting countries are
38
used as an indication of the size of the country. The
population variable however has an ambiguous effect on
trade flows. On the one hand, a large population would
imply a large country endowed with a greater amount of
natural resources and, being more self-sufficient,
participating less in international trade. On the other
hand, a large population also promotes division of labour
and specialization which encourages trade. The distance
variable is generally used as a proxy for trade resistance
and subsumes commercial policy, transportation costs and
lack of information on foreign markets and opportunities.
It is generally assumed that the greater the distance
between countries, the greater will be the lack of
information and transportation costs, which will thus
impede trade.
Studies employing the gravity model have generally
found that customs union among developed economies have
resulted in large increases in intra-regional trade. In
particular, Aitken's study demonstrated that the gross
trade creation effect for the EEC and EFTA in 1967
amounted to some $9.2 billion and $1.3 billion,
respectively, in 1967 dollars. This is about 13.75 times
and 9.25 times higher than would have accrued in the
absence of the EEC and EFTA, respectively (Brada and
Mendez, Regional, 591). A similar study by Hewett
39
substantiated these findings, indicating that the trade
augmenting factor for the EEC, EFTA and CMEA was estimated
at 3.97, 6.45 and 2.57, respectively (8).
Interestingly enough, the multiplicative nature of the
gravity model is based on Linneman's argument, drawn from
Ferber and Verdoom observations that "interactions in
economic life are often geometric rather than of
arithmetic forms" (Linneman, 34). The theoretical
justification for this form would be later provided by
Anderson in his seminal work (1979). Bergstand (1985)
would further substantiate Anderson's work and provide
empirical support for the argument that the gravity
equation is a reduced form of a partial equilibrium
subsystem of a general equilibrium model with nationally
differentiated products.
40
B. TRADE AND THE PARADOX OF THE THEORY OF INTERNATIONAL
ECONOMIC INTEGRATION.
The theoretical foundation for trade promotion as an
engine of growth emanates from the neoclassical trade
theory. This theory expounds the superiority of free trade
over trade with restrictions and, in essence, represents
an extension of the theory of optimization. The theory of
optimization asserts that resources would be optimally
allocated and the greatest amount of welfare achieved when
production prices, as represented by the marginal rates of
transformation, are equated with consumption prices, as
represented by the marginal rates of substitution. It
should be noted, however, that the theory of optimization
assumes the absence of transportation costs, the efficient
operation of the price system, and that the marginal rates
of transformation and marginal rates of substitution
represent factor endownments, factor prices, production
prices, and taste, income levels and income distribuition,
respectively (Kindleberger, 3 0-49).
Tariffs, on the other hand, disrupt this optimization
as they shift lower cost foreign production to higher cost
sources. They thus protect domestic production by shifting
consumer demand from foreign products to domestic
products, tending to further inhibit consumer choices,
at any rate, qualitatively resulting in lower satisfaction
41
and welfare.
This then creates a paradox in the theory of
international economic integration in that if free trade
is superior to trade with restrictions, then tariffs
should not exist. Hence, countries would always elect free
trade to restricted trade and would thus not participate
in international economic integration schemes. Three
solutions to this paradox have been proposed, namely the
"theory of the second best", the infant-industry argument
and the "public goods" argument. As it will be argued,
there are inherent difficulties in the former two
solutions.
42
International Economic Integration and the Theory
of the Second Best: Trade creation Versus Trade Diversion
Prior to Viner and his seminal work, "The Customs
Union Issue" the prevalent view prescribed customs unions
as a step in the direction of free trade, as was apparent
in the works of Harberler and Gregory (Robson, Theories,
4). It was argued that since free trade maximizes world
welfare and since the establishment of a union removes the
tariff restriction among the members, a customs union,
although not maximizing welfare, must raise the welfare of
the countries in the union and the rest of the world
(Axline, Carribean, 3). The argument similar to Lipsey's
"General Theory of the Second Best" which asserts that:
If it is impossible to satisfy all the optimum
conditions (in this case make all relative prices
equal to all rates of transformation in production),
then a change which brings about the satisfaction of
some of the optimum conditions (in this case making
some relative prices equal to some rates of
transformation in production) may make this better or
worse. (498)
This results because tariff restrictions between the
rest of the world are not increased, but those between
members have been eliminated. As such, integration, on the
one hand, by reaffirming the existence of tariffs against
the rest of the world, continues to make trade restrictive
or at any rate does not free trade to the fullest extent
possible. On the other hand, however, integration by
43
freeing trade between the participating countries, helps
generate the gains that free trade generally does
(Aggarwal, 1979, 34-35). In sum, then, partial free trade
was considered better than no free trade at all.
Viner however demonstrated that the creation of such a
union does not necessarily increase the welfare of the
member countries and the world. Viner examined the
economic implications of the customs union in terms of the
relativity of trade creation and trade diversion3. With
the elimination of tariffs within the region and the
establishment of an external common tariff:
There will be commodities, however, which one of
the members of the customs union will not newly import
from the other which it formerly did not import at all
because of the price of the protected domestic market
was lower than the price of any foreign source plus
duty. This shift in the locus of production as between
the two countries is a shift from a high cost to a
lower cost point, a shift which the free trader can
properly approve, at least a step in the right
direction, even if universal free trade would divert
production to a source with still lower costs.
There will be other commodities which one of the
members of the customs union will now newly import
from the others whereas before the customs union it
imported from a third country, because that was the
cheaper possible source of supply even after payment
of duty. This shift in the locus of production is now
not as between the two member countries, but between a
low-cost third country and the other high-cost
country. This is a shift of the type which the
protectionist approves, but it is not one which the
free trader who understands the logic of his own
doctrine can properly approve. (43)
44
Thus, trade creation occurs when the positive effects
on production and consumption from the elimination of |
custom unions duties between countries leads to a shift in I
production from inefficient protected firms to those whose
operations are the most efficient within the region. Trade
diversion occurs when goods formerly imported from outside
the area are replaced by goods produced within the region
by firms less efficient than those they are replacing
(Wilford, 61). Alternatively, trade creation can be
regarded as a move toward internal free trade and Pareto-
optimal ity and trade diversion results from increased
discrimination and the violation of the optimality
condition (Haack, 1983).
Since the primary purpose and major consequence of a
customs union is to shift the sources of supply, this
shift, however, can be either to lower or higher cost
sources, depending on the circumstances. When the trade
creating force is predominant, one of the members must at
least benefit, both may benefit, or the two combined will
have a net benefit, and the world at large benefits; but
the world loses in the short-run at least and can only
gain in the long-run as the result of the great diffusion
of the increased prosperity of the customs union area.
When the trade diverting effect is predominant, at least
one of the members is bound to be injured, or both may be
45
injured, or the two combined will suffer a net injury and
there will be injury to the world at large (Viner, 44-45).
An assessment of the relative dominance of these two
types of trade production, will depend on changes in the
volume of trade and differences in costs. Consequently,
the overall impact of a customs union can be estimated
under constant costs assumptions and fixed pattern of
consumption by difference in the unit costs relative to
the shift from higher to lower (or vice-versa) cost
corresponding to the changes in the volume of trade
(Holzman, 410-42 3). In general, however, the relative
assessment of these two conflicting effects posits that
economic integration is said to be more beneficial among
complementary economies than among competing economies,
where complimentarity refers to a pattern of
specialization, and competition to a pattern of similarity
in the two stages of production. In is implicit in this
contention that costs differentials could be greater among
complementary than competitive economies. This would
contradict the. fundamental tenets of the pure theory of
international trade which asserts that it is competition
per se which leads to optimization. This contradiction is
removed if competitive economies are redefined as those
with similar costs ratios.
46
Besides complementarity of economies, there are
several other considerations which will determine the
extent to which trade creation or trade diversion will
predominate in a particular integration scheme. These
would include the importance of external trade of the
member countries relative to their internal production;
the share of external trade which is undertaken with their
prospective fellow member countries (Holzman, 419); the
sensitiveness of the trading partner to changes in
tariffs; the extent of the differences in the pattern of
relative prices at which the products within the grouping
are produced and; the level of pre-union duties on
imported products (Aggarwal, 1979: 41-42; Axline,
Carribean, 8; Gunter, 5-6).
In general, is has been argued that the larger the
economic area of the customs union, and the more numerous
the member countries, the greater the scope for trade
creation as opposed to diversion. Secondly, if the post
union "average" tariff rate is lower than the pre-union
level, the union is more likely to be trade creating, and
if it is higher, it would more likely to be trade
diverting. Furthermore, if the range of products produced
by higher cost industries in the different parts of the
customs union are similar, trade creation is more likely
the more competitive the member states' economies are.
47
Similarly, the smaller the overlap, the smaller will be
the possibilities for reallocation, and the smaller the
source of trade creation. Finally, for a specified
overlap, trade creation is more likely to predominate the
greater the differences in unit costs for protected
industries of the same kinds as between the different
parts of the customs union, since these will determine the
economies to be derived from free trade among the members
(Robson, Theories, 19-20).
However, such net welfare impacts of trade creation
and trade diversion are usually difficult to calculate
empirically. It has been shown that, in the case of the
European Economic Cooperation, the gains in trade in
manufactures within the union have been substantial, but
there has been a relative loss in trade with the United
States. In 1958, 50% of the manufactured products of the
EEC were imported from the member countries whereas by
1968, this share had increased to 60%. Most of the trade
diversion was from the other countries in Europe that had
initially declined to join. Estimates show that U.S.
manufactures exported to the community fell as a result of
the customs union, but 40% of this decline was made up as
a result of faster growth in the community resulting from
the union. Such gains and losses, however, because they do
not take into account alternative uses of the resources
48
absorbed in the one case or released in the other, must be
distinguished from welfare gains and losses as opposed to
trade gains and losses (Kindleberger, 178). Axline however
asserts that, given that there is generally little
industrial production, and a low probability of finding a
low cost producer of any commodity in the region, in
regional integration schemes involving developing
countries, there is little likelihood of trade creation
and a greater one for trade diversion (Axline, Carribean,
12) .
Consequently, the economic rationale for international
economic integration, as a means of achieving increased
efficiency and combined welfare, is only valid to the
extent that the effects of trade creation outweigh those
of trade diversion.
It should be noted, however, that the analysis of
international economic integration in terms of creation
and diversion of trade was found to be incomplete and its
assumptions too restrictive, that several other approaches
were adopted. These approaches stem from the relaxation of
one or several of the Vinerian assumptions. In one
approach, the assumptions of fixed proportions in
consumption and constant costs in production were relaxed.
The first, the Gehrels-Lipsey argument, dealt with the
consumption effects of price reduction due to the removal
49
| of the duties on imports from member countries. This
approach argued that Viner's analysis abstracted from
inter-commodity substitution and terms of trade effects.
It asserted that even if there were no shifts in resource
allocation to make better or worse use of opportunities
for comparatively more advantageous production, indeed
even if production remained unchanged everywhere, the
changes in relative prices charged to consumers would
induce them to rearrange the pattern of their consumption
in line with their preferences. In other words,
favourable consumption effects may conceivably outweigh
any adverse production effects of trade diversion from
lower-costs to higher-cost sources of supply. The welfare
increasing effects of equating the marginal rate of
substitution between goods and the marginal rate of
transformation in production, initially distorted by non-
preferential tariff, can offset the loss in welfare due to
the diversion of trade with the formation of a customs
union from a lower cost non-member to a higher cost
partner. (Krauss, 415; Gunter, 15-17).
50
Tariffs and Import-Substitution Industrialization
The import-substitution industrialization strategy as
a means of development, first advocated by Raul Prebish
and Lewis almost coterminously, provides another
justification for the existence of tariffs (Krause, 104).
This argument advances the notion that the developing
countries demand for industrial imports, generated by the
requirements for economic development, increases faster
than foreign demand for exports. This in turn leads to a
shortage of foreign exchange. The argument then advocates
that, on the one hand, developing countries should try to
produce those industrial products which they cannot
purchase because of this shortfall of foreign exchange
(Hope, 81). On the other hand, since capital, skills and
technology to produce these goods are scarce domestically
these countries should attract foreign investment (Axline
Carribean, 10). Furthermore, it was argued, that since
these "infant-industries" could not survive unaided
initially, they had to be protected. Hence import
licensing and other direct controls, such as import
restrictions and tariffs, which became progressively
higher, were imposed first on non-durable consumer goods
and inputs, and later on intermediate and durable goods
(Alexander, R., 297-308; Findlay, 26-27).
51
Generally, import-substituting industrialization is
l
constrained by the small size of the domestic market which ,
prevents new industries from attaining their efficient and ;
optimum size, and thus precludes these industries from
reaping the benefits of advanced technology in most of the ,
basic and heavy industries. Conversely, import-
substituting industrialization may lead lead to the
establishment of inefficient plants and of an inefficient
industrial structure, thus postponing the time and
compounding the difficulties of the reorientation of
policies once the limits of import-substitution have been
reached (Balassa and Stoutjesdijk, 37). Several studies
have, in fact, shown that countries with high levels of
protection in their manufacturing sector, without
exception, export very little of their manufacturing
output, thus suggesting that these policies encourage
inefficiency in the protected sectors (Gonzalez-Eivas,
5-6; Nash, 47). Furthermore, import-substituting
industrialization generally tends to reduce the extent of
competition in the protected industries, provides little
or no incentive for technological improvements (Krause,
107), creates a bias against the production of
intermediate and capital goods in favour of the production
of consumer goods and generates a bias gainst manufactured
exports (Bulmer-Thomas, 69; Nash, 47).
52
In addition, import-substitution industrialization may
lead to an increase in imports of a different type,
primarily imports of inputs for the newly stimulated home
industries (Willmore, 398-414; Krueger, 27). This, in
general, has been characteristic of the import-
substitution industrialization strategy in much of Latin
America (Guerra-Borges, 53). Also, to the extent that the
strategy has led to higher incomes, a greater amount of
imports were further induced (Hope, 87). Thus, as Farley
argues:
Import-substitution does not guarantee any lessening
of dependence on the external sector. The
development of one industry necessarily generates new
interindustry requirements, particularly in terms of
intermediate products. This in turn generates new
import requirements and leads to an elevation, not a
lessening of import coefficients. (219)
Similarly, to the extent that import-substitution
industrialization is financed through foreign capital
inflows, Nwanna has found that such inflows generally lead
to in increases in imports (103-116). In sum then, the
import-substitution industrialization strategy, far from
reducing the balance of payment problems amd foreign
exchange bottlenecks, frequency increases them. In point
of fact, this was a serious problem for CACM where, as
early as 1977, 55 to 75 percent of all earnings from
extra-regional exports was being consumed by the
53
industries need for foreign exchange for intermediate and
capital goods (Bulmer-Thomas, 68-69). In addition, many
have attributed the current "structural imbalances",
particularly the balance of payments problems, facing the
Latin American economies, among other factors, to the
import-substitution industrialization strategy (Fanelli et
al., 111).
54
Tariffs and the Public Goods Approach
Cooper and Massell however have argued that since a
"customs union is necessarily inferior to an appropriate
policy of non-preferential protection", a greater
efficiency in the allocation of resources cannot be the
sole reason for the establishment of a customs union. Any
country, faced with the realization that a non-tariff
policy is superior to a customs union will always elect
free-trade (Cooper and Massell, New Look, 747), a
proposition in dissonance with the observations of
contemporary international trade policy (Yarbrough and
Yarbrough, 8-9). Thus, the use of a tariff policy, among
developing countries, must be for the purpose of achieving
an objective unattainable by the countries individually,
most often the cultivation of industrial development and
the guidance of such development along economic lines
(Cooper-Massell, General Theory, 461-462). In addition,
they have argued that:
By permitting customs-union participants to draw on
one another's markets, a customs union may make it
possible for its members to maintain a protected
market at less sacrifice in income than is possible
through non-preferential protection. (747)
Thus, their approach proposes two other gains that
accrue from the formation of a customs union, namely the
55
"tariff reduction component" or "dynamic effects" (Krauss,
42 0) and the terms of trade effects. Corden, by extention,
asserts that the dynamic effects posits, in the first
instance, the effects of protection on efficiency. A
reduction in tariffs would raise the income of factors
intensive in the production of exportables and lower those
of factors intensive in the production of importables
(Krauss, 420). Secondly, the dynamic effects argue that
the extension of the market, through the elimination of
tariffs between two member countries, may permit the
exploitation of economies of scale, thus leading to
increased productivity (Axline, Carribean, 11; Gunter,
15). If national markets were too small for "optimum-
sized" plants or the most efficient types of organization
to be used, larger plants and larger firms could, in
multinational markets, produce at lower costs (Machlup,
1974: 76). Pearson and Ingram estimate that with the
effective integration into ECOWAS, Ghana and the Ivory
Coast stand to achieve welfare gains of some 3 3 percent
and 22 percent of their gross output in world prices,
respectively (994-1008).
Johnson, however, asserts that the economies of scale
argument for a customs union assumes that countries with
differing income levels, consumption patterns and customs,
taken together, would increase effective demand for some
56
commodities. The economies of scale effect on customs
union will depend on whether it is assumed that the
minimum point on the firm's average cost curve lies below
or above the world price level. If the former were the
case, then the firm would be an exporter sympathetic to a
free trade policy. The latter case would, on the other
hand, require protectionist policies with the domestic
producer supplying the whole market (Krauss, 42 0).
Corden, in this regard, by employing a partial
equilibrium and static analysis, examined the relevance of
the concept of trade creation and diversion in the
presence of economies of scale. He concludes that trade
creation and trade diversion are still relevant provided
that they are supplemented by the two other concepts,
namely the cost-reduction effects and trade suppression
effects, where the former involve an increase in welfare
due to a fall in the average domestic cost per unit of
production resulting from an expansion in output due to
economies of scale, and the latter a decrease in welfare
brought about by the substitution of imports from their
most efficient source by a less efficient domestic source.
The cost reduction effects are distinct from Viner's trade
creation effects in that cost reduction refers to a
cheapening of an existing source of supply as opposed to a
movement to a cheaper source which the latter implies
57
(Corden, 465-4 69). The theoretical argument for the
economies of scale has been substantiated by Teitel in a
recent empirical study (Teitel, 92-115).
The notion that customs unions are formed to achieve
an objective which countries individually aren't able to,
engenders the "unorthordox" approach to economic theory of
customs union. The orthordox view holds that countries,
recognizing the gains from international trade, would not
protect their domestic industries in the first place. But
in cases where they have, they would not demand
reciprocation for tariff removal, since tariff reduction
would represent an act of economic self-betterment. The
objective of a customs union then, from the "unorthordox
approach" would be the maximization of a community's
economic welfare in the presence of a public good. This
provides the basis for Johnson's and Cooper and Massell's
explanation for why governments often follow seemingly
economically "irrational" protection policies, and how
membership in a customs union may enable a less developed
country to achieve more economically the ends served by
protectionism (Cooper and Massell, General Theory, 462;
Coussy, 2 00; Gunter, 9). Behrman, in this vein, argues
that free trade is not wholly acceptable to any nation
because the results of free trade generally, are
considered inequitable from the standpoint of national
58
interest (3). Similarly, Johnson, building on Anthony
Down's theory of democracy, Gary Becker's theory of
discrimination and Albert Breton's economic theory of
nationalism, proposes nationalism as a collective capital
good. Thus, the economic motive for protectionism would be
the maximization of the economic welfare of the community
in terms of both public and private goods, subject to
constraints and assuming there exists a collective
preference for industrial production (Johnson, 2 57). Such
constraints would include domestic political
considerations or trade objectives and other treaties,
like GATT.
This approach demonstrates the superiority of a
customs union over a unilateral tariff policy, and
provides justification for the formation of a customs
union and free trade area under the constraint of the
"most favoured nation" principle of GATT (Balwin and Kay,
104). Indeed, a customs union is the only permitted form
of reciprocal tariff reduction in GATT. Assuming that
industrial' production is not a homogeneous aggregate, but
that the industrial sectors of member countries have
different levels of comparative advantage, as manifested
by varying degress of efficiency, some for exports and
others protected to obtain an optimal amount of domestic
industrial production, then a unilateral tariff reduction
results in an unambiguous loss. If, however, the tariff
reduction by one country was reciprocated, then the
optimal total production in both countries could be
maintained. The increase in exports of industrial
production would then offset the loss in industrial output
from the import-competing sectors. As such, the same
amount of collective consumption could be produced at a
lower cost in terms of forgone private consumption
(Johnson, 267-278). This forms the basis for the
formation of a customs union, and as Krauss elaborates:
The preferential reciprocal tariff reduction would
be superior to the non-tariff reduction because
through trade diversion each country can offer its
partners an increase in exports and industrial
production without suffering a loss of its own; and in
the case were trade diverting possibilities are
exhausted, the preferential reciprocal reduction yield
the partner the whole of any increase in the tariff
country's imports while the partner's exports would
expand by less than the increase under non-
discriminatory tariff reduction. The latter implies
that some of the tariff cutting country's loss will
not be reciprocated; hence maintenance of the optimal
level of industrial production in that country
requires a greater reduction in the partner's
industrial production than is required with
preferential tariff reduction. (427)
A customs union thus results in welfare gains through
its potentialities of satisfying public consumption demand
at a lower cost in terms of forgone private consumption.
This is achieved through a reallocation of domestic
resources from a less efficient competing sector to a more
efficient export sector. It should be noted, however, that
a unilateral tariff policy is preferred to a customs union
in terms of the traditional private consumption oriented
concepts of welfare economics because of its
potentialities of satisfying private consumption demand at
a lower cost, achieved through a re-allocation of
resources from less efficient partners to more efficient
third countries.
From the standpoint of the "unorthordox theory" then,
international economic integration is prescribed as a
means of overcoming the limitations of a solely import-
substituting industrialization strategy, under conditions
of unemployment and underutilization of resources, and of
reaping the attendant benefits of efficient and optimum
sized industries (Axline, Carribean, 11; Coussy, 200;
Edwards and Sevastano, 192). In general, developing
countries have two routes for fostering economic growth.
The first is the autarkic path, but its costs makes this
path too prohibitive. The second involves the traditional
"outward-looking" path. This implies that the development
of these LDCs would depend heavily on the economic
situation in the industrialized countries, since the
predominant exports of many LDCs are primary products
whose prices fluctuate widely, leading to instability in
the exports of LDCs.
61
It is from this standpoint that integration becomes
important. Economic integration presents an alternative
1 between the autarkic and outward-looking development
strategies. It serves as a policy option for developing
countries as part of an overall strategy of economic
development (Balassa and Stoutjesdijk, 37). Integration
adopts, from autarky, the protection of the integration
area from outside competition through the common external
tariff, and from the outward-oriented development
strategy, the opening of national markets of each of the
member countries to regional competition. For the
developing countries then, economic integration should be
viewed, as many have advocated, as an alternative
development path rather than as a means to better
allocate resources.
Thus, for the developing countries, the real
alternative is not between free trade and international
economic integration, but between the national
protectionism of each country and integration, or in other
words, regional protectionism. International economic
integration, as such, provides the means by which
developing countries can strive for goals that each
country could not achieve independently without unbearably
high costs. More specifically, integration allows
developing countries, in the first instance, to promote
62
industrialization at lower costs than does autarky, and
secondly, to increase the bargaining power of member
countries in relation to third countries (Robson,
Integration, 15; English, ASEAN, 102).
International economic integration, which combines the
elements of both the export-oriented and import-
substitution strategies has been viewed as a viable
alternative for the developing countries to promote
industrialization more effectively, overcome the
limitations of their respective domestic markets and
accelerate their pace of economic development (Langhammer
and Hiemenz, 5-7; U.N., Econ. Int, 28). UNCTAD V sees
international economic integration as a key element in the
strategy of collective self-reliance and essential
instrument to promote structural changes. As Axline
elaborates:
Thus, in substituting the goals of structural
change from development economics for the welfare
gains in terms of marginal increases in efficiency of
neo-classical economics, the theory of economic
integration among underdeveloped countries is not a
"theory of the second best" but rather a "theory of
better-than-nothing" providing a rational basis for
political action toward regional integration. Yet the
static benefits are minimal for underdeveloped
countries as compared to the development impact of the
dynamic effects of integration, which have been
largely neglected in the study of European
integration. The dynamic effects of integration
provide the source of hope for long-term changes in
the pattern of production. (Carribean, 13)
63
Consequently, it is hoped that such a strategy would
result in a balanced and equitable process of economic
development with the developing country or countries
enhancing cooperation with each other to increase each
other's capabilities and meet their development needs
(Aggarwal, 537-538). UNCTAD V argues that integration
pursued exclusively with developed countries can only be
narrowly based in the sense of supplying manufactures
based on technologically simple labour-intensive
operations or providing components with similar
characteristics. Such activities provide few or no
horizontal links with other sectors of the economy and are
destined to remain activities within foreign enclaves, as
did the traditional extraction and plantation activities,
which never provided the impulse for an autonomous
industrialization process. Integration with developing
country partners can be of an entirely different nature,
since it may involve the establishment of a fully-fledged
process within the grouping, including technologically
more sophisticated transformation process. This would
stimulate the training of competent manpower, particularly
management and increases the demand for domestic and
regional inputs (English, 100-103; UN, Econ. Int: 28).
64
Krauss however asserts that a customs union, although
superior to a unilateral tariff policy or national
protectionism, is inferior to a direct production subsidy
union, as for any given level of public good consumption,
private consumption will be greater in the direct
production subsidy union. This is because direct
production subsidies lack the consumption costs component
of tariffs. Export subsidies could be used for the same
purpose by LDCs and at a lower cost than with regional
protectionism. It thus follows that "so long as
governments have the option of granting adjusting direct
production subsidies, customs union will not be the most
efficient protective mechanism in the public good case"
(Krauss, 428).
On the other hand, however, the possibility of using
export subsidies to foster industrial growth presupposes
that is is possible for the developing countries to export
manufactured goods. But this is not necessarily the case
given the many obstacles that the developing countries as
well as developed countries have established in order to
control their imports. Also, export subsidies could create
more distortions than protectionism of the regional
external tariff. This would occur if the individual
countries were to enter into export-subsidy competition,
each trying to attract new industries by granting more
65
subsidies than the other countries. This would be absent
in the case of common external tariff. Furthermore, export
subsidies are more prone to generate retaliation from the
other countries than would integration. This is
especially true when, because of subsidies, other
countries begin to import goods that are sensitive even to
developed countries. Therefore, export subsidies may not
be an adequate policy measure for reaching other aims of
integration, especially in that they do not allow LDCs to
improve their bargaining position (Lizano, 277-278).
In sum then, the economic rationale for customs unions
and other acts of commerical policy, using the public
goods approach, is only justifiable if for political or
other reasons, governments are denied the use of direct
production subsidies (Krauss, 428) .
66
Summary
A review of the orthordox literature on international
economic integration demonstrates that increases in
economic welfare alone, in terms of the static effects of
trade creation and trade diversion, cannot provide the
economic justification for the creation of international
economic integration schemes. Free trade is superior to
restricted trade and countries will always theoretically
elect a policy of free trade to attain the greatest amount
of welfare. Thus, international economic integration, with
its regional protectionism, must achieve benefits other
than economic welfare. This has generated the "public
goods" argument as the justification of international
economic integration, where industrial development,
economic diversification and growth, nationalism and
national security are seen as public goods.
However, the acceptance of the "public goods" argument
as the justification for international economic
integration, implies that, on the one hand, the evaluation
of the successes or failures of international economic
integration schemes must involve criteria other than
economic efficiency. On the other hand, this implies that
the performance of international economic integration
schemes will be affected by factors other than those
relating solely to economic efficiency.
67
SECTION IV
LIMITATIONS OF THE THEORY OF INTERNATIONAL ECONOMIC
INTEGRATION
An acceptance that the economic rationale for
international economic integration extends beyond welfare
gains and increased efficiency necessitates that any
analysis of the failure or success of such schemes must
extend beyond factors that determine economic efficiency.
Many have argued that, in the case of international
economic integration involving developing countries, less
attention should be paid to the static effects of trade-
creation and trade-diversion. In fact, some have argued
that trade diversion is beneficial for developing
countries in a customs union, as long as the costs of
trade diversion is outweighted by the benefits (Elkan, 58;
Robson, Integration, 14). Others assert that the decisive
element in the political assessment of the results of the
distribution of benefits and costs should lie in the
extent to which countries share in the allocation of new
industries made possible through economic integration
(Penaherrera, 71). With the developing countries, then, it
is more important to evaluate integration in terms of
opportunities generated for growth and diversification of
the economy in terms of the possibility of establishing
new productive industrial activities (Lizano, 27 6-277).
68
In this respect, the works of Johnson, Cooper, Massell
and Corden, among others, represent a recognition of and
attempt to address some of the limitations of the
orthordox theory of economic integration, However, their
attempts, though providing an advancement over the
Vinerian analysis, still failed to provide a theoretical
analysis of other issues, including those involving
employment, the balance of payments, exchange rates, the
rate of inflation and perhaps more importantly, the rate
of economic growth. In particular, the orthordox theory of
international economic integration has failed to -
explicitly consider the effects of transnational
corporations on customs union, or its applicability to
developing and centrally-planned economies. In addition,
the orthordox theory assumes that customs unions are
formed only among market economies and economies with the
same levels of development, assumptions which are
generally violated in customs unions involving developing
countries. The patterns, processes and issues, especially
with respect to equity in the distribution of benefits and
policies towards foreign investment and transnational
corporations (Robson, Integration, 17-3 3), of a custom
union under these conditions may be radically different,
as noted by Furtado:
Straightforward trade liberalization schemes in
the tradition of free trade areas and customs union
may be meaningful in particular situations ...
characterized by a similar degree of development and
on the point of embarking on the first stage of
development. But for countries already at a relatively
advanced stage of industrialization geared toward the
achievement of self-sufficiency or countries whose
degrees of development are vastly different, such
schemes are of little value in themselves. In fact, by
creating priviledged conditions for international
consortia, in a position to plan their development on
a regional-wide scale, these systems may lead to forms
of "integration" that ignore or tend to undermine the
national decision centers without providing genuine
multinational planning or regional development. It is
more or less obvious that the real problem is not
simply a matter of liberalizing trade, but of
promoting the progressive creation of a regional
economic system ... In short, the problem is much less
the creation of a unified economic framework by means
of progressive mobility of goods and factors of
production which would only be feasible if the
national economies had attained a far greater degree
of homogeneity in their internal structures and were
at the same level of development... than the
reorientation of development in the national plane
towards a growing integration of the national
economies into a coherent whole. (2 03-2 04).
To a large extent, given the problems in the
theoretical literature, the historical-descriptive
approach has confined the analysis of international
economic integration schemes to the actual problems and
successes of such schemes. In general, studies adopting
this approach have argued that the success of such schemes
are dependent on such factors as the domestic class
interests, the role of foreign governments and
transnational corporations (Vaitos, 1978), nationalism
70
(Diaz-Alejandro, 222), cultural chauvinism, disparities in
the size of countries and population, disparaties in the
levels of development and dissimilarity in economic
development philosopies, as manifested in centrally-
planned versus market economies, or even "self-centered
economic thinking" (Laslo, 1-33; Rosenbaum and Tyler,
258-265; Cizelj, 23). Although these arguments remain
persuasive, most of them remain as hypotheses, as there
has been little empirical test to substantiate their
importance. Thus, most of these studies confront a major
difficulty in terms of the identification problem; the
extent to which observed changes can be justifiably be
attributed to the effects of integration rather than those
of other influences that would have occurred independently
This section serves to introduce the theoretical
significance of some of these factors, particularly the
role of transnational corporations and disparate levels of
development, for customs unions among developing countries
and argues for their synthesis into the orthordox theory.
71
A. TRANSNATIONAL CORPORATIONS AND INTERNATIONAL
ECONOMIC INTEGRATION
Transnational Corporations (TNCs) are an important
facet of modern international relations. They have been
critical in the extrodinary growth of international trade
and capital flows during the past two decades. TNCs, far
from only transferring capital or establising operations
in the host country, have facilitated the transfer of new
techologies, different tastes and styles of living,
managerial services and diverse business practices,
including cooperative amd marketing arrangements,
advertising and transfer pricing mechanism (Dickie and
Layman, 5). The pervasiveness of the TNCs is noted by
Mutharika, Chief of the ECA/UNCTC Joint Unit at the United
Nations Center on Transnational Corporations:
The rise in power, resources and technological
supremacy of the planetary or transnational
corporations over the past threee decades is the
single most explosive issue of modern times. Pressing
world issues, such as food shortages, energy, ecology
and environment, population, abject poverty,
unemployment, inflation and science and technology can
no longer be meaningfully discussed or resolved
outside the influence of the giant TNCs. These
corporate business houses shape the structures of
civilizations, life-styles and human values. Political
ideologies and conflicts, and international economic
relations form a gigantic global jigsaw puzzle whose
solution involves intricate relationships between
nation States and TNCs. (349)
72
The pervasiveness of TNCs is reflected in a study by
Rothgeb which shows that higher levels of investment by
I TNCs have led to increases in implementation of political
i
I
reform, decreases in political repression and political
conflict, and fostered greater respect for human rights in
the host countries (105-12 0). Any treatment of
international economic integration must thus incorporate
the influence of TNCs. The orthordox literature on
international economic integration, however, has not
explicitly accounted for the effects of TNCs on
international economic integration. By adopting the
neoclassical trade assumptions, it has assumed that
economic integration affects the location of investment
but not the ownership, or the extent to which it is
undertaken as part of a corporate strategy by foreign
enterprises (Parry, 19-21).
Thus, although capital or intermediate flows have been
included into the analysis, the manner in which they have
been transfered has been ignored. The vehicle of this
transfer is generally the TNCs. In this respect, Tironi
argues that the change in economic welfare of a group of
countries forming a common market, which affects
industries dominated by foreign firms, is not given only
by the classical trade-creation and diversion effects, but
also by the "foreign profit creation and diversion
73
effects". The latter measures the international income
redistribution that results from changes in the foreign
firm's rents and monopolistic profits (150-170).
It is therefore possible that the activities of the
TNCs may, in some instances, work against the objectives
of international economic integration schemes (Bock, 42;
Robson, Integration, 28; Frank, 39). This would be
especially true in cases where the TNCs interact
negatively with the developing countries' "market
imperfections" to replace both national and international
markets for internal corporate planning (Diaz-Alexanjro,
2 31). In this regard, some have argued that TNCs have not
only been the principal beneficiaries of such integration
schemes (Ffrench-Davis, 159) , but also frequently have
been promoters of industrialization policies in some
regions that have hindered the development of
complementarity among the countries there (Cizelj, 27;
Franco, 42). In addition, Vaitos argues that there are
three situations were TNCs are apt to discourage regional
economic integration:
First, they wish to avoid host government action in
'externalizing integration' through the creation of
common fronts on foreign factor inflows and in
government intervention on effective industrial
planning and control over the decision about the goods
to be produced, the geographic allocation and
composition of resources, and the structure of
consumption patterns. Second, they wish to avoid a
government-induced rationalization of the productive
structure. Thirdly, they attempt to block effective
integration among medium-sized or larger countries.
Such countries will most likely confront the presence
of multiple and parallel foreign subsidiary activities
often belonging to the same parent. (735)
If it is assumed that the primary objective of the TNC
is to attain the least-cost production in their
operations, then from the resource allocation standpoint,
their operations in any regional grouping would not
necessitate any qualification to the orthodox theory
(Robson, Integration, 30). There has however been an
increasing recognition of TNCs as economic organizations
that strive for maximization of long-term profits, coupled
with the maintenance of an acceptable share of the market,
particularly the domestic market (Vaitos, 732; Chapman,
152; Dickie and Layman, 2). In addition, according to the
Hymer-Kindleberger tradition, in order to compete with
indigeneous firms possessing knowledge of local
environment, markets and business conditions, foreign
entrants, such as TNCs, must have some compensating
advantage (Buckley and Casson, 2; Keohane and Ooms, 13;
Cohen, 23). These advantages assume the form of
proprietary intangible assets which TNCs prefer to utilize
themselves rather than license other firms use (Kierans,
210-213). In this light:
75
Foreign direct investment is seen as a modality
(but not the only one) by which firms vertically or
horizontally integrate separate economic activities
located in different countries in order to capture a
set of transnational benefits derived from placing
these activities under common ownership. (Dunning and
Robson, 104)
Foreign direct investment through intra-firm trade,
thus allows the firm to exploit rents associated with firm
specific advantages, such as technological expertise in
product or process development, as well as providing a
means of reconnoitering foreign markets. This, in turn,
facilitates the development of a new product and thus
encourages further expansion (Greenway, 156; Blake and
Walters, 102-103; Grewlich, 53; Shapiro, 104).
The recognition of TNCs as coordinated and integrated
units of decision making engaging in cross-border value
adding activites implies a recognition of the departure
from perfect competition in the goods market, including
product differentiation, marketing skills and
administrative pricing (Singh, 33 6; Buckley and Casson, 2;
David, 173). This stands in contradistinction to the
orthodox theory of international economic integration
where welfare effects accrue to the proper functioning of
the market. The orthodox theory, as discussed above, links
the domestic costs and prices with the direction,
composition and extent of intra-regional trade, and the
distribution of costs and benefits among the integrating
countries. The validity of the orthodox theory is
challenged by the ability of TNCs to by-pass the
operations of the markets. This occurs because within
TNCs, the activities of subsidiaries or affiliates can be
regulated and transactions internalized in ways which,
although they may be optimal from the standpoint of the
global interests of the corporation, may not necessarily
be so from the standpoint of the individual affiliate,
considered as a profit center, or from that of the host
country itself, or indeed from that of the regional
grouping in which the affiliates may be located (Dunning
and Robson, 108; David, 173; Kogut, 43).
Furthermore, TNCs may affect resource allocation
through territorial allocation arrangements which, in
essence, constitute restrictive business practices. These
arrangements may include determining which particular
subsidiaries of the TNC import or export what particular
product from or to a specific destination, the levels of
production and types of activity that can be undertaken by
the subsidiary, and the kinds of capital equipment and
inputs used. In addition, the TNCs through the
manipulation of transfer prices, used in intra-firm
transactions, may be able to transfer profits outside the
region or within it, with the sole purpose of either
77
minimixing tax liabilities or influencing imports or
exports. Such operations of the TNCs may thus affect both
the distribution of the benefits of economic integration
or potential resource allocation gains (Robson,
Integration, 30; Bock, 41; Frank, 96-100; Long, 76-80).
Consequently, there are two considerations that the
orthordox theory of international economic integration
must account for. In the first instance, the possibility
of second best or even detrimental effects on efficiency
resulting from the conduct of the TNCs in the regional
grouping will depend on the ability of groups to remove
national obstacles to rationalize production. The more
complete the internal market becomes and the greater the
degree of agreements and coordination on regional
policies, as manifested in the policies of the group, the
lesser will be the scope for lack of consonance between
the activities of the group and those of regional
integration.
Secondly, even with the achievement of the internal
market and the removal of distortions, there can be no
assurances that the intra-regional operations of those
TNCs that are subject to external national jurisdictions
having differing objectives and aims, will also favourably
advance the objectives of the regional grouping (Dunning
and Robson, 108).
78
However, the presence of TNCs in regional groupings,
per se, does not necessarily work against the objectives
of the grouping (Tironi, 169). The forces making for
corporate integration, namely a belief that a unified
control of separate productive activities dispersed in
space yields benefits to the owner over and above those
that would be attained if owned separately (Caves,
Multinational, 67), are similar to those that encourage
regional integration. The latter involves a perception
that the net gains are procurable for a group of countries
from the unified conduct of certain policy instruments. In
both cases, the motivating force behind integration stems
from a desire to bridge the imperfections in the market
so as to allocate economic activity more efficiently among
the units being integrated, which are affiliate companies
in the case of TNCs, and countries, in the case of
regional groupings.
For TNCs, integration provides the means of overcoming
these market imperfections that arise because the net
interfirm transaction costs of particular industries are
perceived to be higher than the costs of similar
transactions when undertaken within the firm (Aiber, 249).
For customs unions, on the other hand, the motivation
derives in part from a desire to reduce inter-country
transaction costs. It also represents, to a large extent,
79
a perception that the benefits derived from overcoming the
allocative and efficiency costs of government-induced
market distortions can be derived from a coordinated
conduct of policies in circumstances where a high degree
of economic and structural interdependence exists among
participants. It may further represent a desire to
counteract economic or political force of other countries
or group of countries (Dunning and Robson, 105).
The position of established TNCs producers or regions
or countries may mean that neither corporate, regional or
national interests would be served by participation in or
promotion of a customs union, in the absence of some form
of compensation for the adjustment or displacement costs
involved. Similarly, it is not always in the interest of
TNCs to promote the formation of a customs union any more
than it is of particular countries, if that would mean,
for example, subjecting established markets to increased
competition from new entrants.
Thus, corporate integration and TNCs can present both
beneficial and adverse effects in regional grouping. On
the one hand, where transaction costs of using the market
as an exchange mechanism are reduced by intra-firm
transaction costs, a more efficient allocation of
resources can be expected to prevail. On the other hand,
insofar as corporate integration may lead to a
80
concentration of economic power and the promotion of
oligopolistic or anti-competitive behaviour (Newfarmer,
166-169), it may work against the objectives of regional
integration (Dunning and Robson, 114) .
81
B. THE THEORY OF INTERNATIONAL ECONOMIC INTEGRATION
AND NON-MARKET ECONOMIES
The theory of international economic integration
espouses the abolition of all trade barriers among member
states and the erection of a common external barrier.
These trade barriers may consist of tariffs, quotas,
prohibition of imports, licenses, foreign exchange
allocations and other administrative and regulatory
measures designed to curb imports. The effective abolition
of all trade barriers results in the creation of a single
market for goods in the entire region and the resulting
pattern of trade flows reflects differences in comparative
advantage of the member states. As such, in market
economies, integration attempts to create identical
competitive conditions for producers, consumers and
traders in the member countries.
In the centrally-planned economies, however, most
enterprises are publicly owned. Here, the economy is
organized on the basis of comprehensive national
development plans, which dictate detailed targets for
production, consumption, investment and prices. The amount
and composition of trade is determined primarily by an
annual plan with import and export plans not necessarily
based on an assessment of comparative advantage.
Consequently because the quantity and composition of
82
imports and exports are determined in physical terms by
the plan, most of the commercial trade barriers become
irrelevant. As foreign trade in the centrally-planned
economies is conducted through State export and import
monopolies, it is, as such, regulated by quantitative
methods in accordance with the provisions of the annual
plan, instead of the use of instruments found in market
economies.
The trade aspect of integration for centrally-planned
economies can be either through the coordination of a
single plan for the whole region drawn up by a
supranational authority or by national planning agencies
working together. The regional plans will allocate
specific production goals to different member states, and
trade among them will reflect the specialization of
production implicit in the plan. However, a single
regional plan covering all the countries of an integration
scheme may be difficult to attain in the absence of some
sort of supranational agency with some measure of
executive power. The more usual pattern of integration
among centrally planned countries is limited to
coordination of plans through agreements on inter-country
specialization for a limited range of products. Intra-
regional trade will then reflect specialization in these
products (Ghai, 67-69).
83
C. THE THEORY OF INTERNATIONAL ECONOMIC INTEGRATION
AND MIXED ECONOMIES
The orthordox literature on international economic
integration, by its assumptions, has dealt primarily with
developed, market economies with somewhat homogeneous
economic systems. It should be noted, however, that
neither theories of integration for market economies or
those for centrally-planned economies may be applicable in
their entirety to economic integration among the
developing countries. This is because there are but few
developing countries that possess all the attributes
either of market or of centrally-planned economies. For
example, developing countries which organize their
economies on the models of centrally-planned economies
typically rely more on the price mechanism for allocation
of resources than do most of the industrially-advanced
centrally-planned economies. Also, the former have a
larger private enterprise component in their economies
that the latter. The developing market economies also
differ from their developed counterparts in several other
respects.
In the first instance, the former are more likely to
be characterized by monopolistic and oligopolistic
structures in the modern sectors of their economies than
the latter. Secondly, the public sector component of their
84
economies tend to be more extensive than in the
industrialized countries. Thirdly, developing countries
are more likely to have their economies regulated by non
price measures than are developed market economies. This
implies that though various developing countries may be
thought of as being market-oriented or centrally-planned,
their behaviours are apt to differ in significant aspects
from their developed counterparts. Consequently,
integration schemes among developing countries cannot be
exact replicas of those prevailing in the developed
countries.
The juxtaposition of countries with different economic
systems within the same regional grouping also poses a
variety of problems which may be absent in groupings of
countries with more homogeneous systems. These problems
may be due to differences in development objectives,
strategies and policies and differences in the principles
and practices of the organization of the economy (Ghai,
67-69). These diversities in the objectives of an
integration scheme are directly related to the different
levels of development that the member countries have
attained, and the more diverse the aims of the countries,
the more difficult it generally would be to reach a
workable agreement. The greater the disparities, the
greater would be the pressure on the more developed
85
countries, even if they are poor, to make concessions in
favour of the more backward countries in the group, and
the greater the disparities, the more the integration
scheme is weakened (Lizano, 279; Behrman, 2-3).
Furthermore, there may also be conflicts in
industrialization policies. Countries attempting to move
in the direction of a centrally-planned economy may press
for a regional planning of industrialization and
agreements for allocation of specific industries to member
countries. The market economies may, on the other hand,
prefer to rely on market forces for the location and
pattern of development of new industries (Ghai, 70).
86
D. THE THEORY OF INTERNATIONAL ECONOMIC INTEGRATION WITH
DISPARATE LEVELS OF DEVELOPMENT
The orthordox theory of international economic
integration assumes participating countries with similar
levels of economic development. However, international
economic integration among developing countries generally
involves countries with different levels of economic
development. Any treatment of the theory of international
economic integration must therefore account for two
issues4 that may arise in these situations, namely the
accentuation of disparaties, and the creation of "backwash
and spread" effects.
