Friends in Need

ASEAN is learning the costs and opportunities of togetherness

The last five months have made clear that ASEAN members cannot isolate themselves from each other's economic performance -- and policies. As the Asian flu spread from Thailand to Indonesia and on to Malaysia, the Philippines and even Singapore and Brunei, the region's currency and stock markets have fallen ill. More recently, South Korea and Japan have caught the bug. But that's old news. As demonstrated at the finance ministers' conference in Malaysia's capital (attended by Australia, China, Hong Kong, Japan, South Korea and the U.S., as well as ASEAN), the focus has turned to figuring out what to do now and how to prevent similar contagion in the future.

Put the current turmoil in context. Thirty years ago, the region was dominated by sleepy fishing villages and paddy fields. Back then, time passed in seasons, measured by the winds, rain and the changing color of crops. But today, the pace of life is fast, the fishing villages are likely to be golf resorts, and the rice paddies have turned into housing developments. Among the five original ASEAN members, per capita gross domestic product today averages more than 20 times what it was three decades ago. Exports have increased on average more than 70 times since ASEAN's founding.

But the economic miracle of year-upon-year of rapid growth hid mounting problems. Just as a frenetic stock trader might ignore a swelling drug addiction so long as the good times -- and the money to pay for them -- kept flowing, Thailand (and to a lesser extent Indonesia and Malaysia) became dependent on easy credit. This opiate fed unproductive investment and property speculation. And when finance companies and other lenders could no longer maintain the habit, currencies and asset prices crashed.

Does the finance ministers' meeting in Kuala Lumpur and their pledge to liberalize financial services and develop deep, liquid debt markets signal real reform? Depends on who you listen to. Malaysian Prime Minister Mahathir Mohamad continues to blame hedge fund managers like George Soros for many of Asia's problems. Michel Camdessus, managing director of the IMF, which is studying the effect of currency trading on markets, told the same finance ministers' meeting, "It would be a mistake to blame hedge funds as the central agent of turmoil in Asia." Instead, he faults poor economic fundamentals and governments' unwillingness to fix them. But, in the same speech, Camdessus praised as a positive development the so-called Manila Framework, the peer pressure mechanism drafted in the Philippine capital in November and endorsed in Kuala Lumpur.

Words about economic cooperation in Southeast Asia are nearly as old as ASEAN itself. But until now, they haven't amounted to very much. Twenty years ago, the group devoted months to assembling lists of tariff-free goods, only to realize that half the items were different sizes and types of nails.

Nevertheless, dreams of greater trade within the region persisted. One long-held goal: an ASEAN automobile, built from parts manufactured throughout the region. Malaysia's Proton uses Thai components as well as materials from Singapore. But in reality, the car is more representative of Mitsubishi Motors than ASEAN. The Japanese company is one of the few multinationals to employ an ASEAN-wide strategy to order and distribute parts made in Malaysia, Thailand, Indonesia and the Philippines for its cars and trucks. The Mitsubishi experience demonstrates that private industry can often do more to promote intra-ASEAN trade than governments.

That's partly why Manu Bhaskaran, chief economist with SocGen-Crosby Securities in Singapore, believes that regional recovery depends on deregulation: "Root out inefficiencies, reduce protectionism, pull down all sorts of barriers, and do away with the licenses, monopolies and tendency to think they can pick winners instead of letting market forces decide."

Jardine Fleming economist Rajeev Malik in Singapore figures Malaysia, for instance, will be forced to accept significantly lower growth because of a fundamental imbalance in its economy: "Its big problem is it doesn't have enough skilled workers to allow fresh foreign investment to move to the next level of high value-added exports." Malik believes that because of this skills shortage such ASEAN members as the Philippines, Indonesia and Thailand will be forced to turn the clocks back and focus on natural resources. "That's their comparative advantage," he says. "If ASEAN countries are to move forward, this misallocation of resources needs to be corrected."

The obvious model for many of these changes may be Singapore. After all, the Lion City has retained and nurtured a manufacturing sector and has taken steps to cool property speculation and keep a lid on inflation. This year, the monetary authorities have allowed the Singapore dollar to depreciate slowly, thus retaining the city-state's competitiveness along with its position as a safe haven. And Singapore has continued to invest in education, training and technology -- the future.

But it may be unique. For example, Singapore has not had to concern itself with raising the quality of life in vast rural areas while maintaining city services. Similarly, Brunei can offer practical insights only to economies that rely almost exclusively on oil. Might the Philippines be a better model? In the years since ASEAN was formed, the Philippines has lagged badly, growing between one-half and one-tenth as much as its fellow members. In fact, the country has been under IMF tutelage for nearly the entire life of ASEAN. But that means it has already confronted the crony capitalism and asset bubbles now facing its neighbors. Certainly, the newest ASEAN members -- Laos, Myanmar and Vietnam -- have a rich set of economic experiences from which to choose.

ASEAN comprises a wide mix of nations bound by geographic proximity, cultural similarities and, now economic troubles. But the recent crises may force ASEAN to finally come to grips with its interconnectedness. The watchful eyes of neighbors can be as comforting to a community of friends as they are intrusive to strangers.