Globalization II : A bumpy road for Southeast Asia
International Herald Tribune
October 21, 2002
Philip Bowring

Enthusiasm for globalization seems to be waning in Southeast Asia, which has been one of the main beneficiaries of open markets, trade and capital flows. Political leaders and the public have not turned hostile to the concept, as in Latin America, but there is a sense that the process is grinding to a halt and that the region needs new ways of maintaining or regaining economic momentum.

There is some lingering impact of the Asian financial crisis on local confidence, but that is now a secondary factor. With sensible policies, these nations can now cope with liberalization, so optimists still see a return to pre-crisis conditions, albeit with slower growth than in the past.

That optimism is being eroded, however, by the following factors.

Trade and investment competition from China. It can reasonably be argued that these countries gain as much as they lose from Chinese growth driven by foreign trade and investment. China's goods market, tourists and outward capital flows are all beneficial to its neighbors. However, China is viewed as supplanting Southeast Asia as a locus from which manufacturers serve global markets. This is diminishing the smaller countries' attractiveness for foreign direct investment, which makes them think more in terms of regional or domestic than global markets.

Damage to commerce from Sept. 11, the threat of war against Iraq and the terror attack on Bali. Even before Bali, the region was being hurt by foreign investors' perceptions of danger. It is difficult for Asians to retain faith in globalization when its Western promoters are losing theirs.

Recognition that Southeast Asia's traditional markets and sources of capital will grow slowly, at best. Whether or not the U.S. economy picks up soon, its trade deficit has to be addressed sooner or later. Europe is almost moribund, Japan's prospects are at best modest.

Awareness of global overcapacity in many industries, from autos to consumer electronics, on which the region had been relying for growth. With China adding capacity faster than its domestic market is growing, it will take a long time for overinvestment to clear.

Faced with these problems, regional leaders have been trying to adjust. Prime Minister Mahathir bin Mohamad of Malaysia, for instance, remains a tireless promoter of foreign direct investment, but now suggests that Malaysia may need to be more inward-looking simply out of necessity.

Prime Minister Thaksin Shinawatra of Thailand has gained political mileage by emphasizing the merits of local investment projects. He is also now pushing ideas for regional rather than global cooperation.

Optimists hope that increased regional and bilateral cooperation can make up for lack of progress at the World Trade Organization and other global forums. ASEAN's free trade agreement continues to progress and the goal of a free trade pact with China is at least a statement of intent. Singapore's signing of bilateral free trade pacts is an attempt to keep liberalization from stalling.

However, foreign investment, more than official pacts, has been the engine of regional trade liberalization. Less foreign investment may mean more pressure from local capital, including that of the state, for protection. National projects, backed by public money, could be favored as governments attempt to offset falls in foreign investment.

South Korea's success in building many industries behind high tariff walls is a siren song. If Thailand, Malaysia and Indonesia follow that path they are more likely to end up like Latin America than Korea. This would be a blow, too, to the much touted idea of regional cooperation.

There could be benefits from increased competition for foreign investment. One is a more efficient use of capital and increased emphasis on human resources. The region's capital-to-output ratios suggest wasted resources and poor returns. Another possible benefit is an emphasis on domestic rather than export demand.

Southeast Asia does not face another crisis. But it is facing changing global circumstances that may prove a greater challenge and opportunity than the financial crisis of 1997-1999.

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