Accentuation of Disparaties
International economic integration among countries
with different levels of economic development may
accentuate the initial differences and disparities among
the member countries (Chen and Whitaker, 123). The two
important factors in this regard are the opportunity a
country has for promoting economic growth and the capacity
of a country to exploit these opportunities. In this
respect, less advanced countries feel they are being asked
to give up prospects for industrialization in favor of
those already advanced industrially. The more advanced
countries, on the other hand, feel they are being asked to
make all the sacrifices for integration, even to the
extent of bearing the burden for the less advanced
countries (Behrman, 3; Franco, 42).
Thus, some countries will grow faster than others
(Axline, Underdevelopment, 9). Greater economic size or a
substantially higher per capita income doesn't necessarily
provide some countries in the group a greater ability to
capture a larger share of the benefits of integration. The
determining factors are the levels of industrial
development attained insofar as higher levels represent a
greater capacity to reap the benefits of integration in
the industrial field, a capacity reflected in the volume
and composition of trade within the group, and the other
members' views as to the advantages which the dominant
countries may have over them in terms of resources or
policies. In almost all of such regional groupings
involving developing countries, as some have asserted,
there are one of more countries which have a dominant
position. As Panaherrera asserts:
In the East African Community, Kenya's supremacy
sowed the seed of discord which produced the great
conflicts besetting that integration attempt. In
UDEAC, the United Republic of Cameroon is the country
which is most suited to and offers the greatest
advantage for industrial development; in LAFTA, that
position is occupied by the three largest countries,
Argentina, Brazil and Mexico; in the Central American
Common Market it is held by Guatemala and El Salvador;
in CARICOM, Trinidad and Tobago and all the larger
islands have the advantage over the less developed
countries belonging to the East Caribbean Common
Market; finally in the Andrean Group, the most forward
countries are Colombia and Venezuela. (72)
Thus, the disparate levels of economic development may
cause weaker countries to have misgivings before
integration and to be dissatisfied with the distributions
of costs and benefits once integration has been
established, both of which may serve to limit the scope of
economic integration. This was particularly true in the
case of LAFTA (Kruase and Matthis, 16/3 3-34), and to a
lesser extent, in ASEAN (Langhammer and Hienenz, 67). By
the same token, a country with a relatively broader
domestic market and other conditions favourable to
industrialization may not be as enthusiastic to favour
integration as opposed to a country with a smaller
domestic market, less industrial tradition and a lower
capacity for industrial development. Thus the objectives
of the two countries in seeking integration will be
different and they will probably opt for different
mechanisms. Their acceptance of the same integration
formula may tend to either reduce the scope for their
objectives and weaken their mechanisms, as was, again, the
case with LAFTA (Behrman, 3-4), or may tend to encourage
the adoption of integration objectives and procedures
which would prove fundamentally impracticable, as was the
case with the Council of Arab Economic Unity (Penaherrera,
72) .
The Backwash and spread Effects
International economic integration among countries
with different levels of economic development may also
create two competing effects, what Gunnar Myrdal has
identified as the "backwash" and "spread" effects, that
influence the balance of costs and benefits from
integration. The backwash effect seems to be stronger in
case of integration schemes involving developing
countries. The latter represents an upward spreading
effect of integration and prevails in the industrialized
countries, while the former represents a clustering of the
gains around the growth poles of the region and tend to
prevail in the underdeveloped regions, particularly where
there are large existing disparities among the member
countries (Axline, Underdevelopment, 9). This arises
because economic units, especially industrial enterprises,
are not located evenly throughout the integration area but
have a strong tendency to concentrate and form at
development poles.
Spread effects would thus lead investors to seek lower
costs factors of production by moving from the more
90
developed to the less developed countries in the region.
But labor and capital would also tend to move towards the
most developed areas, in the "backwash" effect, to take
advantage of the linked industrial processes and overhead
capital (Milenky, 12). Although the structural benefits
arising from international economic integration will
accrue to the group as a whole, as a result of the
"backwash effect", some individual members may experience
stagnation, and even structural retrogression, loss of
scarce productive resources and increasing balance of
payment difficulties. This ensues because international
economic integration may lead to enhanced rationality in
the distribution of regional resources through the
encouragement of greater specialization and thus fosters
faster economic growth, but the distribution of such
growth will be uneven.
The "polarization" or uneven distribution of growth is
reflected in the marked imbalances in intra-regional trade
in manufactures (Robson, Integration, 21). Elkan, using
aggregrate manufacturing output and import indicators has
shown that, in the case of the Central American Common
Market, between 1960 and 1968, although regional economic
integration benefited El Salvador the most, and to some
extent Guatemala and Costa Rica, Nicaragua and especially
Honduras, were victims of "progressive polarization" or
91
I backwash effects. Similarly, in the case of the East
African Common Market, while Kenya benefitted most from
the arrangement, the position of Tanzania, already the
weakest in the 1960s, deteriorated even further (Elkan,
64-67; Robson, Integration, 21). Thus, international
i
i
j economic integration would provide a much larger market
for those countries with more advanced industries while
! those countries with backward industries would shift
|
resources from industry to other areas, such as
agriculture and mining where they have a comparative
advantage (Crouch, 2). But it is argued that the "backwash
j effect" is not a necessary cost of economic integration
and should be prevented rather than compensated both
through an even geographical spread of industries and
! policies designed specifically to create and promote
' exports from weaker and outlying member countries to the
i
i
! stronger ones. (Elkan, 192). The main factors that tend to
!
I
influence this polarization include the following: the
initial disparities themselves make it more difficult for
most backward countries to have the political and
; technical skills required to prevent the mechanisms of
integration programmes from aggravating the disparities;
! the concrete nature of the integration scheme may
I
| complicate matters if, for instance, integration is
| conceived of as just establishing a free trade and the
92
free movement of factors, in which case the polarization
would be greater; if the "periphery" is rich in natural
resources, complementary factors of production are likely
to move from the "centre" to the "periphery". Obviously,
if the periphery lacks natural resources, factors will
flow from the former to the centre (Lizano, 279).
93
CONCLUSIONS
The analysis and review of the literature on economic
integration demonstrates the disagreement over the
definition of international economic integration as a
"state of affairs" or a "process". However, abstracting
from the disagreement, three aspects of international
economic integration are salient to both definitions. In
the first instance, economic integration proports and
encourages some division of labor based on specialization.
Secondly it generally involves some mobility of goods and
factors. Thirdly, it involves the discrimination of goods
from outside the integrated area and non-discrimination of
goods in the integrated area. A broader definition of
international economic integration, satisfying both points
of view, would be the situation where two or more
countries formally associate to achieve some specified
economic objective, through joint endeavour, which each
country feels it would be able to achieve less effectively
is pursued individually.
The review of the orthordox literature demonstrates
the importance of trade in international economic
integration. However, the review also illustrates that
increases in economic welfare alone cannot provide the
theoretical economic justification for international
economic integration. Since free trade is always superior
94
to trade with restrictions, a country will always
theoretically elect a policy of free trade to attain the
greatest possible economic welfare. Tariffs, as such,
should not exist nor would countries participate in
international economic integration. This has thus
engendered the development of the "public goods" approach
as the economic justification for international economic
integration, in which industrial development, economic
diversification and nationalism, among other objectives,
are viewed as public goods. However, acceptance of the
"public goods" approach paves the way for the recognition
of other criteria for the assessment of international
economic integration and the acknowledgement of other
factors that may affect the success of international
economic integration schemes.
In this regard, while the orthordox theory has
developed an economic justification for international
economic integration, it has not enveloped any treatment
of factors, such as the different levels of economic
development, the political structure, domestic class
interests, the role of governments, the negotiation
process, bilateral constraints, transnational
corporations, nationalism and cultural chauvinism, among
other socio-political factors, and their effects on
international economic integration. The different levels
95
of economic development may accentuate the initial
disparaties, and create backwash effects among countries
in international economic integration schemes. In
addition, the different levels of economic development may
suggest a structural bias against trade as the output of
these economies may be composed primarily of non-tradables
and not-traded goods. All of these factors may serve to
limit or inhibit the potential effects of international
economic integration. Also, the presence of TNCs in
regional integration may engender an extra-regional trade
bias as opposed to an intra-regional one as the objectives
of the TNCs may be different from those of the countries
forming the integration scheme. This thus calls into
question the applicability of the orthodox theory of
economic integration to developing countries, and also to
countries with centrally-planned or mixed economies.
Most of these factors have been identified by studies
adopting primarily the historical-descriptive approach.
However, there have been generally few empirical studies
to validitate the importance of these factors. As such,
most of these studies suffer from an identification
problem as to what extent the observed changes can be
justifiably be attributed to the effects of integration,
rather than other independently occuring phonemena. In a
study that has tried to mitigate effects of the
96
identification problem, Brada and Mendez have found that
the levels of economic development of participating
countries is an important factor influencing the levels
of intra-regional trade in two Latin American regional
integration schemes. These findings are of significance to
ASEAN as its member countries exhibit disparate levels of
economic development. Furthermore, the levels of TNC
investment is large in many of the ASEAN countries. It
will thus be argued below that these factors, together
with the disparate levels of development and levels of
investment of TNCs, are important determinants of intra-
ASEAN trade.
In the final analysis then, the inability of solely
economic welfare considerations to provide the
justification for international economic integration
schemes implies that the evaluation of the success of
international economic integration must depend on the
extent to which the enunciated objectives are achieved.
Since the promotion of intra-regional trade remains an
important objective of many international economic
integration schemes, the analysis of the success of these
schemes must include an analysis of intra-regional trade.
However, in light of the public goods approach, such an
analysis must account for the socio-political and economic
factors that influence intra-regional trade. The inclusion
97
of such factors as the effects of transnational
corporations, disparate levels of economic development,
the role of governments and other non-traditional economic
factors, in the empirical analysis of intra-regional trade
serves to address the diffidences in the orthordox
theory, and to nullify the identification problems
experienced by the 1 1 non-orthordox" theory of international
economic integration, and provides the rationale for the
utilization of the "extended grativy model".
98
CHAPTER II
EMPIRICAL ANALYSIS OF INTRA-ASEAN TRADE
INTRODUCTION
Acceptance of the "public goods" argument as the
economic rationale for international economic integration,
necessitates the evaluation of the achievements of such
schemes according to their professed objectives. Since the
promotion of intra-regional trade is a primary goal of
many such schemes, one measure of the success of these
schemes would be increases in intra-regional trade. The
Association of Southeast Asian Nations (ASEAN) is one such
scheme, formed nearly twenty-five years ago, with the
explicit goal of accelerating the economic growth, social
progress and cultural development in the region through
joint endeavours. Although this goal was first enunciated
in Bangkok in 1967, the blueprints for these joint
endeavours were only drawn up in Bali in 1976. One of the
programmes instituted at the Summit was the Preferential
Trading Arrangement (PTA), designed to develop intra-ASEAN
trade.
Thus, in assessing the economic success of ASEAN, it
is necessary to discern any changes in the patterns of
trade of the ASEAN countries which would testify to its
success. This then forms the raison d'etre of this
chapter. The change in the trading patterns of ASEAN could
99
be brought about directly as a result of the PTA scheme,
or, given the inverse relationship between conflict and
trade as suggested by several studies (Polachek, 55-78;
Gasiorowski, 23-38), through an improvement in the
political climate engendered by the formation of ASEAN. If
the PTA, specifically, or ASEAN generally, was successful,
then there should be, in the first instance, an increase
in intra-ASEAN trade, particularly after 197 6. Secondly,
there should be a shift in the trading patterns away from
traditional ASEAN sources; more specifically, a shift in
the trading patterns of ASEAN member countries away from
non-member countries towards member countries.
Section I of this chapter provides a brief history of
the formation of ASEAN and a description of the economies
of the ASEAN countries. Section II will then outline the
history of the Preferential Trading Arrangement (PTA),
with the secondary view of highlighting the negotiation
process involved, which as it will be argued in a
subsequent chapter, acts as an impediment to regional
cooperation, and the limited scope of the PTA. In section
III, the import and export patterns of the ASEAN member
countries will be empirically analyzed, in the first
instance, for all commodities, to discern any change in
trade structure that could be attributable to the
formation of ASEAN. Secondly, this section will analyze,
100
specifically, the import and export patterns of the ASEAN
countries in Commodity Groups SITC 5 and SITC 7, as many
of the items granted preferential treatment fall within
these categories. This has prompted some authors to argue
that the PTA should thus be evaluated in its ability to
generate increases in intra-regional trade in these
categories.
However, as this chapter will illustrate, there has
been no significant change in the trade structure of the
ASEAN countries. By and large, the developed economies
remain the main trading partners of the ASEAN member
countries.
101
SECTION I
A. ASEAN IN HISTORICAL PERSPECTIVE
ASEAN, comprising the six independent states3 of
Brunei, Indonesia, Malaysia, the Philippines, Singapore
and Thailand, was formed on the 8th of August 1967 with
the signing of the ASEAN declaration in Bangkok. Its goals
were manifold, foremost of which was:
to accelerate the economic growth, social progress
and cultural development in the region through joint
endeavours in the spirit of eguality and partnership
in order to strengthen the foundation for a prosperous
and peaceful community of South East Asian Nations
.... to collaborate more effectively for the greater
utilization of their agriculture and industries, the
expansion of trade, including the study of
international commodity trade, the improvement of
their transportation and communication facilities and
the raising of the living standards of their
peoples. (Saw, ASEAN Econ, 322)
*
ASEAN was not a sudden phenomenom, but rather the
culmination of an evolutionary process that dates back
about three decades. After World War II, a number of
multilateral groupings emerged in Southeast Asia (Chwee,
21). The ephemeral nature of these regional organizations
stands testimony to the bilateral tensions between the
states of ASEAN. The most important of these organizations
was perhaps the Southeast Asian Treaty Organization
(SEATO). A product of the Cold War, SEATO's solidarity
began to dissolve when the political climate in the West
102
became more favourable (Stirling, 273; Leifer, ASEAN, 28).
This and other factors led to the eventual dissolution of
SEATO. A second attempt at regionalism occurred in 1961
with the formation of the Association of Southeast Asia
(ASA). ASA brought together Thailand, Malaya, which was
soon to become Malaysia, and the Philippines (Chng, 1).
ASA too was weakened by, among other factors, a dispute
between Malaysia and the Philippines over the North Borneo
territory of Sabah. Its promising start ended in less
than two years when the Philippines laid claims to Sabah
(Leifer, ASEAN, 19). This dispute has yet to be fully
resolved. The third attempt was the Maphilindo in 19 63
which consisted of Malaysia, the Philippines and
Indonesia. The subsequent dissolution of Maphilindo over
the Sabah issue (Saravanamuttu, Imperialism, 215-216)
perhaps best illustrates the bilateral friction and
tension engendered by territorial considerations that has
existed between the members of ASEAN. These bilateral
frictions, as will be argued later, may have impeded
regional cooperation and, as such, have affected the
levels of intra-ASEAN trade.
103
B. ASEAN Economies in Perspective
ASEAN occupies a land area of over 3.1 million square
kilometres and extends from 20° 30' North to 11° South and
from 92° 20' East to 134° 50' East. ASEAN has a combined
annual GNP of over US$ 4 08 billion in 1988 and its annual
trade with the United States amounted to US$30 billion in
1981, making it the fifth largest trading partner of the
United States (Manning, 13). Estimates of private
investments by the United States in the region amounted to
some US$15.5 billion in 1985, with petroleum related
activities and manufacturing accounting for some 40% and
2 5% of total investment, respectively (UN, ESCAP, 86). In
addition, several studies have shown that ASEAN has one of
the highest rates of return on investment in the world
(Tucker, W. , 40).
The real strength and potential of the ASEAN countries
lie in their rich natural and human resources, given their
combined population of over 302 million people in 1987.
The ASEAN labour force is not only large in size but is
also generally regarded as highly trainable and
productive, with a large pool of mechanics, technicians
and manegerial manpower and professionals (Wong, Regional
Coop, 16). With the exception of Singapore, ASEAN is
richly endowed with natural resources as any part of the
world. The ASEAN region, taken as a whole, annually
104
exports over 80% of the world's natural rubber, 56% of the
world's palm oil, 70% of tin, 70% of copra and coconut,
50% of hardwood, in addition to the high proportion of its
other mineral and agricultural commodities, including rice
and petroleum (Tadem, 13). As the ASEAN region controls
more than half of the world's exports of some of these
commodities, it perhaps provides ASEAN with another base
for regional cooperation (English, ASEAN Changing, 103).
c. ASEAN: Pre-Bali Years
The first years of ASEAN were dominated by
essentially political problems. During this period, as the
subsequent chapter will discuss, the members of ASEAN
expended most of their energy managing strained political
relations and searching for solutions to divisive inter
member political issues. In general, however, much of the
political disharmony within ASEAN during the initial years
stemmed from bilateral relations between Indonesia and
Singapore, Singapore and Malaysia and Malaysia and the
Philippines. For example, just 8 months after the Bangkok
Summit of 1967, a long-standing dispute over Sabah between
Malaysia and the Philippines re-surfaced and this brought
the organization to a complete standstill for almost a
year. Constant friction has also existed over the long-
; io5 1
i
i
i
standing and widespread smuggling between the Indonesian
Islands and Singapore (Jorgensen-Dahl, 69-7 0). j
Thus, for a number of years after its formation, ASEAN
"languished as an institution plagued by bilateral tension ;
and a lack of strong internal organization" (Sneider and
Borthwick, 1246). Some have pointed to the emergence of a
declaration vis-a-vis a treaty as an accentuation of the
tentative minimal base on which Southeast Asian
cooperation began. ASEAN's organizational structure also j
reflected this minimal base, as the basic parts of ASEAN ,
were adopted virtually unchanged from ASA (Leifer, ASEAN, !
i
24). In this light, ASEAN is most often viewed as a force [
i
for regional integration that would not supercede the
nation state as an authoritarian decision-making body, but !
rather as a step in evolution of "an experiment in
cooperation among nations which have similar goals
regarding national development" (Suriyamongkol, Politics,
49) .
At the same time there were several important changes
i
and events in the regional and international environment ,
that presented the ASEAN leaders with commonly perceived
threats that held ASEAN together, bilateral tensions
notwithstanding. These perceived threats to the collective
security from the international environment apparently
i
shook ASEAN out of its lethargy.
; The first of these occurred in 1967 when the British
iLabour government announced a withdrawal of British
military presence East of the Suez. This was followed a
year or two later by a switch in the U.S. policy to a
lessened commitment to her allies in East and Southeast
Asia, and the subsequent rapprochement between the United
States and China. However, perhaps the most significant
catalyst was the United States withdrawal from Vietnam and
the fall of Indochina to the communists in 1975, as
manifested sequentially by the occupation of Phnom Penh by
the Khmer Rouge, the emergence of Democratic Kampuchea,
the capture of Saigon by forces of Hanoi, with the
establishment of the Socialist Republic of Vietnam, and
the creation of the Lao's People's Democratic Republic
through political osmosis. The unification of Vietnam and
Kampuchea caused the ASEAN leaders to worry about the
actual and potential consequences of the conflict between
Vietnam and China (Fifield, 74; Chwee, 22; Leifer, ASEAN,
8-9) .
This perception of the international environment being
predatory in nature permeated the thoughts of most leaders
of the ASEAN countries, as betrayed by their speeches. For
instance, in March 1967, the Thai Prime Minister, Thanat
Khoman, asserted that "it is by no means an exaggeration
to observe that the world we live in today is at best
107
difficult and challenging, and at worst hazardous and even
dangerous" (Jorgensen-Dahl, 72). Similar sentiments were
expressed by Singapore's Premier, Lee Kuan Yew:
In the next hundred years, we shall have to live
with the fact that at present, two and later three
superpowers will contend in the Pacific and Indian
Oceans to ... order the political and economic life to
the maximum advantage of each superpower. (Jorgensen-
Dahl, 72)
The perceptions of threat from communism in general,
and China, in particular, has had an impact on ASEAN and
on the propensity of regional states to participate or not
participate in regional organization. This link between
participation in regional organization and security did
not cease once the meeting in Bangkok ended, but it was
perhaps instrumental in keeping ASEAN alive in the period
of internal stress between April 1968 and December 1979,
during which the Philippines resumed active pursuit of her
claim to the Malaysian territory of Sabah (Jorgensen-Dahl,
106) .
108
D. ASEAN: Post-Bali Summit and Avenues of Cooperation
In February 1976, the ASEAN Heads of Government,
spurred by these regional and international developments
(Chan, P., 12), met in Bali, Indonesia, for their first
summit meeting since the formation of ASEAN. The summit
led to the adoption of the "Declaration of ASEAN Accord"
and the "Treaty of Amity and Cooperation". The declaration '
was aimed not only at economic and cultural cooperation
'but also established a framework for a stronger and more
concerted political role by the five members in global and
regional forums (Sneider and Borthwick, 1246) .
The major features of economic cooperation agreed upon
included agreements to cooperate on the production of
basic commodities, particular food and energy; cooperation
in the establishment of large-scale, government-owned
industrial plants with five projects (ASEAN Industrial
Projects) selected for implementation by member countries;
promotion of intra-ASEAN trade and to work towards 1
Preferential Trading Arrangements (PTA) in the long-run;
and cooperation in the areas of export commodity
agreements to increase export-earnings (English, Poverty,
162-164). These features emanated from the recommendations
of a United Nations team commissioned by the ASEAN
governments^ to study methods of improving economic_________ ;
109
cooperation in the region (UN, Econ Coop, 24-46).
Subsequently, two other schemes, the ASEAN Industrial
Complementation (AIC) scheme and the ASEAN Industrial
Joint Ventures (AIJV) scheme were instituted to promote
ASEAN economic cooperation (Balasubramanyam, 172; Hirono,
94) .
The central proposition of the U.N. report was the
exploitation of the economies of scale, especially for
industries on a regional basis designed to overcome the
limitations of the narrow confines of a national market.
The team believed that the industrial development that had
thus far occurred had covered most of the local
consumption of goods produced in industries which were
everywhere small-scaled and labor intensive. Thus, all the
industrial projects proposed were large-scaled, capital-
intensive and modern technology based. They overlooked the
fact that many of the labor-intensive and small industries
were in need of modernization and there was scope for
ASEAN economic cooperation in modernizing those small
industries by widening their markets, providing technical
and physical aid and financing on special terms (English,
ASEAN Change, 104-105).
As such, the AIP strategy proposed was that of
regional import-substitution, in lieu of export-
orientation toward extra-ASEAN economies. This strategy
110 I
I
was recommended on the belief that it was difficult to
export to the external world owing to the restrictive
i
trade policies of both the developed and developing
!
countries, and the strong competition in the world market
by business giants with large capital, world-wide
I
connections, established brands and advertising (Lee and ,
I
Booth, 112-113; Langhammer and Hiemens, 4-10). ]
I
i
The AIP represents an attempt by ASEAN to achieve one
of its stated objectives of "resource market pooling".
I
Under the AIP scheme, the host government would possess i
i
60% of the project's equity, with the remaining 40% shared 1
by the other ASEAN members. The original allocation of ;
Industrial projects assigned urea projects for Indonesia j
and Malaysia, production of phosphatic fertilizer for the
Philippines, soda ash production for Thailand and diesel (
engines for Singapore (Castro, 1980, 58). The allocation
of urea projects to Indonesia and Malaysia was consistent j
with their development of national programs to institute
green revolution techniques. The success of these programs
were contingent in part on cheap energy sources and the
availability of low cost fertilizers, since 78% of
Indonesia's and some 60% of Malaysia's fertilizer (urea)
needs were imported. Between 1971 and 1974, however, there
was an international fertilizer crisis with prices for
i
fertilizers increasing from $46 to $315 a tonne. !
Ill j
i
I
I
However, the progress of the AIP scheme has been \
I
disappointing to date, primarily because of the ASEAN |
member countries' inability to forgo or deal with national |
interests (Suriyamongol, Politics, 112-118; Hirono, 45).
For example, Singapore abandoned the diesel engine project
after Indonesia's insistence that Singapore produce only
diesel engines above 500 horsepower, so as not to '
undermine Indonesia's own diesel engine plants (Lim, C.Y.,
I
111). Although the AIP scheme was first proposed at the
Bali Summit in 1976, and the agreements originally signed j
in 1980, ASEAN has only been able to reach agreement on
two urea projects, one for Malaysia and the other for
Indonesia and a potash plant currently under consideration
for Thailand (Naya and Plummer, 264; Lim, C.Y., 110-114).
The AIC scheme was instituted in 1981 and involved the
liberlization of intra-ASEAN trade in intermediate
products at various phases in the production of a final
product which was to be assembled in ASEAN. AIC projects
require the participation of at least four ASEAN countries
in the production process, and unlike the AIP scheme, the
AIC projects could be proposed by both the governments of |
I
the ASEAN countries and the private sector, the latter
i
represented by the ASEAN Chambers of Commerce and Industry !
, i
(Khanthachai, 72). The AIC package was however not adopted ;
until the concept of "'vertical integration of production j
by country" was accepted. Only two AIC projects are
■ currently in operation, both involving joint ventures with
the Japanese automobile manufactures, Toyota and
Mitsubishi. '
The AIJV scheme was instituted in 1983 and designed to
, be more flexible and decentralized than the AIP or AIC !
I
schemes. Unlike the latter schemes, only two ASEAN
countries are required to participate, with total minimum !
ASEAN equity ownership of 51% and with each ASEAN
participant having at least 5% equity. The approval J
process was also made less complicated. In addition, !
projects in the AIJV scheme could be of any size and joint
l
ventures with foreign capital were encouraged. The mtial
results of the AIJV scheme were disappointing, prompting
recent changes in the scheme. These changes included the
liberalization of restrictions on foreign participation.
In addition, the preference rate of items trade under the
AIJV scheme was increased to 90% of the existing external
tariff, from the 50% granted to other items traded under
the PTA scheme. These changes have led to an increase in
the proposed number of AIJV projects (Naya and Plummer,
264-265; Khanthachai, 72-74).
However, seven years after its institution, the
response to the AIJV has not been great. Only 18 products
have been granted AIJV accreditation, and many are not in
113
operation as yet. Furthermore, a majority of the AIJVs
have foreign equity participation and there are very few
AIJVs with ASEAN-wide participation. In point of fact,
there is only one AIJV having equity participation by all
the ASEAN countries. In addition, problems with exporting
still exist, with some involving great difficulties in
attaining preferential treatment from the participating
countries (Pangestu et al., 337).
114
SECTION II
PREFERENTIAL TRADING ARRANGEMENTS
The ASEAN Preferential Trading Arrangement (PTA)
scheme represented the first substantial attempt by the
ASEAN member countries to foster the much discussed
regional economic cooperation through enhanced intra-ASEAN
trade. The PTA is essentially a commodity by commodity
trade liberalization scheme designed to encourage intra-
ASEAN trade (Balasubramanyam, 172) . The details of the PTA
were spelt out in the agreement on the Preferential
Trading Arrangement initiated by the ASEAN economic
ministers in Manila, in the Philippines, in February 1977.
The PTA provides certain specific instruments of
preferential trading. These include long-term quality
contracts, private finance support at preferential rates,
preference in procurement by government bodies in ASEAN,
extension of tariff preferences on a negotiated basis,
preferential treatment of products of the ASEAN Industrial
Projects and Industrial Complementation Scheme, and
liberalization of non-tariff barriers on a preferential
basis (Chwee, 28; Castro, 1980, 58). In addition, ASEAN
member countries agreed to the use of protection against
dumping on products selected for the PTA and the
establishment of Trade Preferences Negotiating Groups (UN,
Survey 1978: 32).___________________________________
115
Fearing market disruption, some safeguards were
incorporated into the agreement, like the "Rules of
I
Origin" clause. This clause allows only products with an
ASEAN content of at least 50%, or in the case of
Indonesia, an ASEAN content of not less than 60%, receive
preferential treatment. Furthermore, there is an exclusion
list of products which are not eligible for preferential
treatment as these products are deemed vital to each
countries' "national interest". It is this exclusion list
which has, in part, rendered the PTA scheme ineffective
(Pangestsu et all, 335).
The products offered for inclusion in the PTA are
selected on two basis. In the first instance, there is a
matrix of products which are the results of bilateral
requests that have been negotiated and agreed upon. There
is also a voluntary list composed of unilateral offers by
each member country for generalized tariff reductions to
all other ASEAN countries. Herein lies the shortcomings of
the PTA. As many observers have noted, the product-by-
product approach entails numerous rounds of protracted
talks and bargaining by various government officials to
find products, on a quid pro quo basis, eligible for
tariff reduction. The product-by-product approach
illustrates the consensus style of negotiations as
summarized by "musjawarah" and "mufakat" endemic to all
|ASEAN processes. The evolution of the actual list of
1 products enjoying tariff reduction, described below, and
the length of time taken, provides a case in point.
A. Evolution of the PTA List
During the fifth meeting of the ASEAN Economic
Ministers held in Singapore in 1977, agreement was reached
on the first of 71 products on which tariffs were reduced
by 10% to 3 0%. Initially prior to that meeting, the
Philippines, Singapore and Thailand had agreed to a more
extensive trade liberalization scheme involving a 10%
across-the-board tariff concession for 1751 commodities,
but this was rejected by Indonesia and Malaysia,
and was thus discarded (Wong, ASEAN, 40). The 71 items
accorded preferential treatment ranged from manufactured
goods such as ball-bearings, sanitary towels, portable
typewriters and insecticides, to primary products such as
maize, rice, vegetables, beet, sugar, and sawn timber. Out
of these items, 15 were offered by Indonesia, and 14 by
each of the other member countries. These initial items
were rather insignificant in terms of bilateral trade and
a mere reduction of 10% in tariff rates was not expected
to help much in intra-ASEAN trade. The total value of
intra-regional trade in the 71 products was estimated at
117 j
i
I
i
I
US$ 150 million, in 1978, constituting only about 2.6% of
the total intra-ASEAN trade in 1975 (Saw, ASEAN PTA, 142).
Thereafter, the ASEAN Committee on Trade and Tourism
i
(COTT) resolved to conduct quarterly negotiations with
1
each country offering tariff concessions on at least 50 !
products during each round. This resulted in the agreement
and implementation of a second list of 755 items during
I
the Sixth ASEAN Economic Ministers' meeting held in I
Jakarta in 1978. It was further decided that each country
should offer at least 100 items in future meetings in j
• . . 1
order to attain a much rapid extension of the PTA. At the
Seventh ASEAN Economic Ministers meeting held in Kuala
Lumpur, Malaysia, another 500 items were added to the
list. Another 1001 items were included in the PTA Scheme
i
at the following Economic Ministers' meeting. Furthermore,
at that meeting, the ASEAN economic ministers agreed, in
the first instance, to increase the number of items to be j
included in the PTA from 100 to 150 at each round of
quarterly negotiation. Secondly, they gave COTT the
mandate to consider how much deeper tariff reductions
would be needed to expand and liberalize intra-ASEAN
|
trade. Thirdly, as a time-saving measure, they agreed to '
l
forgo negotiations on commodities with 1978 import values
of less than US$50,000, and include these items j
I
automatically. I
118
During the Ninth ASEAN Economic Ministers' meeting in
Singapore in 1980, besides the addition of 1,498 items to
the PTA Scheme, agreement was also reached on an across-
the-board tariff reduction of 20% on more than 6,000 items
with annual import values of less than US$50,000 (Saw,
ASEAN PTA, 143). However, this 20% across-the-board tariff
reduction was not applied to sensitive items in order to
protect certain industries of member countries (Tan, 4;
Balasubramanyam, 72) . In the subsequent meetings of the
ASEAN Economic ministers, the number of items included in
the PTA Scheme increased and by January 1982, the PTA
Scheme had included some 8,529 products with the tariff
reductions being increased from 10% to 2 5% (Wells, 88).
Subsequently, the cut-off rate has been successfully
raised to US$10 million and the preferential rate set at
50% on over 75% of the eligible traded goods (Ooi, ASEAN,
70). Following the Manila Summit in 1987, the coverage of
items in the PTA was enhanced to 50% of the value or 90%
of all traded items for each member country, with the
exclusion lists restricted to 10% of traded items (Naya
and Plummer, 2 65). Although this new regime in the PTA was
to be implemented over 5 years, and over 7 years, in the
case of the Philippines and Indonesia, at the end of 1989,
the items in the PTA accounted for only US$578 million or
3.2% of intra-ASEAN trade, with fewer than 900 items from
/
119
the list of 16,000 items actually being traded among the
ASEAN countries (Henson, 26) .
B. EFFECTIVENESS OF THE PTA
Many authors have questioned the effectiveness of
these tariff reductions as a means of increasing intra-
ASEAN trade (Pomfret, 109-117; Balasubramanyam, 168; Ooi,
Potential Effects, 8-25; Armas, 146-151; Ardnt, 1981).
Several studies have shown that the increases in intra-
regional trade accruing to a scheme like the PTA would be
minimal. This ensues because the PTA schemes is based on
the assumption that the price elasticities of supply and
intra-regional exports are highly elastic. Thus,
industries within ASEAN, faced with the lower intra-
regional prices, must be able to respond to increases in
demand.
Armas, for example, has argued that, under partial
equilibrium and assuming the country to be a price-taker,
the direct effect of the ASEAN tariff reduction on each
commodity group will depend on the level of original
tariff and on the price elasticity of import demand. Thus,
the complementary or competitive nature of the economies
in ASEAN would affect the success of the PTA. Armas, using
a 10% across-the-board tariff cut, further estimated the
120
expansion of Philippine imports using 1975 data. He
asserts that import groups with higher elasticities will
experience greater import expansion, as will items with
higher original tariffs. The complementarity or
competitiveness of the ASEAN economies would be reflected
through import price elasticity of demand. Armas found
that imports of basic manufactures (SITC 6) would
experience the greatest trade expansion because of their
high import-elasticity estimate. In general, the import
expansion would range from nearly 4% to 21% of import
values at the pre-tariff cut of 10%. Food imports (SITC 0)
would experience a 1% to 6% increase due to a tariff
reduction, while mineral imports (SITC 3) would rise by an
estimated 1% to 2%. However, in his study, Armas found
that most of the other import groups would register, in
general, negligible increases. More importantly, Armas
argues that a 10% reduction in the tariff rates of the
Philippines would increase ASEAN imports by 3.75% with an
equivalent to some US$4.43 million. Philippine imports
from Indonesia, Thailand, Singapore and Malaysia would
expand by 2%, 5%, 2% and 3%, respectively (146-151).
Using a slightly modified approach, Ooi estimated the
potential trade creating effects, for the Philippines and
Thailand, of a 20% across-the-board tariff reduction on
all items with import values of less than US$50,000. She
121
concludes that on the whole, the maximum overall trade
creating effects on imports of all commodities are
negligible, amounting to 0.06% for the Philippines and
0.02% for Thailand. She asserts that, although the
estimated increase of a tariff reduction on commodities
with import values of less than US$50,000 would be between
0.1% and 19%, in the case of the Philippines, and 1.4% and
8.3% in the case of Thailand, the contribution of these
commodities on total imports of each SITC group is
insignificant. They would amount to a maximum of 0.2% in
the case of the Philippines and 0.17% in the case of
Thailand.
Ooi also presents an estimate of the potential trade
creating effects for the Philippines for tariff cuts of
30%, 50% and 100% for commodities with import values of
US$100,000, US$300,000 and US$500,000, and in a later
study, for items with import values of less than US$10
million. Her findings indicate that, in the first
instance, the proportion of cutoff items as a percentage
of total imports is low. For example, items with import
values of less than US$500,000 account for only 5.17% of
total imports whereas items with import values of less
than US$10 million account for 42.49% of total imports.
Secondly, her findings indicate that the maximum trade
creating effect is low even with a high tariff cut. A
122
complete removal of tariffs for all items with import
values of less than US$500,000 would result in only a 2%
increase in imports, and for those with import values of
less than US$10 million, the increase would be only 14%
(Ooi, Potential Effects, 16 -21; Tariff Cuts, 70-72),
Others, however, suggest that these tariff reductions
should not be expected to yield large increases in intra-
ASEAN trade until such a time as there are changes in the
structure of the economies of the ASEAN countries. The
significant increases in intra-ASEAN trade would arise,
they argue, as ASEAN member countries, encouraged by the
preferential tariffs, begin to specialize in areas of
production in which they have a comparative advantage.
Tan, drawing on his study of zero-order correlation
coeefficients between the distribution of perference items
of the ASEAN countries, confirms the broad similarity in
the distribution of preference items. He asserts that most
of the items accorded preferential treatment fall within
the inorganic chemicals, organic chemicals and machinery
category. Consumer goods make up very small proportions of
the preference items offered by Indonesia, the Philippines
and Thailand, presumably because these countries want to
protect their domestic import-substituting industries. Tan
argues then that the purpose of the PTA is the longer term
effect of encouraging regional specialization and
123
stimulate intra-ASEAN trade in these few broad categories
(9-43).
These studies notwithstanding, the initial effects of
the PTA on intra-ASEAN trade have been meagre. For
example, six years after the institution of the PTA,
preferential trade granted by Indonesia in 1983 amounted
to only US$1,285 million or 0.03% of total Indonesian
imports from ASEAN. This amount fell to US$883,001 or
0.04% of total Indonesian imports in 1984. More
significantly, neither Thailand nor the Philippines had
obtained any concessions from Indonesia. Similarly,
Thailand's gross preferential trade granted to ASEAN
amounted to some US$15,182 million or 1.1% of total Thai
imports from ASEAN (Devan, 198-200).
Thus, in sum, tariff reductions thus far implemented
have been neither extensive nor deep enough to have had
any significant impact on intra-ASEAN trade (Sanchez, 6).
In addition, as these studies suggest, further exchange of
preferential tariffs and increases in the cut-off limits
for lightly traded goods will not have much more than a
marginal impact on intra-ASEAN trade. Furtermore, the full
impact of the PTA is nullified by the ability of countries
to exclude "sensitive products" from the PTA Scheme, which
have ranged from 2 percent of all items, in the case of
124
Singapore, to 63 percent, in the case of Thailand (Alburo,
33) .
In this regard, it is also important to note that
while the ASEAN countries espouse the benefits of the PTA,
they concommitantly have made extensive use of non-tariff
barriers (NTBs) to insulate their domestic industries from
external competition (Sanchez, 6). In studies of Malaysian
exporters (Rahman and Isa, 74-96) and Singapore exporters
(Ooi, Barriers, 97-113) in their trade with ASEAN, the
most common forms of NTBs encountered were import
prohibitions, customs related NTBs, especially customs
clearance, classification and valuation processes, and
safety and standards regulations. The studies found
customs related NTBs prominent in trade with Indonesia,
the Philippines and Thailand, while safety and standards
regulations were mostly encountered in trade with
Singapore. In addition, the highest incidence of NTBs was
found in trade with Indonesia. Furthermore, many of the
exporters have asserted that these NTBs have had a
psychological, deterring effect on both current and
potential exports, that have resulted in anger,
frustration and uncertainty. The use of NTBs by the ASEAN
countries casts doubts on the extent of political will of
the ASEAN countries to develop regional economic
cooperation through the use of the PTA.
125
SECTION III
EMPIRICAL EVALUATION OF TRADE PATTERNS OF ASEAN
Much has been made of the Bali Summit and the
resultant schemes designed to increase intra-ASEAN trade.
The ASEAN political leadership have asserted that these
schemes have been instrumental in increasing intra-ASEAN
trade. As such, an analysis of the trading patterns of the
ASEAN member countries between 1969 and 1986, and
especially after 1976, would provide insights into the
effectiveness of ASEAN, in general, and the PTA scheme,
in particular, in spurring intra-ASEAN trade. Such an
analysis is provided in Table 1 and Graphs 1 to 5, which
illustrate ASEAN member countries' aggregate trade flows,
and Tables 2 and 3 which illustrate their trade flows in
raw materials, including fuels, and manufactures,
respectively. Several important observations are apparent.
In the first instance, as dictated by Table 1, the
developed economies (U.S., Japan, E.E.C.) accounted for
between 60% and 86% of the final destination of exports
of the Philippines, Malaysia, Indonesia and Thailand.
Similarly, about 70% of all imports of Indonesia, the
Philippines and Thailand were from the developed
economies, while Malaysia's and Singapore's imports from
the developed economies amounted to 39% and 31.4%,
respectively. In 1969, Singapore's imports from ASEAN
126
TABLE 1
EXPORTS AND IMPORTS OF ALL COMMODITIES OF ASEAN
AS PERCENTAGE OF GLOBAL EXPORTS AND IMPORTS
EXPORTS IMPORTS
1969 1977 1986 1969 1977 1986
Indonesia
ASEAN 24.9 10.6 10.2 7.1 14.4 10.4
Singapore 17.6 9.2 8.4 5.1 8.6 9.0
Dev. Economies 60.4 78.5 73.8 65.3 60.1 60.2
World* 799 10853 14805 782 6183 10718
Singapore
ASEAN 27.1 18.6 19.5 25.3 16.5 16.9
Malaysia 22.9 14.3 14.8 22.4 13.6 13 . . 3
Dev. Economies 25.4 38.6 43.1 31.4 41.1 46.5
World 1548 8242 22494 2039 10472 25512
Philippines
ASEAN 1.2 4.0 6.8 4.8 6.4 9.7
Malaysia .005 1.0 1.8 1.7 1.5 4.1
Dev. Economies 86.8 77.1 73.4 71.6 57.8 53.1
World 822 3137 4730 1256 4270 5394
Malaysia
ASEAN 26.4 18.9 21.8 16.0 14.6 21.5
Singapore 23.3 15.9 17.1 8.0 8.4 15.0
Dev. Economies 45.1 58.3 53.7 39.0 53 .1 53.9
World 1585 6079 13838 1484 4538 10816
Thailand
ASEAN 17.2 17.9 14.0 3.1 4.3 12.2
Singapore 7.8 6.2 8.8 1.1 3.0 6.6
Dev. Economies 51.4 51.4 53.8 69.7 59.3 55.9
World 678 3451 8787 1286 4617 9139
Source: UN Commodity and Trade Statistics (various years)
* millions of U.S. Dollars
127
accounted for 25.3% of total imports, and exports from
ASEAN, some 27.1%. However, if bilateral trade with
Malaysia is excluded, then Singapore's trade with the
ASEAN region stands at less than 3%. Much is the same with
Malaysia. Although Malaysia exported about 2 6.4% of total
exports to ASEAN in 1972, 23.3% of her total exports was
to Singapore. Malaysia's imports from the ASEAN region,
excluding Singapore, was higher, accounting for some 8%
of her total imports.
A comparison of the 1969 trade figures with those for
1977 and 198 6, as summarized in Table 1, demonstrates the
absence of any significant change in the trading partners
of the ASEAN countries. The developed economies, in 1986
were still the main trading partners of the ASEAN member
countries, accounting for a substantial proportion of
their exports. Perhaps what is more disturbing is the fact
that, as displayed in Table 1, and with the exception of
the Philippines, exports of all commodities of the ASEAN
member countries to the developed economies, as a
percentage of their total exports, have increased.
Indonesia's, Singapore's, Malaysia's and Thailand's
exports to the developed economies have increased
substantially, testifying to the success of the their
individual export-oriented industrialization strategy.
Only exports of the Philippines to the developed economies
128
decreased from 86.8% of total exports in 1969 to 73.4% in
1986. Conversely, with the exception of the Philippines
once again, intra-ASEAN exports as percentage of total
f — --
exports for all commodities of the ASEAN members, most
significantly in the case of Indonesia, has decreased.
However, in the case of Malaysia, if exports to Singapore
are excluded, then intra-ASEAN exports of Malaysia has
increased from 3.1% to 4.7%. Similarly, in the case of
Singapore, if exports to Malaysia are excluded, then there
has been an increase in intra-ASEAN exports, though small,
from 4.2% to 4.7%. Indonesia's exports to ASEAN have
decreased from 24.9% in 1969 to 10.2% in 1986. When
Indonesia's exports to Singapore are excluded, her exports
to the other members of ASEAN have decreased from 7.3% in
1969 to 1.8% in 1986.
On the import side, there has been, in general, an
increase in intra-ASEAN imports among member countries
between 1969 and 1986. However, intra-ASEAN imports still,
on average, account for less than 12% of total imports of
the ASEAN member countries. In the case of Indonesia and
Malaysia, however, when imports from Singapore are
excluded, imports from the other ASEAN countries have
actually declined. Indonesia's imports from Singapore
increased from 5.1% in 1969 to 9% in 1986, implying a fall
in imports from the other ASEAN countries from 2% to 1.4%.
129
In the Malaysian case, imports from Singapore increased
from 8% in 1972 to 15% in 1986, indicating a fall in
imports from the other ASEAN countries from 8% to 6.5%. As
Table 1 further indicates, imports of all commodities from
the developed economies have decreased, as a percentage of
total imports, for Indonesia, Thailand and markedly in the
case of the Philippines. Singapore and Malaysia have
however increased the percentage of their imports from the
developed economies.
