ASEAN




Vanishing minnows
By Chan Akya
December 1, 2007
http://www.atimes.com/atimes/Asian_Economy/IL01Dk01.html

The growth of China and India has caused significant policy shifts
across Asia as countries used to absorbing the attention of Western
politicians and investors suddenly find themselves in the shadows,
approaching obscurity. About the only thing that now attracts global
attention to these countries tends to be of the wrong sort, such as
natural disasters and terrorist attacks.

The impact of the two growing markets in the midst of world economy in
a downward spiral simply means that competitors will have to pay up
dramatically to garner attention from capital providers, let alone
actually get any money.

I wrote many moons ago about the growing irrelevance of the
Association of Southeast Asian Nations (ASEAN) [1], which has now been
echoed by other media after the group failed to find common ground
this month against Myanmar. Granted that any group that counts the
authoritarian government of Singapore as a democracy has a long way to
go on its definition of human rights, the failure to agree on Myanmar
was nevertheless a pointer to the bleak future of member countries who
have lost the key economic rationale to stay together.

More than India, it is China that has helped to push ASEAN into
economic irrelevance, as the country vacuumed up first the lower end
of manufacturing and then increasingly absorbed value-added
industries. This has left vast swathes of industry in countries like
Vietnam and Malaysia completely unviable in the face of competition
from the Asian giants.

Lacking the strategic depth required to offer domestic consumption,
ASEAN has found member countries' reliance on exports suddenly
poisonous. The dilution of their trade protocols with China helped to
diminish tariff protection accorded to key industries such as computer
hardware and automobile parts, in turn destroying the growth potential
if not the actual existence of many manufacturing plants. That has in
turn changed the role of ASEAN from value-added manufacturing to more
basic industries, such as the export of agricultural produce, mining
and energy.

Central banks around ASEAN have failed to catch on to the need for
their domestic markets to account for an increasing portion of
economic growth, which would have allowed them to free up their
currencies. Instead and thanks mainly to the Asian financial crisis of
10 years ago [2], the region's currencies are still "managed" to
provide competitive advantages for manufacturers in what must count as
one of the most futile tasks in the global economy today.

Singapore is an excellent example. Hoping against hope, the country's
central bank zealously guards against any "unnatural" rise in the
currency, in order to provide some degree of staying power to its
strategic industries including manufacturing. With Singapore’s
manufacturers suffering from higher employee costs, a miniscule
domestic market and marginal productivity gains relative to China and
India, I simply cannot see any of them surviving under open
competition. The last point goes to the heart of ASEAN's current
problems.

In the days of yore, that is 10 years ago, ASEAN benefited from
significant competitive advantages in the raising of capital. This in
turn meant that the region's producers could easily ramp up
capital-intensive industries, which amplified the productivity
advantage against China and India. In the years following the Asian
financial crisis, capital has flowed freely into first China and then
India, effectively neutralizing any advantage that ASEAN used to
possess.

The gap between the domestic technological prowess of ASEAN and that
of China and India has reversed completely. In India for example, a
domestic company, Tata Motors, has announced that it will introduce a
car for US$2,500 [3], showing cutting-edge engineering capabilities
that will leave the automobile manufacturers in Malaysia gasping for
breath should tariff barriers be removed. The protected icons of
Malaysian automobile manufacturing such as Proton haven't designed and
developed a single doorframe on their own, let alone a whole car.

The delicious irony of this development is that the same Indian
company is reportedly the front-runner to buy the Jaguar and Land
Rover units of Ford Motors, showing that it can raise substantial
capital at short notice even in the context of the current crisis in
credit markets.

Strategic consequences
While the strategic consequences of China's growth have been most
dramatically felt by Taiwan, whose efforts to remain recognized by a
motley crew of Pacific islands and South American countries have met
exponentially growing obstacles with every year, the same effect is
now being felt across the rest of the region.

South Korea has been at great pains to increase the contribution of
its services sector and has of late been projecting an image of Seoul
as the new financial center for North Asia. This is because a country
of 40 million people could simply not hope to both innovate and
manufacture competitively against China for the next 20 years. This is
why the thinking among South Korean businessmen with respect to North
Korea is shaped by the need for access to cheaper manufacturing
facilities. That has in turn imposed strictures on what any South
Korean government can do and say with respect to the North.

India's neighbors have it worse. Not one of them is a functioning
plural democracy to start with, with the possible exception of Sri
Lanka [4]. Even after ignoring the niceties of democracy in Sri Lanka,
the decades-long civil war with Tamil separatists appears to have
worsened in recent days with the killing of the political chief of the
separatists earlier this month seen as causing further bloodshed in
coming months. The deadly Tamil Tigers could easily push the country
into a sharp recession, more than any changes in textile quotas and
the vagaries of the Monsoon on tea exports ever could. Investors
looking at returns similar to those of India but with significantly
higher political and terrorism risks would obviously choose against
Sri Lanka in coming months.

I have already written recently on Pakistan [5]. About the only thing
that can be added to that article is that the worst-case scenario of
Shaukat Aziz's departure unfolded on the same day that the article was
published. Without his capable direction, I expect the Pakistani
economy to slide, with many foreign investors likely to pull out as
the political environment worsens. It is of course not the economy
that Western countries care about for Pakistan, as I wrote in the
above-mentioned article, but the fate of the country's nuclear
weapons. Remove these weapons from the picture and it is unlikely that
Pakistan would get any more column space in major Western media than
Afghanistan does today.

Nepal and Bangladesh have poor infrastructure to start with, and
political turmoil has made matters worse for any turnaround in these
countries. The troubles caused by the Marxists and Islamic
fundamentalists in these countries [6] have caused many industrialists
to flee, despite obvious cost advantages in place. An unstable
political environment means that foreign direct investments are
increasingly difficult to source. This is how any downward spiral
starts, keeping the poor in desperate poverty.

The main, some would say sole, export of these countries is people to
staff the factories of India. To be sure, that has caused significant
political backlash in India itself, as seen in the recent attacks on
illegal Bangladeshi laborers in northeast states. Indian media report
that despite these attacks, the flow of people fleeing Bangladesh for
the relative economic prosperity of India has only increased in recent
weeks. That is because the only thing remaining for people left behind
in Bangladesh (and perhaps Nepal) to do is to sit around waiting for
the annual flooding of the Ganges.

Notes
1. Mid-life crisis for ASEAN Asia Times Online, December 16, 2006.
2. Asia's scalded cats Asia Times Online, July 7, 2007.
3. This will be the cheapest mass produced car in the world, according
the auto industry insiders, although I do question where in India
these cars will be driven given the parlous state of the country's
infrastructure.
4. The strict definition of a plural democracy doesn't work for Sri
Lanka given the large number of disenfranchised people in the
country's restive north, as a result of the country's patently racist
constitution.
5. Playing South Asia's World War III game Asia Times Online, November
17, 2007.
6. The jihadi ate my homework Asia Times Online, February 24, 2007.




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