A similar pattern is trade structure prevails with the
examination of the ASEAN member countries' trade in raw
materials and manufactures. The developed economies remain
the major trading partners of ASEAN, save in ASEAN imports
of raw materials, and a sizeable portion of intra-ASEAN
trade is bilateral. Specifically, as Table 2 illustrates,
the developed economies remain the main trading partners
of the ASEAN countries, except for Singapore, accounting
for over 50% of the ASEAN countries' exports of raw
materials. Malaysian and Indonesian exports to the
developed economies have increased from 45.0% and 69.7% in
1969 to 54.1% and 81.4% in 1986, respectively. Conversely,
Filippino exports have fallen from 86.6% to 76.7% over the
same period. Table 2 however also illustrates that the
developed economies are not major suppliers of raw
materials for the ASEAN countries. In general, intra-ASEAN
130
TABLE 2
EXPORTS AMD IMPORTS OF RAW MATERIALS (INCLUDING FUELS) OF ASEAN
AS PERCENTAGE OF GLOBAL EXPORTS AND IMPORTS
EXPORTS IMPORTS
1969 1977 1986 1969 1977 1986
Indonesia
ASEAN 13.9 10.7 8.1 6.6 43 .7 25.5
Singapore 4.9 9.3 7.0 5.7 42.9 24.5
Dev. Economies 69.7 77.1 81.4 69.4 17.3 14.4
world* 512 9140 9783 35 9 62 1937
Singapore
ASEAN 10.5 11.4 24.0 55.9 22.3 20.6
Malaysia 5.6 6.5 16.4 50.4 20.6 19.7
Dev. Economies 36.4 37.2 27.9 3.4 2 . 6 3.4
World 920 3780 5789 615 3620 5925
Philippines
ASEAN .08 .06 2.1 15.6 15.9 23 .8
Malaysia - -
.07 -
3.4 14.7
Dev. Economies 86.6 84.0 76.7 37.4 11.5 9.7
World 516 889 585 197 1272 1179
Malaysia
ASEAN 29.3 18.6 20.5 43 .4 26.9 56.3
Singapore 26.9 15.4 13.0 19.9 19.7 50.2
Dev. Economies 45.0 58.3 54.1 6.4 6.5 6.5
World 843 3297 6208 222 838 1319
Thailand
ASEAN 12.5 15.0 8.6 14.0 10.6 19.3
Singapore 5.1 8.7 4.7 6.4 8.6 16.5
Dev. Economies 67.4 67.2 64.7 33.1 12.1 8.4
World 224 538 853 131 1372 1812
* millions of U.S. Dollars
131
exports have fallen between 1969 and 1986, except for
Singapore, whose exports of raw materials to ASEAN has
increased from 10.5% in 1969 to 24.0% in 1986. Similarly,
intra-ASEAN imports of raw materials have fallen for the
ASEAN member countries' between 1969 and 1986.
Much of the same pattern is discernible from an
examination of the ASEAN member countries' trade in
manufactures. Table 3 illustrates that the developed
economies remain a major source of imports of manufactures
for the ASEAN countries, accounting for over 60% of their
imports. However, there has been a slight fall in the
share of imports from the developed economies, with the
exception of Indonesia. Similarly, the developed economies
remain a major destination of ASEAN member countries'
exports of manufactures. Indonesian and Singaporean
exports of manufactures to ASEAN have fallen from 63.5%
and 54.4% in 1969, to 18.8% and 17.5% in 1986. On the
other hand, exports of Thailand, Malaysia and the
Philippines to ASEAN have increased over the same period.
132
TABLE 3
EXPORTS AMD IMPORTS OF MANUFACTURES OF ASEAN
AS PERCENTAGE OF GLOBAL EXPORTS AND IMPORTS
EXPORTS IMPORTS
1969 1977 1986 1969 1977 1986
Indonesia
ASEAN
Singapore
Dev. Economies
World
Singapore
ASEAN
Malaysia
Dev. Economies
World
Philippines
ASEAN
Malaysia
Dev. Economies
World
Malaysia
ASEAN
Singapore
Dev. Economi es
World
Thailand
ASEAN
Singapore
Dev. Economies
World
63.5 21.9 18.8
62.8 20.9 15.7
32.1 72.3 52.7
171 324 2725
54.4 22 .6 17.5
50.9 19.0 14.3
17.2 44.4 54.6
320 3250 12203
2.3 6.4 6.6
.02 1.0 2.3
78.2 71.2 67.8
58 524 1412
13 .1 15.4 21.5
9.7 12.1 18.8
71.3 68.3 62.6
451 1573 5186
5.4 12.5 17.1
2.4 7.1 13.6
85.7 66.1 44.8
106 8053 3839
6.9 3.4 5.7
5.4 2.3 4.8
68.9 80.2 77.0
508 3607 6193
5.4 7.9 13.6
5.0 6.1 9.7
69.5 71.2 63 .8
924 4978 15286
0 0
o
•
1.2 3.2
.03 .05 .05
86.3 82 .2 69.1
763 1808 1657
5.5 7.1 14.2
4.5 5.8 10.6
74.9 75.5 67.6
822 2494 7096
9.8 .08 5.8
.04 .03 3.9
84.4 82.3 69.7
829 2237 4790
Source: UN Commodity and Trade Statistics (various years)
133
A. ASEAN Trade Flows: Pre versus Post 1976
1976 marked a watershed in the history of ASEAN. Many
of the instruments of regional economic coperation, such
as the PTA scheme, were instituted at the Bali Summit in
that year. It is thus necessary to analyse the trade flows
of the ASEAN countries over the whole period from 1969 to
198 6, with the view of discerning any change in the
trends of ASEAN trade flows in the pre and post 197 6
period which would testify to the success of these
schemes.°.
Graphs 1.1 and 1.2 depicts the import and export trade
patterns of Indonesia over the period. Between 1969 and
197 6, Indonesia's exports to the ASEAN region fell, but
after 1976, there seems to be an increase in Indonesian
exports of all commodities to the ASEAN region. With
respect to Indonesian imports, fluctuations
notwithstanding, there is an overall increase in imports
from the ASEAN region between 1969 and 1986. More
importantly, as shown in graph 1.3, these fluctuations in
levels of imports correspond, in general, to Indonesian
growth rates of Gross Domesetic Product (GDP). Singapore,
as graphs 1.1 and 1.2 indicate, remains one of Indonesia's
major trading partners, accounting for a very large
proportion of Indonesia's exports and imports from ASEAN.
Although Indonesian imports from the U.S., Japan and the
Graph 1 .1
Imports of Indonesia
All Commodities
Percentage of Total Imports
0.35
0.3
0.25
0 .2
0.15
0.06
1989 1971 1973 1975 1977 1979 1981 1983 1985
Year
"“ U.S. Japan Singapore ASEAN “ ^“ E.E.O.
Source: UN Commodity & Trade Statistics
Graph 1.2
Exports of Indonesia
All Commodities
Percentage of Total Export3
0.8
0.5
0.4
0.3
0.2,
0.1
1989 1971 1973 1975 1977 1979 1981 1983 1985
Year
■ “ U.S. -4 — Japan — x~'Singapore "^ "E .E .G . "m ^ m ASEAN
Source: UN Commodity & Trade Statistics
Graph 1.3
Growth of GDP
(Constant Prices)
Percentage
101-------
■zi ■ -----1 ----- ■ -1 -------■ -1 -------■ -1 ----- 1 -1 ----1 ---1 ----1 ---1 ----1 --- £— i ------- 1 ----
1908 1970 1972 1974 1970 1978 1980 1982 1984 1988 1988
Year
“ “ US. — Japan -^S in g a p o re - A r-Indonesia
Source: World Tables
136
137
E.E.C. have declined slightly over the period, they
nonetheless remain major sources of import for Indonesia.
Similarly, the United States, the E.E.C. and Japan remain
a major destination for Indonesian exports, with
Indonesia's exports to Japan increasing tremendously over
the period.
Graphs 2.1 and 2.2 show Thailand's import and export
flows between 1969 and 1986. Imports of Thailand from
ASEAN remained fairly stable between 1969 and 1976, with a
slight dip in 1974, corresponding perhaps to the oil
shock. However, after 1976, Thai imports from ASEAN
experienced a sharp increase. Here again, as graph 2.3
illustrates, the fluctuations in Thai imports seem to
correlate to fluctuations in growth of Thai GDP. Although
Singapore remains a major source of Thai imports, since
1978 however, Thai imports from the other ASEAN countries
have increased faster than her imports from Singapore.
Exports of Thailand to ASEAN, on the other hand, first
experienced an increase, but since 1972 have experienced
a slight decrease, with no discerning change in export
trends in the pre or post 1976 period. In that same
period, Thai imports and exports from Japan have
experienced a sharp decline. While Thai imports from the
U.S. and the E.E.C. have remained fairly constant over
this period, Thai exports of all commodities as a
Graph 2.1
Imports of Thailand
All Commodities
Percentage of Total Imports
0.4
0.3
02
1969 1971 1973 1975 1977 1979 1981 1983 1985
Year
United States ~ + ~ Japan Singapore - A r-E.E.O. ASEAN
Source: UN Gommodity & Trade Statistics
138
Graph 4.2
Exports of Thailand
All Commodities
Percentage of Total Exports
0.35
03
0.25
02
0.15
0.05
1989 1971 1973 1975 1977 1979 1981 1983 1985
Year
—*— United States Japan Singapore
E.E.O. ASEAN
Source: UN Commodity & Trade Statistics_________________________________
139
Graph 2.3
Qrowth of q d p
(Constant Prices)
Percentage
14
12
10
8
8
4
2
0
-2
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988
Year
"■ “ U.S. _4—Japan Malaysia Thailand
8 ourceL_Worl.d_Ia bl es____________________________________________________________________
140
141
percentage of total exports to these countries have
increased.
Graphs 3.1 and 3.2 show Malaysia's trade flows over
the period 1972 and 1986. Malaysian imports of all
commodities from the ASEAN region have remained constant,
amounting to some 15% of total imports, until about 1979
when imports increased sharply. However, as shown in Graph
3.1, Singapore remains a major source in ASEAN for
Malaysian imports, and the sharp increase in imports after
1979 are due to increases in imports from Singapore. There
has, after accounting for Singapore's contribution, in
fact, been a slight decline in Malaysian imports from the
other ASEAN countries, between 1972 and 1979. Exports from
Malaysia to the ASEAN region first experienced a decline
from 1972, but then, after 1978, experienced a sharp
increase. Singapore, here again, is the major destination
of Malaysian exports, and accounts for the fluctuations in
trade flows, as shown in Graph 3.2. There has been a shift
in Malaysian trading patterns with the developed
countries: Malaysian imports and exports from the E.E.C
have decreased over the period, while those from Japan and
the U.S. has increased.
Graph 3.1
Import* of Malaysia
All Commodities
Percentage of Imports
0.4
0.35
0.3
0.2
0.15
. i * .
005
1972 1974 1976 1978 1980 1982 1984 1980
Year
United States Japan Singapore ASEAN " ^ “ EEO
Source: UN Commodity & Trade Statistics ________
142
Graph 3.2
Exports of Malaysia
All Commodities
Percentage of Total Exports
0.35
0.3
0.25
0.2
0.15
0.05
1972 1974
1980 1978 1978 1984 1982 1988
Year
United States Japan - x - Singapore “ * ■ ASEAN " ^ E E O
Source: UN Commodity & Trade Statistics
144
Graphs 4.1 and 4.2 illustrate the Philippines import
and export patterns of all commodities between 1969 and
1986. Philippine imports from ASEAN experienced an
increase between 1974 and 1976, remained fairly constant
at about 5% between 1974 and 1982, and experienced a rapid
increase thereafter. However, as illustrated in graph 4.3,
the fluctuations in Filippino imports also tend to
correlate with the growth rates of Filippino GDP.
Philippine exports to ASEAN have remained low and fairly
constant between 1969 and 1974, accounting for some 2% of
Filippino total exports of all commodities. After 1974
however, there seemed to be a very sharp increase in
Filippino exports to the ASEAN region but intra-ASEAN
exports still accounted for less than 10% of total
exports. Imports of the Philippines from Japan and the
U.S. have declined over the period. Imports from the
E.E.C. have, on average, remained fairly stable over the
period. There has also been a considerable fall in exports
of the Philippines to Japan over the period. Filippino
exports to the U.S. increased between 1969 and 1974, but
generally declined thereafter. Exports of the Philippines
to the E.E.C. have increased from 1969, with a marked
increase after 1974, suggesting the possible displacement
of the U.S. in favor of the E.E.C. as a more important
destination of her exports.
Graph 4.1
Imports of tho Philippines
All Commodities
Percentage of Total imports
0.35
0.3
0.25
0.2
0.15
0.05
1989 1971 1973 1975 1977 1979 1981 1983 1985
Year
Countries
U.S. Japan ~ B ~ Malaysia ~A~ E.E.C. ASEAN
Source: UN Commodity & Trade Statistics
Graph 4.2
Export of Philippines
All Commodities
Percentage of Total Exports
0.5
0.4
0.3
0.2
pjr— in-.jLT t 1 T l — --1 —
1969 1971 1973 1976 1977 1979 1981 1983 1985
Year
Countries
— U.S. Japan ~M alaysia — A_ E.E.C. ASEAN
Source: UN Commodity & Trade Statistics
146
Graph 4.3
Growth of GDP
(Constant Prices)
Percentage
15
10
5
0
5
101— LH — LH — ' — I — 1 — I — 1 — I — 1 — I — 1 — | — ' — | — ' — | — I — |
1968 1970 1972 1974 1970 1978 1980 1982 1984 1980 1988
Year
— U.S. Japan — Philippines
Source: World Tables
147
148
The import and export data of Singapore over the
period 1969 to 1986 are illustrated in Graphs 5.1 and 5.2.
As Graph 5.1 suggests, Singapore's imports of all
commodities from the ASEAN region has experienced a
gradual decline over the period. Though Singapore imports
from the ASEAN countries account for, on average, some 20%
of total imports, the bulk of imports were from Malaysia.
More significantly, this decline in imports from ASEAN can
be attributed to the decline in imports from Malaysia, as
illustrated. There is no significant difference in
Singapore's import pattern from ASEAN prior to and after
1976. Singapore's exports to ASEAN declined between 1969
and 1976. However, after 1976, Singapore's exports to
ASEAN has increased gradually. Malaysia is a main
destination for Singapore's exports and, as shown in Graph
5.2, the changes in intra-ASEAN exports can be attributed
primarily to changes in exports to Malaysia. Singapore's
imports and exports from the U.S. has gradually increased
over the period, while those from Japan, barring minor,
fluctuations have remained constant. Singapore's imports
from the E.E.C. has, in general, declined between 19 69 amd
1986, and the sharp increase in imports from the E.E.C. in
1973 can be attributed to the United Kingdom joining the
Community, as can be the sharp increase in Singapore's
exports to the E.E.C. in 1973. However, Singapore's
Graph 5.1
Imports of Singapore
All Commodities
Percentage of Total Imports
0.3
0.25
0 .2
0.15
0.05
1969 1971 1973 1975 1977 1979 1981 1983 1985
Year
U.S. ~ t “ Japan Malaysia
ASEAN E.E.O. U.K.
Source: UN Commodity & Trade Statistics'
149
Graph 5.2
Exports of Singapore
All Commodities
Percentage of Total Exports
0.3
0.25
0.2
0.15
0.05
1969 1971 1973 1975 1977 1979 1981 1983 1985
Year
United States
ASEAN
Japan
EEO
Malaysia
West Germany
Source: UN Commodity & Trade Statistics
150
exports to the E.E.C. experienced a gradual increase
between 1969 and 1976, but declined thereafter.
B. ASEAN Trade Patterns In Chemicals and Machinery
Tan (1986) has asserted that, many of the items
accorded preferential status were in Chemicals (SITC 5)
and Machinery (SITC 7). This has prompted some authors to
argue that the PTA scheme should be evaluated in terms of
whether there has been specialization among the ASEAN
members in these categories which would be reflected in an
increase in intra-ASEAN trade in these categories. This
section thus examines the ASEAN trade structure in
Chemicals and Machinery.
Graphs 6.1 and 6.2 show the trade flows of Malaysia
for Chemicals. Malaysian imports of Chemicals from ASEAN
has increased between 1976 and 1986, and has increased
more sharply after 1982. Singapore, however, as the graph
indicates, is the main source of Malaysian imports of
Chemicals. The sharp increase in imports from ASEAN after
1982 is attributable primarily to the sharp increase in
imports from Indonesia. The developed economies, however,
remain a major source of Malaysian imports of Chemicals,
with Malaysian imports of Chemicals from ASEAN still
accounting for less than 10% of total imports.
152
GRAPH 6.1
Malaysia
Imparts of 8ITG 8 (. chemiom-S)
Parcantaga of Imparts
1972 1974 1973 1934
YOar
US. Japan Singapore m*m ASEAN E-E.Q.
Malaysia
Imports of 8 IT 0 8
Parcantaga qf Imparts
0.0 a
0.02
0.01
1972 1974 1978 1973 1934
YMr
| ndanasla — Phil Ipplnas — * — Thailand
Souraet un ooramodity a irada statistics
153
GRAPH 6.2
A- Malaysia
E x p o rt! o f 9ITC 6 ( CHEMICALS )
Fteroantaa# of Export#
&7
oa
oe
0 4
o a
02
01
o
1972 1974 1970 1973 1930 1932 19S4 1930
tear
— u.s. — '— japan Singapore ASEAN — E.EQ.
Malaysia
Exports of SITC 8
Pereentaaa of Export#
0.2
0.1
1972 1970 1974
tear
"•* Indonesia —“—Philippines — *— Thailand
Souraat UN Oommodity a Trad# Statistic#
154
Malaysian exports of Chemicals to ASEAN, on the other
hand, with the exception of the Philippines, declined
between 1972 and 1986, from about 65% of total exports in
1972, to some 30% in 1986. Singapore, throughout the
period, remained a major destination of Malaysian exports.
Malaysian exports to the Philippines increased drastically
between 197 3 and 1979, but declined thereafter. However,
Malaysian exports of Chemicals to the U.S., Japan, and the
E.E.C. increased between 1972 and 1986.
Malaysian imports of Machinery from ASEAN increased
between 1972 and 1986, from about 1% in 1972 to some 15%
in 1986, as shown in graph 7.1. The increases have been
sharp between 1972 and 1976, and 1981 and 1986. Singapore
remains a major source of Malaysian imports of Machinery,
though imports from the Philippines, though considerably
less, has increased sharply since 1978. The developed
economies, nonetheless, still remain a major source of
Malaysian imports of Machinery.
Graph 7.2 depicts Malaysian exports of Machinery
between 1972 and 1986. Malaysian exports to ASEAN has
decreased sharply over the period, from nearly 80% of
total exports in 1972 to some 20% in 1986. Here again,
Singapore is a major destination of Malaysian exports.
Malaysian exports to the individual ASEAN countries, in
general, has decreased over the same period, save the
/
155
GRAPH 7.1
A. Malaysia
Imports of SITC 7
Percentage of Total import#
06
19 S2 1972 1974 1979
■ t e a r
U-S- Japan Singapore ASEAN “ • “ E-EO-
B* Malaysia
Imports of 9ITC 7
Percentage of Total Import*
0.2
0.1
0^—
1972 197a 1974 1979
Year
Indonesia Philippine* Singapore
Thailand ” *■ asea n j
Source UN Ooramodlty a Trade Statistic*_____________________________ |
156
GRAPH 7.1
Malaysia
Imports of SITC 7
Paraentago of Tbtal import#
14
12
0.1
1972 1974 1932 1970 1973
Y&ar
indent* la Philippine# Singapore -^ “ Thailand
souroec UN oommccnti1 a irajcto Statretio#
157
GRAPH 7.2
Malaysia
Exports of SITC 7
Raraentaae of Export# of si TO 7
1974 1972 1976
—— U.S. - 4— Japan Indonesia Philippine#
Singapore m ai land ■*“ ASEAN EE.o.
Malaysia
Exports o f SITC 7
Percentage of Export# of s it o 7
0 1 4
0.1
0
1972 1974 1976 1978 1980 1982 1984 1986
Year
—“— Indonesia —“— Philippines “ 4 Thailand
Source* UN oornmodlty a Ifade Statistic#
158
Philippines, where exports briefly increased between 1974
and 1977, but decreased thereafter. Malaysian exports to
the E.E.C. and the U.S. has increased over the period, and
in the latter, drastically between 1972 and 1978.
Malaysian export of SITC 7 to Japan has remained fairly
stable after 1977.
Graphs 8.1 and 8.2 show the imports and exports of
Thailand in Chemicals between 1969 and 1986. Thai imports
from ASEAN has, on average, accounted for less than 5% of
total imports. Imports from ASEAN declined between 1969
and 1981, but increased sharply after 1981. This sharp
increase can be attributed primarily to the increase in
imports from Singapore. The developed economies are still
major sources of imports of Chemicals.
Thai exports of Chemicals to ASEAN has experienced
erractic fluctutations between 1969 and 1986. Thai exports
to ASEAN account for, on average, some 25% of total
exports of Chemicals. There however doesn't seem to be any
significant deviation in trade patterns prior to and after
1976. Japan is a major destination of Thai exports, with
exports to the U.S. and the E.E.C. accounting for about
20% of Thai exports.
159
GRAPH 8.1
A . Thailand
Importa of 3ITC 8 C<=HBM>cAU3)
Poroontaao of Export*
1973 1976 1977 1979 19a i 1933 1936 1971
\oar
— U.S. — japan — Singapore ASEAN E-E.O.
B. Thailand
Import* of 9ITC 8
Perawitago of Export*
1969 1971 1973 1976 1977 1979 19 S1 1983 1936
Y»ar
indoneaia Maiayaia Philippine*
Singapore asean
Source UN ooraracoity a Trad* stallatloe
160
GRAPH 8.2
A . Thailand
Exports Of 3ITC 8 C CHEM ICALS)
Pa roan tag o of Export*
0.2
i9 ai 19 aa 1971 1976 1977 1979 1973
tear
— — u.s. — japan lnoloneala Malayan
Philippine* Singapore* ASEAN EEO-
B • Thailand
Exports of QITQ 6
Peraentaga of Bt porta
0.2
0.1
1969 1971 1973 1976 1977 1979
tear
Indonesia Malayan -*-Pnillpptnae Singapore
Source* u n commodity _ajTr.ad&_statiatioa_______
161
Graphs 9.1 and 9.2 depict the import and export of
Machinery to and from Thailand between 1969 and 1986. Thai
imports of Machinery from ASEAN, in general, declined
between 1969 and 1982, and increased thereafter. However
imports of Machinery from ASEAN accounted for less than
10% of total Thai imports, and more significantly, as
shown, most of the imports of Machinery was from
Singapore. The developed economies remain major sources of
Thai imports of Machinery. Thailand imports over 50% of
its total imports of Machinery from Japan and some 10%
each from the U.S. and the E.E.C, with imports from the
U.S. generally increasing over the period.
Thai exports of Machinery to ASEAN increased
drastically from about 15% in 1970 to some 65% in 1975,
but began to decline thereafter. Singapore was a major
destination of Thai exports and the fluctuactions in Thai
exports to ASEAN is yet again, attributable primarily to
the fluctuations in exports to Singapore. Thai exports to
the U.S. increased during the period, and drastically
between 1974 and 1982, increasing from about 1% to about
40%, respectively. Thai exports to Japan and the E.E.C.
together, on average, account for some 10% of total
exports of Machinery, though since 1977, Thai exports to
Japan and the E.E.C. have been increasing.
162
GRAPH 9.1
A • Thailand
Inportb of SITC 7
Percentage of Import a of SITC 7
a?
ps
a s
a*
a s
a2
a i
o
1989 1971 1973 1976 1977 1979 1931 19 SB 1936
\ear
— as. — Japan Singapore' asean - * “ E-E-0.
B* Thailand
Imports of QITC 7
Percentage o f Imports of SITC 7
a 12
0.1
a o a
1971 1973 1976 1977 1979 19 S1 1933 19 S6
YMT
Indonesia — ■*- Malaysia — 1 *- Philippines
Singapore ASEAN
Source UN Qommcdlty a Trade Statistics
163
GRAPH 9.2
0.7
&6
&6
04
&a
E>2
Q1
0
1969 1971 1973 1976 1977 1979 1931 1933 1936
' t e a r
— a s . Japan - ‘‘-Singapore -*-E -E .O . ■ asean
A • Thailand
Exports of SITC 7
p& roan toga of Export® of si TO 7
Souroet UN Oornmcdlty a Traxte Statistic®
Graphs 10.1 and 10.2 illustrate the import and export
of Chemicals for Singapore between 1969 and 1986.
Singapore imports of Chemicals from ASEAN generally
declined between 1969 and 1985, with the exception of a
large fluctuation between 1973 and 1975, from about 9% in
1969 to some 5% in 1986. Malaysia, however remained a
major source of Singapore imports of Chemicals among the
ASEAN countries, as shown. The developed economies too
remained major sources of imports of SITC 5. Imports from
the U.S. of Chemicals increased from about 15% in 1969 to
24% in 1986. Singapore imports of Chemicals from Japan and
the E.E.C. remained fairly stable over the period,
fluctuating between 15% and 2 0%, and 3 0% and 3 5%,
respectively.
Singapore exports of Chemicals to the ASEAN region has
declined significantly from 7 0% of total exports of
Chemicals in 1969, to about 40% in 1986, with a wide
fluctuation between 1972 and 1975. Malaysia, here again,
remained a major destination of Singapore exports of
Chemicals. And, as with the imports of Chemicals, the
fluctuation of Singapore's exports of Chemicals to ASEAN
is attributable to the fluctuations in exports to
Malaysia. There was an increase in Singapore exports of
Chemicals to Thailand, especially between 1973 and 1975.
Singapore's exports of Chemicals to the Philippines
165
GRAPH 10.1
Singapore
Imports « f 8ITC A
Perawitaa* of import* of si t o 6
O.a
0.2
0 1 6
0.1
1973 1976 1977 1979 1931 1933 1936 1971
■U.S. ■ Japan
Y*ar
■ Malaya la ■ASEAN ■ EE.O.
Singapore
Import* o f 8ITC A
Peraentago of import* of SITO 6
0.1
o l1 f l 1 * T--"* T * i 1 " 4 = » ■ ■ r -
1969 1971 1973 1376 1977 1979 1931 1933 1936
VUar
— Malaysia —a— Phlllpplna* —*■- Thailand ASEAN
Souraet UN Oommodity a . irad* Statistic*
1 6 6
GRAPH 10.2
Singapore
Exports gf 9IT C 9
Psrasrvbaas of Exports of Oftartoois
0 3
02
1831 1876 1977 1979 1971 1973
—— U.S. —1 — Japen M alaysia —4 — E.E.G m m m ASEAN
Singapore
Exports of 9IT C A
Paraantoaa of Exports of aiarnicais
02
1971 1973 1976 1977 1979 1931 1933 1936
' i f c H T
*— Malaysia — ® _ Philippines * Thailand ' mmm ASEAN
Soura* UN Oonrnicollty a. TTada Statistics
J
167
increased between 1969 and 1974, from less than 1% to some I
4%, remaining around that level until 1983, and decreased
thereafter. As shown in the graph, Singapore's exports of
Chemicals to Thailand and the Philippines, on average,
accounted for less than 15% of Singapore's total exports
of Chemicals. Singapore's exports of Chemicals to Japan,
after a sharp increase between 1972 and 1974, has
declined. Singapore's exports of Chemicals to the E.E.C.
and Japan, though accounting for less than 10% of total
exports, has been increasing since 1981.
Singapore's import of Machinery from ASEAN, as shown
in graph 11.1, increased from about 4% in 1969 to some 14%
in 1986. Malaysia remained a major source of Singaporean
import of Machinery among ASEAN. However, since 1976,
imports from Thailand and especially the Philippines have
increased. Nonetheless, the developed economies remained
the main sources of imports of Machinery for Singapore,
with imports from the U.S. still accounting for some 30%
of total categorical exports. Imports of Machinery from
Japan increased from about 2 0% in 19 69 to about 3 2% in
1986, compensating for the decrease in imports from the
E.E.C.
Graph 11.2 illustrates Singapore's export of Machinery
to ASEAN and the developed economies. Singapore's exports
to ASEAN decreased over the period, from about 55% in
168
GRAPH 11.1
A • Singapore
Imports of 9ITC 7
Reraentaae of import® of Maoninery
ia a i 19 aa 1973 1976 1977 1979 1971
■ t e a r
—— u.S. —•— Jepan — Meiaysi® —*— E.E.G. “ “ “ ASEAN
Singapore
Imports of 9ITQ 7
Percentage of Import# of Machinery
0.1
1969 1971
1973 1976 1977 1979 1981 1933 19 S6
Year
Malaysia • — * * - Phlllpplnag — ’ TheHard ““ “ ASEAN
souraec un oommodity a Trade statietio#
169
GRAPH 11.2
Singapore
Exports of aiTC 7
Reraentaae of Export* of Machinery
4 -----.
IS 31 1933 1936 1969 1971 1973 1976 1979 1977
'rear
— — U.S. —1 — Japan M alaysia —* - E.E.C 1 1 1 ASEAN
Singapore
Exporta of 9ITQ 7
Reraentaae of Export* of Maoftlnery
1973 1976 1977 1979 1931 1933 1936 1969 1971
' ( O a r
Malaysia Philippines ~ T h a i l a n d wmmm A8EAN
sourae UN Oommcoiity a Trade statietio1
170
1969 to about 19% in 1986, with a sharp decrease between
1969 and 1973. Within this period, Singapore's export of
Machinery fell from 53% to 28%. Malaysia remained a major
destination of Singapore's exports of Machinery in ASEAN.
The developed economies, once again, were major importers
of Singapore exports of Machinery, with exports to the
U.S. alone, increasing from 11% in 1969 to some 40% in
1986.
The Philippines's imports of Chemicals between 1969 to
1986 is shown in graph 12.1. Imports of Chemicals from
ASEAN increased from less than 1% in 19 69 to about 12% in
1986, with the sharpest increase occurring after 1981.
Since 1976, however, the sharp increases in the
Philippines's import of Chemicals from ASEAN was
attributable primarily to the increase in imports from
Indonesia, the main source of imports of Chemicals for the
Philippines in ASEAN. The developed economies, overall,
however, remained the Philippines's main source of
Chemicals, though their imports declined slightly
over the period.
Graph 12.2 illustrates the Philippines's exports of
Chemicals. It is apparent that Filippino exports of
Chemicals to ASEAN, in general, fell from about 38%
of total exports of Chemicals, in 1969, to 15% in 1986,
with sharp decreases occurring between 1975 and 1979.
171
GRAPH 12.1
* • Philippines
Im ports of IJITC 4 1
F*ro»ntafl» of imports of onsrnioais
0.4
- 0 -
1973 1976 1977 1979 1933 1936 1969 1971
■u.s. •Japan
veer
■Singapore • E.E.O. ■ASEAN
Philippines
Imp or is of SITC 4 1
Peroentaas of import# of Ohernicais
0 1 4
012
002
1971
1973 1976 1277 1979 1931 1933 1936
YMT
Malaysia Singapore Thailand
ASEAN Indonesia
Soura* UN Oommodity a irarts Statistics
172
GRAPH 12.2
A - Philippines
Exports of SITC ft
p»ra»ntaa» of Tefal Export® of awuioai®
is ai ia aa 19a 6 1979 1971 1976 1977
tear
inctona«la Maiay®ia Si reaper®
Thailand —1 “ / « ea, n
Philippines
Exports of 9ITQ ft
p® roan tap® of Total Export® of Ghornlool®
oP^' - i ' - P m I fr 1 1 1
1909 1971 1973 1976 1977 1979 19S1 1983 1986
tear
^ " U S . japan Singapore - ^ e e o - asean
Souroec UN Oommodlty a Trad® statistic®
173
Indonesia was a major destination of Philippine exports,
with the fluctuations in the exports of Chemicals to
Indonesia accounting for the fluctuations in Filippino
exports to ASEAN. Concommitantly, between 1974 and 1979,
exports to Japan has increased significantly, from about
20% to some 80%, respectively, but declining sharply
thereafter. The Philippine's exports of Chemicals to the
U.S. and the E.E.C. account for a significant portion of
total exports of Chemicals.
The import and export patterns of the Philippines in
Machinery are given in graphs 13.1 and 13.2. The
Philippine's imports of Machinery from ASEAN increased
between 1969 and 1986, though, on the average, accounted
for less than 3% of total imports of Machinery. Singapore,
however, was the main source of Filippino imports of
Machinery in ASEAN as shown in graph 13.IB. Filippino
imports of Machinery from the other ASEAN countries,
excluding Singapore, accounted for less than 0.5% of total
imports. The developed economies remained major sources of
imports of Machinery for the Philippines, with imports of
Machinery from Japan increasing between 1969 and 1986.
Filippino exports of Machinery to ASEAN decreased
drastically, from some 75% of total exports of Machinery
in 1969 to some 2 0% in 198 6. The Philippine's exports of
Machinery to the U.S., on the other hand, increased from
174
GRAPH 13.1
A * Philippines
Imports o f 9ITQ 7
R&raantagS' of imports of Machinery
137$ 1977 1979 1931 1933 198$ 1971
- — a s . — Japan - *_ sineapor& “ ^B E-Q - ASEAN
Philippines
Imports of 9 IT C 7
■^»ro»ntag» of imports of Machinery
0.04
0.01
19Q9 1971 1973 197$ 1977 1979 19 a i 1933 19S6
Y»ar
Indonesia Malaysia sinaaporo
Thailand ASEAN
Sourest UN Oommodlty a Trade Statistics
175
GRAPH 13.2
A * Philippines
Exports of 9 IT C 7
Raroantaga of Export* of Maahinery
0.2
1909 1971 1973 1976 1977 1979 1931 1933 1936
tear
U-S. ■ Japan -x ~ si ngapora E-EO. ' ASEAN
B . P hi iip pines
Exports of SITC 7
Ranoantaga of Export* of Mao hi nary
1909 1971 1973
indoneaia
Thailand
1976 1977 1979 1931 1933 1936
tear
Malay*la
A3E*N
Si ngapora
sounoa un oommodity a irada statiatloa
176
about 10% in 1973 to some 60% in 1983, but decreased to
about 40% of total exports by 1986. Filippino exports to
the E.E.C increased from about 5% in 1972 to some 7 0%,
with this increase coinciding with the decrease from
ASEAN. Since then, however, exports to the E.E.C. has
fluctuated between 5% and 21%.
Graph 14.1 shows Indonesia's import of Chemicals
between 1969 and 1986. Indonesian imports of Chemicals
from ASEAN generally, has increased over this period.
Within ASEAN however, Singapore was the main source of
Indonesian imports of Chemicals as shown in graph 14.IB.
The fluctuations in Indonesia's imports of Chemicals, as
such, accrue to the fluctuations in Indonesia's imports
from Singapore. The other ASEAN countries, excluding
Singapore, accounted for less than 2% of Indonesia's
imports of Chemicals. Indonesian imports of Chemicals from
the U.S. generally increased over this period, with sharp
increases having occurred between 1971 and 1975, and 1977
and 1981. The developed economies remained a major source
of Indonesia's imports of Chemicals.
Graph 14.2 depicts Indonesia's exports of Chemicals.
In general, Indonesian exports of Chemicals to ASEAN
increased over the period, with sharp increases having
occurred between 1969 and 1979, and 1980 and 1983.
Indonesian exports of Chemicals to the E.E.C., however
177
GRAPH 14.1
A • Indonesia
Imports of 9ITQ S
Ppnoentaa© of import* of Ohemiaal*
0.2
1989 1971 1976 1977 1979 1981 1983 1986 1978
U.S.
ipar
Japan Singapore ~*~E-E-0- 'ASEAN
B • Indonesia
Imports of 9ITC f t
Peraentoae of Import* of onemioaJ*
= ' " v f r * " " - ' !.
1989 1971 1878 1976 1977 1979
YtW
Maioyeia
Thailand
Philippine*
ASEAN
1981 1983 1986
Sineapore
GRAPH 14.2
178
A * Indonesia
Export! of SITQ #
POraontago of Exports of Chomloal!
0.7
is ai 19 aa 19a 6 1979 1973 1976 1977 1969 1971
U-S. ' Japan
’ro ar
■Singapore • E.E-Q. 'ASEAN
Indonesia
Exports of 9 IT Q &
p& roan tag o of Export! of Chaniloala
0 . 6
0.2
1971
1973 1976 1977 1979 1981 1933 1936
\oar
Malaysia Phiiipptnoa Singapore
~4~ Thailand asean
sourer un Oornmcdity a Tracfe stati!tioa
179
decreased sharply between this period, from some 38% in
1969 to some 10% in 1986. Indonesian exports of Chemicals
to the U.S. increased sharply between 1969 and 1974, to
some 25% of total exports of Chemicals. Since then, it has
fluctuated between 10% and 2 0%. Indonesian exports of
Chemicals to Japan has fluctuated between 2% and 10% over
the same period.
Indonesia's exports and imports of Machinery are shown
in graphs 15.1 and 15.2. Indonesian imports of Machinery
from ASEAN decreased between 1969 and 1980, but sharply
increased thereafter. However these imports of Machinery
from ASEAN constitute less than 10% of Indonesia's total
imports of Machinery. Singapore remained a major source of
Indonesia's imports of Machinery, with the rest of the
ASEAN countries accounting for less than 1% of Indonesia's
total imports of Machinery. The developed economies were
major sources of Indonesian imports of Machinery, with
imports of Machinery increasing from some 3 5% to 42% over
the period.
Indonesia's exports of Machinery to ASEAN increased
from 10% in 1969 to some 98% in 1983, but has declined
thereafter. However, as was the case with Indonesian
imports, Singapore remained the major destination of her
exports, with the fluctuations in Indonesia's exports to
Singapore accounting for the fluctuations in Indonesian's
GRAPH 15.1
180
Indonesia
Imports of 9ITC 7
Peroentaae of import# of Machinery
C M
1931 1933 1936 1979 1976 1977 1989 1971 1973
I P f t T
— u s . —t” japan -*-s in a a p c re “fc_E.E.o. asean
Indonesia
Imports of QITC 7
Peroentaae of imports of Maohinery
0 . 0 6
1971 1973 1976 1977 1979
VtMT
Malaysia Philippines sinaapore
Thailand asean
Sourast UN Qommcdity a Trade statistics
181
GRAPH 15.2
A* Indonesia
Exports of 9 IT C 7
p&ro&ntage' of Export# of Machinery
02
1976 1977 1979 1981 1988 19S6 1971 1989
'(ear
— U-S- —t — Japan - “-Singapore EEO- " *■ ASEAN
0.8
0 7
08
06
04
08
02
01
0
1989 1971 1978 1976 1977 1979 1981 1988 1986
vear
— u.s. - '- ja p a n Malaysia Thailand -^ -E & O
. Indonesia
Exports of 9>TG 7
Percentage of Export# of Machinery
source UN Qommcdity a Trade statietio#
182
exports of Machinery to ASEAN. Indonesian
exports of Machinery to the U.S. and Japan each
constituted, on the average, less than 5% of total
Indonesian exports of Machinery. Indonesian exports of
Machinery to the E.E.C., on the other hand, fluctuated
between 2% and 18% during this period.
183
CONCLUSIONS
The chapter had sought to ascertain if there had been
an increase in intra-regional trade with the formation of
ASEAN, particularly after 1976. This increase in intra-
ASEAN trade should have occurred as result of the
institution of the PTA Scheme and at the expense of non-
ASEAN members. Specifically, trade with the developed
economies should have decreased, relatively. The
effectiveness of the PTA Scheme to spur intra-regional
trade, however, is based in part on the premise that the
price elasticities of supply and intra-regional exports of
the ASEAN countries are perfectly, or at least, highly
elastic.
The above analysis, however, suggests that, in the
first instance, for all commodities, the developed
economies still remain the major trading partners of the
ASEAN countries between 1969 and 1986. Trade with the
developed economies in some cases has increased. Secondly,
intra-ASEAN imports of all commodities for the ASEAN
countries, except Singapore, has increased. However,
intra-ASEAN exports of all commodities has increased for
some of ASEAN countries, but has decreased for others.
This apparent contradiction between import and export data
can perhaps be explained by the fact that a sizeable
184
proportion of intra-ASEAN trade of most of the members is
bilateral. Singapore, for instance, is the principal
trading partner of Malaysia and Indonesia, and to a lesser
extent, Thailand. When bilateral trade with Singapore is
excluded, intra-ASEAN trade of the latter countries have,
in some cases, decreased. This same pattern is exhibited
in the analyses of the import and export data of the ASEAN
countries in Chemicals and Machinery. In general, intra-
ASEAN imports of Chemicals and Machinery for most of the
member countries have increased, between 1969 and 1982,
whereas exports of these commodities have decreased.
Thus, not all the member countries of ASEAN have
experienced a blanket increase in imports from or exports
to other member countries, at the expense of the developed
economies, as the theory of regional integration dictates.
This then suggests that the price elasticities of supply
and intra-regional export of most of the member countries
are highly inelastic. This would be in tandem with the
levels of industrial development of many of the ASEAN
countries, thus dictating that the bulk of the latters'
imports and exports would be with the developed economies,
regardless of the intra-regional versus extra-regional
price differentials. Not surprisingly therefore, imports
from and exports to Singapore, the most developed economy
in ASEAN, for many of the ASEAN countries have increased
185
between 1969 and 1986. This perhaps further lends credence
to Axline's portrayal of the "polarization effects" where
gains from regional economic integration would cluster
around the growth poles of the region.
Thirdly, for the countries of ASEAN, there is no
significant change in the import and export patterns prior
to and after 1976. More specifically, there has not been
an increase in intra-ASEAN trade after 197 6, that was
prior absent, and attributable to the political and
economic activity in ASEAN engendered by the fall of
Vietnam at the end of 1975. The fluctuations in intra-
ASEAN imports and exports seem to be influenced more by
the growth rates of the member countries. A examination of
Graphs 1.3, 2.3 and 4.3 suggest a high degree of
correlation between the growth rates of GDP of the
developed countries and those of the member countries of
ASEAN. This suggests that the levels of intra-ASEAN
imports and exports may also depend on the growth rates of
the developed economies.
Finally, between 1969 and 1986, there has been a shift
of trade away from the E.E.C. towards Japan for many of
the ASEAN countries. Similarly, the U.S. has become a more
important trading partner for many of the ASEAN countries.
186
CHAPTER III
ECONOMIC IMPEDIMENTS TO ASEAN REGIONAL ECONOMIC
COOPERATION
INTRODUCTION
With nearly twenty-five years into its inception, ASEAN
has registered little progress towards spurring economic
development through regional cooperation, as measured by
the levels of intra-ASEAN trade. As the previous chapter
has shown, there has been no significant increase in the
levels of intra-ASEAN trade and any increase that has
occurred has been primarily bilateral with established
pre-ASEAN trading partners. Furthermore, the developed
economies, especially Japan and the United States, still
remain the major trading partners of the ASEAN countries.
Nonetheless, the theory of international economic
integration espouses the benefits of economic cooperation
among developing countries. Such a strategy combines the
elements of export-oriented and import-substitution
strategies, thus providing a bridge across the
difficulties of a limited domestic market faced by the
individual countries in their development pursuits. In the
context of ASEAN then, many have argued that there remains
sufficient grounds for such economic coperation (English,
1980, 103). Specifically, in the political domain, all
the ASEAN countries share a mutual concern for greater
\
187
physical security which requires external stability and a
new regional equilibrium (Colbert, 177). They also, with
the exception of Thailand, share a colonial history
(Leifer, Foreign Relations, 3; Krause, 6). Another
cohesive force operating in favour of regionalism is the
commitment of the ASEAN countries to rapid economic growth
as their national priority which they realize can only be
achieved through their own efforts and not by reliance on
the industrially more developed countries (Wong, ASEAN,
3). And above all, as evident from their policies, all the
ASEAN countries recognise trade as an important component
in their industrialization strategies, though in varying
degress.
However, the benefits of regional economic integration
notwithstanding, the lackluster progress of many ;
international economic integration schemes, particularly
ASEAN, argues for the existence of centrifugal forces
styming, if not acting against, regional economic
cooperation, as highlighted in chapter 1. Such forces
would include the absence of political will necessary for
international economic integration (Koh and Toh, 133).
Furthermore, such forces could be generated from the lack
of economic homogeneity of the member countries and the
operations of transnational corporations, and their
investment patterns in the region. This chapter argues
188
that these forces are certainly present in the case of
ASEAN, as manifested by its inability to generate
increases in intra-regional trade, and examines the
economic impediments to regional economic integration.
Specifically, there are three major economic factors which
have affected the viability and thus the levels of
regional economic cooperation in ASEAN.
In the first instance, the economies of the region are
non-complimentary in that over fifty per cent of the total
export earnings of the countries in the region are derived
from the export of two or three more or less similar
primary commodities such as natural and manufactured gas,
dried and fresh fruits, and nuts. The non-complementarity
in economic structure serves as an impediment to an
increase in intra-regional trade as it implies a limited
absorptive capacity in the intra-ASEAN market for the
major exports of the ASEAN countries. The non
complementarity in economic structure is examined in
Section I.
Secondly, the heterogeneity in the levels of
development in ASEAN (Alburo, 33), and especially the low
levels of economic development of Indonesia, the
Philippines and Thailand, has affected intra-regional
trade. The disparate levels of economic development
suggest that the demand patterns for intermediate and
189
capital goods, needed for development, of the ASEAN
countries may be biased extra-regionally. In addition,
trade liberalization or development schemes, such as the
PTA, presupposes that the price elasticities of supply and
of intra-regional exports are highly ,if not, perfectly
elastic. Thus, with the reduction in tariffs, industries
in ASEAN become lower price sources vis-a-vis non-member
countries and are assumed to be able to respond to the
increased demand. The industrial structure of ASEAN may be
such that it is not the case. Furthermore, the disparate
levels of economic development would imply that the
benefits from regional economic integration may not be
uniformly distributed across the countries in the secheme.
The heterogeneity in economic development of the ASEAN
countries is discussed in Section II.
Thirdly, the ASEAN countries share a similarity in
economic development philosophy, first in the use of
import-substitution industrialization, although at varying
lengths, and later in their switch to export-oriented
growth. Section III provides a description of the
economies of ASEAN and their development strategies. The
import-substitution strategy, may, in part, account for
the low levels of intra-ASEAN trade as such a strategy
imposed low tariffs on capital and intermediate goods, but
a much higher tariff on consumer light and agricultural
/
190
goods. Since consumer light and agricultural goods form
the majority of the ASEAN countries' exports, the higher
tariffs thus discouraged intra-regional trade (Koh and
Toh, 16). The subsequent switch to export-oriented
industrialization strategy, as accentuated by the high
share of exports to Gross Domestic Product (GDP) of the
ASEAN countries, would conceivably have motivated greater
interests and incentives for increasing intra-regional
trade. Ironically, however, the regionally un-coordinated
employment of the strategy of export-oriented
industrialization, accentuated by the investment patterns
of the TNCs, as described in Section IV, has engendered
the development of parallel industries in the ASEAN
countries. Although the development of parallel export
sectors in ASEAN doesn't necessarily negate intra-regional
complementarity in production, which, to a large extent is
one of the objectives of regional economic integration,
the absence of regional coordination by the ASEAN
countries and the absence of any significant increases in
intra-ASEAN trade suggest the contrary. The development of
parallel export sectors has created, once again, a limited
absorptive capacity for manufactured exports in the ASEAN
market and induced intra-ASEAN competition for external
markets.
SECTION I
Non-Complementarity of ASEAN Economic Structure
The generally.non-complexnentary economic structure of
the ASEAN countries have evolved over the years in
response to the geographical environment, the Western-
dominated historical experience and the aspirations of the
people after independence. The geographical proximity
accounts for some of the similarities in agricultural and
natural resource activities, while the development of
extractive industries was the result of the economic
influence of the Western Powers. With the exception of
Singapore, agriculture and resource-based industries are
still the dominant activities in the ASEAN countries. In
recent years, the ASEAN countries have intensified their
diversification efforts in an attempt to establish new
industries and modernize the traditional paddy and
agricultural sectors. These have included oil exploration
and production in Indonesia, Malaysia and the Philippines,
oil palm plantation in Malaysia, and banking and finance
in Singapore (Saw, ASEAN Region, 31).
However, despite the considerable progress by the
ASEAN countries towards industrialization, the production
of primary commodities still remains the mainstay of the
ASEAN economies. Both the attempts of the ASEAN countries
at diversification and the primacy of raw materials and
192
primary produce are illustrated in Tables 8 and 9. Table 8
displays the ASEAN exports of food and live animals
(SITC 0) and Table 9, their exports of raw materials (SITC
2) and fuels (SITC 3).
ASEAN's efforts at diversification can be gleaned from
the gradually declining share of raw materials and primary
produce in total exports. Nonetheless, these commodities
still make up the bulk of their exports, and, with the
exception of Indonesia, by far the largest proportions of
their merchandize exports are agricultural products (Naya,
10-12).
In the case of Indonesia, however, the bulk of the
exports are taken up by fuel, which especially since 1975,
has accounted for over 70% of total exports. As shown in
Table 8, food and live animals comprise, on average, about
50% of Thailand's annual total exports between 19 69 and
1986. This, together with raw materials accounts for some
80% of Thailand's exports. Much is the same for the
Philippines where food and live animals, and raw
materials have accounted for the majority of Filippino
exports. Similarly, in the case of Malaysia, between 1972
and 1977, exports of raw materials have accounted for some
40% of total exports. Although the share of raw materials
in total exports has fallen considerably since then, to
some 22% in 1986, this together with the export of fuels
193
TABLE 8
ASEAN EXPORTS OF FOOD AND LIVE ANIMALS (SITC 0)
AS A RATIO TO TOTAL EXPORTS
Indonesia Malaysia Philippines Singapore Thailand
1969 0. 11 n. a 0.21 0.11 0.47
1970 0.12 n. a. 0.26 0.11 0.49
1971 0. 15 n. a. 0.28 0.10 0 . 50
1972 n. a 0. 07 n.a. 0.09 0. 58
1973 0. 08 0.06 0.24 0.07 0.44
1974 0. 05 0. 05 0.36 0. 06 0.56
1975 0. 05 0.06 0.36 0. 07 0.56
1976 0. 07 0.06 0.29 0.06 0. 59
1977 0.10 0.05 0.30 0. 07 0. 57
1978 0. 08 0.05 n.a. 0. 06 0.50
1979 0.08 0.04 0.19 0.05 0.47
1980 0.06 0.04 0.24 0. 05 0.45
1981 0. 04 0.04 0.23 0. 05 0.54
1982 0. 04 0.04 0.23 0. 05 0. 55
1983 0.05 0.04 0.19 0. 04 0.51
1984 n. a. n.a. n.a. n.a. n.a.
1985 0. 07 0.04 0.18 0. 04 0.45
1986 0.12 0. 06 0.18 0. 05 0. 44
Source: UN Commodity & Trade Statistics (various years)
194
TABLE 9
ASEAN EXPORTS OF RAW MATERIALS (SITC 2) AND FUELS (SITC 3)
AS A RATIO TO TOTAL EXPORTS
Indonesia Malaysia Philippines Singapore Thailand
1969 0.02 n.a 0.61 0.35 0.33
0.47 n.a 0.24
1970 0.49 n.a. 0.54 0.30 0.29
0.33 n.a. 0.23
1971 0. 36 n.a. 0.51 0.22 0.27
0.39 n.a. 0.25
1972 n.a. 0.46 n.a. 0.18 0.22
n.a. 0.07 0.24
1973 0.33 0.56 0.48 0. 24 0.27
0.50 0.05 0.20
1974 0.18 0.44 0.33 0.18 0.19
0.71 0.08 0.32
1975 0. 15 0.35 0.28 0.13 0.14
0.75 0.11 0.34
1976 0.18 0.42 0.27 0.16 0.15
0.70 0.14 0.30
1977 0.16 0.40 0.28 0.16 0.16
0.68 0.14 0.30
1978 0.16 0.37 n.a. 0.15 0.15
0.69 0.14 0.28
1979 0 . 20 0.37 0.27 0.14 0.17
0.65 0.18 0.24
1980 0.16 0.32 0.25 0.11 0.15
0.72 0.25 0.29
1981 0.10 0.28 0.19 0.08 0.11
0.80 0.27 0.32
1982 0.07 0.26 0.17 0.06 0.10
0.82 0.29 0.32
1983 0.08 0.26 0.15 0.07 0.11
0.76 0.29 0.28
1984 n.a. n.a. n.a. n.a. n.a.
n.a. n.a. n.a.
1985 0.08 0.19 0.10 0.05 0.10
0.69 0.32 0.27
1986 0.10 0.22 0.11 0.05 0.09
0.56 0.23 0.21
Raw Materials (SITC 2)
Fuels (SITC 3)
Source: UN Commodity & Trade Statistics (various years)
195
however still accounts for over 40% of Malaysia's total
exports. The primacy of raw materials and primary produce
in the exports of the ASEAN countries has meant that the
ASEAN domestic market affords a limited absorptive
capacity for these products, and hence the low levels of
intra-ASEAN trade.
The pattern of ASEAN production thus has been
determined largely by resource endowment and economic
constraints. With the availability of petroleum, mineral
and forestry resources, and with the population mostly
concentrated on the Island of Java, Indonesia has
developed her resources for export, in order to feed her
population and purchase capital goods to satisfy her
development projects. Singapore, being an island state,
has, by necessity, concentrated on trading, manufacturing
and like industries. The Philippines and Thailand have
relatively low man-land ratios, which allow them to
specialize in agricultural products, particularly food and
food processing industries. This surplus food is then
exchanged for oil and other capital goods. Malaysia, on
the other hand, is relatively the most self-sufficient
economy. Its pattern of production is determined, in the
first instance, by her own needs, and secondly by her
potential to develop certain sectors for export. Malaysia,
like the other ASEAN countries, has to import capital
196
goods for her development needs (Arasanee, 13).
The trade pattern of the ASEAN countries, as is the
case with many developing countries, has been shaped
primarily by the colonial economic influence in the past,
and partly by the economic diversification strategies
pursued. The economies of the ASEAN countries are still
export oriented in the few mineral, forest, agricultural
and manufactured products (Sours, 178). Their principal
trading partners are still the industrialized market
economies, as has been discussed in Chapter 2. The
economic structure of the ASEAN region, as a whole, still
exhibits the characteristics of an open dualitic economy
with considerable dependance upon foreign investment and
aid. It is thus inevitable that these strong links,
trading or otherwise, with countries outside the region
would result in a low volume of intra-ASEAN trade. At
present, such trade flows represent less than 15% of total
trade despite the activation of the ASEAN Preferential
Trading Arrangements (PTA). Primary commodities comprising
food, beverages, tobacco, crude materials, fuels, animal
oils and fats account for about 75% of intra-ASEAN trade.
The rest is taken up mostly by manufactured products,
comprising chemicals, basic manufactures, machines and
transport equipment and miscellaneous manufactures (Ng and
Hong Hai, 7).
197
SECTION II
Heterogeneity of ASEAN Economies
Great disparity exists between the member countries of
ASEAN with respect to their physical area, population,
levels of economic development and size (Alburo, 33).
Indonesia is the largest, with a land area of over 1.9
million sqaure kilometres and a population of over 18 0
million people (Wallace, Al). It is also, however,
economically the least developed, with a per capita GNP of
US$440 in 1988 (World Bank, 1990, 148), a large and
poverty striken rural sector and a manufacturing sector
which accounted for only 19% of her Gross Domestic Product
(GDP) in 1988. Indonesia's aggregate GNP however,
accounted for some 42% of the ASEAN total; and its
economic size and political influence largely sets the
pattern and pace of ASEAN economic cooperation. Indonesia
has also the most inward-looking development philosophy
and is largely pre-occupied with problems of national
unity, employment and poverty eradication (Chia, ASEAN,
1). Singapore, on the other hand, is the most developed
country in ASEAN. It had a per capita GNP of US$9 03 0 in
1988, and a well developed manufacturing and service
sector. In contrast, Singapore's development strategy is
outward-looking, perhaps due to the fact that she lacks
natural resources and a large domestic market, and
198
emphasizes economic efficiency and the free operation of
market forces. The other ASEAN countries lie in a
continuum between these countries. Some of the basic
indicators of the ASEAN countries are given in Table 10.
As illustrated by the Table 10, ASEAN witnessed rapid
economic growth in the last decade or two, and has emerged
as one of the most dynamic regions in the world (Arasanee,
10). The regions growth has, in general, exceeded the
United Nation's target of 6% annual growth in GNP
(Stirling, 278). The growth rate for the region during the
period 1970 and 1978 averaged between 6% and 8%, which was
considerably higher than the 2% to 3.7% attained by the
members of the EEC (Arasanee, 14). Along with the high
rates of economic growth, the ASEAN countries have also
achieved significant structural changes in their
economies. Exports of manufactured products have increased
from around 5% of total exports in 1960 to between 2 0% to
2 5% for Malaysia and the Philippines and in excess of 3 0%
for Thailand. The share of industrial exports is expected
to reach between 50% and 60% during the next decade
(Sanittatont, 60).
However, the heterogeneity in levels of economic
development present problems for ASEAN and thus affect
intra-regional trade. As discussed in chapter 1,
competitive forces operate most efficiently when the
199
TABLE 10
BASIC INDICATORS OF ASEAN COUNTRIES
Indonesia Malaysia Philippines Singapore Thailand
Area:
'000 sq km 1904.3 3 29.7 300.0 0.6 &4T2T3
% of ASEAN 59.9 10. 4 9.4 0.02 20.2
Population
(Millions) 175.6 16.9 58.7 2 .65 54.5
GDP
1961
1988
GNP
per capita
8670
/
139452 \
\
440
^290
90806/' 1
1940
6960
48493
630
700 2250
{ 493&L' 79939
9070 1000
Growth rate
(1965-1988) 4.3 4.0 1.6 7.2 4.0
SHARE OF GDP
1965/1988
Manufacture 8/19 9/ - 20/25 15/30 14/24
Agriculture 56/24 28/ - 26/23 3/ 0 32/17
Industry 13/36 25/ - 28/34 24/38 23/35
Services 31/40 47/ - 46/44 74/61 45/48
POPULATION
GROWTH
1960-1970 2.1 2.9 3.0 2.4 3 . 0
1970-1980 2.3 2.5 2.7 1.5 2.5
1980-2000 2.0 2.1 2 . 3 1.2 2.0
Sources: World Development Report
International Financial
. 1983, 1990;
Statistics 1990.
200
countries forming the unions or groups are at about the
same stage of economic development and have industries,
which in the absence of barriers, would compete for one
another's markets. There is however a lack of homogeneity
in the levels of economic development and resource
endowment in the countries in the region. The creation of
a free trade area would theoretically lead to enhanced
rationality through the release of the forces of
competition which would encourage greater specialization
in the region. This would lead to the extinction of
inefficient producers, and, at least theoretically, open
new markets for the efficient producers who in turn would
be able to increase production. Expansion of efficient
production would foster faster regional economic growth,
but inevitably such growth would be uneven. Economic
growth would provide a much larger market for the
countries with the more advanced industries, while those
with less advanced industries would shift resources from
industry to other sectors where they have a comparative
advantage, such as mining and agriculture (Crouch, 2).
But the main priority of the countries in the region,
given the existing economic structure, is not efficient
allocation of resources in the different economic
activity, but increasing the rate and level of economic
and social growth. Releasing the forces of competition
201
t
^ indiscriminately in the region would result in a pattern
of trade which in turn would create a strong and permanent
growth-retarding structure in the region (Aggawal, 546).
In the case of ASEAN, economic integration would enable
the high-technology industries in Singapore to dominate a
vastly expanded market, and thus pre-empt the development
of similar industries in the other ASEAN countries.
Economic integration may also provide similar
opportunities for some industries in the Philippines,
Thailand and Malaysia. However, the benefits of access to
a wider market for some of the industries in these
countries would have to be weighed against the
! consequences of opening their own domestic markets to
penetration by their more advanced neighbours in other
sectors. In the case of Indonesia, given its level of
development, the opening of its markets to the industries
of the other ASEAN states would be disastrous for its
prospects of industrialization (Crouch, 2).
The presence of heterogeneity may further affect the
process of regional integration in two ways. In the first
place, it induces mistrust on the part of the relatively
weaker countries, an ex ante attitude, and dissatisfaction
with the distribution of benefits, an ex post attitude.
Secondly, a programme of uniform trade liberalization,
such as the PTA, would give undue advantage to the more
202
developed countries whose manufactured products would
invade the markets of the lesser developed countries in
the grouping, and stifle their national growth. There
might thus be "polarization effects", implying that
progress in advanced areas would be accompanied by and
would even contribute to stagnation in the other areas.
203 I
i
'SECTION III
ASEAN Development Philosophies and Trade
t
Trade has always been an important factor in the |
l
development strategies of the ASEAN countries. Although |
I
there was an emphasis on import-substitution i
industrialization in their earlier stages of their
{
industrial development, the ASEAN countries, confronted j
i
with saturated domestic markets, eventually shifted i
towards manufacturing for export. The strategy of import-
substitution cum export expansion was a post-war
development strategy designed to diversify the economy I
from an over reliance on primary products, or in the case [
i
of Singapore, on entrepot trade, and to accelerate ;
economic growth and increase employment. However, there
i
were significant differences in the ASEAN countries7
industrialization experiences that account in part for the
variation in the current state of their industrial
development (Bautista, 7).
Furthermore, and more significantly, the pursuit by
!
the ASEAN countries of the export-oriented ;
industrialization program was in consonance with national |
i
development objectives as opposed to a regional
development objective. Thus, although the shared
philosophy of export-oriented industrialization provides a
ibasis for potential increases in intra-regional trade, the |
204
i
uncoordinated national development priorities have led, in
I I
effect, to the development of parallel export sectors and
competition for export markets which has thus capped the
levels of intra-ASEAN trade. It should be noted that a
comparison of exports sectors at the aggregate level could
I
still support the contention that intra-regional
complementarity in production has been achieved even with
I
the development of parallel export sectors, through
i
vertical integration. However, the absence of regional j
coordination by the ASEAN countries during their earlier j
stages of industrial development, coupled with the lack of i
any significant increases in intra-regional trade in these
i
sectors during the period and the heavy extra-regional
bias of ASEAN exports, as discussed in Chapter 2,
invalidates the contention.
205
A. Economic Policy in Singapore
Singapore's industrialization programme experienced
only a brief import-substitution phase in the early 1960s, ,
i
\
during which protective tariffs and quota restrictions 1
!
were moderate. The Economic Development Board (EDB) was j
established in 1961 as an overall agency for development,
under the Ministry of Finance. The Board initiated I
i
projects and financed them through loans and equity ;
I
participation. Export industries were encouraged through j
appropriate government policies and infra-structure
’support, with initial concentration on labour-intensive i
industries. Political separation from Malaysia in August j
,1965 and the abortion of the common market proposal, which
; i
was Singapore's main economic rationale for the merger
with Malaysia, continuing high unemployment and fears of a
recession induced by the impending withdrawal of the
I
British military base, accelerated her encouragement of
foreign investment to produce for export (Chia, Foreign
Trade, 2 60). The Economic Expansion Act of 1967 modified 1
the tax incentives of the 1959 Act and introduced new tax
j
incentives aimed at encouraging pioneer and export *
industries. Concommitantly, institutional facilities were
developed to assist manufacturing investments and i
fostering industrial peace. t
206
Furthermore, the government participated in business
enterprises through the establishment of wholly-owned or
partially-owned companies. These companies were located
in a large number of key industries, including trading,
transportation, communications, finance, ship-building and
repairing, electronics and manufacturing. Government
participation in business was evident as early as 1961
through equity shares in the National Iron and Steel Mills
and Prima Flour mills. This was besides its original
participation in Malayan Airlines and its modern
successor, Singapore Airlines (SIA) which is a wholly-
owned company. In 1974, Temasek Holdings Private Limited,
a wholly government-owned holding company was
incorporated. The Ministry of Finance has thus, since
January 1975, transferred control of all its investments
in local companies to it (Chen, P., 8).
Consequently, the manufacturing sector in Singapore
experienced rapid growth in the 1960s and 1970s, expanding
production at an average annual rate of some 12% during
the two decades. Manufacturing's share of GDP increased
from 12.8% in 1960, to 20.5% in 1970, to 24.1% in 1980 and
some 30% in 1988. Largely due to the success of export-
oriented industrialization and mass employment creation,
the government's economic policy since 1970 placed
increased emphasis on industries requiring higher levels
207
of skill, capital and technology, and, at the same time,
diversified the economy into trade services, primarily
tourism, transport, communications and financial services.
The shift in the industrial structure of the Singapore
economy is reflected in Table 11. The share of textiles,
clothing and footwear, which are primarily labour-
intensive industries, in the manufacturing value-added,
decreased between 1960 and 1988. The contributions of
the metal and wood industries also declined over the
period. By the 1980s, three major industries had emerged,
namely electrical machinery, petroleum and transport
equipment. These accounted for close to two-thirds of
manufacturing production.
During the mid-1970s, in the midst of the recession in
the international economy, emphasis shifted to the
promotion of higher value industries in what has been
termed a "Second Industrial Revolution". Its purpose was
to accelerate Singapore's transtition to a more
sophisticated technological base, thereby removing her
from competition with lower wage countries and thus
reducing her reliance on labour expansion for economic
growth (Rodan, Political Economy, 142). This Second
Industrial Revolution was manifested in 3 sets of
measures, the first of which was a wage correction policy
208
TABLE 11
COMPOSITION OF MANUFACTURING VALUE ADDED
SINGAPORE
1960 1970 1980 1988
Food and Beverages 25.6 10.2 4.5 5.0
Textiles 3.1 2.2 1.7 0.6
Wearing Apparel 3 . 1 3.0 2.9 3 . 1
Wood Products 7.1 5.5 1.8 0.5
Furniture 1.0 1.0 1.0 0.8
Paper Products & Printing 18.5 5.8 4.7 5.5
Chemical Products 6.8 4.5 4.8 11.8
Petroleum 6.8 19.2 18.4 4 . 3
Rubber & Plastic Products 2 . 6 2.9 2.4 2 . 6
Non-metallic Minerals 3.8 3.0 2 . 6 1.3
Basic Metals 1.3 2.0 1.5 1.2
Fabricated Metal Products 7.6 6. 6 4.6 5.8
Machinery & Appliances 10. 1 14. 2 32.3 46.5
Transport Equipment 5.8 14.6 13 .8 7.8
Precision Equipment 6.7 0.3 1.4 1.8
Other Products 6.7 5.0 1.6 1.4
Total 100.0 100. 0 100. 0 100. 0
Source: Economic Survey of Singapore (various years)
209
designed to restore wages to market levels. Large wage
increases, averaging 20% annually between 1979 and 1981
were introduced to force firms to improve their efficiency
of labour, spur productivity and reduce dependence on
guest labour.
The second set of measures involved changes in
investment incentives aimed at encouraging a more limited
number of priority industries, producing highly skilled,
capital intensive and technologically sophiscated
products, such as computers, computer peripheral
equipment, and automotive and aerospace components.
Tariffs on some other industries were removed to improve
their efficiency, or in the case of internationally
uncompetitive industries, to phase them out. The final
component of Singapore's industrial restructuring strategy
involved the expansion of training and educational
facilities for both prospective and already employed
workers to improve their skills (Bautista, 7/15). Thus,
the state actively strove to discourage low value-added,
labour-intensive production by raising labour costs to the
employers. Concommitantly, it sought to improve the
quality of social and physical infra-structure and thus
ensured low establishment and operational costs for more
sophisticated and higher value-added production. However,
by the mid-1980s, it was apparent that the response of
210
international capital to the government initiates was not
likely to generate the necessary momentum to realize
official targets and objectives. In addition, the
deepening of the global recession and consequent reduction
in export demand compounded the problem and resulted in
Singapore, in 1985, registering a negative growth of 1.6%
for the first time in her history. (Rodan, Rise and Fall,
150-171). The greater productivity generated in the
manufacturing sector did not reduce dependence on guest
labour to the extent envisaged by the government (Rodan,
Foreign Trade, 187). Acknowledging the severity of the
problem, the government reversed key components of its
"Second Industrial Revolution" and endeavoured to reduce
labor costs in an attempt to regain competitiveness in
areas other than high-value sectors. These included wage
restraints, with cooperation of the trade unions, and
reduction in tax rates and other employer fees. These
measures, aided by favourable external conditions, led to
recovery in economic growth at an average rate of 9.5%
between 1986-1990 (Chintayarangsan et al., 370).
211
B. Economic Policy in Malaysia
In Malaysia, the government strove consciously to j
promote industrialization soon after independence from
Britain, with the introduction of the Pioneer Industries
Ordinance in 1957 (Lim, D., 94). It provided incentives to
firms through pioneer status, exempted them from the 40%
corporate income tax and provided subsidies for infra
structure services, such as electricity and water, for a
set period of years. Import-substitution was a primary |
l
source of growth between 1963 and 1968, but towards the
end of that period, there was a shift to export-oriented
industrialization engendered by a saturated domestic
market for consumer goods (Cho, 189).
In 1965, the Federal Industrial Development Authority !
was established to oversee the country's industrialization
programme. Manufacturing developed at a fast pace between
1958 and 1968 under a system of modest tariff protection
and liberal investment incentives. The average annual rate
of growth of value added in the manufacturing sector was
17%, but those of the pioneer companies were surprising
much higher, at an impressive 58%. Table 12 shows a
t
substantial decline since 1968 of the share of ;
!
agriculture-based processing activities, from 28.9% in !
1959 to 10.5% in 1968. Concommitantly, the newer
industries, especially those processing intermediate and j
212
TABLE 12
COMPOSITION OF MANUFACTURING VALUE ADDED
MALAYSIA
1959 1968 1980 1985
Processing of Estate-Type
Agricultural Products
Food, Beverages and
Tobacco
28.9
24. 1
10. 5
28 . 3
33 . 3 21.1
Textiles, Clothing &
Footwear
-
2.8 3.0 4 . 9
Wood and Furniture
Paper, Printing and
Publishing
18.7 13 . 0
7.6
15.0 12 .2
Chemicals, Petroleum Rubber
and Plastic Products 16.5 17.9 11.0 26.0
Non-Metallic Mineral
Products 3.9 8.2 6.9 6.1
Basic Metals and Metal
Products 4.4 6.6 8.1 6.9
Machinery 1.8 2 . 2 3.4 2 . 0
Transport Equipment 1.7 2.9 4.9 4 . 3
Other Manufactures — — 12.4 17 . 3
Source: Baustista, 8
Malaysian Industrial Development Authority
213
investment goods grew much faster and substantially
increased their contribution to total manufacturing
output. To encourage further industrial investment, the
Incentives Act was passed in 1968 which accorded specific
benefits particularly to export-oriented industries. Among
other means of export infra-structure support, free
trade zones and export processing zones were established,
through the Free Trade Zone Act of 1971, in selected parts
of Malaysia.
During the Second and Third Malaysian Five-Year Plans,
between 1971-1975 and 1976-1980, respectively,
manufacturing was once again accorded primacy. As a
result, the subsequent industrial growth was rapid, with
manufacturing output expanding more than threefold between
1968 and 1980 (Bautista, 8-9). In the 1980s, the Malaysian
Industrial policy sought to, yet again, accelerate growth
in the manufacturing sector, and re-emphasized the
development of a more efficient and dynamic export sector,
through various packages of new incentives and supportive
economic policies (Cho, 201; Jomo, 481). The diminishing
labour surplus in major industrial areas made the active
encouragement of labour-intensive manufactured exports
less compelling, although incentives were provided to
increase the attraction of dispersal to new areas with low
wage cost. However, the value added in the export
214
industries was still low, owing to the heavy reliance on
imported inputs and the associated lack of investments in
ancilliaries and dissemination of skills and technology
(Ariff, 280-286). The industrial plan for 1981-1985 called
for the further development of resource-based industries,
particularly in the processing of cocoa, palm oil and
crude petroleum, as well as the manufacture of rubber and
wood-based products both for export and domestic
consumption. It also emphasized the promotion of
investment in heavy industries and the manufacture of
capital goods, which represented a program of import-
substituting heavy industrialization (Lim C. P.,41-70;
Leigh, 116). This plan was conceived by Prime Minister
Mahathir in an effort to reduce economic dependence on the
capitalist states in general, and on world commodity
markets in particular, for both econonomic and nationalist
reasons (Machado, 507). However, this strategy was revised
in the Fifth Malaysia Plan, 1986-90, which, given external
constraints, the limited size of the domestic market and
because of the growing budget deficit and political
challenges, sought to reformulate the tariff and incentive
system in order to make the industrial sector more export-
oriented (Lim, D., 97; Lim and Pang, 22-23; Machado, 504).
215
C. Economic Policy in the Philippines
In the Philippines, under the Nationalist banner,
import-substitution as an industrialization strategy was
introduced in 1949. Controls on imports and foreign
exchange, and a severe overvaluation of the domestic
currency were instituted as an ad hoc response to a severe
balance of payment problem. Initially, this regime had an
unintended effect of stimulating the production of import-
substituting industrial consumer goods but penalized
backward integration and agricultural production.
Manufacturing net product grew rapidly, initially at a
real average rate of 12 percent a year during the first
half of the 1950s (Lindsey, 78).
However, this strategy soon became a protective device
to encourage production of substitutes. Decontrol and
devaluation in the beginning of the 1960s had little
effect on the incentive structure favouring import-
substituting industries that mainly produced final-staged
consumer goods since the qualitative nature of industrial
production remained. The highly protective tariff system
introduced in the late 1950s, but made redundant with the
enforcement of import and foreign exchange controls, was
still in place and as such, domestic industries were still
accorded heavy protection through a cascading tariff
216
structure (Balisacan, 82). The sluggish manufacturing
growth from the late 1950s was re-juvenated with a defacto
devaluation in 1970 of the domestic currency, accompanied
by discrimanatory stabilization measures favoring
manufactured exports and the enactment of the Export
Priorities Act. In line with export infra-structure
development, several measures were adopted including the
establishment of an export processing zone. The remarkable
response of manaufactured exports, which expanded at an
annual rate of about 50% between 1970 and 1973, provided
the stimulus for the acceleration of the growth of
manufacture, from 3.7% in 1969 to about 14.8% in 1973,
before being affected by adverse external conditions. As
illustrated in Table 13, the changing composition of
manufacturing valued-added reflects the policy bias of the
1950s and 1960s towards import-substituting industries.
The industries which expanded rapidly included those
manufacturing textiles, paper products, plastic products
and electrical appliance. These products were mainly
import-replacing consumer goods (Jurado, 267-2 80).
But, in 1980, the Philippine government, responding to
the collapse of international primary commodity prices,
the oil price shock of 1978-79 (Jayasuriya: 53), the
increase in government expenditures, the cumulative effect
217
TABLE 13
COMPOSITION OF MANUFACTURING VALUE ADDED
THE PHILIPPINES
1959 1971 1980 1985
Food, Beverages & Tobacco 42 . 2 38.6 38 . 2 48 . 2
Textiles, Clothing and
Footwear 10. 2 9.2 10.7 9 . 2
Wood and Furniture 5.0 5.4 3 . 0 3 . 0
Paper, Printing and
Publishing 5.1 5.2 4.7 2.5
Chemicals, Rubber and
Plastic Products 12.9 14.9 16 . 0 14 . 4
Non-Metallic Mineral
Products 3.4 5.4 4.1 1.8
Basic Metals and Metal
Products 5.5 5.7 6.6 8.3
Electrical Machinery 3.5 3 .1 5.0 7.0
Transport Equipment 3 . 7 2 . 7 4.4 0.6
Other Manufactures 7.1 9.0 6.1 4.3
Source: Bautista, 10
Business and Investment in the Philippines,
National Economic and Development Authority.
of inefficiency and corruption in the use of foreign
loans, the increasing current account deficit and downturn
in the world economy, instituted major policy changes
(Lindsey, 1992, 85). These changes were intended to make
the Filippino economy more open, and thus involved the
reduction in tariff rates, the elimination of most
quantitative restrictions and import licensing, export
promotion, investment incentives and administration,
industrial revitalization and implementation of major
industrial projects. These industrial restructuring were
carried out primarily to improve the country's
manufacturing capability in providing a broader and more
competitive export base and to promote the development of
an efficient domestic intermediate goods industry. Also,
to reduce the overall level of protection and make the
rates more uniform, the average nominal protection for the
manufacturing sector was reduced from 43% to 3 8% between
1981 and 1985. In 1979 and 1980, improvements in export
incentives and promotional measures were also instituted.
Trade liberalization and investment incentive
rationalization was accompanied by a revitalization
programme designed to assist existing industries to
produce at lower costs and improve their competitiveness
(Jurado, 267-280). Furthermore, eleven major industrial
projects were identified for implementation between 1980
219
and 1987 that were meant to produce vital commodities and
intermediate inputs at internationally competitive
prices, induce the establishment of downstream
labour-intensive industries and enhance the country's
technological capabilities.
However, given the state of the world economy, these
policies did not lead to any substantial increases in
exports. In point of fact, merchandize exports fell by 7
percent in 1982, as did merchandize imports, but only to a
level slightly below the 1980 level. Concommitantly,
imports of services, which had increased by 22 percent in
1981, increased by 25 percent in 1982, all of which served
to fuel a 50 percent increase in current account deficit
to some US$3.2 billion (Lindsey, 1992, 86). Real GNP fell
between 1981 and 1986 (Jayasuriya, 53), before
experiencing an upturn in 1986. Real GNP per capita only
regained its 1977 level in 1988.
Consequently, the National Economic and Development
Authority (NEDA), recommended that, in the first instance,
in order to generate broad-base spending increases to
revitalize the economy, a redistribution of wealth
downward, primarily thorugh land-reform, was necessary.
Secondly, to reduce financial outflow, it recommended a
two year moratorium on debt-servicing and selected
repudiation of fraud or corruption related international
debt. Further attempts to ameliorate the Phlippines'
economic problems can be gleaned from its 1989 "Letter of
Intent" to the International Monetary Fund. The external
policies contained in the letter included trade policy ,
reforms, the encouragement of foreign investment, the !
I
removal of distortions and controls on private sector j
activity, and the improvement of accessibility of small j
and medium scale exporters to financing (Lindsey, 1992, j
86-89; Jayasuriya, 54).
D. Economic Policy in Thailand
At the end of the Second World War, Thailand lacked an
indigeneous bourgeoisie who could lead the process of
industrialization, as the Thai elite were either engage in !
court or in bureaucracy. There was, however, a sizeable
Chinese community engaged in commerce but who were willing ;
to shift into industrial activity. An alliance was forged
between the Thai political elite and the Chinese
bourgeoisie, with the latter being allowed to assume the
lead in industrial activity. This alliance was strongly in j
favor of modern industries in urban areas (Jansen, 23). !
Thus, in Thailand, industrialization began only in the
early 1960s. In response to balance of payments and trade
i
problems, a policy of import-substitution was adopted to [
: 221
i
! reduce manufactured imports. A system of protective
tariffs and indirect subsidization was instituted under
I
i the industrial promotion scheme, with the introduction of
[
i
the New Investment Act of 1962. Not surprising then, the
; State did not adopt the import-industrialization strategy
i
on its own accord, but in response to, as the Thai
Minister of Finance had stated, strong representation from
local industrialists (Hewison, 55). As with the case of
the Philippines, this policy led to the establishment of
. manufacturing industries producing mainly consumer goods,
heavily dependent on imported capital equipment and
intermediate products, and unable to absorb much of both
the country's unemployed and under-employed labor force
(Tambunlertehai, 217).
The import-substitution industrialization strategy
■ (ISI) did, however, initiate structural changes in the
manufacturing sector, with its contribution to GDP rising
from 12.5% to 17.5% in the 1960s. Furthermore, the ISI
strategy with its high rate of protections, encouraged
domestic investment and advanced the process of capital
accumulation for the domestic banking and industrial
capitalist. The banking capitalist, notably the Bangkok
Bank and its principals, the Sophonpanich family, took
advantage of the ISI policies to expand into industry,
i enhancing their corporate power.
222
But, by the end of 1972, excess capacity had become a
! major problem in the Thai economy. This was pointedly
manifested in the fall in growth of manufacturing from
17.2% in 1971 to 7.5% in 1972 (Hewison, 55).
I 1
I
Simultaneously, the growing trade deficit forced the Thai
government to examine export-oriented industrialization as
an alternative strategy for development. Consequently, the
Export Promotions Act of 1972, which exempted exporters j
from business taxes and from taxes on imported inputs, was ,
introduced. Nevertheless, import-substituting policies
persisted through the decade and into the 1980s, even as
manufactured exports were being actively promoted
(Phongpaichit, 16). Several major commodities were j
I
, subjected to export tax, while uncompetitive products were
i
still protected. Tariffs were still maintained on
■ i
manufactured goods while quotas were imposed on primary
I
products. This skewed incentive structure impeded the i
I
development of export industries, especially labor '
|
intensive manufacturing (Chintayarangan et al., 366). i
I
Nonetheless, manufacturing value-added grew at an !
j
average annual rate of 11% at constant prices in the 1960s
i »
and 1970s (Tambunlertehai, 218). As can be seen from
Table 14, processed food, beverages and tobacco heavily
dominated Thai manufacturing in the early 1960s. This :
sector's share however diminished through the 1960s and >
223
TABLE 14
COMPOSITION OF MANUFACTURING VALUE ADDED
THAILAND
1962 1972 1979 1985
Food, Beverages and Tobacco 60 . 5 36.9 33 . 5 23.7
Textiles, Wearing Apparels
Footwear 6.5 18.3 24.3 4 . 8a
Wood, Furniture and Fixtures 6.0 3 . 6 2.3 14.3
Paper, Paper Products,
Printing and Publishing 2 . 3 3 . 2 3.8 8 . 1
Leather and Leather Products 1.6 1.1 0.5 8.2b
Chemicals and Rubber
Product 9.1 7.5 9.2 10.5
Petroleum, Refining and Coal
-
8.6 5.9 3 . 7
Non-Metallic Mineral
Products 5.7 5.7 5.9 9 . 1
Basic Metals 0.2 1.8 1.2 19 . 1
Machinery
I
3.8 3 . 6 3.4 19.5
Transport Equipment 3 . 3 5.0 7.8 7.5
Other Manufactures 4.3 4.4 3 . 0 16.7
a excluding footwear
b including footwear
Source: Bautista, 11
Asian Development Bank, 1985.
i 224
i
; 197 0s, with the growth of import-replacing industries and j
| the expansion of non-traditional manufactured exports, J
like textiles and clothing. j
In the early 1980s, Thailand realizing that she would |
I
face serious and complex economic problems of structural
adjustments, brought about by the increase oil prices, the j
appreciation of the baht and the fall in world commodity j
I
prices for agricultural produce (Jansen, 19; Robison, \
Structures, 378), if policy redirections were not made, !
embarked on an industrialization strategy aimed at
increasing production and productivity in the
; manufacturing sector (Phongpaichit, 11). This strategy
I
also included policy efforts to reduce protection in the j
J
domestic industry, to encourage manufactured exports and
i
to promote regional dispersal of industry (Baustista, 8). ;
Investment incentives, such as low interest loans for
exports, tax rebates and refunds for exports, and expanded
infra-structure were also introduced. Some steps were also
taken toward the implementation of comprehensive tariff
I
changes which lowered effective protective rates for the 1
i
: import-substituting industries and raised those for export ■
industries. The private sector was very responsive to the
■ export promotion policy, with manufactured exports
increasing threefold between 1985 and 1990 ,
I
' (Chintayarangan et al., 367). It was recognized by the i
225 !
I
I
I
Thai government that the expansion of manufactured exports
would contribute significantly not only to employment j
creation, but also alleviating the country's severe j
balance of payment current account deficit which between |
j
1980 and 1985, averaged over US$1 billion. The j
establishment of basic industries including iron and j
steel, fertilizer, soda ash and newsprint represented the ;
subsequent stage of Thai Industrialization !
(Tambunlertehai, 217-243). ■
]
r
i
E. Economic Policy in Indonesia
i
I
The belief that the state has a legitimate role in j
tempering market forces, in favor of social objectives, I
and restraining foreign ownership in the economy, so as to
I
nurture domestic investment and achieve a significant
degree of national autonomy, has shaped Indonesian
economic policy since 1949 (Robison, Gold Rush, 17;
Sjahrir and Brown, 125; MacIntyre, 140). Government
interventions in the economy aimed at the protection of ;
so-called infant industries led to the inefficient use of
scarce domestic resources and reduced the international
competitiveness of labor-intensive industries, as, even |
I
though Indonesia has the largest population in ASEAN, it j
226
is limited by the size of its domestic market (James and
Fujika, 60; Pospos, 52). This was especially true in the j
, period of Sukarno's "Guided Democracy" from the late 1950s j
until 1966, where export earnings from the plantation !
sector fell from US$442.5 million in 1958 to US$330 j
million in 1966. This in turn contributed to the '
replacement of a US$25 million current account surplus in f
1
1959 with a US$248 million deficit by 1965 (MacIntyre, <
141). As a result, the Indonesian economy experienced !
I t I
'stagnation in the 1950s and the greater part of the 19 60s. i
Furthermore, from 1965 to the early 1970s, as a result of \
a fiscal crisis, hyper-inflation and bankruptcy, there was |
a temporary retreat from economic nationalism and the j
accompanying state intervention. The state was forced to
thus reconstruct the economy around foreign capital and ;
I
loans (Robison, Gold Rush, 17; Sjahrir and Brown, 124-
125) .
With the enactment of the Domestic and Foreign
Investment Laws in 1967 and 1968, coupled with the
launching of the First Development Plan, the Indonesian |
economy grew, especially the raining and manufacturing
sectors. Since manufacturing constituted only a minor
sector in the Indonesian economy before 1968, there was
also much scope for import-substitution, promoted by the '
i
then new policy measures protecting domestic industries !
227
producing consumer goods from competing imports. The
result was that Indonesia's import of consumer goods as a
proportion of total imports decreased from 42.7% in 1966
to 16.1% in 1972 (Wong, ASEAN, 164).
However, import-substitution subsequently slackened,
as the share of consumer goods, other than rice, flour,
and sugar, rose from 9% in 1972 to 11% in 1977. Even
through the late 1970s and early 1980s, manufactured
products comprised less than 5% of Indonesia's total
exports. Table 15 illustrates that food, beverages and
tobacco accounted for about half of Indonesia's value-
added in 1972. This was however reduced to one-third by
1979. The share of clothing, textiles and footwear, which
accounted for only 10% in 1972, assumed greater
significance by 1979 (Paaum, 151).
After 1974, with the rise government revenues
induced by the increase in oil prices between 197 3 and
1974 and then again in the 1980s, there was a resurgence
of state-led economic nationalism (MacIntyre, 142;
Robision, Gold Rush, 17). This not only reflected the
persistence of such sentiments, but also, with the inflow
of oil revenues, the ascendancy of a new dominant force in
Indonesia; the military bureaucrats, state managers of
capital and major domestic corporate groups (Robison, Gold
Rush, 17; MacIntyre, 142).
228
TABLE 15
COMPOSITION OF MANUFACTURING VALUE ADDED
INDONESIA
1972 1979
Food, Beverages and
Tobacco 50.8 33 . 6
Textiles, Clothing and
Footwear 10. 9 15.4
Wood and Furniture 2 . 9 4 . 6
Paper, Printing and
Publishing 2 . 3 1.5
Chemicals, Petroleum, Rubber
and Plastic Products 21.3 17.4
Non-Metallic Mineral
Products 4 . 0 8.8
Basic Metals
-
1.3
Metal Products, Machinery
and Transport Equipment 6.8 15.1
Other Manufactures 1.0 0.3
Source: Bautista: 11
229
Thereafter, adjustments in the Indonesian economy were
aimed at reducing her dependance on oil. Although she had
relied on import-substitution to save foreign exchange,
Indonesia also strove to expand non-oil products,
particularly manufactures to augment foreign exchange
revenues. A number of heavy industry projects were
identified for public investment. These included a US$2
billion aluminium smelter project, cement plants, two urea
fertilizer plants, a newsprint plant and a US$1.7 billion
olefin center (Paaum, 158).
In the early 1980s, however, increased fiscal
difficulties, aggravated by the two-stage collapse in oil
prices, coupled with the international economic downturn,
and a deterioration in the trade balance, created a
situation in which continued reliance on interventionist
and inward-looking ISI approach became increasingly
untenable (MacIntyre, 144). The economic crisis
necessitated severe reforms in the Indonesian economy.
These included a 27.6% devaluation in the rupiah to boost
non-oil exports, institution of a counter-purchasing
scheme, changes in the personal income tax rate and Value-
Added Tax. To reduce government expenditures, subsidies on
basic food items and fuel, amounting to some Rp 608
billion, were removed. Most importantly, in May 1983,
forty-eight large existing and planned public sector
230
project investments, with a value of over US$20 billion,
were shelved (Robison, Gold Rush, 3 0-3 2). For the longer
term, the policy adjustments involved a change in the
country's trade regime towards greater encouragement of
exports, improving the investment and regulatory
environment, raising the efficiency of financial
intermediation and adjusting domestic prices to reflect
economic costs. These policies were designed to increase
the competitiveness of the Indonesian products in the
world markets (Paaum, 151-158). This change in regime was
reiterated with a further devaluation of the rupiah in
•r
1986, and the institution of other measures designed to
reduce the overall levels of protection, liberalize
foreign investment laws and deregulation of the finance
sector (MacIntyre, 145; Sjahrir and Brown, 126-130).
The World Bank has attributed Indonesia's fiscal
difficulties, in part, to the proliferation of protected
high cost industries which produced expensive goods for
domestic consumers and prevented Indonesia's competition
in the world market. In particular, the World Bank, in a
1985 report on Indonesia, highlighted sectors in the
Indonesian economy which registered negative value-added,
brought about because of implicit subsidies. This suggests
that it would have been cheaper for Indonesia to have
imported the goods that were manufactured in these
231
sectors. These sectors included the majority of high
technology production, as well as the more established
import-substitution industrialization producers in
automobiles, motorcycles, televisions, other electrical
products, and various metal engineering^products, to name
but a few. These implicit subsidies amounted to some
US$156.8 million for Portland cement, US$43.6 million for
color televisions, US$74.8 million for steel billets,
Rp37.55 billion for glass, Rpl34.4 billion for motor
*
vehicles, Rp67.1 billion for cosmetics and Rpl37.6 billion
for sugar, among others (Robison, Gold Rush, 34; World
Bank, 1985, 63). Many of these industries are key elements
in the long-term strategy of creating nationally
integrated and industrially-based economy. It is precisely
in these negative value-added industries that a vast
majority of the major domestic business groups are located
and flourish under the aegises of politico-bureaucrats and
within the monopoly positions made possible by their
political patrons.
232
Summary
Thus, in their first phase of their economic
development, the ASEAN countries utilized the import-
substitution industrialization (ISI) strategy. However,
owing to the limited absorptive capacities of their
respective domestic markets, and fiscal difficulties, they
invariably adopted the export-oriented industrialization
strategy, though there was a variation in the duration of
the ISI phase among the ASEAN countries. In the case of
Indonesia, however, there has been lingering sentiments of
economic nationalism and its accompanying ISI strategy.
The industrialization strategies adopted by the ASEAN
countries highlight the role and importance of the state
in their economic development.
The belief in the export-oriented industrialization
strategy provides, theoretically, a basis for intra-ASEAN
trade. However, the development of non-complementary
parallel export sectors in the individual ASEAN countries,
has, in effect, capped the potential for intra-ASEAN
trade. A review of Tables 8 to 12 illustrates the extent
of similarity of the export sectors. Manufacturing value-
added in the Food, Beverages and Tobacco sector in all the
ASEAN countries, save Singapore, accounted for over 3 0% of
total manufacturing value-added in 1980. This sector,
233
together with that of Textiles, Clothing and Footwear,
accounted for over 50% of total manufacturing value-added
in Indonesia, Thailand and the Philippines, and some 40%
in Malaysia. There has also been a parallel development of
the Chemicals, Petroleum, Rubber and Plastic Products
sector for export. To a large extent, Singapore has been
the exception, with manufacturing value-added in the
Machinery and Appliances sector accounting for about 32.3%
of total manufacturing value-added in 1980. By 1988, the
manufacturing value-added in this sector had accounted for
some 4 6.5% of total manufacturing value-added. This non
complementarity of production in the export-sectors of the
ASEAN countries is further substantiated by an analysis of
the investment patterns of the TNCs in the ASEAN
countries.
234
SECTION IV
ASEAN Industrialization and TNCs
As the above discussion illustrates, the governments
in ASEAN have actively sought to attract foreign direct
investment (FDI) through the use of fiscal incentives,
investment guarantees and other forms of promotions.
These measures have included Indonesia's Foreign Capital
Investment Law of 1967, Malaysia's Investment Incentive
Act of 1968 and Free Trade Zone Act of 1971, Philippines's
Foreign Business Regulation Act and Investment Incentive
Act of 1967, Singapore's Economic Expansion Incentives
Act, and Thailand's Investment Promotion Act of 1977.
Furthermore, some of the ASEAN countries have
instituted guidelines designed to direct investment into
specific sectors, and have established conditions for the
entry, operations and departure of foreign businesses. The
ASEAN countries have established "Boards of Investment" or
similarly named coordinating agencies, designed as "one-
stop" government agencies to coordinate the work within
government agencies so as to promote national development
objectives through FDI. Malaysia, Singapore and Thailand
have specified promotion of exports, especially
diversification in favour of manufactured items.
Indonesia's primary goal has laid in developing effective
235
management of foreign investment, without linking foreign
investment directly to export-oriented development. The
Philippines has utilized foreign investment to advance its
economic nationalism through the development of local
enterpreneurship, industrial expansion and diversification
in favour of manufactured exports, and employment creation
(Suriyamongol, Politics, 50).
The success of the efforts of the ASEAN countries, in
export-led growth can be gleaned from Table 16. To a large
extent, the success of the strategy of export-oriented
industrialization is attributable to foreign direct
investment. As Table 16 indicates, all the ASEAN countries
have realized average annual growth rates in exports of
about 10% between 1950 and 1988. More significantly,
between 197 0 and 1980, the ASEAN countries experienced
growth rate in exports of over 25% annually. The presence
of TNCs in the ASEAN countries are equally significant.
For example, in Malaysia, by 1971, foreign-controlled
enterprises accounted for 80% cent of limited companies in
mining, 62% in manufacturing and 58% in construction.
Furthermore, their contributions to the growth in output
between 1968 and 1971 amounted to some 21% of GDP, and
about 67% of manufacturing. By 1986, it has been estimated
that TNCs had invested some US$8.2 billion in the
236
TABLE 16
AVERAGE ANNUAL GROWTH RATES OF EXPORTS
Indonesia Malaysia Philippines Singapore Thailand
1950-1988 11. 6 9.9 9.2 11. 2 11. 5
1950-1960 - 1.1 0.6 4.5 - 0.1 1.5
1960-1970 1.7 4.3 7.5 3.3 5.9
1970-1980 35.9 24.2 17.5 28.2 24.7
1980-1988 - 4.9 6.1 0.9 6.8 9.7
1981-1982 -11.3 2 . 2 -12. 3 - 0.9 - 1.3
1982-1983 - 5.3 17.5 - 0.3 5.0 - 8.3
1983-1984 3.5 17 .4 6.3 10.4 16.4
1984-1985 -15.1 - 6.9 -14. 6 - 5.4 - 3.9
1985-1986 -20.3 -10.9 6.6 - 1.4 22.9
1986-1987 15.7 30.4 14.9 27.5 31.9
1987-1988 12 .1 17.7 26.4 37 . 0 34.9
Source: Handbook of International Trade and Development
Statistics, 1988
237
Malaysian economy (Lim and Pang, 2 0). Malaysia's success
in encouraging foreign direct investment is reflected in
Table 17.
Similarly, Singapore has strove diligently to attract
foreign investment through liberal incentives, the absence
of restrictions or controls on the entry and operation of
TNCs, a pattern of consistency and the promotion of
political and economic stability. The sum total of these
measures has made it one of the most attractive investment
centers in the world (Chia, Foreign Trade, 281). The
results of enthuasistic encouragement of FDI is displayed
in Table 18.
Foreign direct investment has accounted for, on
average, over 75% of total investment in Singapore between
1980 and 1988. The United States and, after 1985, Japan,
as is the case with the other ASEAN countries, are the
main sources of foreign investment in Singapore, with the
former accounting for over 35% of annual foreign
investment inflows. It is estimated that foreign
investment stock in Singapore, amounted to some US$11.4
billion by 1986 (Lim and Pang: 20). This is much the same
for the Philippines, Thailand and Indonesia as shown in
Tables 19, 2 0 and 21, respectively. Furthermore, as these
tables indicate, Japan and the United States are major
sources of foreign direct investment in the ASEAN
238
TABLE 17
INFLOW OF FOREIGN DIRECT INVESTMENT MALAYSIA
BY COUNTRY OF ORIGIN (1982-1987)a
U.S. JAPAN EC U.K. WEST
GERMANY
TOTAL
1982 22.9
0.044b
136.9
0.264
113.0
0.218
80.2
0.154
22 . 7
0.044
519. 0
1983 22 .1
0. 044
37.8
0.12 7
78.9
0.266
70. 3
0.237
5.3
0.018
269. 3
1984 21.3
0.077
67.3
0.244
51.1
0.186
9.3
0.034
9.2
0.033
275. 4
1985 36.8
0. 113
81.7
0.252
28. 8
0. 089
10.7
0.033
2 . 6
0.008
324.9
1986 17.1
0.033
58. 1
0.111
223.9
0.427
19. 1
0.036
1.4
0. 003
524.5
1987 61. 3
0. 082
230.8
0.308
64.5
0.086
26.1
0. 035
10. 1
0. 013
750. 0
a. Millions of Malaysian Ringits
b. Ratio of investment to total foreign investment
Source: Malaysian Industrial Development Auhtority
(various years)
239
TABLE 18
INVESTMENT COMMITMENTS BY COUNTRY OF ORIGIN
SINGAPORE (1980-1988)a
1980 1981 1982 1983 1984 1985 1986 1987 1988
U.S. 505.7 674 .4 533.3 571.7 805.9 427.3 443 .4 543.5 594.7
35.8b 36.2 31.3 32.2 44.1 38.2 30.7 31.2 29.6
Japan 135.3 212.1 73.7 166.6 166.6 244.1 492.8 601.1 693.2
9.6 11.4 4.3 9.4 9.1 27.8 34.2 34.5 34.4
EC 269.9 166.3 386.9 338 .8 318.9 180.9 204.8 241.0 345.1
19.1 8.9 22.7 19.8 17.4 16.1 14.2 13.8 17.1
U.K 129.5 83 .1 283.1 207.5 186.6 69.4 93.4 42.4 56 .6
9.2 4.5 16.6 11.7 10.2 6.2 6.5 2.4 2.8
GER 69. 2 , 11.5 31.4 12.8 14.3 20.1 16.7 90.3 46.7
4.9 0.6 1.8 0.7 0.7 1.8 1.2 5.2 2.3
TOTAL
FDI 1189 1221 1163 1269 1334 888 1189 1448 1667
84.1 65.6 68.2 71.5 73.0 79.3 82.4 83.1 82.7
TOTAL
1413 1863 1705 1775 1828 1120 1443 1743 2015
a. Millions of Singapore Dollars
b. Percentage of Total Investments
Source: Economic Survey of Singapore, 1988
240
TABLE 19
INFLOW OF FOREIGN DIRECT INVESTMENT TO THE PHILIPPINES
BY COUNTRY OF ORIGIN (1980-1987)a
U.S. JAPAN EC U.K. WEST
GERMANY
TOTAL
1980 283 . 4 336.1 758.9 137. 2 213. 0 1775.7
0.160® 0.206 0.427 0. 077 0.120
1981 495.9 225.5 654. 1 295.1 35.1 2092.1
0.237 0.122 0.313 0.141 0.017
1982 1031.7 117.1 360.2 121.8 120. 5 2182.7
0.473 0.054 0.165 0. 056 0.055
1983 2028.9 56.4 188.1 60.1 64.6 2977.8
0. 681 0.019 0.063 0.020 0.022
1984 1708.8 568. 1 618.7 33 .9 75. 1 3920.5
0.436 0.145 0.158 0.009 0. 019
1985 1087.4 485. 3 528.1 354.9 17.5 2449.6
0.444 0.198 0.216 0.145 0. 007
1986 457.5 454.5 171. 6 133.3 8.7 1593 . 8
0.287 0.285 0.108 0.084 0. 005
1987 739.8 591. 3 481. 6 210.3 14.4 3427.3
0.216 0.173 0. 141 0.061 0. 004
a. Millions of pesos
b. Ratio of investment to total foreign investment
Source: Board of Investment of the Philippines
(various years)
241
TABLE 2 0
NET INFLOW OF FOREIGN DIRECT INVESTMENT IN THAILAND
BY COUNTRY OF ORIGIN (1978-1987)a
U.S. JAPAN EC U.K. WEST
GERMANY
TOTAL
1978 506.2 687.7 225.9 65.6
1
t o
H
•
1428.8
0 . 354 0.481 0.158 0.046
—
1979 224.5 245.9 288. 8 103.7 184 . 7 1047.7
0.214 0.235 0.276 0. 099 0.176
1980 730. 3 902 .5 532 . 7 82.5 261.8 3816.0
0.191 0.237 0.14 0 0.022 0.069
1981 2395.0 1405.2 746.1 334.8 179.1 6363.2
0.376 0.221 0.117 0.053 0.028
1982 843.5 1016.5 1492.5 182.1 182.2 4338.6
0.194 0.234 0.344 0. 042 0.042
1983 1252.9 2431.8 2112 . 0 793 . 4 236.3 8191.9
0.153 0.297 0.258 0.097 0.029
1984 3731.6 2588.1 329.0 257 . 1 18.2 9624.3
0.388 0.269 0.034 0.027 0. 002
1985 2370.5 1533.7 399.1 121. 6 166. 3 4379.2
0.541 0.350 0.091 0.028 0. 038
1986 1293.3 3049.0 517. 6 245.1 160.3 6880.2
0.188 0.443 0.075 0.036 0. 023
1987 791. 3 3268.7 964 . 6 328.9 448 . 1 4711.5
0.168 0.694 0.204 0. 070 0. 095
a. Millions of Baht
b. Ratio of investment to total foreign investment
Source: Bank of Thailand (various years)
242
TABLE 21
INVESTMENT COMMITMENTS BY COUNTRY OF ORIGIN
INDONESIA (1975-1989)
U.S. JAPAN U.K. W. GERMANY TOTAL
1975 42 .6 1037.4 3.7 9.0 3535.3
0.024a 0.594 0.002 0.005
1976 15.7 81.4 11. 3 14 .0 1746.2
0.034 0.179 0.025 0.031
1977 27.0 104.1 7.8 6.5 608.6
0.044 0.171 0.013 0.011
1978 22.0 162.2 4.9 1.4 397.8
0.055 0.408 0.012 0.004
1979 49.4 1033 .7 45.3 3.9 1827.1
0.027 0.565 0.025 0.002
1980 136.9 72.7 4.8 23.4 875.5
0.156 0.083 0.006 0.027
1981 16.7 219.9 14.9 15.3 1171.3
0.014 0.188 0.013 0.013
1982 80. 3 602.4 163.6 52.3 1919.6
0.042 0.314 0.085 0.027
1983 588.2 548.4 73.1 109.5 2882.2
0.204 0.190 0.025 0.038
1984 94.8 112.1 13.9 17.0 1107.1
0.086 0.101 0.013 0.015
1985 141.4 127.1 77.1 65.5 859.0
0.165 0.148 0.089 0.076
1986 153.8 328.9 124.4 16.5 826.2
0.186 0.398 0.056 0.020
1987 72.6 531.8 12.7 330.6 1457.1
0.050 0.365 0.009 0.227
1988 671.9 247.0 120.9 955.9 4434.5
0.152 0.056 0.027 0.216
1989 348.0 768.7 43.4 6.6 4718.8
0.074 0.163 0.009 0.001
a"! Ratio of investment to total foreign investment
Source: Bank of Indonesia (various years)
243
countries.
Tables 22 and 2 3 further demonstrate the overall
success of the ASEAN countries in attracting foreign
direct investment. Table 23 shows the foreign investment
flows into the ASEAN countries over the period for 12
years, from 1968 to 1980. Japan and the United States are
major sources of foreign investment in the ASEAN region
and, with the exception of Malaysia, foreign investment
inflows from these countries account for over 45% of total
foreign investment. Furthermore, between 1951 and 1981,
Japanese foreign direct investment in the ASEAN countries
accounted for some 21.7% of total Japanese foreign direct
investment, which ranked second only to the 27.1% of total
Japanese foreign direct investment in North America
(Saravanamuttu, Japanese, 140). Although the United States
accounts for a large stock of foreign assets in the ASEAN
countries, this relationship is asymmetrical in that the
ASEAN countries account for only about 3% of the stock of
total United States direct investment in 1977, and also
about 3% of U.S. direct investment in 1982 and 1983
(Suriyamongol, Politics, 136) .
244
TABLE 22
AVERAGE ANNUAL NET FOREIGN DIRECT INVESTMENT
FLOWS (1975-1986)
Average
1975-1980
Average
1981-1985 Annual Flows
Amta Percent Amt Percent 1984 1985 1986
Singapore 502 25 1130 23 884 974 673
Indonesia 290 14 229 5 226 272 259
Malaysia 524 26 1083 22 797 694 530
Philippines 74 4 58 1 9 -11 127
Thailand 85 4 280 6 404 161 264
a. US Millions of Dollars
Source: UNCTAD Handbook of International Trade and
Development Statistics, 1987 Supplement.
245
TABLE 23
FOREIGN INVESTMENT FLOWS INTO ASEAN
(BY COUNTRY OF ORIGIN)a
Japan United
States
United
Kingdom
Germany
Indonesia 1593.4 504 .8 83 .2 105.2
1968-1981 33. 7° 10.7 1.8 2.2
1951-1988 9523.0 — — —
Malaysia 170. 3 74.1 161.4 19.5
1968-1979 18.5 8.1 17.6 2.0
1951-1988 1597.0
— — —
Philippines 218 . 8 289.4 78.7 38.8
1968-1980 22.5 29.8 8.1 4.0
Singapore 1129.8 1177.6
— —
1970-1981 30.1 31.4
- -
1951-1988 3471.0 — - —
Thailand 286.7 318. 6 57.8 33.2
1970-1980 29.3 32. 6 5.9 3.4
1951-1988 1499.0
i
a. U.S. Millions of Dollars j
b. Percentage of Total Foreign Investment j
Source: Linsey, 233
Lint and Pang, 3 3
246
More importantly, the overall investment patterns of
the major investing countries do not complement the trade
structure of the ASEAN countries. Instead, the U.S.
i
I
investment patterns, for example, reflect and complement
the strategies of the North American TNCs. These
strategies have continued to promote investment in raw
material extraction for export and import-substituing
industries. For example, in Indonesia, the estimated
investment in petroleum and mining sectors during 1971
and 198 0 amounted to over 50% as compared to the world
average of 11% to 16% (Pangestu, 3 07). This pattern of
investment is further illustrated in Table 24 which
juxtaposes the sectoral breakdown of foreign investment
I
flows into the ASEAN region with those of the world in j
jl971 and 1980. Again, in Indonesia, in 1980, 82% of total {
I
foreign investment was channelled into the mining and I
i
petroleum industries, compared to the world average of J
16.2%. This represents a nearly twofold increase over
1971. Similarly, 18.6% of the Malaysian foreign investment
inflows was devoted to agriculture, forestry and
fisheries, in 1980, as compared to a world average of
-0.1% and a 1971 Malaysian average of 8.4%. In
Manufacturing, 6.9% and 29% of foreign investments was
channeled into petroleum and coal industries, in Malaysia
and Singapore, respectively, which is again, above the
247
TABLE 24
AVERAGE ESTIMATED SECTORAL BREAKDOWN OF
FOREIGN INVESTMENT IN ASEAN, 1980
(In percentages)
1971 1980
Indonesia Malaysia Philippines Singapore Thailand Indonesia Malaysia Philippines Singapor
Agriculture, Forestry 7.9 8.4 0.1 0.1 2.4 18.6 1.1
and Fishery
Mining and Petroiem 47.6 1.7 4.0
-
1.6 82.0 11.9 14.0
Mining 9.1 1.7 2.0 1.6 3.0 n.a. 3.7
Petroleua 38.5 n.a 2.0
-
79.0 n.a. 10.3
Manufacturing 14.8 6.0 16.2 12.1 2.8 13.6 29.6 52.8 64.4
Food, Beverages 4 Tobacco 2.9 1.0 4.2 0.4 0.1 0.6 3.1 7.2 1.9
Chenical Products 4.1 0,6 2.0 0.8 0.6 2.9 1.2 15.5 2.2'
Metal Products 2.0 1.1 1.1 0.6 0.0 5.6 2.0 8.8 2.7
Machinery 4 Transport - 0.2 0.6 0.6 -0.3 - 0.3 3.6 4.4
Electrical Products - 0.7 0.7 1.1 0.4 -
4.9 n.a. 13.5
Textiles 4.8 0.6 0.5 0.9 1.6 3.0 2.2 3.0 2.6
Wood 4 Pulp C.l 0.7 1.7 0.8
-
0.4 0.1 n.a. 2.7
Petroiem 4 Coal n.a n.a n.a n.a - - 6.9 2.7 29.4'
Other 0.9 0.6 4.4 G.8 0.1 1.5 8.9 14.7 4.9
Services 1.8 3.5 7.7 3.5 5.6 1.5 34.3 30.9 39.6
Banking 4 Insurance n.a n.a 3.2 n.a 1.2 n.a. 22.9 20.5 7.1'
Trade 4 Comerce 0.3 3.5 3.0 n.a 3.0 n.a. 11.2 5.1 10.8
Public Utilities, Transport
4 Coraunications 0.3
- 1.5 n.a 1.1 0.6 n.a. 1.6 8.7 (
Other 1.2 - - n.a 0.4 -
0.9 n.a. 3.7
Construction 0.1 0.2 0.1 n.a 2.9 0.3 1.3 1.1 -
Other Industries
- 4.0 - n.a - -
4.5 0.1
-
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Pangestu, 310/314.
248
world average.
Similarly, against a world average of 3.6%, 13.5% and
16.5% of foreign investments were chanelled to the
manufacture of electrical products in Singapore and
Thailand, respectively. These, once again, reflect
tremendous increases over the 1971 levels of 1.1% and
0.4%, respectively. For Thailand, in 1982, the export of
these components accounted for some 13% of manufactured
exports. There is also an increasing investment
specialization in the Philippines brought about by the
establishment of the Export Processing Zones. Exports of
electrical components accounted for some 40% of Filippino
non-traditional exports (Pangestu, 315).
In addition, the leading industries for U.S. foreign
investment world-wide in 1980 were chemicals, transport
equipment, metallurgical industries and machinery. Export
sales of these industries accounted for only 18% world
wide of sales of U.S. majority-owned foreign affiliates.
However, in the Asia-Pacific region, the share of export
sales of U.S. affiliates totalled some 57% as a result of
investments primary in oil, natural gas extraction for
export and off-shore production of electrical and
electronic equipment (Suriyamongol, Politics, 136). Table
25 illustrates specifically and poignantly the sectoral
structure of American and Japanese foreign direct
249
TABLE 25
SECTORAL STRUCTURE OF JAPANESE AND AMERICAN FOREIGN
DIRECT INVESTMENT IN ASEANa
I 'SIA M'SIA PHILNES S'PORE THAILND
UNITED STATES
All Industries1 3 1298 419 698 402 234
3929 1111 1211 2521 1282
Petroluemc 79.3 66. 3 30.8 36.8 49. 6
82.7 63.4 8.3 23.0 66.8
Manufacturing 7.9 18. 1 39.3 27.1 20.1
6.0 29.6 49.7 59.2 20.0
Trade 0.7 9.3 12 . 5 12 . 7 13.2
—
4.7 6.9 6.0 3.8
JAPAN
All Industries 2704 356 355 303 224
8673 1282 913 2571 884
Agriculture/ 4.0 4.5 5.1 0.0 1.8
Fishery 2.3 2.3 4.3 0.1 1.8
Mining 64 . 9 28.7 55.5 n.a. 2 . 2
66.5 11.5 43.4 0.1 0.6
Manufacturing 25.2 57. 6 26.2 72 . 6 76. 3
27.2 66.7 40.4 60.2 70.1
a figures are for 1976 and those in bold for 1986 for
the U.S. and 1987 for Japan.
k in millions of U.S. dollars
c percentage of total investment
Source: Wagner, 8-9.
250
investment in the ASEAN countries for 1976 and 1986, in
the case of the United States and 1987 in the case of
Japan. As the table indicates, over 60% of total American
foreign direct investment was chanelled into the petroleum
sectors of Indonesia, the Philippines and Thailand.
Similarly, over 50% of total Japanese foreign investment
was directed into the mining sectors of Indonesia and the
Philippines.
These patterns also indicate that any "complementary
association with export-oriented strategies, tended to
orient the ASEAN countries away from the region towards
the rest of the world by creating competition among the
countries in manufactured exports" (Suriyamongol,
Politics, 137). This has thus tilted the orientation of
ASEAN towards the international division of labour as
opposed to a regional division of labour. As such, the
investment patterns of the TNCs have had a tremendous
impact on intra-ASEAN trade.
Summary
The economies of the ASEAN countries are characterized
by their non-complimentary economic structures, disparate
levels of economic development, a reliance on export-
oriented industrialization and foreign direct investment.
251
The non-complementary economic structures in ASEAN is
manifested by the heavy reliance on the export of two or j
three similar primary commodities which account for over
50% of their total export earnings. This has generated a
limited absorptive capacity in the intra-ASEAN market for
the major exports of the ASEAN countries and biased trade
extra-regionally. Similarly, the varying levels of
economic development in ASEAN, and especially the low
levels of development of three of the ASEAN countries,
have meant that the bulk of intermediate and capital goods
needed for development can only be attained extra-
regionally. Furthermore, ASEAN's reliance on a strategy of
export-oriented industrialization, and the regionally
uncoordinated utilization of foreign direct investment to
achieve this objective, has led to the development of
parallel export sectors in the ASEAN countries and
competition for export markets. As such, ASEAN trade has
been geared extra-regionally and towards the international
as opposed to a regional division of labor. The
cumulative effect of these developments has limited the
goods that can be traded intra-regionally and has thus
capped the potential for any increase in intra-regionally
trade that regional economic cooperation can generate.
252
CHAPTER IV
REGRESSIONAL ANALYSIS OF ASEAN TRADE FLOWS
INTRODUCTION
The neoclassical trade theory has argued that regional
economic integration enhances inter-member trade through
import-substitution on a regional scale. As noted in
chapter 1, the successes of some of these schemes have
been documented in the works of Aitken, Balassa, Hewett,
and Pelzman, among others.
However, in the case of ASEAN, it has been shown in
chapter II that, nearly 25 years into its inception,
there has been no significant shift in the trading
patterns of the ASEAN members, nor a significant increase
in intra-regional trade. The developed economies still
remain the major trading partners of the ASEAN members.
Furthermore, as has been argued in chapter III, this lack
of increase in intra-regional trade is attributable to
several economic factors. It has been argued that the
disparate levels of economic development, non
complementarity of the economic systems, together with the
regionally uncoordinated encouragement of foreign
investments have skewed ASEAN trade extra-regionally.
This chapter thus regressionally tests the effects of
the economic factors on intra-regional trade. In
particular, this chapter will demonstrate_that although
253
income and population levels of the trading countries
affect trade flow, the investment patterns of
transnational corporation and the differing levels of
economic development of the countries in ASEAN have
affected intra and extra-ASEAN trade flows. Furthermore,
this chapter will illustrate that the economic measures
adopted in the Bali Summit in 1976 to encourage intra-
regional trade have had little or no effect in altering
ASEAN trading patterns.
Finally, this chapter will demonstrate that not all
the variation in the trade flows can be accounted for by
the economic variables, even with the inclusion of the
investment levels of the transnational corporations and
different levels of economic development of the ASEAN
countries. This argues for the importance of non-economic
variables whose adequate quantification remains without
the scope of this thesis. Nevertheless, these socio
political varaibles, such as historical animoisty and
cultural heterogeneity remain important in shaping the
political will of member states on the pace and levels of
regional economic cooperation.
254
SECTION I
THE MODEL
As it has been discussed in chapter 1, and utilized
in the works of Balassa et al., the trade-enhancing
qualities of regional integration schemes has been
succintly captured by and quantified through the gravity
equation, the basic form of which asserts;
X±j = A.P' Y^.Yj^.N^.Nj^.Djj^r ,ej_j
where
j = value of exports from country i to country j.
A = constant
Y^Yj = incomes in the exporting and importing
countries
NiNj = population in the exporting and importing
countries, respectively,
j = distance between countries i and j.
e^j = error term.
The income and population variables reflect the
preference and endowments of the trading countries.
Economic theory asserts that the larger the incomes of the
countries, the greater would be their effective demand,
and consequently their trade flows. Therefore, it is
expected that income coefficients would be positive. The
255
populations of the importing and exporting countries are
generally used as proxies for the geographical sizes of
the countries, and consequently as a guage of their
natural endownments.
However, it has been argued that the population
variable would have an ambiguous effect on the intra-
regional trade flows. On the one hand, a large population
would suggest a country endowed with a great amount of
natural resources, and thus more likely to be self-reliant
and less likely to participate in international trade. On
the other hand, a large population and country would more
likely encourage a division of labour and specialization
which would thus enhance trade (Brada and Mendez, 590).
Learner and Stern, in an apparent attempt to reconcile
this ambiguity, have argued that population coefficient
for the exporting countries would be negative, while that
of the importing countries would be positive (152-153).
The distance variable is generally used as a proxy for
trade resistance. Usually measured by the actual nautical
distance between the commercial centers of the countries,
the distance variable subsumes commercial policies,
transportation costs and a dearth of information on
foreign markets, culture or business opportunities. The
coefficient of this variable is thus expected to be
negative, based on the premise that the farther the
256
distance between countries, the greater will be the lack
of information and the higher will be the transportation
costs, and hence the greater will be the impediments to
trade. It has been emprically demonstrated that transport
costs have had a crucial impact on bilateral trade flows
(Geran and Prewo, 67-74). However, Langhammer in a study
of industrialized countries' exports to the Philippines,
has found that transport costs differentials between the
developed economies has not significantly influenced
exports to the Philippines. He argues that other factors,
such as changes in exchange rates, marketing efforts and
relative competitiveness of these countries are more
important in explaining trade flows (Langhammer, Trade,
379-389). This finding thus adds credence to the argument
that the investment levels of transnational corporations
may be more important than transport costs in explaining
trade flows.
The importance of these variables as determinants of
trade flows have been substantianted in several studies.
Aitken, for instance, in a 17 year cross-sectional study
of European trade, found, using a slightly modified form
of the gravity model that incorporated preference area and
the effect of neighbouring countries, that between 77%-88%
of the variation in trade were accounted for by variations
in these variables (881-892).
257
However, this chapter utilizes a modified form of the
grativy equation to examine the effects of the formation
of ASEAN on member countries' trade flows. In chapter 1,
it has been argued that the basic form of the gravity
equation has failed to recognise the perculiar
circumstances of regional integration schemes involving
developing countries, characterized primarily by disparate
levels of economic development and the presence of TNCs in
the domestic economies. It is asserted, following the
discussions in chapter III, that the disparate levels of
economic development not only captures the different
levels of economic activity, but also, as it will be
recalled, the different levels of rational decision-making
and nature of the regimes. Similarly, as chapter II has
illustrated, investments by transnational corporations
have been predominant in the industrialization strategies
of the ASEAN countries. More importantly, these
investments have been chanelled to specific sectors,
primarily the extractive industries. Given that the bulk
of the ASEAN countries' exports to the developed economies
are raw materials, this thus provides reason to explore
the effect of the investment levels of transnational
corporations on ASEAN trade flows.
258
Thus, the modified form of the gravity equation
used tests not only the effects of population and income
of the exporting and importing countries on regional
trade, but also the effects of the different levels of
economic development and foreign investment levels of the
developed economies on intra-ASEAN trade. Specifically,
the equation assumes two forms, namely;
= A.YiP^YjPa.N: i ^.NjP\Lj^.Gif 3 &.GjP 7.Dijl ^.Pij^.Tpio.eij
where
Xj^ = imports of country i from country j7
Y^Yj = incomes of exporting and importing countries
respectively,
N^Nj = population of exporting and importing countries
L^j = difference in levels of economic development of
exporting and importing countries.
G^Gj = economic growth rates of exporting and importing
countries
D^j = ratio of import values of country i to export
values of country j
P^j = dummy variable with values of 1 if one of
countries is not in ASEAN and 2 if they are both
in ASEAN.
T = time trend
e^j = error term
where
X^j = exports of country i to country j
A = constant
Y^Yj= income of exporting and importing countries
N^Nj= population of the exporting and importing
countries
L^j = difference in levels of economic development of
the exporting and importing countries.
G^Gj= growth rates of the exporting and importing
countries
D^j = ratio of import values of country i to export
values of country j
I^j = investment levels of importing countries
P^j = dummy variable with values if 1 if countries are
in different preference areas and 2 if they are
in the same preference area.
T = time trend
e . ; - t = error term.
260
The equations were tested for all commodities groups
(ASITC) and also for 7 of the ten broad commodity groups,
corresponding to food and live animals (SITC 0), raw
materials (SITC 2), fuels (SITC 3), chemicals (SITC 5),
basic manufactures (SITC 6), machinery and transport
equipment (SITC 7) and other manufactures (SITC 8)8. The
equations were tested using multiple regression by the
ordinary least squares method (OLS)9, on pooled trade data
between 19 69 and 1986, for some 63210 cases for the import
equation. These represented imports between the ASEAN
member countries and each member's imports from the
United States, Japan, Great Britian and West Germany. The
regression equation for exports was tested against 2 34
cases which represented only ASEAN member country exports
to the United States, Japan, Great Britian and West
Germany11.
In operationalizing the regression variables, per
capita Gross National Product (GNP) was used as proxies
for the income levels of the importing and exporting
countries, and the growth rates of Gross Domestic Product
(GDP) as proxies for the economic growth rates of the
importing and exporting countries. The total populations
of the importing and exporting countries were used as
proxies for the size of the countries. The absolute
difference between the per capita GNPs of the importing
261
and exporting countries was used as proxies to capture the
difference in levels of economic development. Since all
import values are measured with cost, insurance and
freight (cif), and all export values are measured free on
board (fob), and given that the physical amount of country
i's imports from country j must be the same as that of
country j's export to country i, then the difference in
dollar values should represent the cost of insurance,
freight and other impediments to trade. Thus, the ratios
of import values of country i to export values of country
j were used as proxies for the impediments to trade. It is
argued that this ratio would serve as a more reliable
gauge for transportation costs than the actual nautical
distance between countries which would remain the same
regardless of the direction of bilateral trade.
262
SECTION II
THE EMPIRICAL RESULTS
A. Regression equation for Imports
The results of the regression equation on imports for
all commodities (ASITC) and the seven broad commodity
groups are given in Table 26. All the coefficients are
significant at the 0.01 level and most are significant
beyond the 0.001 level.
From the regression results, it is evident that
population and income levels of the trading countries
affect the levels of intra-regional trade, as dictated by
the neoclassical trade theory. However, the results also
substantiate the effects of different levels of economic
development on intra-regional trade and the extra-regional
bias of ASEAN trade. The results further illustrate that
over the period 1969 to 1986, intra-ASEAN imports have
generally decreased.
Specifically, the regression results suggest that
across all the broad commodity groups and except for all
commodities (ASITC), fuels (SITC 3) and basic manufactures
(SITC 6), the population level of the importing country is
an important determinant of imports. The coefficients are
negative, implying that the smaller the population and
hence size of the country, the larger would be the levels
of imports. This gives credence to the view, at least in
263
TABLE 2 6
EMPIRICAL RESULTS OF REGRESSION EQUATIONS
IMPORT DATA (1969-1986)
LnASITC = -9.5560 + 0.3802lnLi- t - 0.45671nT + 0.406111^
(0.3240)6 (0.0340) J (0.1729) (0.0303)
+ 0.09281nYi + 0.13041nNi + lne^
(0.0293) (0.0301) J
R2 = 0.58
LnSITCO = -14.6718 + 0.68451nNi + 0.14581nGi + 0.34681111^
(1.3558) - (0.0741) (0.0480) (0.0687) J
+ 3.395611^.: - 0.5229lnT - 0.393911^ - 0. 1069lnN-i
(0.4894) J (0.1173) (0.1181) (0.0455) J
+ lne
il
R
2 _
0.18
LnSITC2 = -10.6659 + 0.7576lnLi^ + 0.73291nNi
(1.1804) (0.0651) J (0.0684)
+ 3.46711nPi- - 0.86951nY.! - 0.3685lnN-j
(0.4686) J (0.12107 (0.0831)
+ 0.13791nGj + 0. 28891nY£ + lne —
(0.0454) (0.1118) J
R2 = 0.3 3
264
LnSITC3 = 5.037 0 f —\ 0.62891nN± - 0.5889lnY,j + 0.4866lnDii
(0.8088)1^ (0.0632) (0.0785)J (0.1073) J
+ 0.1738lnGi + lne.^
(0.0597) J
R2 = 0.2 7
LnSITC5 = - 2.2281 - 2.05321nPii + O.SlSOlnYj^
(0.6251) (0.1882) J (0.0601)
+ 0.20261riJ ^ - 0.37171nNi - 0.483911^ +
(0.0402) J (0.0468) (0.0645j
+ lnei:j
R2 = 0.76
LnSITC6 = -5.5461 - 2.56791nP-. + 0.32831111^.:
(0.3373) (0.1784) J (0.0383) J
+ 0.17511nG j + lne^
(0.0356) J
R2 = 0.55
265
LnSITC7 = -7.1660 - 2.18441nPii + 0.48231nLi^ - 0.57281nT
(1.0036) (0.3542) (0.0482) J (0.0859)
+ 0.611311-^ + 0.35621nDi^ - 0.14801nN- + lne^
(0.0873) (0.0673) J (0.0326)J J
R2 = 0.79
LnSITC8 = -7.5383 - 1.3229111?^-: + 0.31371nLii - 0.46071nT
(0.4591) (0.2132) J (0.0451) J (0.0680)
+ 0.56411nYi + 0.25911nDii - 0.1102lnN^
(0.0679) (0.0726) J (0.0603)J
+ 0.08201nGi + lne-^
(0.0286) J
R2 = 0.71
266
the case of ASEAN, that larger countries tend to be more
self-sufficient and this may have captured the import-
substitution policies of the member countries. Similarly,
the results suggest that population levels of the
exporting countries are important determinants of levels
of ASEAN imports for all commodities (ASITC), for food and
live animals (SITC 0), raw materials (SITC 2) and fuels
(SITC 3). The coefficients are positive for the former
three, implying that the larger the population levels, and
thus country size, the greater would be the levels of
imports. This suggests the limited absorptive capacities
of the ASEAN economies for these products. The negative
coefficient for fuels (SITC 3) substantiates the oil
dependency of the ASEAN countries.
The regression results also suggest that the economic
growth rates of the exporting countries are important
determinants of ASEAN member countries' imports for all
commodity groups except chemicals (SITC 5) and machinery
and transport equipment (SITC 7). The coefficients are
positive perhaps reflecting the export-oriented growth
policies of the ASEAN countries.
Furthermore, the regression results suggest that the
levels of income of the exporting countries are important
determinants of the imports of the ASEAN countries, for
all commodity groups except for fuels (SITC 3) and basic
267
manufactures (SITC 6). The coefficients are positive,
except for food and live animals (SITC 0), suggesting that
higher levels of income of the exporting countries are
associated with greater import levels of the ASEAN member
countries. This perhaps provides the first indication of
the effect of differing levels of income on trade flows.
If it is borne in mind that Singapore's income level is
closer to the developed countries than to the other ASEAN
members, this result provides the first indication that
the levels of economic development, as reflected by
differing income levels, affect trade flows.
The effect of different levels of economic development
on trade flows is captured more succinctly with the use of
the difference in per capita GNP. The regression results
illustrate the importance of the difference in economic
develoment on ASEAN imports for all commodity groups
except fuels (SITC 3). Furthermore, in the imports of all
commodities (ASITC), 48% of the variation in import flows
is attributable to variation in the levels of economic
development. The coefficients are positive implying that
ASEAN import levels are highest when the levels of
economic development between the trading countries are
greatest. As such, this suggests that ASEAN imports are
from the developed countries, and generally biased extra-
regionally.
268
This bias of ASEAN member imports towards the
developed economies is also captured through the use of
the dummy variable for preference area. Its importance as
a determinant of ASEAN member countries' imports is seen
by its presence in all categories of goods, except all
commodities (ASITC) and fuels (SITC 3). However, more
significantly, the coefficients for the preference
variable is negative for all commodities, for chemicals
(SITC 5), basic manufactures (SITC 6), machinery and
transport equipment (SITC 7) and other manufactures
(SITC 8), but positive for food and live animals (SITC 0)
and raw materials (SITC 2). In addition, about 67% of the
variation in imports of chemicals, 48% of the variation in
imports of basic manufactures, 64% of that of machinery
and transport equipment, and 59% of that of other
manufactures can be explained by variation in the
preference area. Positive coefficients generally are used
as indications that trade has been biased intra-regionally
and thus as a measure of success for regional economic
integration. Negative coefficients in the case of ASEAN as
such, indicates that ASEAN member countries' imports of
these commodities are biased extra-regionally and thus
regional economic integration has not spurred intra-
regional trade in these commodities. The coefficients for
food and live animals (SITC 0), raw materials (SITC 2) and
269
fuels are however positive, which indicates ASEAN member
countries' import of these commodities are biased intra-
regionally. It is most noteworthy that the distance
variable seems to be important in explaining only the
levels of ASEAN member countries' imports, of fuels
(SITC 3), machinery and transport equipment (SITC 7) and
other manufactures (SITC 8). However, once again, the
positive coefficents attained runs contrary to the
expectations of the neoclassical trade theory which
predict negative coefficients to capture the trade
discouraging tendencies of greater distances.
Finally, the coefficient of determination for the
regression equation of imports for all commodities, for
chemicals (SITC 5) and for all manufactures, namely basic
manufactures (SITC 6), machinery and transport equipment
(SITC 7) and other manufactures (SITC 8) are high,
amounting to 0.58, 0.76, 0.55, 0.79 and 0.71,
respectively, with all the equations significant at the
0.001 level.
270
B. Regression Equation for Exports
The results of regression equations for ASEAN exports
to the developed economies are given in Table 27. All
coefficients are significant at the 0.05 level, with many
significant at the 0.001 level. All regression equations
are significant to at least the 0.01 level. As with those
from the import data, the regression results reaffirm the
importance of income and population levels on ASEAN
exports. However, the results attest to the effects of
foreign investment levels and differing economic
development levels on ASEAN export and reaffirms the
non-complimentary nature of the ASEAN economies.
Specifically, as with regression results on imports,
the results suggest that the size of the importing
country, as proxied by the population of the country, is
important in explaining ASEAN member countries' exports to
the developed economies for all categories of goods. The
coefficients are however, positive, indicating that higher
levels of exports are associated with larger countries
which is contrary to that suggested by coefficients in the
import equations. This perhaps captures the export-
oriented trade strategies of the ASEAN countries.
The regression results also show the size of the
exporting countries, as proxied through the levels of
271
LnASITC =
R2 = 0.70
LnSITCO =
R2 = 0.47
LnSITC2 =
TABLE 27
EMPIRICAL RESULTS OF REGRESSION EQUATION
ON EXPORT DATA (1969-1986)
-14.6596 + 1.25761nN_t + 0.15141nG-i + 0.14971x11^
(1.1207) (0.0896) (0.03 2 3) (0.0371) J
- 0.70001110^ - 0.11201nGi + lne±i
(0.2304) J (0.0450) J
-14.5490 + 1.15971nN-i + 0.12701nNi + 0.14041nG_:
(0.9248) (0.0974) (0.0358) (0.0421)J
+ lnei;j
-6.9037 + 0.5143 InN-; - 0.58401nDi^ + 0.22201x11 —
(1.3720) (0.1310) (0.1259) J (0.0528) J
f 0. 17561nG-i - 0.17301nYi + lne^
(0.0460) (0.0640) J
R2 = 0.42
272
LnSITC3 = - 6.8449 + 2.97001nNi - 3.3369lnY^
(3.8490) (0.3235) (0.6937)J
+ 1. 5662InT + lne^
(0.6462) J
R2 = 0.48
LnSITC5 = -20.2000 + 1.44151nN-j + 1.32861nNi +
(2.4164) (0.1744) (0.1942)
- 2. 0894lnY-i + 0.16591nG.i + lne±i
( 0.3859) ( 0.0649) J
R2 = 0.37
LnSITC6 = -11.5830 + 0.70991nN- + 0.24291nNi +
(1.2094) (0.1099) (0.0447
- 0.46001nDj^ + lne^^
(0.1567) J J
0.33461nNi
(0.6462)
1.72361nYi
(0.3117)
0.2 3 03lnlj^
(0.0447) J
R2 = 0.50
273
LnSITC7 = -2.3108 + 1.25611nN.i - 1.36431nNi + 0.55441nLi- :
(3.3711) (0.1341) (0.2109) (0.1928) J
- 0.16311nGi - 1.533511^ + 1.6333InT + lne^
(0.0521) (0.3339) (0.4154)
R2 = 0.54
LnSITC8 = -13.6151 + 0.6100lnN_j + 0.88831111,.;-. - 0.1554lnNi
(0.9401) (0.1033) (0.1473) J (0.0454)
- 0.41901nT - 0.07971nGi + lne...
(0.1444) (0.0388) J
R2 = 0.42
274
to be important an determinant of ASEAN exports
for all categories of goods except all commodities (ASITC)
and raw materials (SITC 2). The coefficients are positive
except for machinery and transport equipment (SITC 7) and
other manufactures (SITC 8). The larger ASEAN countries
thus appear to be rich in foodstuffs, fuels and chemicals
but, given the limited absoprtive capacities of the
domestic economies, rely on the developed markets. The
inverse relationship between country size and exports of
manufactured goods may be capturing Singapore's economic
development level and export patterns vis-a-vis her ASEAN
neighbours.
Furthermore, the regression results show that the
income levels of the developed countries are only an
important determinant for ASEAN exports of chemicals
(SITC 5). The coefficient is negative which suggest that
as income levels of the developed countries increase,
ASEAN exports of these commodities to them fall.
Similarly, the regression results also show that the
income levels of the ASEAN countries are important
determinants of their of exports raw materials (SITC 2)
and chemicals (SITC 5). The coefficient is negative for
the former, suggesting that as income levels in the ASEAN
country rise, presumably due to economic growth, exports
of these commodities will fall as more of these
275
commodities would be needed in the domestic economy. It is
however positive for chemicals.
The effect of growth rate of the ASEAN countries on
their exports is better reflected by an examination of
the effect of growth of GDP of the developed countries on
ASEAN exports. The regression results demonstrate that the
growth rate of the developed economies affect ASEAN
exports of all categories of goods except all commodities
(ASITC), fuels (SITC 3) and basic manufactures (SITC 6).
The coefficients are positive for food and live animals
(SITC 0), raw materials (SITC 2) and chemicals (SITC 5)
but negative for machinery and transport equipment (SITC
7) and other manufactures (SITC 8). This would suggest
that high economic growth rates in the developed economies
spur greater demand for ASEAN exports food, raw materials
and chemicals. This may in turn reflect the levels of
economic development of the ASEAN countries and the
limited absoptive capacity of the ASEAN economies for
primary produce as opposed to manufactured products. The
negative coefficients for machinery and transport
equipment (SITC 7) and other manufactures suggest that in
periods of high growth in the developed countries, ASEAN
exports of these commodities face greater competition from
domestic sources.
276
Surprisingly, the regression results indicate that,
overall, the growth rates of the ASEAN economies are not
important determinants of ASEAN member countries' exports.
This may suggest the asymmetrical trade relationships
between ASEAN and the developed economies wherein the
levels of ASEAN exports do not depend on the domestic
growth rates but the growth rates of the developed
economies, although the developed economies represent an
important source of imports for ASEAN.
Furthermore, the regression results also suggest that
the levels of investment of the developed economies in
ASEAN are important in explaining the export patterns of
ASEAN member countries. The investment levels are
important determinants of the exports of all commodities
(ASITC), raw materials (SITC 2), and basic manufactures
(SITC 6). The coefficients are positive for all the
commodity groups except other manufactures (SITC 8). Since
this implies that greater levels of investment are
accompanied by greater levels of exports of these
commodities, the view that TNC investments in ASEAN tend
to bias trade extra-regionally is somewhat substantiated.
In addition, the regression results suggest that the
difference in levels of economic development between ASEAN
and the developed economies are important in explaining,
in part, the ASEAN member countries' exports of machinery
277
and transport equipment (SITC 7) and other manufactures
(SITC 8) to the developed economies. The coefficients are ,
i
positive which suggest that greater disparaties in levels
of development would lead to greater exports of these
commodities to the developed countries.
Finally, the positive coefficients for the time trend
for fuels (SITC 3) and machinery and transport equipment
(SITC 7) suggest that over the period, ASEAN exports of
these commodities to the developed economies have
increased.
278
C. Regression Results for Two period Import Equation
The results of the regression equation tested on
import data between 1969 and 1975, and 1976 and 1986 are
given in Table 28. All coefficients are significant at the
0.05 level and most are significant at the 0.0001 level.
All regression equations are significant at the 0.01
level. Based on the results, several observations are
suggested.
The first observation is the appearance of the growth
rate of the exporting countries as a determinant of the
level of ASEAN member country imports after 1975. This
perhaps attests to the asymmetrical trade relation between
ASEAN and the more developed economies.
Secondly, the regression results suggest that
preference area is an important variable in determining
levels of imports between 1969 and 1975, and 1976 and
1986, for all categories of goods except for all
commodities (ASITC), and for food and live animals
(SITC 0). In the case of all commodities, the importance
of preference area as a determinant of the level of ASEAN
imports is apparently eliminated after 197 6. In the case
of food and live animals (SITC 0), on the other hand,
preference area appears an a determinant of the level of
imports after 1976. A comparision with the regression
results in Table 2 6 however shows there to be no
279
TABLE 28
EMPIRICAL RESULTS FOR REGRESSION EQUATION
ON TWO PERIOD IMPORT DATA
LnASITCig6g = -5.6899 - 1.93111nPii + 0.4282lnLi^
(0.5345) (0.2888) J (0.0656)
R2 = 0.606
LnASITCig76 = -10.2861 + 0.363811- lL^- + 0.396511^
(0.4014) (0.0432) J (0.0521)
+ 0.2002 lnGj^ + 0.08741nN^ + lne^.:
(0.0370) (0.0353)
R2 = 0.578
LnSITC0ig6g = -6.5474 + 0.31131nNi
(0.7407) (0.0872)
R2 = 0.058
LnSITC0ig76 = -16.1622 + 0.7009lnN.j + 0.2427lnGi
(1.7192) (0.8630) (0.6004)
+ 0.36311nLii + 3.25581nPii + 0.40121nYi
(0.0762) J (0.5242) J (0.1257)
- 0. l3981nY.i + lnej j
( 0.0542) J
R2 = 0.220
280
LnSITC2 ]_g gg
R2 = 0.328
LnSXTC2 g —
+
+
R2 - 0.340
LnSXTC3 ^ggg
R2 = 0.388
LnSITC3^gy^
= -14.2425 + 0.87941nLii + 0.69031111^
(1.3578) (0.1200) J (0.1120)
+ 2.86281nPii - 0.40861nY • + lne^
(0.6053) J (1.5712) J
-16.7156 + 0.72051nL
(1.6134)
0.6718LnNj
(0.0828)
0.2492InYj
(0.1163)
(0.0719) 13
+ 3.0313InP
(0.4973)
+ lneij
+ 0.3 02ILnGj
ID
(0.0570)
- 0.26281nY.
(0.0796)'
-10.7226 - 1.04471nN-j + 4.455111^.:
(3.1944) (0.2059) (0.6302) J
+ 0. 66421nD^-: + 0.85851nY^ + lne^
(0.1295) J (0.1690) J
-15.03456 - 0.2476lnNi + 0.27491111^
(2.2209) (0.1130) (0.0714)
+ 0.27631nGi + 1.066511^ + 4.3897lnPii
(0.0825) (0.1535) (0.6911) J
+ 0 . 40231nD: j + lnei - i
(0.1438) J J
R2 = 0.346
281
LnSITC5196g = -2.6722 - 2.07861nPi- s + 0.759011^
(1.8981) (0.3848) (0.1077)
- 0.37011nN.! - 0.4563InY-i + lne^
(0.1220) (0.1895) J
R2 = 0.750
LnSITC5ig76 = -7.9300 + 0.47441nY± - 2.07981nPii
(0.5420) (0.0654) (0.2103) J
+ 0.23421nLj+ 0.09001nG.; - 0.08041nN-:
(0.0441) J (0.0359) (0.0323) J
+ in e±j
R2 = 0.774
LnSITC6ig6g = - 5.2602 - 2.74211nPij + 0.33751111^
(1.0056) (0.3703) J (0.0877)
+ lne^j
R^ 0.529
LnSITC6ig76 = - 7.1292 - 1.68671nPii + 0.2376lnL±i
(0.6480) (0.2502) J (0.0521) J
+ 0.27091nGi + 0.318811^ - 0.09541nN^
(0.0425) (0.0786) (0.0384)J
+ lneij
R2 = 0.595
282
LnSITC71969 —
R2 = 0.839
LnSXTCV^g^g —
R2 = 0.784
LnSITC81969 =
R2 = 0.688
LnSXTC8^9yg —
-10.7328 - 2.25721nPi- t + 1.03491nYi
(1.0391) (0.52507 (0.1803)
- 0 . 53 3 llnT + 0.24351nLi^ + O.SSSSlnD-ji
(0.1233) (0.0881) J (0.1438) J
+ lne^j
-2.6018 +
(1.9437)
+ 0.5522InYj
(0.0967)
- 0.4882lnY.
(0.1565)-
0 . 5562 lnL^-i ■
(0.0568) J
- 0.4867lnN.
(0.0998)'
- 0.1524InNj
(0.0705)
1.70751nPii
(0.4147) J
+ 0.37 361nD
(0.0758)
+ lneij
-8.2259 + 0.884 llnY j - 1.1516111?^-;
(0.9944) (0.0989) (0.4109) J
- 0.1613 lnN^ + lne •
(0.0509) J
-7.6317 + 0.52071nYi + 0. OOSSlnX^-i
(0.6553) (0.0712) (0.0476) J
- 1.12171nPii + 0.28491nDii - 0.61841nT
(0.2331) J (0.0629) J (0.1879)
+ 0.12331nGi - O.lOOOlnN^ + lne^
(0.0377) (0.3265) J
R2 = 0.760
283
difference in the signs of the coefficients in the three
periods. The coefficients are positive for food and live
animals (SITC 0), and raw materials (SITC 2), and negative
for chemicals (SITC 5), basic manufactures (SITC 6),
machinery and transport equipment (SITC 7) and other
manufactures (SITC 8). Since most of the efforts at
regional economic integration occured after 1975, this
suggests that there hasn't been any change in the trade
patterns and, by and large trade, is skewed extra-
regionally.
Finally, the regression results across both periods
attest to the importance of the difference in levels of
economic development as a determinant of the levels of
ASEAN member countries' imports for all commodities
(ASITC), raw materials (SITC 2), basic manufactures
(SITC 6) and machinery and transport equipment (SITC 7).
In the case of food and live animals (SITC 0), chemicals
(SITC 5) and other manufactures (SITC 8), the difference
in levels of economic development as determinants of
levels of import takes on importance after 1976. However,
as was the case with the results in Table 26, the
coefficients are positive, indicating that the levels of
ASEAN member countries imports are associated with greater
differences in the levels of economic development. This,
284
once again, suggests that ASEAN member countries' imports
, are biased extra-regionally.
1
CONCLUSIONS
The inability of ASEAN to generate increases in intra-
regional trade has argued for the existence of socio
political and economic impediments to regional economic
integration, as explored in chapter III. It has been
asserted that, with regards to the economic factors, the
levels of economic development of, and the investment
patterns of the TNCs in the ASEAN member countries have
skewed trade extra-regionally. The regression results have
shown that the levels of economic development are
important in explaining a large proportion of the
variation in ASEAN member countries' imports across all
commodity groups. The positive coefficients of this
variable substantiates the argument that ASEAN member
countries, given their relatively lower levels of economic
development, tend to import from the developed economies,
Singapore notwithstanding, with their higher levels of
economic development.
This extra-regional bias, in general, of ASEAN imports
is further validated by the negative coefficients of the
dummy variable for preference area, for chemicals
(SITC 5), basic manufactures (SITC 6), machinery and
transport equipment (SITC 7) and other manufactures
285
(SITC 8) , in toto of which constitutes manufactured
products. It is however positive for food and live animalsj
(SITC 0) and raw materials (SITC 2), indicating that ASEAN
member countries' imports of these commodities, which
constitute primary produce as opposed to manufactured
goods, are biased intra-regionally. But, given that there
has not been any change in the signs of the coefficients
across the two time periods, 1969 to 1975 and 1976 to
1986, the intra-regionally bias of imports of these
commodities cannot be attributable ASEAN's formation.
The regression results have also shown that the levels
of foreign direct investment by the developed economies
are important in explaining the variations in exports of
the ASEAN member countries of raw materials (SITC 2),
basic manufacutres (SITC 6) and other manufactures
(SITC 8). The positive coefficients of the levels of
foreign investment substantiate the view that foreign
direct investment by the developed economies was channeled
primarily into raw material extraction and basic
manufactures which were geared for extra-regional markets.
As such, the regionally uncoordinated promotion of foreign
direct investment has been detrimental to intra-ASEAN
trade.
Furthermore, the regression results suggest that,
i
insofar as the ratio of import to export values stand as a
286
good proxy for transportation costs, the latter, in
general, have had no effect on trade flows. This
i
contradicts the traditional argument of the effects of
costs on the levels of trade and highlights the importance
of differing levels of economic development with their
resultant asymmetrical trade inflows of technological
advanced products into ASEAN and concommitant outflow of
raw materials.
In addition and most significantly, the regression
results, in general, show the dummy variable for
preference area to be an important determinant of trade
flows over both time periods. This thus suggests that the
formation of ASEAN and the initiatives of the Bali Summit
have been ineffective in altering the intra-regional and
extra-regional trade regimes of the ASEAN member
countries. This is further validated by the consistency in
the signs of the regression coefficient across both time
periods and in the import and export regression equations.
If ASEAN had been successful in increasing intra-regional
trade, the signs of the coefficients for the preference
area, the latter, though significant in both time periods,
would have changed to reflect the shift of trade intra-
regionally for chemicals (SITC 5), basic manufactures
(SITC 6), machinery and transport equipment (SITC 7) and
other manufactures (SITC 8).
287
Equally important, the regression results demonstrate
that not all the variations in trade flows can be
accounted for by the economic variables, even when the
disparate levels of economic development and investment
patterns of the TNCs are included. This suggests the
importance of other perhaps non-economic variables, such
as the absence of political will, engendered by historical
animosity, conflicting territorial claims and ethnic
conflicts, and their pluasible resultant effects on intra-
ASEAN trade flows.
Finally, the regression results reaffirm the
importance of population and income on the levels of
intra-ASEAN trade. However, the negative regression
coefficients of population for the importing countries and
the positive coefficients for the exporting countries in
both the import and export regression equations, for all
commodity groups, save food and live animals (SITC 0),
stand incongruent with Learner and Stern's postulations.
The negative regression coefficients for the importing
countries may have captured the import-substituting
policies of the ASEAN countries, with the positive
coefficient for food and live animals (SITC 0) reflecting
the limited absoptive capacity of the domestic economies
for these products.
288
CHAPTER V
SOCIO-POLITICO DETERMINANTS OF ASEAN REGIONAL
ECONOMIC COOPERATION
INTRODUCTION
The absence, in ASEAN, of significant progress in
achieving economic development through regional
cooperation, argues for the existence of centrifugal
forces mitigating the requisite political will and acting
against regional economic cooperation. Some of these
forces have been identified in chapter 1. In addition,
chapters III and IV have demonstrated that a similarity in
economic development philosophies and strategies, and the
non-complimentarity of the economies of ASEAN have impeded
regional economic cooperation. The latter has resulted in
the limited absorptive capacity of the major exports of
the ASEAN members intra-regionally.
Furthermore, the ASEAN member countries' intial
import-substitution growth strategy imposed low tariffs on
capital and intermediate goods but higher tariffs on
consumer light and agricultural goods. Given that the
latter two categories formed the majority of ASEAN
countries' exports, intra-regional trade was again
discouraged. The subsequent switch to an export-oriented
industrialization growth strategy by the ASEAN countries
served also, ironically, to constrain the levels of intra-
289
ASEAN trade, as it led to the development of parallel
export sectors in the ASEAN countries. This, coupled with
the TNC investment patterns, as highlighted in chapter
III, has biased ASEAN trade extra-regionally and has
generated competition among the ASEAN countries for
external markets. The effects of the investment patterns
of TNCs and the disparate levels of economic development
on intra-regional trade have been substantiated in chapter
IV.
One of the more significant conclusions of chapter IV,
however, has been that not all variations in intra-
regional trade flows have been accounted for by variations
in aforementioned and other economic variables. This thus
posits the existence of socio-politico factors that have
mitigated the requisite political will, necessary for the
success of any regional economic cooperation (Cizelj, 23)
and have thus affected the pace and levels of regional
economic cooperation. Indeed, as Robson and Vaitsos
assert, there are many important political and social
considerations, which, though highly relevant to a broad
appraisal of integration issues, can find no place in any
neoclassical analysis however broadened, nor which can be
easily embodied in any formal analysis (Robson,
Integration, 14).
290
As chapter I has suggested, these socio-politico
factors would have included "narrow and short-sighted
forms of nationalism which can transform legitimate claims
for national independence into a quest for national
autarky", thereby proving inimical to growth and
development (Laszlo, 17). In addition, the disparate
levels of economic development may produce fears and
suspicions among the less developed countries in the
region of being overwhelmed by their more advanced
neighbours, with their more efficient production systems
or greater resources. These fears may be amplified by
cultural chauvinism which would serve to debilitate the
implementation of regional aggreements. Such fears and
suspicions may highten geopolitical tensions in the
region, serving not only to weaken the links between
countries, but also, through enlarged military
expenditures, jeopardize the very basis of the national
development of each nation.
This has resulted in the military expenditure of some
countries competing openly with economic and social
development programs, consequently leading to reduced
import capacity. For example, in Latin America, of the 21
countries for which information on functional distribution
of expenditure by the central government is available,
eight spend more on defence than on health, three spend
291
more on defence than on education, and two spend more on
defence than on education and health combined (Moldonado,
67-68). In fact many have argued that it is these
geopolitical tensions and the diversity of political
regimes that have slowed economic integration and
cooperation in Latin America and the Carribean (Moldonado,
67) .
These centrifugal forces and geopolitical tensions
are certainly present in the case of ASEAN, as this
chapter will illustrate, and have thus tampered the
requisite political will, necessary for successful
regional economic cooperation. Specifically, this chapter
argues that suspicion and distrust among member countries
arising out of historical animosity, the perceived threats
and insecurity, and the personality traits of political
leaders have dampened the requisite political will. These
have, as a consequence, transmutted the pace and levels of
ASEAN regional economic cooperation, as measured by the
levels of intra-ASEAN trade.
Section I of this chapter examines the sources of
bilateral tensions in ASEAN and posits their impact on the
pace and levels of ASEAN regional cooperation. These
tensions and animosities have arisen from overlapping
territorial claims and ethnic issues. It is argued that to
the extent these bilateral tensions and historical
292
animosities have pre-dated and shadowed the formation of
ASEAN, they have not provided the necessary impetus to
overcome the "backwash effects" or unequal gains that
accompanied regional economic integration.
Section II will then posit the impact of the
personalities of the ASEAN leaders, facilitated by the
style of negotiations in ASEAN, on the pace and level of
cooperation in ASEAN. Two caveats in this respect are
necessary. In the first instance, it is not asserted that
personality traits are the only determinants of foreign
policy, but rather, in some instances, may be a major
determinant of policies. Secondly, this section does not
attempt to, or in a larger sense can it, conclusively
show that the personalities or ideologies of the ASEAN
leaders have directly affected the levels of intra-ASEAN
trade. Rather, it attempts to sketch the possible
influences of individual leaders, given the elitist nature
of the regimes, on bilateral relations and consequently on
the requisite political will. It is argued that the
omission of such a consideration, on the other hand,
necessarily implies the absence of any possible effects,
and thus negates altogether the role of political leaders
in ASEAN. The effect of personality traits on political
outcomes is not novel, or endemic to ASEAN. This section
will thus sketch the theoretical and empirical basis for
293
personality traits in leadership studies. In addition, it
will be argued that the pattern of ASEAN diplomacy and
negotiations, embodied by the twin notions of "Musjawarah"
and "Mufakat", has enabled the personalities of the
political leaders to affect the pace of regional
cooperation.
294
SECTION I
SOCIO-POLITICAL IMPEDIMENTS TO REGIONAL ECONOMIC ^
COOPERATION
A. TERRITORIAL CLAIMS AND BILATERAL TENSIONS
The relationship between conflict, bilateral relations
and trade has been variously explored by, among others,
Haas and Schmitter, Nye, Keohane, Polachek and
Gasiorowski. Although these studies differ as to whether
trade and conflict are directly or inversely related, with
empirical analysis supporting both approaches12, they
nonetheless posit the theoretical foundations for the
effects of bilateral tensions on the pace and levels of
regional cooperation.
In the ASEAN context, overlapping territorial claims
and ethnicity remain the two major fissures of bilateral
tension and friction. These bilateral tensions and
fictions have formed the backdrop to ASEAN and, it is
argued, have affected the pace and level of intra-regional
cooperation. Although bilateral tensions and frictions are
part and parcel of international political and economic
relations, their significance in the case of ASEAN lies
with the intensity of these tensions. These tensions have
led in several instances to a suspension in diplomatic
relations, and to armed confrontations.
295
To some extent, the dynamics of these bilateral
tensions on ASEAN trade flows can be gleaned from the
regression equation for imports of all commodities in
Table 26. The regression coefficients are estimates of the
effects of the individual variables on ASEAN trade flows,
averaged across all countries, and between 1969 and 1986.
It is thus expected that the predicted values of ASEAN
imports, attained from the regression equation in Table
26, would not deviate substantially from the actual
values, with overpredictions generally offsetting
underpredictions. This is in indeed the case for the
predicted values of Singapore's imports of all commodities
from the U.S. and Thailand, respectively, as shown in
Table 29. However, as Table 29 further demonstrates, the
predicted values of Singapore's imports from the
Philippines is consistently and substantially greater than
the actual import values, as is also the case with
Singapore's imports from Malaysia.
These findings are further sustantiated in Table 30.
A comparision of the actual and predicted import values
suggests that Malaysian imports of all commodities from
Thailand are consistently and substantially underpredicted
while Malaysian imports from the Philippines are, to a
similar extent, overpredicted. These overprediction of
import values are similarly true for Indonesian imports
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
296
TABLE 29
SINGAPORE IMPORTS OF ALL COMMODITIES®
PHILIPPINES TH A ILA M ) M A LA Y S IA U N ITED S T A T E S
Ictual Predicted Actual Predicted Actual Predicted Actual Predicted
-5.89 -3.6758 -3.62 -3.7223 -1.50 -4.1181 -2.54 -1.5274
•5.63 -3.9333 -4.01 -3.9277 -1.68 -4.3394 -2.22 -1.8721
-2.06 -1.9913 -3.90 -4.1066 -1.79 -4.0441 -2.06 -1.9913
-5.73 -4.1310 -3.57 -4.1787 -1.84 -4.0316 -1.96 -2.0276
■5.79 -4.0274 -3.69 -4.0359 -1.81 -3.9481 -1.89 -2.2033
-5.94 -3.9831 -3.63 -4.0078 -2.03 -3.8644 -1.97 -2.2663
■5.56 -3.8625 -3.86 -3.9006 -2.15 -3.9807 -1.85 -2.5118
■5.50 -3.8142 -3.77 -3.8381 -1.94 -3.7183 -2.02 -2.1343
■5.03 -3.8338 -3.80 -3.8070 -2.00 -3.7501 -2 .0 7 -2.1247
5.29 -3.7949 -3.59 -4.7766 -1.65 -2.5145 -2.60 -2.7231
■5.48 -3.7014 -3.56 -3.8698 -1.99 -3.5900 -1.94 -2.0615
5.77 -3.6310 -3.92 -3.6576 -2.01 -3.5174 -1.96 -2.1485
5.55 -3.5696 -4.07 -6.8102 -2.09 -3.4280 -2 .0 7 -2.1245
5.62 -3.5674 -3.97 -3.5495 -2.01 -3.4045 -2.05 -2.4074
5.39 -3.6811 -4.02 -3.4656 -1.93 -3.6341 -1.89 -2.1058
5.04 -3.9220 -3.81 -3.4382 -1.90 -3.2933 -1.92 -2.0027
4.88 -3.6225 -3.88 -3.5499 -1.94 -3.7408 -1 .8 9 -1.9939
4.93 -4.0301 -3.54 -3.5520 -2.02 -3.5643 -1.90 -1.9878
all values are in natural log
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
297
TABLE 30
IMPORTS OF ALL COMMODITIES*
M A L A Y S IA N IM P O R T S F R O M PHILIPPINES IM P O R T F R O M IN D O N E S IA N IW0RTS F R O M M A L A Y S IA N IM P O R T S F R O M
TIE PHILIPPINES S IN G A P O R E M A L A Y S IA T H A ILA N D
Actual Predicted Actual Predicted Actual Predicted Actual Predicted
n. a. -5.33 -3.4598 -5.22 -4.2684 n.a .
n. a. -5.59 -3.6439 n.a . n.a .
n. a. -4.90 -3.7248 -5.29 -4.3251 n.a .
-5.86 -4.7084 n.a. n.a . -3.16 -4.7315
-5.64 -4.5936 -5.28 -3.6570 -5.16 -4.2739 -3.11 -4.5924
-5.41 -4.5429 -4.80 -3.5819 -5.67 -4.1944 -3.34 -4.5601
-5.36 -4.4607 -5.12 -3.5026 -5.47 -4.3748 -3.23 -4.4921
-2.45 -3.5348 -5.20 -3.4451 -2.45 -3.5348 -3.18 -4.3982
-5.12 -4.4150 -4.81 -3.4407 -5.83 -4.1563 -3.07 -4.3773
-4 .8 7 -4.3667 n.a -5.73 -4.1145 -3.16 -4.3149
-4.74 -4.2390 -4.35 -3.2950 -5.32 -3.9407 -3.34 -4.2636
-4.61 -4.1532 -4.14 -3.2051 -5.71 -3.8561 -4.61 -4.1532
-4.79 -4.1201 -3.46 -3.0927 -5.41 -3.8044 -3.38 -4.0860
-4.38 -4.1680 -3.58 -3.0578 -5.70 -3.8570 -3.31 -4.1448
-3.91 -4.3159 -3.31 -2.9701 -5.61 -3.8704 -3.51 -4.1169
-4.06 -4.5361 n .a. n. a. -3.39 -2.6060
-3.98 -4.2349 -3.65 -3.3457 -5.28 -4.2552 -3.34 -4.2153
-4.16 -4.6673 -3.72 -3.1266 -5.36 -4.1025 -3.22 -4.2546
all values are in natural log
298
from Malaysia and Filippino imports from Singapore, as
illustrated in Table 30. These consistent overpredictions
and underpredictions suggest the presence of undercurrents
in bilateral trade flows arising, as it is suggested, from
bilateral tensions and frictions.
The overlapping territorial claims that have soured
the bilateral relations in ASEAN have emanated, in the
first instance, from the issue of Sabah and secondly, from
the extended territorial jurisdictions, arising from the
International Law of the Sea Conference and more
importantly, their concommitant natural resources.
Bilateral tensions arising from the ethnicity issue
reflect the heterogeneity of the ASEAN region and have
revolved around the presence of Chinese in predominantly
Muslim Southeast Asia. Specifically, they encompass the
Chinese majority in Singapore, and the Muslim minorities
in Thailand and the Philippines.
The Sabah Issue
The dissolution of Malphilindo, briefly discussed in
chapter 2, best illustrates the level of bilateral tension
engendered by overlapping territorial claims. The
political leaders of Malaysia, the Philippines and
Indonesia attempted to establish Maphilindo as a
confederation of nations with Malay origins to engage the
299
common struggle against colonialism and imperialism.
I However, its primary goal was in fact the settlement of
competing claims to the states of Sabah and Sarawak in
Northern Borneo, on the island of Kalimantan (Leifer,
ASEAN, 19; Suriyamongkol, Politics, 11). The largest
portion of this island was under Indonesian jurisdiction
but the Sultanate of Brunei was a British Protectorate
and the states of Sabah and Sawarak were under British
control, slated to become, together with Malaya and
Singapore, the Federation of Malaysia in 1963. However,
this "narrow-based and misguided" concept based on
ethnicity soon floundered on the rocks of "Tengku's
impatience and Sukarno's grandiose ambition" (Lau, ASEAN,
115) .
The Philippines has been contesting the rights to the
territory for over 2 0 years. The Philippines' claim has
rested on the assertion that in 1878, the Sultan of Sulu,
had leased and not ceeded the territory of North Borneo to
the British (Samad and Darusalam, 554-557). As such the
territory and sovereignty of the territory still lay with
the heirs to the Sultan of Sulu who, on 22 January 1958,
through a proclamation from Sultan Esmail Kiram, cancelled
the lease and subsequently on 5th February 1962, vested
sovereignty and domain over North Borneo with the
Philippines. The Philippines thus objected to the British
300
plan. President Macapagal of the Philippines presented
this first official claim to Sabah to the British in June
1962.
The British and Malaysia however denied that there was
any such lease, and asserted instead that the 1878
agreement represented a cessions of sovereignty and domain
of North Borneo to the British (Ariff, 14-34). Indonesia,
on the other hand, demanded that the peoples of the two
states be given the right to vote as to whether to join
the Federation. Britain dismissed the Philippine's claim,
and the three Asian countries agreed to the planned
formation of the Federation, leaving to a later date the
issue of elections. It is important to note that, for
Malaysia, the Sabah issue extended beyond a matter of
principle and represented tangible gains as Sabah was rich
in natural resources, constituted about one-fifth of the
country's land area, and provided a racial balance (Milne
and Mauzy, 33). For the Philippines, however, Sabah
represented a security issue, and highlights the
suspicions and distrust prevalent in Southeast Asia. This
can be gleaned from President Macapal's letter to U.S.
President John F. Kennedy on 20th April 1963 where he
asserts that:
301
North Borneo ... is vital to the security of the
Philippines ... it is only 18 miles drom the nearest
Philippine island ... control of the northern tip ...
by any unfriendly power would constitute ... a deadly
threat ... We are opposed to placing North Borneo
under the authority of any country on the Asian
mainland ... whose territorial integrity is itself
under threat of communist domination. (Indorf, 25)
However, the subsequent findings of a United Nations
mission, published on 14th September 1963, ran contrary to
the Indonesian and Filippino claims. The UN's Malaysia
Mission discovered that the participation of Sabah and
Sarawak in the proposed Federation of Malaysia had been
duly approved by legitimate legislative bodies, as well as
a large majority of the people, through free and
impartially conducted elections in which the question of
Malaysia was a major issue (Young, 75; Reinhardt, 92).
Despite several high-level talks and third party
intervention, the Philippines refused to recognize the
Federation of Malaysia. Indonesia and the Philippines, on
16th September 1963, suspended diplomatic relations with
Malaysia. Shortly thereafter, President Sukarno of
Indonesia declared his campaign of "Konfrontasi1 " or a
Confrontation policy with the aid of the Indonesia
Communist Party and launched armed attacks on the borders
of Sabah and Sarawak (Suriyamongkol, Politics, 11).
Sukarno went so far as to state, on 25th September 1963,
302
that ”Indonesia will crush Malaysia to the end because it
is a form of neocolonialism” (Young: 76).
In June 1966, with President Sukarno removed from
power in Indonesia, President Marcos, who had succeeded
President Macapagal in the Philippines, attempted to
inject life into the settlement process, by recognizing
the Federation of Malaysia. Both Malaysia and Philippines
issued a joint communique stating their intentions to meet
to discuss the settlement of the issue. The Malaysian
government, in a demonstration of impending ASEAN spirit
and to assuage some of the security anxieties of the
Philippines, signed an agreement with the Philippines
against smuggling and border crossings in Sabah. This
agreement was unique in that there was an absence of a
quid pro quo arrangement which implied a possible loss of
revenue and employment in Sabah with no compensation from
the Philippines (Indorf, 25).
In March 1968, however, news broke internationally of
a secret training camp on Corregidor Island where the
Philippine army was training Mindanao Muslim irregulars
for possible military intervention in Sabah. The operation
was codenamed "liberation” or "Project Merdeka” and this
caused diplomatic protests from Malaysia and the
Philippines to be exchanged and registered with the United
Nations. A June 1968 negotiation meeting failed, leading
303
once again to the recall of the ambassadors of both
( countries and a suspension of diplomatic representation
(Leifer, ASEAN, 31-32). However, the ASEAN meetings were
still attended by both parties (Indorf, 24).
In September 1968, the Philippines issued the Sabah
Annexation Act in which the baselines of its territorial
seas were defined, and its sovereignty over Sabah was re
stated. In response, Malaysia repealed the anti-smuggling
agreement and recalled its ambassador and staff from
Manila (Leifer, ASEAN, 34). In December of 1969,
diplomatic relations were restored between the two
countries though an "uneasy passivity" prevailed for a few
years. Malaysia was preoccupied with the aftermath of a
1969 elections and the Philippines, with an
intensification of turmoil in its southern provinces. At
the concluding session of the second summit meeting in
Kuala Lumpur in 1977, President Marcos, seized the
occasion to reassure his hosts that, on his return to
Manila, he would undertake definite steps to abrogate
claims to Sabah. There has however been little progress on
this assuarance, and though the Philippines has not
reiterated its claim to Sabah, it has not recinded the
Sabah Annexation Act (Indorf, 24). Thus, although the
claim has not been pursued in recent years, its existence
has blocked normal exchanges between Malaysia and the
304
Philippines. This is manifested by the Malaysian Prime
Minister's unwillingness to pay an official visit to the
Philippines (Weatherbee, 1232). Furthermore, the muslim
resistance in Southern Philippines, the political
interests of the present and former leaders, and the
deterioration in the political and economic performance
all serve to significantly hinder the Philippine
government from relinquishing its claim to Sabah (Samad
and Darusalam, 555-558).
305
Exclusive Economic Zone and Bilateral Tensions
A second source of bilateral tension within ASEAN,
which has seriously affected bilateral relations, stems
from overlapping territorial rights, generated through the
application of the "Archipelagic concept" and the 200-mile
"Exlusive Economic Zone". Both of these are provisions in
the International Law of the Sea Conference.
An archipelagic state has the right to draw straight
base lines between the outermost points of its farthest
islands and reefs, and lay sovereign claim to all water
and land within this area. Indonesia officially applied
this principle on 13th December 1957, with the Philippines
following suit in 1962. As a result, Indonesia has
incorporated an area of some 999,000 square nautical miles
into its jurisdiction, which amounts to one and a half
times the land mass of the ASEAN countries combined
(Indorf, 20). This represents an estimated three and a
half times the territorial sea that Indonesia would have
been able to claim with only the 12-nautical mile
territorial limit, as opposed to using straight base lines
(Leifer, Malacca, 17/23). In the same way, the Philippines
incorporated 148,921 square nautical miles into its
jurisdiction. Initially, the three other ASEAN states
objected to this "cartographic imperialism", but later
306
relented under the pressure of international acceptance
and guarantee of future negotiations.
Indonesia, by including 2 islands in the South China
sea to insure an integral unity of her 13,000 islands and
connecting waterways, has interposed her territorial
boundaries between East and West Malaysia. After nineteen
years of "simmering animoisty" a memorandum of
understanding was signed in 197 6 and subsequently, a
treaty to that effect was signed on 25th February 1982.
Many technical problems have yet to be resolved. However,
some regional observers have asserted that the agreement
should not be attributed to the existence of ASEAN, but
rather to a bilateral willingness to compromise which
stems from a common cultural heritage shared by the two
countries (Indorf, 20).
The Exclusive Economic Zone (EEZ) has also increased
tensions between the ASEAN states competing for rich
fishing grounds and energy sources. The EEZ extends a
coastal state's jurisdiction by 200 nautical miles from
the baseline from which the breath of the territorial sea
is measured. There is however little agreement on bases
and contours of the continental shelf, and a rather
liberal interpretation and application of this principle
has, in the case of Southeast Asia, transformed the South
China Sea "into a national lake with widely overlapping
307
sea borders claimed by nine littoral states" (Indorf, 21).
To the extent that overlapping territorial claims
represent an exertion of sovereignty, they underscore
i
j significant economic gains. However, the area gained in
I
I itself is not necessarily a measure of resource wealth.
\ *
Water depth is a factor in hydrocarbon exploitation,
I
; mineral dredging, biological productivity and bottom fish
4
I
• catch. In Southeast Asia, the continental shelves are
j underlain by thick sedimentary basin and thus contain
i possible petroleum deposits. Their shallow depth also
offers the possibility of mining for detriral minerals and
trawling for demensal fish. The Continental Shelf
underlies the small areas gained by Singapore and 80% of
that gained by Malaysia and Thailand, but only 10% gained
i
by the Philippines. Indonesia has equal areas of shelf and
deep water. Singapore and Thailand have claimed
geographical disadvantage due to the extended
jurisdiction. Thailand is both shelf-locked and zone
locked in the South China Sea. Moreover, the Thai distant-
water fishing grounds in the South China Sea have come
under the jurisdiction of Malaysia and Indonesia.
I
1
j Singapore, on the other hand, lacks an EEZ. It has little
j continental shelf and its miniscule maritime territory is
I surrounded by that of other states (Valencia, 97). More
; importantly, however, the extended maritime jurisdiction
308
encompasses many sedimentary basins having hydrocarbon,
namely Natural Gas potential. Much of these resources
remain speculative and cannot be proven until actual
drilling. Nonetheless, for many of the ASEAN countries,
these potential resources are worth several times their
annual GNPs. The potential worth of these resources are
illustrated in Table 31.
Consequently, for the Southeast Asian countries,
increasing energy demands, strong growth prospect for the
region, decreasing oil supplies and expected price
crunches in excess of US$30 a barrel by the year 2000,
coupled with a greater reliance on foreign oil, has
spurred offshore exploitation for new sources of
production (Goldstein, 47). At the same time, the expanded
use of natural gas, and its more attractive pricing as
premium fuel, is encouraging companies and governments to
explore for further gas reserves. Table 32 illustrates the
Asia Pacific Oil balance. Although Indonesia, Malaysia and
Brunei are major regional producers, they are also large
consumers. As such, a large proportion of the growing
regional production is used to satisfy internal demand.
Projections indicate that net oil exporters increased
exports from 1.6 million barrels a day (MMBD) in 1982, to
1.9 MMBD in 1986 and this is expected to increase only
marginally by 1990s. A significant drop in oil production
309
TABLE 31
ESTIMATED GROSS VALUE OF OIL AMD GAS RESERVES
GAINED BY EXTENDED JURISDICTION
Country
Shelf Area Ultimately
(to 2 00-m Recoverable
isobath) Resources
Valuea
Off (US$ billion)
'000 sq
'000 sq
.km Oilb
. nmi
Gasc Oil Gas Total
Indonesia
2777
809. 6
10-100 10-100 150-1500 25-250 175-1750
Malaysia
373.5
108 . 9
10-100 10-100 150-1500 25-250 175-1750
Philippines 1
78.4
52.0
1-10 10-100 15-150 25-250 40-400
Singapore
0.3 n.a n.a n.a n.a n.a
Thailand
257.6
75.1
1-10 10-100 15-150 25-250 40-400
a. US$15/bb; of oil and US$2.50/1000 cu. ft. of gas
i
! b. billion barrels
i
i c. TCF
{
I
| Source: Valencia, 99
310
TABLE 32
ASIA-PACIFIC OIL BALANCE
(Thousands of Barrels per day)
1982 1985/86 1990 1995 2000
Net Oil Exporters 1608 1874 1914 1423 337
Net Oil Importers -5817 -5335 -6080 -6762 7400
Oil Required outside
Region 4209 3461 4166 5339 7023
Dependence on Persian
Gulf 70% 60% 65% 75% 85-90
Source: Fesharaki , 14 6
311
is thus expected (Fesharaki, 146). Table 33 illustrates
the share of oil and gas as a percentage of total primary
sources of energy in the ASEAN countries. It is apparent \
that natural gas (LNG) has emerged as a main subsitute for
oil in all the ASEAN countries except Singapore. For j
example, the share of LNG in total energy consumption for
Indonesia has increased from 3.1% in 1974 to 25.4% in
1984. Similarly Malaysia's consumption of LNG in total
energy consumption has increased from 1.1% to 20.4%
between 1973 and 1985.
ASEAN, as a whole, has substantial deposits of natural
gas resources. Brunei, Indonesia, and Malaysia account for
some 66% of the world's LNG exports. Furthermore Brunei,
Indonesia, Malaysia, Thailand and to some extent, the
Philippines, together account for over 43% of the Far East
reserves of LNG, though this represents only 4% of the
estimated world's reserves of LNG. The ASEAN LNG reserves
has increased substantially between 1983 and 1988, from
about 2897 billion cubic metres to 4369 billion cubic
metres. This represents an increase of over 50% which is
far above the world average of 25.7%. The average annual
growth in production of LNG in Indonesia, ASEAN's largest
producer, was 19.2% between 1979 and 1986. Malaysia,
however, registered the highest growth rate of 791.1% over
I
I
the seven year period, which amounts to about 113%
312
TABLE 33
PERCENTAGE OF OIL AND GAS AS PRIMARY ENERGY SOURCES
IN ASEAN COUNTRIES
1973 1979 1985a
Country Oil Gas Other Oil Gas Other Oil Gas Other
Brunei
68.4 31.6 0.0 68.3 31.7 0.0 47 . 6 52 .4 0.0
Indonesia
92 .2 3 . 1 4.7 76.8 19.5 3.7 68 . 0 25.4 6.6
Malaysia
92 . 6 1.1 6.3 94.9 1.0 4.1 69.7 20.4 9.9
Philippine
95.0 0.0 5.0 91.9 1.0 8 . 1 65. 4 0.0 34.6
Thailand
93 .5 0.0 6.5 90.2 0.0 9.8 64 .7 20.2 15.2
Singapore
100.0 0.0 0.0 100.0 0.0 0.0 100. 0 0.0 0.0
a. For Indonesia, figures are for 1984
Source: Sharnta, 165.
313
annually. Thailand, which began LNG production only in
1981, has registered eightfold increases in production
between 1981 and 1986 (Sharma, 167-170).
However, these potential Natural Gas bearing areas,
because of the EEZ, have multiple claimants. For example,
the Southwestern gulf of Thailand is claimed by Malaysia,
Thailand and Vietnam, and the area North, East and West of
Natura, with an estimated gas and oil reserve of between
US$25 and US$250 billion, is claimed by Indonesia,
Malaysia, China and Vietnam. Furthermore, the Dangerous
Ground, with an estimated reserve of some US$0.25 to
US$2.5 billion is claimed by the Philippines and Malaysia
(Valencia, 94-97). The situation is further aggravated
because Indonesia and Malaysia are heavily dependent on
oil and gas for foreign exchange earnings and government
revenue. For example, about 50% of Indonesia's export
earning and 39% of government revenue were generated from
oil and gas in Indonesia's 1986-1987 fiscal year (Sharma,
170) .
The Philippines was the first country in ASEAN to
proclaim its EEZ in August 1979. Indonesia, Malaysia and
thereafter Thailand followed suite in March 1980, May 1980
and February 1981, respectively. All four ASEAN countries
unilaterally declared their EEZ, disregarding
international recognition of their boundaries, but
314
offering to negotiate any problems with respect to
delineation. Subsequently, in late 1979, Malaysia became
the first ASEAN country to publish an official map, which
has since been the center of controversy, as her ASEAN
neighbours vehemently objected to the assertedly
extravagant claims. Malaysia, however, has defended her
actions, arguing that it is necessary for one state to
project distinctly and authoritatively its territorial
assumptions so as order to provide the basis for
negotiation.
The Philippines sent a diplomatic note to Kuala Lumpur
in May 1980, protesting the inclusion of the Commodore
Reef in Malaysian territorial waters. The Philippines
claimed the Reef to be part of its Kalayaan Province. The
Malaysian action was described as an invasion of
Philippine sovereign rights with a foreign flag marker and
the accousting of Filippino fishing boats in adjacent
waters.
Indonesia too, objected to the Malaysian map, which
showed the islands of Litigan and Sipadan as being located
in the latter's continental shelf. Both Indonesia and
Malaysia assumed sovereignty over the islands at
independence in 1948 and 1957, respectively, based on maps
each inherited from the Dutch and British colonial powers
(Aznam, 20). Although the dispute has yet to be fully
315
resolved, both nations have agreed to accomodate the
other's archipelagic priviledges. However, in 1981, ,
Indonesia reported that "foreign troops" were occupying I
Sipadan and sent its patrol boats into the immediate
viscinity and captured eigtheen Malaysian fishing trawlers ;
"illegally fishing" in its territorial waters (Indorf, 21-
22) .
Furthermore, in the Sulawesi Sea, Malaysian and
Indonesian differences over Pulau Sipadan continue to
surface, intensified by possible hydrocarbon potential in
the channel waters where the island is situated. The
Spratly Islands have long borne seeds of international
conflict. They have been claimed and occupied, in varying
degrees, by the forces of China, Taiwan, Malaysia, the
Philippines and Vietnam. On March 1988, when the dispute
over ownership of the islands and its attendant resources
in the 200 mile EEZ erupted into violence between China
and Vietnam, the Philippines subsequently reinforced its
garrison on eight island. Then, in April 1988, the
Malaysian Navy seized three fishing vessels near Rizal
Reef and detained their 49-member crew for fishing without
a permit. They were released only after an appeal from
President Corazon Arquino to Prime Minister Mahatir
Mohammed.
The economic importance of the extended jurisdictional
claims is further demonstrated by Singapore's recent claim
to Batu Puteh Island. This island is but a small piece of
rock with an area of about 500 metres square located some
50 km from Singapore and about 19 km off the coast of
Johore, the southern most state of Malaysia. The British
built Horsburh lighthouse on the island in the mid 19th
century and since Singapore's independence, Singapore has
manned and administered the lighthouse. Officially,
Singapore has based her claim to the island on the
grounds that the island is an important navigational aid
with Singapore relying heavily on maritime traffic for her
economic well-being. Unofficially, there is speculation
that Singapore's claim to the island would enable her to
draw the 2 00 mile exclusive economic zone east of the
island into the resource-rich South China Sea (Vatikiotis,
Island, 20-21).
The extended jurisdictional claims also offers the
possibility of enhanced fishing potential of significant
gross value. Although fisheries, on the whole, contribute
less than 10% of the GNPs of the ASEAN countries, it
nevertheless supplies some 65% of the animal protein
consumed in Indonesia, Malaysia and the Philippines,
besides employing more than 2 million people. Furthermore,
the ASEAN countries exported nearly US$1 billion worth of
317
fish in 1980 and have an annual potential product of about
US$ 5 billion. Most importantly, however, the rural
coastal people in Southeast Asia depend on fish for their
nutrition, employment and way of life.
The extended jurisdictional claims have thus similarly
have resulted in several areas with overlapping claimants.
These areas may habour fisheries potential of great value.
For example, it has been estimated that the Dangerous
Ground and the Eastern Gulf of Thailand may habor fishing
potential of some US$8.4 million and US$7.3 million a
year, respectively. The search for fish for export and
domestic use by distant-water fishers produces conflict
with states trying to protect their newly-gained
resources. The estimated gross value of fishing potential
in these overlapping areas are given in Table 34. Numerous
enforcement actions have resulted in the seizure of
fishing vessels, and many of these incidents have involved
gunfire. Thailand's concern is directed towards protecting
and regulating its own fishing fleet which has been
subjected to armed attacks and seizure by Kampuchea,
Vietnam, Burma and most recently, Malaysia. The Thai-
Malaysian fisheries dispute have soured relations bewteen
the two countries. Malaysia declared a new Fisheries Act
in 1985 and Malaysian seizures of Thai fishing boats
intensified in mid-1986. In one incident, a Malaysian
318
TABLE 34
ESTIMATION OF TOTAL CATCH AND GROSS ANNUAL VALUE
IN AREAS OF OVERLAPPING CLAIMS
Countries Area of
Overlaps
sq. km
(sq. nmi)
Present
Average
Fishing
Intensity
(kg/sq. km)
Total
Present
Catch
(tonnes)
Total
Annual
Gross
Value
US$
mil.
Philippines/China/
Taiwan/Malaysia/
Indonesia
240615
(70150)
45.5 10950 8.40
Philippines/
Indonesia
14749
(4300)
450 6637 5. 10
Philippines/
Indonesia
21266
(6200)
450 9570 7 . 40
Malaysia/
Philippines
8301 4.5 37 0. 03
Source: Valencia, 114
319
coastal patrol craft fired on a Thai trawler which
resulted in the death of one Thai crewman and another
wounded. Some 824 Thai protestors in Pattani demanded that
the government dispatch navy gunboats for their
protection, while lobbies in Peninsular Malaysia's East
Coast demanded more arrests of Thai fishermen. Malaysia
has not been arresting Thai fishermen caught fishing
illegally, but has been confiscating their seized vessels
and equiptment as well. Then again in April 1988, the
arrest by the Malaysian Navy of 49 Filippino fisherman
who allegedly intruded into Malaysian waters generated
considerable tension in bilateral relations between the
Philippines and Malaysia. This led to the deployment by
the Philippines of additional ships and troops in the area
bordering Malaysia (Ascharya, 173).
Furthermore, Malaysia has insisted that the passage of
Thai fishing vessels through its EEZ is conditional only
on prior notice. The Thai fishing fleet has the sixth
largest catch in the world and a lucrative export industry
to the markets of the developed world. To maintain this,
it must at least transit Malaysian waters and fish in
other countries' waters because it has exhausted its own
resources (Valencia, 108-116) .
320
, B. ETHNICITY OF ASEAN AND BILATERAL TENSIONS
I
The heterogeneity of the ASEAN region underlies the
basis of a significant portion of bilateral tensions
between some of the countries of ASEAN. ASEAN comprises a
heterogeneous region in terms of culture, languages,
religion, ethnicity, history and religion. The diversity
of the cultural and ethnic origins of the peoples of the
region exceed the diversity of the size and density of the
countries they occupy. The Indonesians are predominantly
Muslims, the Thais, Buddhists, and the Filippinos,
Catholics. The Malays in Malaysia are Muslims, but their
large minority of Chinese are Buddhist-Confucians, as are
the majority of Singaporeans. The Indonesians, Thais and
Malays have their cultural roots in South Asia, while the
Filippino culture seems more occidental than oriental. The
Chinese in Malaysia and Singapore belong to the East Asian
culture (Sanittanont, 59) .
This heterogeneity in races has been responsible not
only for the racial riots and tensions within the member
countries of ASEAN, but also the racial tensions between
members countries. The latter is evident by the Indonesian
Confrontation policy with Malaysia and Singapore. As
Leifer argues:
321
The prospect of Malaya (whose population was 3 7 per
cent Chinese and whose economy was dominated by this
community) forming a political junction with the
predominantly Chinese island of Singapore and then
extending this association to the very border of
Indonesia in Kalimantan (Borneo) was contemplated with
some alarm. It was argued that should Malaysia ever
succumb to internal Chinese Communist takeover and
become in consequence a client of the People's
Republic, then Indonesian security would be threatened
directly. (58)
Singapore's separation from the Federation of Malaysia
in 19 65 provides another case in point of communal
tensions prevalent in the region. Malaysia and Indonesia,
hitherto, have remained apprehensive of China's aid to
Thailand in the Kampuchean Issue with Vietnam, viewing it
as indicative of the possible growth in strength of China
in the region, leading at best to increased power rivalry
: in the region, and at worst, to the reassertion of
; Beijing's hegemony (Pye, 166). This is perhaps
I
i attributable in part to Indonesia's suspicion of Beijing's
I involvement in an abortive coup in 1965 which led to the
i
i
, former's suspension of diplomatic relations with China
i
! (Suriyadinata, 683).
! Furthermore, for Indonesia, there was an additional
!
| concern that a militarily powerful and economically modern
j China would ultimately challenge Jakarta's leadership in
Southeast Asia (Simon, 79). Over the years, questions
about the loyalty, economic role and citizenship of
322
Indonesia's over five million ethnic Chinese inhabitants,
have managed to prevent the actual re-opening of embassies
and the restoration of official ties (Van der Kroet, 75).
In addition, resentment exists, in particular, over the
economic dominance exercised by the port and commerical
center of Singapore, and especially over the role of
capital controlled by the "ubiquitous overseas Chinese
community" in Singapore and Indonesia . (Leifer, Foreign,
58). Such sentiments may affect the success of economic
relations within ASEAN in view of the fact that the
Chinese make up the majority of the population of
Singapore and a very sizeable proportion of the population
of Malaysia (Stubbs, 407). Two specific and significant
sources of bilateral tensions then, stem from the role of
the Chinese in ASEAN, especially in Singapore, and the
Muslim minorities in Buddhist Thailand and Catholic
Philippines.
i The Overseas Chinese In ASEAN
I For hundreds of years, the Chinese have been migrating
j
to Southeast Asia to the extent that some 96% of all
i
Chinese expatriates have settled in the countries of this
| region. It is estimated that they control some 60% of the
! region's trade and commerce. Perhaps the most serious
! . . . !
consequence of the Asian countries' failure to control
> I
Chinese immigration was the emergence of a powerful
i
i Overseas Chinese middle class controlling a massive share
! of the region's trade. Some idea of their economic success |
I
I
can be gleaned from the constant remittances they sent
I
j back to China; remittances which largely financed the coup |
I ,
j that toppled China's imperial leaders in 1912. Similarly,
j their boycotts of trade between Southeast Asia and Japan
i
some twenty-five years later would seriously hamper
Japanese efforts to subjugate China during the Sino-
Japanese War between 1937 and 1945. j
! However, no single aspect of the Chinese "invasion"
i
j
< terrified Asians more than the incredible secret societies
that "ruled Overseas Chinese communities like autonomous
!
! governments and imposed reigns of terror on Chinese and |
i i
1 Asians alike" (Alexander, 20). The Southeast Asian ■
i j
governments were equally concerned and alarmed with the ;
I I
I rising tide of pan-Chinese nationalism. The Overseas
I i
| Chinese, united and invigorated with a sense of national
324
and racial destinity, were becoming frightening unruly and
anti-Western. Secret societies' uprisings had already j
caused enormous fatalities, including some 10,000 lives in
then Siam in 1845.
Thus, for an equally long period commensurate with
their immigration, there has been racial fear, distrust,
suspicion and persecution of the Overseas Chinese, as
manifested by one Sininic incident after another. For
example, in 1603, the Spanish rulers of the Philippines,
believing that the local Chinese traders had been planning
to sack Manila, "liquidated" the city's 20,000 Chinese
residents. In 1639, a second Manila pogrom, under similar
pretenses, claimed another 2 5,000 Chinese lives. More
recently, in November 1967 in Western Kalimantan, in
Indonesia, there was a massacre of 300 to 400 Chinese by
native Dyaks. In the pandemonium that ensued and largely
through semi-official discrimination arising from an
unfounded belief that the Chinese were collaborating with
the Communists, another 4000 to 5000 Chinese lives were
lost. This semi-offical discrimination is best summed up
in the remarks of the then Governor of West Kalimantan,
Chief Oevaang Oerang who asserted that "everything is the
fault of the Chinese ... they are subversive communist,
hand in glove with Mao Tze-tung and part of his plan to
take over Asia" (Alexander, 4) .
325
This legend of the "Yellow Peril conspiracy riding the
back of wandering opportunistic Overseas Chinese"
(Alexander, 4) was spawned by the close relations between
the Nationalist Party of China, the Kuo Min Tang (KMT) and
the secret societies of the Overseas Chinese Communities.
In fact, the KMT was formed with the merger of five
Chinese secret societies (Blythe, 280). The symbiotic
relationship between the KMT and the secret societies was
generated with the emergence of the Chinese Communist
Party and the consequent need by the KMT, through the
secret societies, to rely on the Overseas Chinese for
funds to finance its war. It was reported that by 1928,
the secret societies and the KMT had "bullied, blustered
and coerced" their way to raising over $2,100 million in
war funds from the Overseas Chinese in Malaya, the Dutch
East Indies and the Philippines (Blythe, 327).
The subsequent Japanese invasion of Southeast Asia in
1941 and 1942 initiated yet another wave of anti-Chinese
pogroms. This resulted in the near total annhilation of
the secret societies, and the wane of their influence and
importance in the Overseas Chinese communities, though
there was a brief resurgence of their activity and
violence, especially in Malaya, after the war (Blythe,
327-330). But the close identification of the KMT with the
secret societies in the past, coupled with problems of
326
national cohesion, encouraged the impression of the
continued strength of these secret societies and
propogated the myth of Chinese expansion, thus justifying
the use of special legislation by the governments in
Southeast Asia (Alexander, 1-32). "The age old Yellow
peril ... had imperceptibly developed into the Red peril"
and as Alexander further explains:
At the same time, Asia's own rulers had good reason
for propagating the image of a continuing secret
society menace even though there may not have been
one. The rampant lawlessness which erupted across
the region after the Japanese surrender was not so
much a Chinese problem as a multi-racial one largely
spawned by the social and economic after effects of
the war and by the continuing repercussions of the
massive pre-war influx of Overseas Chinese. Southeast
Asia's European leaders ... had neither the men nor
the laws to takle this explosive situation. But they
did, in many cases, have special laws to govern the
pre-war threat of the Chinese secret societies. (29)
The fear, suspicion and distrust of the Overseas
Chinese has persisted into the 1970s and 198 0s.
Singapore's relations with Malaysia and Indonesia have
been thus significantly affected by the racial and ethnic
animosity related to the "Chineseness" of Singapore
(Jorgenshen-Dahl, 105). Because communal issues remain
close to the surface of public consciousness, "any
regional policy affecting a state detrimentally is somehow
quickly identified with the dominant cultural strain of
327
the policy-initiating country". As such, Singapore with
its almost 2 million Chinese has had to bear the brunt of
intra-ASEAN ethnic critiques, critiques exacerbated by its
economic success (Indorf, 34) .
Singapore's Seperation From the Federation
! Singapore's separation from the Federation of Malaysia
I
l
; in 1965 provides the sharpest illustration of the problems
t
of ethnic pluralism as a factor against regionalism. The
Federation of Malaysia initially included the states of
peninsular Malaya, Sabah, Sarawak and Singapore. Ethnic
divisions and, in particular, the demographic
| concentration of ethnic Chinese in urbanized areas and of
I
I Malays in rural areas, and the predominantly Chinese
character of Singapore were a serious obstacle to the
merger, since Malaysia was already concerned over the
strength of the economically powerful Chinese community in
j the Peninsular vis-a-vis that of the Malay (Legge, 362;
j
I Reinhardt, 80-83) .
I
; The process of negotiating Singapore's entry into
j Malaysia was distinguished by hard bargaining and marred
by ill-feeling. During the course of the negotiations, and ;
throughout the Malaysian period, Lee Kuan Yew insisted on !
i
retaining the designation of Prime Minister of what was |
I
[ still only a partially self-governing colony, whereas_____ ]
leaders of other federating units were known as Chief
Ministers (Minchin, 131). Accordingly, he conducted
himself as head of the government and toured the world as
such, a pretention resented by the Malaysian
representatives. Prime Minister Tunku Abdul Rahman was
later to remark that Singapore was out of the Federation
because "the prime minister of Singapore wanted to be
prime minister. There can never be two prime ministers in
one nation" (George, T., 82).
Premier Lee was committed to political union but
exploited the process of negotiations to represent himself
as the stoic defender of the island's interest. Such a
pose served only to sow the seeds of subsequent mistrust
in Kuala Lumpur, accentuating racial fears, ands later to
be transformed into bitter conflict (Milne and Muazy, 37-
41). As Leifer describes:
An underlying suspicion was transformed into bitter
conflict when Lee Kuan Yew entered his People's
Action Party in the mainland Malayan elections of
April 1964 in an unconcealed attempt to assume the
non-Malay position held by the Malayan Chinese
Association (MCA) in the intercommunal coalition
federal government. This electoral intervention was a
virtual failure, but its effect was to provoke Malay
political feeling against the multi-racial advocacy of
Lee, whose strident demand for "a Malaysian Malaysia"
was construed as an insiduous plot to transform
Chinese economic predominance in the country into
political control. From this juncture relationships
moved from bad to worse, with violence between Malays
and Chinese occurring in Singapore in the autumn of
1964. (Foreign, 66)
The PAP challenge served only to severly damage Kuala
Lumpur-Singapore relations and was another factor that
eventually led to Singapore's separation from Malaysia. To
Tunku Abdul Rahman, loyalty and honesty were two of the
highest virtue. The Tunku had believed that Lee had
promised that the PAP would not participate in the
mainland elections, and thus felt that he had been
"stabbed in the back" (Milne and Muazy, 37).
Singapore's independence from the Federation left a
legacy of bitterness both in Malaysia and Singapore.
Though Singapore had a shared colonial experience with
Malaysia and had enjoyed many formal and informal channels
of contact, the intensity of this ethnic animosity had
strained to the utmost the pool of good-will and common
experiences with which they had emerged from the colonial
past. It kept bilateral relations to the barest minumum
and provided a stormy background to their common
membership in ASEAN. Although relations would eventually
improve, in this overcharged atmosphere, the significance
of thoroughly trivial incidents were blown out of
proportion. For example, in 1970, enforced haircuts in
Singapore of some Malaysian Malays led to the cancellation
of a scheduled visit of Lee Kuan Yew to Malaysia (Leifer,
ASEAN, 38). Furthermore, Singapore's independence did not
mark the end of the disintegration in the relationship.
330
The continued disinetgration was borne out in the
dissolution of the jointly owned Malaysian Singapore
Airlines in 1971 and the currency split in 1973.
(Jorgensen-Dahl, 105-109).
Since its independence, the Singapore government has
worked diligently to create an image of a multiracial
society by designating English, Malay, Mandarin and Tamil
as official languages. However, many view Singapore as
being synonymous with the Chinese, and her success and
failures, strengths and weaknesses have been credited to
them. The government's attempt to cajole its citizens to
learn Mandarin and adopt Confusian ethics has been
interpreted by some as an ethnic challenge. Regional
suspicions and mistrust of Singapore and Singaporeans is
prevalent. Her motives are questioned , her methods
regarded with apprehension and her single-mindedness with
some envious misgivings. Some of her critics point to her
surge for progress irrespective of whether the rest of
ASEAN can keep pace, as an indiciation of individual
advancement at the expense of others, and its lack of
empathy for the well-being of her neighbours. This is
evident, for example, from the headlines of Thailand's
newspapers which decry, "Thai workers duped in Singapore"
or "Singapore largest market for smuggled ores from
Thailand" or yet again, "Singapore sells Thai rice to
331
Hanoi, circumventing Bangkok's ban on food sales to
Vietnam" (Indorf, 34).
Singapore officials, on the other hand, admit to
often having been inhibited from advancing new ideas for
collective implementation for fear of being misinterpreted
as being "pushy Chinese". Little concensus exists to
explain the negative attitude surrounding Singapore. Some
view Singapore's performance as a display of arrogance.
Others complain of Singapore's ruthelessness in achieving
economic objectives and yet others, her "righteousness" in
foreign affairs that has been viewed as frequently being
transformed in a self-appointed leadership stance. In
ASEAN where, as will be discussed below, the concensual
approach in negotiations is pre-eminent, Singapore's
seemingly self-appointed leadership stance, especially in
regional and international issues, has strained bilateral
relations. This perhaps reflects how ethhic differences
have been subsumed by the more practical dimension of
political opinions (Indorf, 34). The Kampuchean issue
serves as a case in point and is instructive of the
process which engendered the antagonistic attitude.
The Kampuchean issue, with all its complexity, has
proven to be an internally divisive issue for ASEAN
primarily in the nuances of approaches to the solution
(MacIntyre, 516-517). Singapore has consistently sided
332
with Thailand in projecting a "hawkish" viewpoint,
pressing for a policy of attrition to end Vietnam's
dominance over Kampuchea (Paribatra, 152), since the
latter historically has been concerned with land based
threats from the West and East. Since World War II,
Indochina has been the only significant source of threat
to Thailand's territorial integrity (Simon, 79). However,
the only difference between this approach and that of
Malaysia and Indonesia has been the emphasis by the latter
countries on a need for the continuation of dialogue with
Vietnam. At the United Nations, Singapore's Ambassor Tommy
Koh, over the years and by force of personality and
argument, has become ASEAN's "unofficial" spokeman. In
September 1981, Singapore hosted the first meeting of
leaders of the Khmer Opposition groups, assembled to form
a joint military command and subsequently, a government-
in-exile. Singapore's single-mindedness in seeing the
implementation of the ASEAN-backed Khmer Coalition caused
some misunderstanding with Indonesia. Nine attempts had
been made by the tripartite Khmer Ad Hoc committee in
Bangkok but no concensus had been reached on the sharing
of power. Singapore's Foreign Minister, Mr. Rajaratnam and
Mr. Dhanabalan flew to Bangkok in November 1981 to advance
a proposal for a solution to the impasse. The Foreign
Ministers of Malaysia and Thailand quickly agreed to the
333
substance of the initiative, which was advocated as the
ASEAN proposal. This however prompted Indonesia's Foreign
Minister to lament that it was unfortunate that Singapore
had advanced the initiative without prior consultation the
other ASEAN countries (Indorf, 34-36).
Islamic Minorities and Bilateral Tensions
The problems of the Islamic minorities in Thailand and
the Philippines present yet another fissure of bilateral
tension. The ASEAN region, led by Indonesia, and with a
collective population of about 160 million Muslims,
comprises one of the largest concentration of Muslims in
the world. However, while they are a majority in Indonesia
and Malaysia, accounting for some 80% and 60% of the
population, respectively (Wallace, Al), the Muslims only
comprise some 5% of the population of Thailand, 10% of the
population of the Philippines and 17% of the population of
Singapore (Mutalib, 880). Although the minority issues are
technically within the jurisdiction of each state, with
outside interference being deemed a violation of
sovereignty, the Islamic communities in Indonesia and
Malaysia have nonetheless protectively embraced the
interests of their brethen. This is especially true for
the Thai Muslims who are of Malay ethic stock, speak
334
Malay, have personal bonds with Malaysian relatives,
maintain dual citizenship and cross the border freely and
frequently.
This extra-territorial support is illustrated in the
case of the Muslim Moro National Liberation Front (MNLF),
who have been in armed conflict with Filippino government
forces since 1972 over succession or autonomy in Southern
Philippines. It has been a protracted war with over 60,000
casualties in the past decade. Some Filippino sources,
however, have implicated Malaysia in the conflict since
the beginning, alleging that it has been rendering
military training and support through Sabah's former Chief
Minister, Tun Mustapha (Samad and Darusalam, 558).
Thousands of guerillas are said to have been trained in
camps on Malaysian islands off Sabah. Large-scale
, smuggling of Malaysian cigarettes are said to have
financed the purchase of weapons by the MNLF and
supplemented more recently by hardware channeled through
Vietnam. Most recently, the Philippines' National Security
Advisor, Rafael Ileto, commenting on the yet unresolved
issue of Sabah, warned that failure to resolve this issue
could lead to renewed Malaysian aid to the MNLF separatist
guerillas (Acharya, 159). Malaysia has however
persistently denied any official knowledge of the training
camps or of any direct involvement.
The situation is somewhat similar with the Thai Muslim
insurgency. The Muslim population of the four southern
Thai provinces of Satun, Pattani, Yala and Narathiwat, on
the border with Malaysia, comprise some 80% of the
population of the region. The neglect, discrimination and
mistreatment of the Muslims in the provinces, a fact
acknowledged by the Thai government, has led to the
emergence of numerous successionist groups, including a
1,000 armed guerilla group. These groups are apparently
being supported by Muslim countries in the Middle East and
North Africa. The Thai Muslim situation is exacerbated by
the fact that the Muslims in the Malaysian border states
of Perlis, Kedah, Kelantan and, to a lesser extent, Perak
are conservative Muslims with strong fundementalist
tendencies. This is manifested by the substantial backing
in the region of the Malaysian opposition Party, Partai
Islam, that has been apt to support Islamic causes across
the border. Thus, the outright Malaysian assistance for
Thai Muslim suppression efforts could have serious
domestic repercussions. Furthermore, the Malaysian efforts
to upgrade the Bumiputra share of national affluence in
Malaysia has had a promotive effect on the irredentist
movement in Thailand.
r . . :
i
336
In March and April 1981, as rumours circulated of an
impending Thai military action, in conjunction with the
Communist Party of Malaya (CPM), against Southern Muslim
separatist, refugees crossed the Thai-Malaysian border
seeking santuary in Malaysia. To the dismay of its ASEAN
! partners, Malaysia placed more than 1,000 of them in its
refugee camps, defending its actions on humanitarian
i
grounds, and perhaps further exacerbated its actions by
hinting at internationaling the situation through a
request for United Nations administration of the camp. The
Thai-Malaysian ethnic friction is further aggravated by
the links with the CPM. The CPM has operated in the
jungles of southern Thailand over the past 25 years,
collecting protection money from the residents and
conducting occasional skirmishes into Malaysian territory.
The Thai military has vigourously undertaken counter-
i insurgency measures without however, decimating the
substance of the Communist force. This is due to the CPM
not going out of its way to attack Thai troops, since it
views Malaysia and not Thailand as its enemy (Indorf, 39-
41). The recent resurgence of Islamic fundamentalism in
Malaysia has reinvigorated fears in Singapore, Thailand
and the Philippines of external support once again of
Muslim minority issues in their countries (Wallace, Al).
The issue of ethnicity in ASEAN is further capsulized
by the ramifications of the visit to Singapore in November
198 6 of President Herzog of Israel. The visit was seen by
Indonesia and particularly Malaysia as a deliberate
provocation, given the well known support of both
governments for the Palestinian cause and the often
expressed condemnation of Zionism by Prime Minister
I
; Mahathir (Stubbs, 408). The ensuing widespread
i
f
! demonstrations against the Singapore Government were
chiefly orchestrated by the Islamic groups within and
without the Malaysian government (Lau, Diplomacy, 117).
t
I
| Summary
j The relations between the members of ASEAN have been
I
| marked by bilateral tensions and fictions, especially
during the formative years of the Association. At the end
of 1967, the states that established ASEAN had very little
experience in mutually beneficial cooperation. The
earlier attempts of the Southeast Asian states at
j regionalism suggest that nationalism dominated the
j organization design. Furthermore, until the late 1965,
I Indonesia under Sukarno had been more pre-occupied with
playing a role in global rather than regional politics,
j and to that extent, did not involve herself in regional
| affairs, it led her increasingly into conflict with her
338
nearest neighbours because of the strident revisionist and
i
interventionalist tenor of her policies. Consequently, on
the eve of the formation of ASEAN, the relations between
the five states were characterized by a high degree of
mutual suspicion and animosity.
The existence of bilateral disputes are not exclusive
to ASEAN, but are a feature of international relations
between nation states. However, their significance to
ASEAN stem from the gravity of the insuring actions taken
i between states as manifested by the suspension of
diplomatic relations, and even more importantly, by armed
confrontation. These bilateral tensions have engendered
animosity among the member countries of ASEAN and
invariably affected the pace and levels of economic
cooperation in ASEAN.
These bilateral tensions have arisen, in the first
instance, from the overlapping territorial claim to Sabah
and Sarawak, which hitherto has yet to be fully resolved.
i
Secondly, they have resulted from the disputes over
national boundaries, generated from the invocation of the
Exclusive Economic Zones and the "Achipelagic concept".
' The principle of sovereignty notwithstanding, these
i
! disputes have revolved around the ownership of raw
I
j material and energy sources encompassed therein. Thirdly,
I
t these bilateral tensions have stemmed from the significant
339
Chinese population in predominantly Muslim Southeast Asia.
On the one hand, the Chinese majority in economically
developed Singapore has made the Muslim countries of
Indonesia and Malaysia wary and suspicious of its
objectives. On the other hand, the sizeable Chinese
j minorities in Malaysia and Indonesia have generated doubts
about the former's loyalties and ties to China.
Concommitantly, the perceived discrimination against the
Islamic minorities in the Philippines and Thailand have
bred concern and support by the Muslim governments in
i
I ASEAN. This has invoked allegations of intervention by the
j former countries. This heterogeneity in ASEAN has thus
I tended to crouch regional issues or policies in ethnic
j terms, engendering bilateral tensions. To the extent that
1 • . . .
territorial considerations have strained bilateral
I
! relations, the ethnicity issue has served to amplifly the
!
1 forces working against regional cooperation.
J These bilateral tensions seem to persist to the
I
I
j present day. For example, in 1990, relations between
| Singapore and Malaysia were soured when 8 Malaysians and
i
i . 1
i 2 Singaporeans were arrested by Malaysia for allegedly 1
! i
I . .
j spying for Singapore. And in 1991, Singapore objectedly
| strongly to an Indonesian-Malaysian tri-service military
j exercise conducted on the Johore-Singapore border which
| culminated on Singapore's National Day. In response, the
340
Singapore government ordered an open mobilization of its
military reservist to underscore its dissatisfaction
(Stubbs, 4 08).
341
SECTION II
PERSONAL-PSYCHOLOGICAL INFLUENCES IN ASEAN
Jorgensen-Dahl, in his study of regional organizations
in Southeast Asia, has argued that relations between the
nations of Southeast Asia have too frequently "to an
extreme degree, hinged on the personal qualities,
including the likes and dislikes of particular leaders for
each other" (161). Such an assertion finds some support in
the personality trait theories first advocated by Harold
Laswell. Acceptance of this assertion would imply that,
the motivations of political leaders in policy formulation
may be influenced by factors other than national interest.
I
Consequently, aside from historical animosities and |
bilateral tensions, the personalities of the individual
leaders may present yet another factor mitigating the
requisite political will. This section will sketch the
theoretical and empirical foundations of the effects of
personality on political outcomes. It will posit the
conditions that may have allowed the visions and
personalities of the individual ASEAN leaders to affect
bilateral relations. In general, it will be argued that <
!
the authoritarian regimes in Southeast Asia, and the j
method of negotiations adopted in ASEAN, amplifies and |
i
facilitates the ability of ASEAN leaders to affect the j
|
pace of regional economic cooperation. Athough_this________I
342
section does not attempt to prove conclusively that the
personalities of the individual ASEAN leaders have
directly affected the pace of regional economic
cooperation, the influence of the individual leaders is
undoubtedly a factor which must be taken into account.
343
A. A General Approach
To a large extent, there is nothing novel about the
! assertion that a leader's behaviour, political or
i otherwise, is the consequence of his environment and
i
personality or psychological dispositions. As John Stuart
Mill observed:
! The laws of the phenomena of society are, and can be,
nothing but the laws of the action and passions of
1 human beings united together in the social state, Men,
however, in a state of society, are still men; their
actions and passions are obedient to the laws of
| individual human nature. (573)
i
i And, as Lazarus elaborates:
The source of man's behaviour (his observable
action) and his objective experience (such as
thoughts, feelings and wishes) are two fold: the
external stimuli that impinge on him and the internal
dispositions that result from the interaction between
inheirited psychological characteristics and
experience with the world. When we focus on the
former, we note that a person acts in such-and-such a
way because of certain qualities in a situation. For
example, he attacks a friend because a friend insulted
him .... It is evident that man's behavior varies
greatly from moment to moment, from circumstance to
circumstance, changing with the changing conditions to
which he is exposed.
Sill, even as we recognize the dependencies of
behaviour on outside stimuli, we are aware that is
cannot be accounted for on the basis of the external
situation alone but that in fact in must arise partly
from personal characteristics. (27-28)
344
Laswell asserts that any human situation can be
transformed into a power relation when a participant
demands certain conduct from the other, with the ability
to threaten or actually inflict severe deprivation on
anyone who deviates. Thus is born the "politicizing" of
human relationships. As Laswell summarizes:
That men want power is a statement we can accept
as true in every society where power exists; and this
is not to say whether everybody wants it with the same
intensity, or whether the drive for power is innate or
acquired. For the purpose of analyzing the social
process, power is unmistakably a value, in the sense
that it is desired (or likely to be desired).
Participation in the making of decisions (power) is a
value; access to goods and services (wealth) is a
value. Since we are interested in the interralations
of power with personality and the whole social
process, it perhaps useful to provide a succinct
outline of the process. In the social process: Man
pursues Values through Institutions on Resources.
(Power, 16-17)
And as Liddle elaborates:
Hitler and Stalin wanted power, but so do Kohl and
Gorbachev. Southeast Asia in the last half-century
has seen many power-seeking politicians - Ne Win,
Sarit Thanarat, Ho Chi Minh, Mahathir Mohammad, Lee
Kuan Yew, Sukarno, Ferdinand Marcos - who have pursued
remarkably different economic and other policies.
(Politics, 797).
345
Similarly, as Greenstein reiterates:
My most primitive assumption is that politics is
influenced in important ways by factors that are
commonly summarized by the term personality. I am
regularly struck by how, as one perspective on
political activity becomes closer and more detailed,
the political actors begin to loom as full-blown
individuals who are influenced in politically relevant
ways by the various strengths and weaknesses to which
the human species is subject. Viewed in proximity,
political participants present themselves as something
considerably more than indicated by the impersonal
categories of politics ordinarily use to explain
political behaviour, - as more than role-players,
creatures of situation, members of cultures and
possessors of social characteristics, such as
occcupation, class, sex and age. (1)
Laswell's assertions find support in the diary entry
of Winston Churchill at the end of the long day on which
he had assumed his awesome responsibilities as Prime
Minister:
But I cannot conceal from the reader of this
truthful account as I went to bed at about 3 a.m.. I
was conscious of a profound sense of relief. At last,
I had the authority to give directions over the whole
scene. I felt as if I were walking with Destiny, and
that all my past life had been but a preparation for
this hour and this trial... I thought I knew a good
deal about (the situation), and I was sure I should
not fail. Therefore, although impatient for the
morning, I slept soundly and had no need for cheering
dreams. Facts are better than dreams. (Wolfenstein,
Personality, 13).
346
In point of fact, this concept of personality, extends
beyond that ordinarily used by political scientists and is
more amenable to that used by psychologists. In general,
psychologists define personality as a relatively stable
organization of the ways in which the individual deals
j with internal psychological conflict, and his involvement
j in and conflicts with external reality (Wolfenstein,
I
! Revolutionary, 2). In short, it is a construct, introduced
i t
j to account for the regularities in an individual's
I behaviour as he responds to diverse stimuli and thus
| subsumes all important psychic regularities, such as
I
\
I beliefs, attitudes and values (Stone and Schaffer, 58-65).
! Political scientists, however, generally assign a more
! restrictive meaning. As Greenstein asserts, from a review
i
| of the usage of the term in the literature, it, in the
first instance, ordinarily excludes political attitudes.
Secondly, it is further contracted to refer to layers of
the psyche in the clinicians traditional domain - inner
i conflict and the ego defences and their manifestations
1 (Greenstein, 3-4).
i
i
; The use of personality traits to explain political
i
I
I behaviour is not novel. Laswell, in his assessment of
individual political leadership, conceives man as an
animal, driven to the pursuit of pleasure through the
j gratification of his needs and desires. In this approach,
347
]
1
1
1 political men, who experience uncertainty and conflict
i
i
within their own personalities, seek power to overcome the
"low estimates of the self", thus mitigating suspicions of
their own inadequacy by either changing the traits of the
self or the environment in which it functions (Laswell,
j Power, 39).
Such an approach has been used in studies by Laswell,
Tucker, Hargrove, Gottfried, Rogow, George and George,
j Wolfenstein, Bullock, Edinger, McRandle, Burns, Erikson,
j Mazlish, Glad, deMauze, T. George, Hargrove and Nelson,
and Burke and Greenstein, among others. It has also been
used in general readership. In this respect, Greenstein
invokes the Cuban missile crisis and the ensuing academic
J debate in the New York Times as illustration of the policy
I
1 relevance of reliable knowledge of the inner tendencies of
1 the political actors (Greenstein, 9-11).
I
Hargrove, for example, in his study of six
presidential leadership styles, argues that "in a sense,
the Presidential office is shapeless, and each president
fills it to suit himself" (Hargrove, 5). Thus, Hargrove
divides them into Presidents of action and Presidents of
l
; restraint, according to the leadership styles in office.
Personality is the chief variable, structuring the role
played by each (Hargrove, 1-10). More recently, Burke and
; Greenstein in their study of Presidential decision-making
348
in the Eisenhower and Johnson administrations, conclude
that successful and unsuccessful decision-making can be
attributed not only to the properties of the presidential
advisory system, or the political environment of the
president, but also to the personal properties of the
' president (Burke and Greenstein, 1-50). To a large extent,
a similar conclusion is drawn by Mines's and
I
1 Gourishankar's study of South Indian religious leader Sri
i
I Jayenadra Suraswati, the "periyar" or "Big Man" of South
: India, which is a title lexically equivalent to that of
i
i Mahatma used in reference to Gandhi (761).
I
| Similarly, Robert Tucker, in an attempt to explain
"totalitarian terror" programs of Soviet and Nazi
totalitarian regimes, which annilated vast numbers of
wholly harmless people, argues that Hitler and Stalin were
driven by pathological hatred and fear of what they
, perceived as insiduously conspiratorial enemy forces
i
t
operating at home and abroad (Tucker, 555-583).
In much the same manner, Laswell asserts that Abraham
Lincoln grew up in an ambivalent home atmosphere which
! engendered deep uncertainties that he was loved (Laswell, j
| I
! Politics, 131-147), as was the case with Rogow's James j
; Forrestal who experienced acute insecurity as a child, j
I engendered by a dearth of family love within a matriarchal j
i |
family structure (Rogow, 52-61). The same theme runs }
r
349
through in George and George's study of Woodrow Wilson's
leadership behaviour. They assert that Wilson, early in
life, harboured fears that he was ugly, worthless and
unlovable, which were exacerbated by his suppressed rage
at an authoritarian father, who demanded inordiante
erudition and precision of expression from his son. The
boy responded with feelings of diffidence and inadequacy,
with the rigid Calvinism of the father supplying ready
reinforcement for these doubts. He was deeply resentful,
I
| but terrified of his father and completely submitted to !
I )
| his will (George and George, 5-11). j
! This inner personality conflict felt by each of these j
! i
j men was then imposed in their adult lives to the social
i
! context. Wilson himself was aware of this disturbing inner
turbulence. Shortly after being informed that he had been
nominated to the Presidency, he remarked to his private
I
secretary:
You know, Tumulty, there are two natures combined
in me that every day fight for supremacy and
control. On the one side, there is the Irish in me, j
quick, generous, impulsive, passionate, anxious always i
to help and to sympathize with those in distress. And !
like the Irishman at the Doonybrook Fair, always ;
willin' to raise me shillalah and to hit any head i
which stands firnist me. Then, on the other side,
there is the Scottish-canny, tenacious, cold and ;
perhaps a little exclusive. I tell you, my dear j
friend, that when these two fellows get to quarreling j
among themselves, it is hard to act as umpire between j
them. (George and George, xxi) ■
350
Because of this inner conflict, they were all driven
to compensatory power-seeking and justified these power
aspirations by rationalizing them into effors to enhance
public welfare (Laswell, Politics, 78; Shearing, 32).
These invariably led to conflicts in the public arena.
Woodrow Wilson, for example, bore the scars of the lost
battle against his father and would never again capitulate
j his will to another's. This is aptly manifested by his
1 aggressive conflictual situations with Princeton's Dean
West and Senator Henry Cabot Lodge, whom he viewed as j
unbearable threats. Wilson felt he had to dominate out of
fear of being dominated (George and George, 12). The world
j was perceived by these men in terms of a struggle between j
the forces of good and evil. Forrestal, for example,
, became inflexible on policy issues as his displacement of
j private motives led to a militant posture towards his sons
! and the then Soviet Union (Shearing, 3 0-31).
|
j Although there are "competing" theories to the
I
personality trait theory in leadership studies, such as
the great man theory popular at the turn of the century, j
i
or the behaviour theory in the 1950s and 1960s, the ;
I
contingency- situational theory of the 19 60s and 197 0s and
the excellence theories of the 1980s, Rost, in the review
I of the literature, argues that these theories were not
i
I distinct from one another, but contained elements from
each (27). For example, according to the situational
theory, there are situational factors or dimensions that
are finite and vary widely, among which are the leader's
personality, task requirements, follower expectations,
needs and attitudes, and the environment in which they
operate (Fairholm, 35). And as Rost elaborates:
Using traits as an explanation of leadership in the
1980s is as popular as it was in the 1950s. And the
great man/woman theory of leadership is as strong
in 1990 as it was in 1890. Lee Iococca is our Henry
Ford, Malcolm Forbes is our J. Peirpont Morgan, Sam
Walton is our John D. Rockefeller and George Bush is
our Theodore Roosevelt. (19)
Among ASEAN political leaders, the importance of the
person, and hence the possible effect of personality on
political outcomes, is recognized by Singapore's former
Prime Minister Lee Kuan Yew, as evident from his address
to a symposium on leadership and authority:
The Houses of Parliament and the office of Prime
Minister in Britain together with the symbol of the
monarch provide whoever attains the office of Prime
Minister with ready-made set of loyalty symbols, and
changes in the personnel of the leadership do not
affect the pattern of authority of the order of
society ... But the loyalty to Pandit Nehru in the j
hearts of millions in India was certainly higher than I
the loyalty Indians have to the Indian Parliament, the
Lok Sabha ... No doubt ultimately if these new nations
survive and endure their societies may become
established and their institutions of authority will
acquire a capacity to attract loyalty more than that |
of the person occupying these positions of power at j
any given time. President Nkrumah is more Osagyefo, or j
352
the great leader, than he is President of Ghana. So
too President Sukarno is more the Bung than life
President. And so the Tunku is more Tunku than the
Prime Minister of Malaysia. (K.Y. Lee: 2-3)
353
B. Personality and Politics: The ASEAN Context
In Southeast Asia, the countries of ASEAN are
characterized by authoritarian regimes and the elitist
nature of policy formulation, particularly foreign
policies. (Liddle, Politics, 801; Tan, S., 33-34; Crouch,
j 92; Robison, Structures, 371-397; Laothamatao, 451;
Bunbongkan, 131). The authoritarian regimes have accrued
I in the absense of multifarious political, economic,
cultural and professional pressure groups with articulated
interests in foreign policy and with the lack of somewhat
1 well-defined power bases within their respective societies
i
i (Crouch, 92; Cotton, 314-315). The labor unions are either
1 non-existent, subjugated or have been repressed, as in the
case of Singapore (Chan, H.S.,27; Rodan, Rise and Fall,
| 59-73; Rosa, 492-504; Irwan, 427). The business elites, on
I
the other hand, have not been able to exert independent
pressure. Specifically, in Singapore and, to a lesser
i
' extent, Malaysia, the political elites have not emerged
from the business community. As such, the government
while responsive to the needs of the business community,
have been shielded from them. In the case of the
I Philippines, however, the business community developed in
| close cooperation with favour-dispensing politicians, but
I
1 a stable pattern of patronage could not be established
354
because of regular changes in the political leadership
inherent in the pre-1972 political system. After 1972,
however, a new oligarchy of businessmen closely associated
with the Marcos regime emerged, although the established
business community remained influential, even if not as
closely associated with the government as in the past. In
Thailand, because of the fragmentation of the political
elite after 1973, a stable pattern of relationship has not
; been able to develop in the absence of stable political [
order.
In Indonesia, however, the political and business
elites have become virtually identical, a pattern similar
to pre-1973 Thailand (Crouch, 94; Laothamatao, 451), such
that their identity and interests are "too complex to
categorize as state, class or political elites" Robison,
Auhtoritarianism, 72). Thus, a significant number of
political and bureaucratic elites are also state managers
of capital or substantial private owners of capital
(Robison, Authoritarianism, 54; Irwan, 405) and many of
the Indonesian conglomerates are directly linked to
! President Suharto (Mckendrick, 104). The bureaucracy is
i
j powerful, prevading society in every city, town and
: village where it is the largest employer. The bureaucracy
I
I also dominates government in that bureaucrats are the most
powerful actors in most policy conflicts (Liddle,
355
t Soeharto, 71). The power of the state to intervene in and
t
j regulate the economy has been appropriated by these
| "politico-bureaucrats" who have not only shaped the
]
pattern of the vast state investment, but also control the
allocation of state concessions for the private sector, as
manifested by their abilities to maintain the thrust of
j
!
| investment policy in the creation of capital and
! intermediate goods in contradiction to the notions of
J comparative advantage, thus resisting pressures for the
abolition of the ISI strategy (Mckendrick, 104).
Some have argued that these authoritarian regimes have
developed, in part, as a response to the challenges of
national integration and economic development (Jorgensen-
Dahl, 160; Robison, Gold Rush, 53-58), and because of the
prevalent Confucian ethic with its belief in the
superiority and duty of educated men to lead, which
undercuts the notion of the legitimacy of popular
interests and thus perpetuates the highly centralized and
authoritarian system of government (Cotton, 32 0; Kuah,
374). However, there exists considerable differences in
! extent to which the ASEAN countries have conformed to this
i , , .
< "modernizing authoritarian" model, depending, m part,
upon the social bases of support. In general, however, in
the ASEAN countries where the beneficiaries of growth have
356
been large, the social bases of support have been
concommitnantly been large (Crouch, 92).
| Nonetheless, the authoritarian nature of the regimes
t
may have enabled, at times, the policies, particularly
foreign policies of the ASEAN countries, to be dictated by
and reflect, to an extrodinary degree, the beliefs,
attitudes and visions of the top political leaders. This
may have resulted in situations where alternative policies
may not be considered at all, or have been rejected simply
because of their non-conformity to the beliefs of the j
dominant political leader (Jorgensen-Dahl, 163).
In the case of Indonesia, for example, Sukarno's
j ability to individually formulate foreign policy stemmed
from his position at the apex of the political system due
partly to widespread popularity among the masses,
especially in Java. The balancing act between the army and
the PKI, the Communist Party, also gave him the necessary
freedom in the formulation of foreign policy (Liddle,
Politics, 801). Sukarno's policies were based on and
conformed to deep-seated feelings within Indonesian
. . .
society elites. There was sufficient content m policies
to satisfy both the army and the PKI, and to enable him to
appeal successfully to the masses. Thus, by neutralizing j
i
t
the main opposing forces, and by playing one against the
other, he created considerable latitude for himself in
357
t terms of foreign policy (Legge, 358-380). Similarly,
!
Liddle has asserted that, in general, the successful
economic development and policies in Indonesia over the
past quarter century is attributable to the calculations
of Soeharto whom he has conceived as a "relatively
autonomous policy-maker" (Liddle, Politics, 800).
Even in relatively democratic countries, such as
j Malaysia and Singapore, foreign policy has been the domain
j of a small number of people. In Malaysia, the formulation
of foreign policy has been the exclusive domain of a group j
of no more than five persons (Ott, 225) . Also, since the
early 1980s, there has been greater concentration of power |
i I
in the hands of Prime Minister Mahathir to the extent that
| "momentous developments in macroeconomic policies today
i
I emanate solely from the Prime Minister himself". Faced
I
j with judiciary rebuffs, Prime Minister Mahathir has
changed the constitution so as to effectively place the
judiciary under executive control. The series of attacks
on the courts have led to the dismissal of the Lord
president and two other supreme court judges. In addition,
the Prime Minister has designed new laws so as to provide
ministers with blanket powers and modified existing laws
r
i
j to prevent their usage against the Prime Minister by
I political opponets (Halim, 78). Mahathir's critics have t
I . !
^ argued that the scuttling of democratic procedures !
358
represents the Prime Minister's obsession with greater
personal power so as to implement misguided grandoise
plans. Others have asserted his actions indicate a leader
overwhelmed by fissiparous national elites and structural
J
forces, utilizing regime closure to stem out the disunited
elite (Nathan, 129-136; Case, 463-465). Nonetheless, it
illustrates Mahathir's latitude in determining policy and
; has caused Tunku Abdul Rahman, the former Prime Minister
| to lament that "we are on the road to dictatorship. I
| cannot see any other way... This is no democracy..." (Tan,
! S.: 32).
Similarly, in the case of Singapore, foreign policy
fomulation has been the domain of a four-man inner
i
council, as has been the case with all decisions, centered
around Prime Minister Lee. The most important feature
of this team has been the gulf between Lee and the others;
Lee dominates the stage and the others stay in the wings
I
(George, 181).
In the Singapore political arena, the state's attempt
to create the "Ideal Singaporean" based on Confusian
I
I values (Kuah, 375-377) or to have intelligient
J Singaporeans interbreed (Haas, M., Politics, 48) attests
1
to Lee Kuan Yew's ability to shape and mold Singapore
according to his own personal belief and philosophies.
More specifically, as T.J.S. George asserts:
359
It can be easily seen that Lee's background is of a
kind to isolate him. Born into a Chinese family and
inheriting many Chinese characteristics, he was
brought up not to be an ordinary Chinese. Equipped
with English as his first language, with easy access
to English culture and style of behaviour, he is not
English. He once described English-educated Chinese as
a devitalised people, speaking and thinking in a
language which was not part of their being - and his
problem is that he himself is one of them, yet cannot
quite identify with them because of the special
circumstances of his career... Although all of the
Chinese community in Singapore derives sustenance from
the same basic culture, it is diverse, atomistic and
mutually uncomprehending. Its most important division
is into two main streams, the Chinese-educated and the
English-educated. Lee Kuan Yew rode to power on the
backs of the first and has increasingly sought to
buttress his position with the backing of the second,
but he has never won the complete trust of either...
Lee is so conscious of his intellectual superiority
that others find him arrogant. Unlike most Chinese,
who mask their feelings and let them leak out subtly,
he is quick to show contempt. Most of those who work
for him hint that he reduces them to the level of
messenger-boys. ... In short, Lee Kuan Yew is a man
marked by the fact that he does not quite belong
anywhere and has had to produce himself - his style
and his attitudes- out of his own deep mind. Thus he
has the unpredictability of a man with a mission but
no power brakes. When he talks of creating a new
Singapore, he means of course, creating a new society
which will justify his own attitudes to life. His
concept of 'Singaporeanisn' and of 'the rugged
society' is only partly a political devise to ensure
Singapore's separate identity; partly it is a way of
compensating for his alienation by making a society in
his own image - the projection on to the national
scene of an individual's complex psychological
problems. (28-30)
The importance of political leaders is further noted
Liddle who argues that Haggard and Chen's attribution
the economic successes of South Korea, Taiwan, Hong
360
Kong and Singapore (Haggard and Chen, 1987) primarily to
the policies of societally insulated state leadership,
I
neglects... the role of the Korean military under
j Park Chung Hee and Chun Doo Hwan, the Koumintang under
I Chiang Kai-Shek and Chiang Ching-Kuo, the British
j Colonial power in Hong Kong or Singapore's People's
Action Party under Lee Kuan Yew in commanding the
State and organizing and mediating state-society
relations. (Politics, 794) .
361
i
Personality and Bilateral Relations
The authoritarian forms of government and their
corollary, the elitist nature of foreign policy
formulation, have tremendous implications for regional
I
cooperation and ASEAN. On the one hand, such
authoritarian forms of government could make regional
j cooperation or coordination easier, since leaders could
get together with minimal interference from other
political groups. Mutual predictability and non-hostile
! interactions could occur when political leaders enjoy a
monopoly in setting foreign policy. By the same token,
i
■ however, political leaders could manipulate foreign policy
!
for symbolic and domestic purposes under the banner of
national unity. The political and territorial conflicts
over Sabah and Sarawak aptly demonstrate nationalist
appeals creating unpredictable, and at times, hostile
foreign policy in the region. Conversely, perceived
threats from a common enemy from within or outside the
region, as in the Kampuchean issue, may help spur
i cooperation.
j On the other hand, and more prevasive and significant
j in ASEAN, this elitist nature of foreign policy
j formulation, in effect, has enabled the personalities and i
i
j personal characteristics of top political leaders to exert j
362
and manifest themselves in actual policies. This has led
to situations where bilateral relations have "to an
extreme degree, hinged on personal qualities, including
the likes and dislikes of particular leaders for each
other" (Jorgensen-Dahl, 161). The policies adopted and
pursued have naturally also reflected the personal visions
of these leaders. In this respect, T.J.S. George has
further argued that Singapore's Lee Kuan Yew was extremely
unpopular among the leaders of Malaysia, Indonesia and the
Philippines while his relations with Thailand, Burma,
India and then Ceylon were no more than correct. George
asserts that this unpopularity stemmed from the
perceptible arrogance Lee showed towards his neighbours,
to the extent of publicly disparaging theirQ All this
served to generate hostility. As George explains:
He seemed to derive some vicarious pleasure from
holding other Asian leaders to ridicule before
international audiences. He showed that he thought of
Tunku Abdul Rahman as a rather dull and unintelligient
man whose main objective was to "preserve the orchid
from wilting". Malaysian Chinese Association President
Tan siew Sin was described as one whose statements on
the PAP showed 'an imbalance of judgement of a
magnitude to qualify its author for admission to an
asylum for the politically insane. Sukarno was called
a histrionic character who remained in the ascendancy
by mesmerizing people. Filipinos were described as
'American proteges in Asia. Asian governments in
general were often rediculed for their inefficiency
and corruption. (29/167-168)
r
363
Four other examples are presented as further
demonstration of the effect of the personality of
Southeast Asian political leaders on bilateral relations.
These are, namely the relations of President Sukarno and
i
Prince Sihanouk, then chief of state of Cambodia, with
other leaders; the improvement of bilateral relations
between Singapore and Malaysia after 1981; the improvement
I in bilateral relations between Singapore and Indonesia;
I
t
j and as discussed above, the relations between the
I
I Philippines and Indonesia over the Sabah issue.
Prince Sihanouk's sensitiveness and highly developed
self-esteem and concern with position and status were the
direct, though perhaps not the basic, underlying cause of |
I the break in diplomatic relations between Thailand and
[
; Cambodia. It followed immediately upon a remark by the
then Thai Prime Minister Sarit Thanarat at an official
reception where an ill-disguised reference to Cambodia
suggested that Thailand show restraint and patience in
the face of Cambodian accusations by taking consolation
from an old proverbial tale of a pig challenging a lion to
I
| fight. To Sihanouk, this was tantamount to a personal
i
j insult as well as an affront to Cambodia. Thus, on the
23rd October 1961, Cambodia broke off relations with 1
i
i
Thailand, which were not restored until Sihanouk's fall
j from power. In fact Thai officials consider Sihanouk
j 364
himself and his personality as the single most serious
impediment to a resumption of Thai-Cambodian relations
(Gordon, 124).
i
President Sukarno of Indonesia affords another case in
point where the personal characteristics and visions of
political leaders have manifested themselves in foreign
| policies. In 1954, Sukarno expounded his vision of a "Pan-
I
i Indonesia" which would have included Malaya, New Guinea,
and the Philippines. He conceived of the islands situated
between Asia and Australia, and the Pacific and Indian
Oceans as becoming a single entity. Sukarno went so far as
to unilateral rename the Indian Ocean and the Straits of
i
I :
i Malaya as the Indonesian Ocean and the Straits of Sumatra,
; respectively. He further claimed sovereignty over all the
> !
i waters that divided the hundreds of Indonesian Islands. |
! And he asserted that Indonesia should have the "right and
the primary responsibility to guard the security and peace
!
in the region, together with its neighbouring states, the
Philippines and Malaya". Sukarno further envisioned his
orginal concept to include all of Southeast Asia and
i
I
recalled the Indonesian kingdoms of antiquity maintaining ;
l
i hegemony over all of Southeast Asia through the control of
the seas. To this end, Sukarno envisaged the day when the
i
the Indonesian Navy would have taken over the role of the
U.S. Seventh Fleet and the British Fleet (Young, 35-36).
365
This vision undoubtedly formed the basis for Indonesia's
vehement denunciation of the establishment of the
Federation of Malaysia, which he viewed as the creation of
the imperialist and colonist in a last attempt to rescue
their interests in Southeast Asia, with Tunku Abdul Rahman
as their instrument. This view undoubtedly led to the
subsequent policy of Confrontation (Reinhardt, 120; Dahm,
| 404).
t
| Frederick Bunnell argues that the key to Indonesia's
j
1 foreign policy, especially the Malaysia episode, lies in
i
the "ideological-psychological" motivations of the
President. According to Bunnell, Sukarno embraced the
I
I Marxist-Lennist view of international affairs, the idea of
a "dialetical struggle" between the old capitalist states
i and the new evolving states which formed the basis of his
foreign policy. This is manifested by Sukarno's concept
of "NASAKOM", the coopeartion and synthesis of
i nationalism, religion and communism (Dahm, 404). In
I
addition, the "dynamic of the policy " was grounded on the
"psychological need for self-respect felt by a political
elite long humiliated by colonialism". While the
' ideological-psychological impulses may not have been the
I
exclusive elements behind the policies, they appeared to
be the decisive ones. As Bunnell concludes:
366
I
I
I
j
To be sure these vague ideological-psychological
impulses did not prescribe the specific courses of
action, but they did set long term goals, maintain
fears and establish priorities, Moreover, as Guided
Democracy presisted in its efforts at indoctrination,
I it is likely that the state ideology tended to take a
firmer hold on both the political bureaucratic elite
I and the political public. An atmosphere and and a
| momentum was generated that in turn reinforced the
predilections of the original authors. Even the
j president could not be immune to this secondary effect
i of indoctrination programs. (38)
I Sukarno's personal vision, coupled with his dislike
j for the Malaysian Prime Minister, Tengku Abdul Rahman
I dictated Indonesia's "Konfrontasi" policy with Malaysia.
i
To this, Tengku Rahman had lamented, "I still believe the
whole thing is a personality thing. He doesn't like me"
, (Gordon, 132). Sukarno's behavior here was as frenetic as
j it was unpredictable;
From April to September, the story is one of erratic
fluctuations of mood as Sukarno, with apparent
deliberation adopted a strategy of alternating
aggression and concialation which seemed calculated
to reduce Tengku to a state of nervous confusion with
regards to Indonesia's ultimate intentions. (Legge,
366) .
I Although confrontation was not the invention of
i . . .
Sukarno alone, the distinctive character of the
President's personal diplomacy became a major factor in
the gradual crystallization of Indonesia's attitudes.
I
j Indonesia's policy of confrontation,
L_ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
367
as an assertive foreign policy was related not just
to the content of Sukarno's domestic policy - to
his goal of preserving a balance between opposing
forces - but to the mechanics of policy - to the modes
and procedures by which he pursued that goal.
Essential to his domestic political style was the
element of constant movement - the sudden,
unpredictable maneuvers, catching opponents or
doubters off their guard and the resourceful responses
to potential challenges. The maintenance of the mood
of crisis and agitation helped him keep the initiative
always in his own hands. This style had its foreign
policy counterpart - boldness of posture, readiness to
take risks, swiftness of adaptation to setbacks or
challenges and once again, unpredictability. Such a
style of revolutionary diplomacy could indeed achieve
occasional success but it also related Sukarno's
constant need to hold the initiative at home. Sudden
switches of policy thus had a systematic function to
fulfill, and the whole apparatus of negotiation,
detente, demarche, confrontation, the sudden advances
and retreats, was an integral part of his political
method. (Legge, 37 3)
j The improvement in the relations between Singapore and
j Malaysia provides yet another example where personality
j traits of the leadership have significantly affected
j foreign policy. Because of geographic proximity and
i historical circumstances, Singapore's relations with
‘
; Malaysia were apt to be most intense and thus most subject
[ i
I to aggravation. In August 1965, when Singapore secceeded ]
j from the merger with Malaysia, any mutuality had been
' reduced to the absolute minimun required by their national
! j
interests. Because of the events preceeding Singapore's j
!
i separation, the personal rift between Tunku Abdul Rahman I
368
and Lee Kuan Yew could never be repaired (Milne and Muazy,
37) . For the next 16 years thereafter:
relations were characterized by distrust, suspicion,
and other negative attitudes. Relatively minor
bilateral issues became major irritants, and any
possible solutions were postponed in the absence of
any conducive atmosphere for reaching equitable
settlement. (Indorf, 36)
It was soon apparent that popular opinion was further
along the road of reconcialiation than its leadership. It
was not until 1981, when Dr. Mahatir Mohammed became the
new Malaysian Prime Minister that the situation changed
dramatically (Leifer, ASEAN, 38; Indorf, 36). Mahatir and
Lee made an "almost rapturous" beginning. As Minchin
explains:
(jhiey were after all birds of a feather -
opportunistic, eugenicist, racially competitive,
untroubled by traditional courtesies, both modernizers
with a more or less secular worldview and nationalist
who needed to define the object of their loyaltyj Lee
publicly celebrated the fact that he was dealing for
the first time with a Malaysian leader who was "non-U"
and whose life experience gave him a compatible
outlook. (172)
In December 1981, Dr. Mahatir made his first official
visit to Singapore. The two-day official visit ended with
I
i
a general air of euphoria. Most of the outstanding
j bilateral issues were expeditiously settled in what has
j been described as "in a true meeting of minds". For
i 369
i
j example, Singapore, after remaining adamant for several
j years, adopted Peninsular Malaysia's time zone. Also,
! while Singapore gave more land to the Malaysian Navy,
Malaysia gave up some of its own property in Singapore.
Both countries agreed to fix the boundary of the Straits
of Johore in perpetuity, following more hydrographic
survey.
i
| In August 1982, the Singapore Prime Minister on a
j return visit, further consolidated these new bonds with
; the continued rapid settlement of bilateral disputes. A
|
; shuttle air service was instituted between Singapore and
! Kuala Lumpur, with both countries' airlines cooperating
equally. Also, plans were made to extend a natural gas
I pipeline from Malaysia to Singapore by 1988; to jointly
j
; develop fresh water facilities and to exchange training
' opportunities for Civil Servants. In addition, low-capital
based industries were to be transferred from Singapore to
} Malaysia, and Singapore's investment in food production
was expected to increase Malaysia's exports to Singapore.
Subsequently in 1983, both countries also agreed to
; establish an emergency electricity link that would
■ eventually be extended to the rest of ASEAN.
It should be noted that although the groundwork for
I decisions or policies are established by top-level
j intergovernmental committees, which directly reported to
370
their respective Prime Ministers, once this is
accomplished, final decision are made by the Prime
Ministers. Thus, it is the quality of the leadership that
made the difference. Dr. Mahatir saw his counterpart as
"pragmatic.. able to adapt [himself] to the conditions in
the neighbouring countries". On his part, Mr. Lee
described the Kuala Lumpur hierarchy as "a new generation
of self-made, self-confident Malay leaders.. coming from
ordinary families without the mystique of royalty". Thus,
realism and frankness were the apparent attributes. As
such, the role of leadership and the government hierarchy
are important determinants in bilateral relations.
Problems invariably begin to take shape at the middle
levels of government, as Mr. Lee conceeded in one
interview (Indorf, 3 6-37).
Singapore's improvement in relations with Indonesia in
1973 affords yet another example where an individual
leader has significantly altered bilateral relations.
Singapore's relationship with Indonesia was damaged by
Indonesia's Konfrontasi policy with Malaysia, of which
Singapore was then a part. Although this issue was settled
more than a year prior to the formation of ASEAN,
suspicions and ill-feelings lingered on.
371
i
The improvement in Indonesian relations with Singapore
began with the ascendancy of President Suharto. President
Suharto ended Indonesia's Confrontation policy with
! I
I Malaysia and Singapore and embarked on a diplomatic course
; which was to see Indonesia assume a regional leadership
t
i
role acceptable to her neighbours. President Suharto
initiated the "good neighbor" policy which entailed a
j troika of pursuance of cordial bilateral relations, a
| commitment to regional unification and the settlement of
regional conflicts (Lau, 115).
I
However, coinciding with the most serious period of
the Sabah dispute between Malaysia and the Philippines,
i
Singapore's relations with Indonesia reached their nadir
in October 1968. At this time, two Indonesian marines,
I
j captured during Konfrontasi and convicted of terrorist
| bombings were hanged in Singapore, despite a personal
i
1 appeal for clemency from President Sukarno and with an
!
I appeal from Tunku Adbul Rahman, the then Prime Minister of
Malaysia. Against this backdrop, it therefore seems
i surprising that Lee personally insisted on the execution
I
1 of the two marines, and refused to advise clemency despite
I . ,
j these pleas (Mmchin, 174; Leifer, ASEAN, 39). i
j i
I The execution caused an uproar in Indonesia which i
* I
I
, culminated in the sacking of the Singapore embassy and ^
residences. There were also demands for retaliatory j
measures against Singapore, including economic sanctions
and punitive military actions. The explosions of emotions
eventually dissipated primarily because of Indonesian
Foreign Minister Adam Malik's insistence that popular
anger against Singapore would serve no purpose, and thus a
1 serious break in relations was averted. Nonetheless, the
| memories remained vivid in Indonesia for a long time
thereafter and the scars went deep as evident in a
statement by the Chairman of the Indonesia's People's
Congress in which he asserted that "the hearts of the
entire Indonesian people have been sliced and their honour
j insulted". Suharto was said to have also been personally
1
offended and his government began a review of its
relations with Singapore in all fields. Some have argued
that this episode provided the primary motivation for
Suharto's plans to cut Singapore's role as a middleman in
Indonesian trade (George, T., 174).
Bilateral relations with Indonesia improved in 1973,
with Singapore's Premier, Lee Kuan Yew's first-ever visit
! to Indonesia, which occurred only after considerable
• diplomacy and explanations behind the scenes. The
i
1 .
I improvements m relations emanated largely from Premier
Lee's visit to the National Cemetery for war heroes.
There, "overcoming his scruples" and at the suggestion of
Singapore's Malay-speaking Ambassador, Lee Khoon Choy
373
i
t
(Minchin, 175), in a symbolic and unscheduled gesture of
conciliation, he sprinkled flowers on the graves of the
two executed Indonesian marines. It is most unlikely that
this act would have generated the same effect had it been
i
j performed by some other Singapore official. The position
j and authority of Premier Lee within Singapore, coupled
| with the manner in which he is identified with Singapore
j by the Indonesians, as well as others, bestowed special
! significance to the gesture (Jorgensen-Dahl, 107/179;
Leifer, ASEAN, 40).
374
ASEAN PATTERN OF DIPLOMACY
Ernest Haas, in a close study of the negotiation
process, suggest three basis of compromises in
international relations, namely by the minumum common
denominator, by "splitting the difference" and by
deliberately or inadvertently upgrading the common
interests (Haas, E ,95). It is arguable that if the
process of negotiation is characterized by the latter two
modes, then it is most unlikely that the personalities of
the political leaders, even if, effective in policy
formulation in their respective domestic domains, would be
influential in the international arena so as to affect the
pace of regional economic integration. If, however,
negotiations are characterized by accomodations on the
basis of the "minumum common denominator", it is argued
that the personalities of the political leaders will
affect the pace of regional economic cooperation, as
Equal barganining partners gradually reduce their
antagonistic demands by exchanging concessions of
roughly equal value. Gains and losses are easily
identified, but the impact of transactions never goes
beyond what the least cooperative barganing partner
wishes to concede. This mode of compromise is typical
of classical diplomatic negotiations. (Haas, E., 95)
375
In point of fact Southeast Asian diplomacy is
characterized by accomodations on the basis of the minumum
common denominator, as exemplified and distinguished by a
style of negotiations that gives primacy to the notion of
"musjawarah" and "mufakat". Musjawarah is a style of
negotiation introduced by Sukarno and said to have roots
in the traditional village society in Indonesia as well as
the Malay world in Malaysia and the Philippines (Boyce,
176) . The notion of musjawarah warns leaders, at least at
the village level, against acting arbitarily or imposing
their will on the community. Rather it extols leaders to
make gentle suggestions of the path a community should
follow, being careful to consult all other participants
fully and to take their views and feelings into
consideration (Thambipillai and Saravanamuttu, 11).
Mufakat implies consensus or unanimity and, as such,
exemplifies the aim that the process of musjawarah is
striving towards (Koentjaraningrat, 397). At the core of
musjawarah is a psychological disposition on the part of
members to given due regards to the larger interests. Most
notably, negotiations in the spirit of musjawarah occur
between friends and not opponents (Haas, M., 503).
However, as Koentjaraningrat asserts, one crucial factor
endemic to the process is that it implies:
376
the existence of personalities who, by virtue of
their leadership, are able to bring together the
contrasting viewpoints or who have enough imagination
to arrive at a synthesis integrating the contrasting
viewpoints into a new conception. (397)
The adoption of the notions of musjawarah and mufakat
at the international level, however, implies, in the first
instance, that participation in deliberations would
involve facing problems and opposing interests of a vastly
increased intricacy and magnitude than at the village
level. This is despite the fact that interstate
negotiations occur among a group of people who are
psychologically and culturally disposed to give due regard
to each others views. As Michael Haas explains:
Given ethnic divisions and national rivalries,
international relations should be likened neither to
fights, games nor debates, but instead to informal
discussions in which each party is accorded equal
status. There is no acceptance in Confusian doctrine
of the Western concept of raison d'etat, the view that
the states are not bound by moral principles applied
to individuals. Instead of Westerners' Gesellschaftish
penchant for rational and impersonal calculations
preparatory to agreements, it is necessary for Asians
to develop personal relationships with one another in
order to develop mutual trust whence agreements become
! possible. (503)
i
i
j Secondly, and importantly in the intra-ASEAN context,
I
j musjawarah, loses the element of authority usually vested
i
j in the person of the village leader or elder, which is an
; integral part of it at the village level. Although the |
I
377
onus is on extensive consultation and compromise of
opposing interests, the authority and prestige of the
leader will naturally have a great deal of influence. In
international deliberations, then, no participant can
legitimately claim the position of leadership. It is on
the contrary more likely that each participant will
jealously protect his own status as an equal in relation
to the others (Jorgensen-Dahl, 167). This is demonstrated
by Indonesia's criticism, as it will be recalled, of
Singapore's initiative in forwarding the Kampuchean
proposal. Most notably, Indonesia's criticism was not
levied at the substance of the proposal, but at the
action itself which implied Singapore's leadership in the
matter.
In the ASEAN context then, as Haas further elaborates,
this consensual approach in negotiation, dubbed the "Asian
Way", implies that:
Deliberations are informal, conducted in private
with no records kept of the proceedings until public
sessions are held. As a result conflict that may
result in loss of face is softened. If a country
cannot accept a particular majority view, no decision
is made. This is in contrast with the Western
principle of majority rule, (as well as the Quaker
principle of having collective wisdom and judgement of
the majority brought to bear in order to shame or
ostracize the recalcitrant state). The Asian way is
grounded in the belief that no majority has the right i
to shame anyone and everyone is entitled to the i
dignity of his own position. (Haas, M., 505). i
378
Thus the consensual approach to negotiations connotes
cooperation based on the assumption that no projects or
ventures will be launched without the support of all
; members. Unanimity is sought and voting on specific
j proposals is avoided. This implies an absence of
! institutionalized procedures providing for majority
decisions. The avoidance of such decisions within the
| cooperative institutions of ASEAN, suggest that such
I
I procedures would be unacceptable to member states, and
that the majority decisions would more likely then not, be
felt to be binding on those states which did not concur
(Jorgensen-Dahl, 167). Thus a higher level of community,
! indeed integration, which, as E. Haas argues, such
: institutionalized procedures for majority decisions would
] indicate, do not exist among the ASEAN states. The failure
of the ASEAN Industrial Projects (AIP) Scheme demonstrates
the limitations of this consensual approach in regional
! cooperation. The AIP scheme allocated five major
industrial projects among the ASEAN countries and was
based on forty per cent participation by the other four
countries. It was designed to achieve regional
specialization and thus capture the benefits of large-
| scale production. The subsequent disagreement over the
i
j individual projects and the resultant rejection of
Singapore on the equity participation rule stymied the
379
scheme. Singapore's then Prime Minister, Lee Kuan Yew, had
suggested instead the 1 1 five-minus-one" principle, where
even if one member disagreed with a certain policy, it
could still support the activities of the others and thus
not represent an obstacle. However, ASEAN officials had
indicated that such a principle could not be utilized in
all decision-making cases as it would erode the normal
consensus way of arriving at decisions (Thambipillai and
Saravanamuttu, 22).
Musjawah and mufakat are thus both the cause and
effect in relation to the levels of cooperation. In the
first instance, as the principal, if not only method of
negotiations, it implies that the calculations members
make with regard to what is possible are limited or
circumscribed by what they can adopt to the prevalent
style of negotiation. In other words, members attend
meetings with plans and proposals which are deliberately
or otherwise geared to limits set by the mode of
negotiation. (Jorgensen-Dahl, 165-168).
Secondly, since unanimity is sought and each state is
entitled to the "dignity of its own position", this
implies that no reason for country's dissent on a policy
is ncessary or needed. Thus, given the elitist nature of
foreign policy formulation and the authoritarian regimes,
380
there exists great latitude for individual ASEAN leaders
to affect the pace of regional cooperation.
This latitude is further enhanced by the frequent use
of summit conferences. The use of summit conferences is
not novel to ASEAN. Roosevelt and Kennedy appear to have
I
! enjoyed the personal involvement summit conferences
j entailed (Plischke, 47-48). However, in the Southeast
i Asian context, it is a manifestation of the authoritarian
; culture (Jorgensen-Dahl, 17 0). It reinforces the principle
J
that leadership authority resides in the hands of an
elder. In this context, summit conference represents a
method whereby a ruler can best use his person, his
trusted associates and whatever political and government
i
assets he has to strengthen his own influence and achieve
his ends (Wriggins, 3). The propensity to resort to
summit conferences derives more importantly from the
absence or relative weakness of a foreign policy and
diplomatic tradition.
t
The direct involvement of Heads of State through
summitry and otherwise in the actual conduct of foreign
policy, however, presents drawbacks. The personal
animosity, between the Tunku and Sukarno was a well-known
j fact (Gordon, 129-132) and could only have had
I . . .
detrimental effects on Malaysia-Indonesian relations,
especially since both took a very active hand in the
381
i
conduct of their country's policies. "During
Confrontation, mutual exchanges continued between Jarkata
! and Kuala Lumpur with Sukarno and the Tunku apparently
vying with each other in search for the most offensive
j
j epithets to hurl across the Java Sea" (Legge, 366).
j Furthermore, the participation of top leaders in the
enunciation and conduct of foreign policy through summit
meetings tend to lend an aura of finality to the policy
i . .
j position of their countries at any time. Whatever views or
t
| policies advocated by the top leaders are accorded
i
1
! superior status, so to speak, which makes it difficult to
I
| reverse or change specific policies should circumstances
I necessitate. Such changes are made all the more difficult
i
because the integrity and sincerity of the leaders tend to
t be called into question.
j On the other hand, and more significantly, it
makes the relations between countries particularly
vulnerable to the vagaries of personal relationships
between top leaders, something which has been, as
: discussed, a feature of the relationships between the
; countries in Southeast Asia (Jorgensen-Dahl, 17 0-174) .
382
CONCLUSIONS
ASEAN's inability to significantly alter the intra-
regional trade structure betrays the presence of
i
| centrifugal forces acting against regional economic
i
integration. The preceeding section suggests that, in the
first instance, these centrifugal forces have arisen from
, the elitist nature of the regimes in ASEAN. Such regimes
| have enabled, on the one hand, the personal visions and
I
characteristics of political leaders to be translated into
I
national foreign policies which, at times, have run
against the grain of regional economic cooperation.
Consequently, the pace and levels of economic cooperation
I has depended upon the personal relationships between the
j top political leaders in ASEAN. These relationships, in
i . . .
j general, have not been amicable. In addition, the adoption
I of the consensual mode of negotiation, coupled with the
use of summit meetings, has amplified the effect and
importance of political leaders on the process of regional
economic cooperation.
j >
I Furthermore, this chapter has argued that these
i
| centrifugal forces have also emanated from bilateral
| tensions generated from overlapping territorial claims and
; from, essentially, the sizeable Chinese population in
j predominantly Muslim Southeast Asia. Although bilateral
383
!
tensions are not exclusive to ASEAN, their significance
and effects are demonstrated by the resultant suspensions
in diplomatic relations and even armed "Confrontation".
I
Insofar as regional economic integration involves costs
and unequal gains, the suspicions and animosities thus
i created have stifled efforts at regional cooperation.
!
i
i
i
i
i
i
i
I
384
CHAPTER VI
SUMMARY AND CONCLUSIONS
i A review of the literature on international economic
I
J
t
j integration has shown that increases in economic welfare
alone cannot provide the theoretical justification for
international economic integration. This has thus
) :
j engendered the "public goods" approach as the economic
j basis for international economic integration, where
.industrial development, nationalism and economic
diversification, among other objectives, are seen as
i
' public goods. The public goods approach paves the way for
[ the recognition for other criteria for the assessment of
I international economic integration and the acknowledgement
of other factors that may affect the success of
i
■ international economic integration schemes. In the final
i analysis, then, the public goods approach necessitates
i
<
j that the evaluation of the success of such schemes rests
with the extent to which enunciated objectives are
I
I achieved.
' .
In this respect, Asean was formed m 1^69^)with the
| explicitly enunciated objective of achieving economic
I
• development through regional cooperation and joint
j endeavours. However, nearly 2 5 years into its inception,
ASEAN has not achieved this objective. It has been shown
385
that intra-ASEAN trade has not been significantly affected
t
by the formation of ASEAN, even with the institution of
the Preferential Trading Arrangements. This thesis has
shown that the developed economies still remain the major
trading partners of the ASEAN member countries, accounting
for over 70% of all ASEAN exports and imports.
I
I Nonetheless, the theory of international economic
integration, has espoused the benefits of economic
f
■ development through regional economic cooperation. Such a
I
I
' strategy, by combining the export-oriented and import
i
j substitution approaches, creates import-substitution on a
j regional basis and provides a conduit to transcend the
i
difficulties of a limited domestic market. The failure, in
i
essence, of ASEAN to stimulate greater intra-regional
trade, however, argues, in part, for the existence of
other facets to international economic integration not
] accounted for by the traditional economic integration
!
theory, and whose primacy lies especially in economic
integration among developing countries.
Consequently, this thesis has argued that the model of ;
regional economic integration that ASEAN has emulated has
failed to recognize the unique characteristics of
developing countries, in general, and ASEAN in particular.
It has contended these characteristics remain impediments
to ASEAN's ability to achieve its economic objective. The
r
386
traditional model of regional integration has assumed
countries with homogeneous and industrially advanced
levels of development, and has left unaddressed the effect
of regional economic integration among countries with
heterogeneous levels of development and of the investment
; patterns of transnational corporations on trade flows.
!
j These characteristics may, in themselves, bias trade
i
i extra-regionally.
i
This thesis has shown that the heterogenous levels of
f
economic development of the ASEAN countries has skewed
ASEAN member countries' trade towards the developed
I
economies. Since raw materials, on the whole, form the
i
i
! bulk of ASEAN's exports, this has resulted in a limited
J regional absorbtive capacity for these products and a
| necessity to export to areas where there is a high demand
I
i for these products, namely the developed economies.
i
Concommitantly, given that high technology products are
not, in general, available in the intra-ASEAN market,
these products have to be imported extra-regionally and
j specifically, from the developed economies.
I In addition, this thesis has illustrated that all the
j ASEAN member countries have utilized foreign direct
investment and its conduits, the transnational
, corporations, in their economic development strategies.
! The regionally uncoordinated utilization of this foreign
387
direct investment, coupled with these investments
primarily in the extractive and raw materials sectors have
resulted in two outcomes. In the first instance, this has
i
i necessitated the export of these products extra-
regionally, given, as argued, the limited regional
absorptive capacity for these products. Secondly, it has
led to the development of parallel export sectors in the
: ASEAN countries and competition for export markets. The
I
' cumulative effects translate into a cap on the potential
for any increase in intra-ASEAN trade that regional
economic cooperation could generate.
Using regressional analysis, this thesis has
substantianted the argument that the levels of economic
development and the investment patterns of transnational
corporations have affected the trade flows of the ASEAN
member countries between 1969 and 1986. Specifically, the
regression results have shown that the disparate levels of
j economic development of the ASEAN countries, and the great
! disparities between the former, save Singapore, and the
j developed economies, together with the investment patterns
j of transnational corporations have resulted in the imports
j of manufactured goods and the export of primary produce
j and raw materials extra-regionally.
However, the regression results suggest that, on the
average, only some 40% of the variations in intra-ASEAN
388
trade flows are accounted for by the economic variables
discussed, including the levels of economic development
1 and the investment patterns of the transnational
corporations. Although a greater proportion of the
variation in intra-ASEAN trade flows is accounted for in
the manufactured goods categories, this nonetheless
warrants the existence of other pre-conditions and factors
t
that determine the levels of intra-ASEAN trade flows. In
this respect, this thesis has argued that such factors lie
beyond the realm of economics and fall within the domain
J of the socio-political. This belies the shortfall of a
J purely economic approach in understanding the levels of
j intra-ASEAN trade, and underestimates the measures
I
j necessary and the political will required to motivate the
!
j requisite schemes of regional economic integration, if
t
substantive increases in intra-ASEAN trade, in particular,
i
1
j and ASEAN economic development, in general, are to be
i
i
achieved.
This thesis has further argued that a complete
analysis of factors that may account for the limited
j political will as manifested by the low-levels of intra-
, ASEAN trade must, in the first instance, incorporate the
j historial animosity and bilateral tensions between the
i I
j ASEAN member countries that has predated and persisted |
j throughout its existence. This historical animosity has
389
emanated primarily from conflicting territorial claims,
with their attendant natural resources, especially oil,
LNG and fishing, and domestic ethnic disputes but with
regional ramifications. Although bilateral tensions are
characteristics of international relations, their
significance and severity in the case of ASEAN are
exemplified by the suspension of diplomatic relations
between the ASEAN states at various junctures, and, more
poignantly, by armed confrontation.
i
Furthermore, this thesis has posited that the elitist
political structure of ASEAN, and the method of
negotiation, may have enabled the personal perceptions and
ideologies of political leaders to determine the pace and ,
levels of cooperation. Although this assertion has not
been shown conclusively to directly affect the levels of
intra-ASEAN trade, this thesis has nonetheless argued that
any evaluation of ASEAN must include a consideration of
the possible effects of the perception and ideologies of
the ASEAN political leaders on bilateral relations. The
exclusion of such a consideration, on the other hand,
would necessarily dismiss the possibility of any such
effect, and would serve to overlook a fascinating if not
!
intriguing facet of Southeast Asian political relations.
390
POLICY RECOMMENDATIONS
This thesis thus has asserted that several economic,
; social and political factors that have impeded the pace
and levels of regional economic cooperation in ASEAN,
j Paramount among these factors has been the absence of
! determined political will. The pace of economic
j cooperation has been manifested by the levels of intra-
i
| ASEAN trade which has been dismally low. The PTA scheme
l
i was one of the measure adopted by the Bali summit to
; stimulate intra-ASEAN trade. However, as several studies
I
! have argued, and the intra-ASEAN trade flow analysis in
, this thesis has substantiated, the items included in the
1 Preferential Trading Arrangement (PTA) have not been broad
! enough, nor the tariff reductions deep enough to have had
i
i
j any significant effect on intra-ASEAN trade.
i Thus, if the promotion of intra-ASEAN trade remains a
i
j credible objective of ASEAN, then there has to be a
greater reduction in intra-regional tariffs, and across a
! broader spectrum of goods, perhaps reaching the 100
I
percent preference as detailed in the General Agreement on
| Tariffs and Trade (GATT). In addition, the items offered
! for preferential treatment should be expanded to include
: items that the ASEAN countries have been importing from
1 extra-ASEAN sources. This would be a necessary complement
391
to the success of the ASEAN Industrial Joint Ventures
(AIJV) Scheme. Similarly, the deepening of tariffs across
a greater spectrum of goods is necessary to ensure the
success of ASEAN economic cooperation in the ASEAN
Industrial Project (AIP) Scheme, the ASEAN Industrial
Complemenation (AIC) Scheme and the AIJV Scheme.
Furthermore, there should be a reduction in the size
of the exclusion list to, as some have suggested, ten
percent of traded items and fifty percent of intra-ASEAN
trade value (Alburo, 33). Similarly, since non-tariff
barriers are prevalent in ASEAN, steps should be taken to
remove these barriers or, at the very least, standardize
customs regulations among the ASEAN countries.
This thesis has argued that the disparate levels of
economic development of the ASEAN countries may have led
to the "polarization" of growth, which may have generated
unequal gains from regional economic cooperation. Since
unequal costs and benefits from regional economic
integration temper the requisite political will, a system ]
of compensation should be instituted to compensate for J
i
these unequal costs and benefits. Such a system could j
include the gradual future removal of tariffs for the J
lesser developed countries in the group, such as the j
Philippines and Indonesia. It could also involve greater
financial commitment on the part of the more developed
392
j
countries in the group, to joint projects, as opposed to
the present equity formula, or the establishment of a
common fund, where a country's countribution is linked to
economic gains from regional economic integration.
I
This thesis has asserted that the regionally
uncoordinated utilization of foreign investment in the
! ASEAN member countries' development strategies explains,
| J
in part, the extra-regional bias of ASEAN trade flows. As
j such, if increases in intra-regional trade, and their
i
attendant externalities remain a major objective of ASEAN,
then foreign investments into ASEAN have to be
coordinated. Specifically, TNCs investing in the region
have to be induced to distribute their operations among j
the ASEAN countries based on the principle of comparative j
i
1 advantage. Such a task may not prove to be intractable in
i
I light of the fact the Ford Motor Company had made a
j complementary auto parts manufacturing proposal in 1971,
1 at the Fourth ASEAN Ministerial meeting in Manila.
However, the proposal was ignored because of the "politics
of avoidance" as the implementation of such a scheme
required a greater political commitment than the ASEAN
leaders were willing to make then. Ford, as well as
i
i
i
j General Motors, was convinced of an automobile market in
i
the region, a convinction borne by subsidaries of these
auto manufacturers in three of the ASEAN countries. The
I- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -----
393
complementary automobile industry scheme for ASEAN
represented Ford's grand design for developing a unique
inexpensive vehicle for the Southeast Asian market. The
j
| economic rationale called for the allocation of the
manufacture of automobile parts among the ASEAN countries.
These parts could then be exchanged on a tariff-free basis
I
and national production in each country would utilise the
j
economies of scale to meet total regional demand
j (Suriyamongkol, Politics, 70). Ironically,if the proposal
had been accepted then by the ASEAN member countries, it
would have conformed to ASEAN's tenor to achieve regional
economic development through joint endeavors, while
i enjoying economies of scale.
I
I This thesis has also shown that primary products and
i
raw materials remain the main exports of the ASEAN
countries, in general. In this respect, coordinated
j policies should be implemented by the ASEAN countries to,
l
again, induce TNCs to establish final-stage industries to
process these products intra-regionally. This would serve,
in the first instance, to increase efficiency in
production, and secondly to perhaps provide a basis for
increases in intra-regional trade.
i
| Most of the schemes of regional cooperation advocated
by the ASEAN countries involve large-scale industrial
projects and minimal private sector involvement. However,
394
I this approach, while feasible, neglects an important
I
sector of the economy; the small and medium scale
industries (SMI). As Bruch and Hiemenz argue, these
industries in ASEAN, given the appropriate government
policies, may contribute significantly to industrial
growth and development. The SMI are generally labor-
intensive and tend to employ techniques of production that
correspond to the abundance of labor and the scarcity of
i physical and human capital that is endemic to developing
I
i countries. In addition, SMIs demonstrate a higher degree
j of efficiency in the utilization of capital and serves to
!
| mobilize savings, entrepreneurial talent and other
I
! resources (Bruch and Hiemenz, 1-122).
Therefore, anxilliary to the establishment of the
j ASEAN Industrial Projects, consideration should be given
| to the promotion of existing SMIs in ASEAN. In this
r
I
j respect, an ASEAN Common Fund could be established to
!
identify and provide financing for those SMIs that offer
potential for growth in the ASEAN market. The extension of
preferential tariffs to the products of these SMI in the
ASEAN market will provide, on the one hand, yet another
avenue to stimulate intra-ASEAN trade and help the
development objectives of ASEAN member countries. On the
other hand, the success of these SMIs in the ASEAN market,
( in accordance with the tenets of regional economic
395
integration, will provide the basis for internationally
competitive industries.
Furthermore, in this respect, the ASEAN governments
should strive to cultivate greater private sector
involvement and input in the various schemes of regional
economic cooperation. In the final analysis, the success
of many, if not all, of these schemes will be dependant
upon the private sector and their "compliance" with the
economic objectives of ASEAN.
It has been argued that historical animosity and
ethnic disputes, together with the elitist nature of the
ASEAN regimes, which has personified the effects of the
ASEAN political leaders in regional relations, form the
crux of the socio-politico factors impeding international
economic integration. As such, the theoretical solution
lies in neutralizing these socio-political factors, though
immediate policy recommendations may not be as
straightforward. Perhaps cultural exchanges and increases
in intra-regional tourism would foster better relations
between the ASEAN countries, neutralize these historical
I
animosities and provide the requisite groundswell
necessary to elicit any eventual change in the attitudes
of the political leadership. As was discussed in this
thesis, the relaxation in tensions and the improvement in :
1
j
the bilateral relations between Singapore and Malaysia
396
following their separation has been attributed, in part,
to an increase in tourism between these two countries.
This thesis has suggested that the elitist nature of
the regimes, and the method of negotiation adopted by
ASEAN have enabled the personalities and perceptions of
the political leaders to determine the pace and level of
economic cooperation. Thus, the provision of greater
autonomy to the ASEAN Secretariat, and the greater
imvolvement of the private sector, especially in the
evaluation and implementation of regional projects, would
serve to negate, conceivably to some extent, the effects
of the individual political leaders
Finally, successful international economic integration
requires enlightened political leadership, vested with the
realization that national sovereignty and development
objectives, and regional economic development are not
necessarily mutually exclusive nor zero-sum games. The
realization of such a premise may induce the politcal
leadership of the ASEAN countries to initiate policies
geared toward eliminating these historical animosity. In
essense then, the viability of ASEAN as an economic
grouping perhaps lies in time, as manifested through
successive generations of leaders and populace.
Notes
The ambiguity is best recognized by Robson (1980) who
distinguishes three levels of economic integration
namely; National Integration which refers to
integration of borders of a nation state;
International Economic Integration which involves
intergration of different nation states into a
regional bloc; and Worldwide Intergration which refers
to integration of different nation states on a global
scale. For the purposes of clarity, this thesis will
adopt these distinctions.
Axline argues that many of the dynamic effects of
integration cannot be realized without the freeing of
restrictions on other factors of production, such as
labour and capital, requiring a common market or
wihtout a coordination of economic policies in
monetary, fiscal and social matters requiring an
economic union. Thus, he asserts that once a form
of international integration is established, there
will always be an inherent tendency to move to a
higher form of integration.
398
3. Vaitos (1978), in his paper, dismisses the relevance
of trade creation and trade diversion in economic
integration schemes, alluding that they are more
I
"thought diverting versus thought creating". The
theoretical gains in efficiency may be of no
significance from the historical-analytical approach,
and perhaps of little overall significance in
explaining the formation of Customs Unions, as
j Cooper-Massell et al. have argued. However, trade
creation and trade diversion does imply gainers
and losers, and from the viewpoint of political
actors, may be a factor in the overall sucess of
j
; economic integration schemes. This view is somewhat !
substantiated by Haas and Schmitter's observation of
j the processes in LAFTA.
| 4. Crouch posits that countries with different levels of
j
j economic development will display differences in class
i structure and political and adminstrative capacities,
j This is somewhat substantiated in studies by Liptsitz,
i
| Neubauer, and Grabbs, among others, which have found
that there is a tendency for countries with lower
l
levels of economic development to have more j
• authoritarian governments. These differences may ,
j . . i
! impinge upon the success of international economic j
399
integration. The countries with higher political and
administrative capacities would be able to, if they so
desire, pursue such programs and interests of regional
integration which may bring about far-reaching social
and economic change and which may require equally
major social and economic adjustments.
Crouch also contends that a higher level of
development would also imply a relatively large and
prosperous middle class, and a more sophiscated
economy. The latter, together with the demands of the
middle class for a more efficient and professional
administration, would inevitably require technocrats
to administer the economy. With a technocratic
administration, there is an inclination towards
rational decision-making. In addition, rational
decision-making is more easily achieved when the
government is autonomous and insulated from interest
groups.
In sum, Crouch asserts that the prospects for
implementing policies of economic cooperation and
integration will depend not only on whether such
cooperation furthers what economist and technocrats
consider to be national interests of respective
countries, but it will also be affected by how
politically important vested interests in each country
400
assess the effects of particular measures on their
interests. Thus it pits the relative influence of
technocrats and bucreucrats against that of business
interest. This however doesn't necesarily imply that
rational' technocrats or bureaucrats insulated from
'irrational' political pressures will necessarily
favour policies designed to increase regional economic
integration. Indeed, their attitudes will depend on
how they perceive their country's national interest.
Crouch, however, observes that, in general, the main
initiative towards expanding cooperation stems from
technocrats and adminstrators, while the main
resistance stems from groups which have an interest in j
i
maintaining the existing arrangements which may be
harmed by the re-adjustments accompaning integration
(Crouch, 1-5).
ASEAN now comprises the six independent countries of
Malaysia, Indonesia, the Philippines, Singapore,
Thailand and Brunei. On the 1st January 1985, Brunei
gained her independence and simultaneously became the
sixth member of ASEAN. Since Brunei has not been
awarded any projects in the ASEAN Industrial Projects
Scheme, or participated significantly as yet in any of
I
the other schemes, especially the Preferential Trading
401
Arrangement Scheme, Brunei has been, for the purposes
of this thesis, excluded from the discussion.
7. Almost all authors view ASEAN as having undergone two
broad stages, the first between 1967 and 1975, and the
second from 1976 to the present. As Saravanamuttu
summarizes, the first stage was marked by inchoate and
sluggish development of cooperative ventures. There
was a general cautiousness in undertaking genuine
i
integrative measures and most of ASEAN's "success" was ;
achieved through common political postures vis-a-vis
third parties. Joint positions on economic matters
were kept to the minumum, and North-South issues
took a back seat to non-controversial cultural,
social and economic cooperation. The second period
was marked by an acceleration in collaborative
actions in the wake of the Bali Accords and the
impetus supplied by the U.N. team's recommendations
for economic integrative efforts. There were also
common approaches in relations with third
countries, including common stands on North-South
issues. However, as Saravanamuttu warns, the last few i
I
years have witnessed collaboration on foreign policies j
!
and postures on the Indochinese situation, taking j
precedence once again over economic collaboration.
402
8. Imports of country i were used as opposed to exports
of country i to faciltate the use of the distance
variable of ratio of imports, valued at cif, to
i
j exports valued at fob. When exports of country 1 were
i
' used, the ratio for most of the observations were
less than 1.0 which is theoretically unjustifiable as <
1 j
this implied goods valued at cif was less than those
i
valued at fob.
9. The broad commodity groups SITC 1 (Beverages and
| Tobacco) and SITC 4 (Animal and vegetable oils) were
omitted from this study because of paucity of data in
i
*
j these categories. SITC 9 ( goods not classified by
j kind) was omitted because it encompassed unclassified
goods across all the commodity groups. Thus it would
had been theoretically meaningless to discuss the
; effects of the independent variables on this category
j of goods.
^ i
i
|10. In utilizing the ordinary least-squares method,
I
listwise deletion of missing values was speficied. J
403
Trade data for Malaysia existed only after 1972. Trade
data for the Philippines was unattainable for 1972,
1978 and 1984. Trade data for Indonesia was J
unattainable for 1970, 1972 and 1984.
Throughout this chapter, the United States, Japan, West
Germany and Great Britian, in toto, is used
synonymously with the developed economies.
In his work, Gasiorowski finds that the the arguments
for both schools of thought are substantiated when
applied narrowly to trade; costly trade produces an j
increase in conflict while beneficial trade produces a
decline in conflict. He however asserts that inter
dependence has both costly as well as beneficial
aspects and its the former that produces greater
international conflict.
i
404
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Asset Metadata

Creator Pereira, Francis (author)

Core Title The politico-economic determinants of ASEAN regional economic cooperation

Degree Doctor of Philosophy

Degree Program Political Economy and Public Policy

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, General,OAI-PMH Harvest,political science, international relations

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Hamilton, Nora (committee chair), Elliott, John E. (committee member), Kim, Eun Mee (committee member), Schapiro, Morton (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-280464

Unique identifier UC11257932

Identifier DP23399.pdf (filename),usctheses-c20-280464 (legacy record id)

Legacy Identifier DP23399.pdf

Dmrecord 280464

Document Type Dissertation

Rights Pereira, Francis

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA